SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2001
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ___________ to ___________
Commission file number: 1-10153
HOMEFED CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 33-0304982
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1903 Wright Place
Suite 220
Carlsbad, California 92008
(760) 918-8200
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Based on the average bid and asked prices of the Registrant's Common Stock as
published by the OTC Bulletin Board Service as of March 12, 2002, the aggregate
market value of the Registrant's Common Stock held by non-affiliates was
approximately $34,371,000 on that date.
As of March 12, 2002, there were 56,808,076 outstanding shares of the
Registrant's Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, to be filed with the
Commission for use in connection with the 2002 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
PART I
Item 1. Business.
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THE COMPANY
Introduction
HomeFed Corporation ("HomeFed" or the "Company") was incorporated in
Delaware in 1988. The Company is engaged, directly and through subsidiaries, in
the investment in and development of residential real estate projects in the
State of California. The executive office of the Company is located at 1903
Wright Place, Suite 220, Carlsbad, California 92008.
The Company's development projects consist of two master planned
communities located in San Diego County, California: San Elijo Hills, and a
portion of the larger Otay Ranch planning area.
As development manager for these projects, the Company is responsible for
the completion of a wide range of activities, including design engineering,
grading raw land, constructing public infrastructure such as streets, utilities
and public facilities, and finishing individual lots for home sites or other
facilities. The Company will develop its communities in phases to allow itself
the flexibility to sell finished lots to suit market conditions and to enable it
to create stable and attractive neighborhoods. Consequently, at any particular
time, the various phases of a project will be in different stages of land
development and construction.
For any master-planned community, plans must be prepared that provide for
infrastructure, neighborhoods, commercial and industrial areas, educational and
other institutional or public facilities, as well as open space. Once
preliminary plans have been prepared, numerous governmental approvals, licenses,
permits and agreements, referred to as "entitlements," must be obtained before
development and construction may commence. These often involve a number of
different governmental jurisdictions and agencies, challenges through
litigation, considerable risk and expense, and substantial delays. Unless and
until the requisite entitlements are received and substantial work has been
commenced in reliance upon such entitlements, a developer generally does not
have any "vested rights" to develop a project. In addition, as a precondition to
receipt of building-related permits, master-planned communities such as San
Elijo Hills typically are required in California to pay impact and capacity
fees, or to otherwise satisfy mitigation requirements.
Current Development Projects
San Elijo Hills. In August 1998, the Company entered into a Development
Management Agreement (the "Development Agreement") with San Elijo Hills
Development Company, LLC, an indirect subsidiary of Leucadia National
Corporation (together with its subsidiaries, "Leucadia") that owns certain real
property located in the City of San Marcos, in San Diego County, California.
Pursuant to the Development Agreement, this project, which is known as San Elijo
Hills, will be a master-planned community of approximately 3,400 homes and
apartments as well as commercial properties which are expected to be completed
during the course of this decade. The Company is the development manager of this
project with responsibility for the overall management of the project,
including, among other things, preserving existing entitlements and obtaining
any additional entitlements required for the project, arranging financing for
the project, coordinating marketing and sales activity, and acting as the
construction manager. The Development Agreement provides that the Company will
participate in the net profits of the project through the payment of a success
fee as described in this Report, and that the Company will receive fees for the
field overhead, management and marketing services it is to provide, based on the
revenues of the project. The Development Agreement is terminable by either
Leucadia or the Company. For additional information, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
this Report.
2
During 2000, 528 residential sites in six neighborhoods were sold to
builders for aggregate consideration, net of closing costs, of $71,100,000.
These sales were the first residential lot sales at San Elijo Hills. During
2001, 691 residential sites in seven neighborhoods were sold to builders and a
school site was sold to the local school district for aggregate consideration,
net of closing costs, of $83,500,000. The Company earned and collected an
aggregate of approximately $5,800,000 and $3,500,000 in fees on this project for
the years ended December 31, 2001 and 2000. As of December 31, 2001, 2,179
residential dwelling units, consisting of 1,420 single family sites and 759
multi-family units remain to be sold in the project. In addition, the project
has certain commercial lots and school sites which it expects to sell. The
Company has the ability to earn fees on all such sales should they actually
occur.
In order for the Company to sell the next phase of the San Elijo Hills
project, improvements to certain off site roads need to be under construction.
The construction of certain of these improvements requires environmental permits
prior to the commencement of construction. Although the Company has been
informed that these permits will be obtained and will not materially delay the
project, no assurance can be given that they will be received in a timely
manner.
As the development manager of the San Elijo Hills project, the Company has
prepared an internal projection of the net cash flow which might be realized
during the course of the projected remaining seven years of the development and
sale of the project. The Company does not update this projection regularly, but
reviews and updates the projection annually. The Company does not prepare a
projection for its Otay Ranch project because that project is in the early
stages of development.
The projection is based upon many estimates and assumptions, including but
not limited to, the timing of the sales of the various phases of the project,
the prices at which lots can be sold, the cost of financing the project,
construction and land improvement costs, the costs and availability of public
utilities, infrastructure costs, marketing and selling expenses, property taxes
and environmental and other regulatory compliance expenditures. In addition, the
projection is based on the assumption that the Company is the development
manager through the completion of the project. Based upon this cash flow
projection, for the period from January 1, 2002 through the completion of the
project, future sales from the project are projected to aggregate approximately
$260,000,000, and aggregate net cash flow, after payment of all debt service and
other liabilities, is projected to be approximately $99,000,000. Based on these
assumptions, it is projected that the Company would receive fees for field
overhead, management and marketing services in addition to those received
through December 31, 2001, totaling approximately $24,000,000, and a success fee
of approximately $69,000,000. The foregoing does not reflect expenses (which
have not been projected or estimated) that the Company will be required to incur
to fulfill its obligations under the Development Agreement. The Company believes
that any success fee that it may receive will be its principal source of revenue
earned through its participation in the San Elijo Hills project pursuant to the
Development Agreement.
All of the foregoing amounts are not discounted and are derived solely from
the assumptions used in the projection, which are based on the Company's best
estimates, as of November 2001, of the results of the San Elijo Hills project
for the remaining seven years of the project's development. The projection was
not prepared with a view toward compliance with published guidelines of the
American Institute of Certified Public Accountants or generally accepted
accounting principles and has not been examined or compiled by the Company's
independent auditors. The Company's independent auditors do not express an
opinion or any other form of assurance with respect to the projection. Their
report included in this Report relates to the Company's historical financial
information. It does not extend to the projection and should not be read to do
so. The projection is based on a number of assumptions and estimates that are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the control of the
Company, and upon assumptions with respect to future business decisions which
are subject to change. Among the factors that could cause actual results to
differ materially from those projected include, but are not limited to, changes
in general economic and market conditions, changes in domestic laws and
government regulations or requirements, changes in real estate pricing
environments, demographic and economic changes in the United States generally
3
and California in particular, significant competition from other real estate
developers and homebuilders, decreased consumer spending for housing, delays in
construction schedules and cost overruns, increased material and labor costs,
increased development costs, many of which the Company would not be able to
control, the occurrence of significant natural disasters, the imposition of
limitations on the Company's ability to develop the San Elijo Hills project
resulting from developments in or new applications of environmental laws and
regulations, increases in prevailing interest rates, including mortgage rates,
increased interest costs for the project as a result of a delay in completion of
the project requiring the financing to remain outstanding for a longer than
projected period of time, and the availability of reliable energy sources and
consumer confidence in the dependability of such energy sources. The degree of
uncertainty inherent in projections increases significantly with each year that
the projections cover. This projection covers a seven year period and
accordingly, is even more uncertain than projections covering a shorter period
of time. Therefore, the projection is only an estimate and actual results will
vary from the projection. These variations may be, and, in fact, are likely to
be material. Consequently, the inclusion of the foregoing projections in this
Report should not be regarded as representations by the Company or any other
person that the projected results will be achieved. Projections are necessarily
speculative in nature and it is usually the case that one or more significant
assumptions in projections do not materialize. Therefore, the projections should
not be relied upon.
Otay Ranch. On October 14, 1998, the Company and Leucadia formed Otay Land
Company, LLC (the "Otay Land Company") to purchase 4,800 non-adjoining acres of
land located within the larger 22,900 acre Otay Ranch master-planned community
south of San Diego, California. Otay Land Company acquired this land for
$19,500,000. The Company has contributed $11,825,000 as capital and Leucadia has
contributed $10,000,000 as a preferred capital interest; the Company is
development manager of this project.
The City of Chula Vista and the County of San Diego have approved a general
development plan for the larger planning area. Although there is no minimum time
within which implementation of the general development plan must be completed,
it is expected that full development of the larger planning area will take
decades. This general development plan establishes land use goals, objectives
and policies within the larger planning area. Any development within the larger
Otay Ranch master-planned community must be consistent with this general
development plan. The general development plan for the larger planning area
contemplates home sites, a golf-oriented resort and residential community,
commercial retail centers, a proposed university site and a network of
infrastructure, including roads and highways, a rail transportation system, park
systems and schools. Actual development of any of these will require that
further entitlements and approvals be obtained. Because the larger planning area
will be developed by several independent developers in addition to the Company,
developers working in the Otay Ranch planning area will need to coordinate their
activities to develop their respective projects.
Of the 4,800 acres owned by Otay Land Company, 1,400 acres are developable
and 3,400 acres are zoned as various qualities of non-developable "open space
mitigation land." The Company entered into an option to sell 85 acres of
developable land for a sales price of $4,100,000. The Company has received a
non-refundable payment of $500,000 for this option, which will be applied
against the purchase price upon closing. This option, which was scheduled to
expire in December 2000, is extendable for up to eighteen months for a
non-refundable monthly fee of $60,000. The monthly extension fees will not
reduce the purchase price. As of March 12, 2002, the Company received $960,000
of such fees. The non-refundable option fee and the monthly extension fees were
used to pay for operating expenses and development costs of Otay Land Company.
The Company will either develop or sell the remaining developable land; until
such determination is made, the Company will not know the nature or extent of
the entitlements or approvals that may be required.
Under the general development plan, approximately 1.18 acres of open space
mitigation land from within the Otay Ranch project must be set aside and
conveyed to a preserve for each 1.0 acre of land that is developed. Some owners
4
of development land have adequate or excess mitigation land, while other owners
lack sufficient acreage of mitigation land to cover their inventory of
development land. The Company currently has substantially more mitigation land
than it would need to develop its property at this project. Based upon the
general development plan conditions, the Company believes that a market for this
land is likely to develop within the larger Otay Ranch development area as
development progresses.
The current schedule under the general development plan calls for
conveyance of mitigation land from an identified initial area in which the
Company holds a substantial amount of acreage. Some owners of development land
do not have enough mitigation land in the area of initial conveyance to cover
their land available for immediate development. Strict compliance with the
conveyance schedule would create an immediate market for the Company's excess
mitigation land within the area of initial conveyance. It is not clear whether
the City of Chula Vista and the County of San Diego will strictly enforce the
current conveyance schedule; there is also a petition pending to expand the area
of initial conveyance to encompass more mitigation land from the Otay Ranch.
Failure to strictly enforce the current conveyance schedule or an expansion of
the initial conveyance area could have a material adverse impact on the current
sale value of the Company's excess mitigation land.
A market for the Company's excess open space mitigation land also exists
among buyers of such land in the San Diego County region. It is unclear whether
the County of San Diego would accept sales of Otay Ranch mitigation land to
mitigate for development unrelated to Otay Ranch. Pending a resolution of this
issue, the Company is not pursuing such sales.
The Company continues to evaluate how to maximize the value of this
investment while pursuing land sales and processing further entitlements on
portions of the property. The Company cannot predict when revenues will be
derived from this project. As indicated above, the ultimate development of
projects of this type is subject to significant governmental and environmental
approval. Recently, the United States Fish & Wildlife Service proposed
designating a portion of the Otay Ranch project already planned primarily for
non-development/habitat preservation as a critical habitat for an endangered
species. In addition, the project is within the area identified by a draft
United States Fish & Wildlife Service recovery plan for this endangered species.
Although the designation and plan are not final, there can be no assurance that
if the designation and plan are adopted in this or another form, any such final
designation or plan will not have a material adverse impact on the Company's
ability to develop or sell the project.
Other Projects
Paradise Valley. The Company owns a 10 acre site, zoned for public
facilities, at the Paradise Valley project, a community located in Fairfield,
California. This site was previously subject to a purchase option held by the
local school district. In February 2001, they terminated their option to
purchase the site. At December 31, 2001, the book value of this site was
$1,067,000. The Company has applied for approval to rezone this site into
twenty-four minimum 8,000 square foot lots and a 5 acre park. If approved, the
Company believes it can sell the lots in 2002 and the park within two years at
an aggregate price in excess of the book value.
Competition
Real estate development is a highly competitive business. There are
numerous residential real estate developers and development projects operating
in the same geographic area in which the Company operates. Competition among
real estate developers and development projects is determined by the location of
the real estate, the market appeal of the development master plan, and the
developer's ability to build, market and deliver project segments on a timely
basis. Residential developers sell to homebuilders, who compete based on
location, price, market segmentation, product design and reputation.
5
Government Regulation
The residential real estate development industry is subject to increasing
environmental, building, zoning and real estate regulations that are imposed by
various federal, state and local authorities. In developing a community, the
Company must obtain the approval of numerous governmental agencies regarding
such matters as permitted land uses, housing density, the installation of
utility services (such as water, sewer, gas, electric, telephone and cable
television) and the dedication of acreage for open space, parks, schools and
other community purposes. Regulations affect homebuilding by specifying, among
other things, the type and quality of building materials that must be used,
certain aspects of land use and building design and the manner in which
homebuilders may conduct their sales, operations, and overall relationships with
potential home buyers. Furthermore, changes in prevailing local circumstances or
applicable laws may require additional approvals, or modifications of approvals
previously obtained.
Timing of the initiation and completion of development projects depends
upon receipt of necessary authorizations and approvals. Delays could adversely
affect the Company's ability to complete its projects, significantly increase
the costs of doing so or drive potential customers to purchase competitors'
products.
Environmental Compliance
Environmental laws may cause the Company to incur substantial compliance,
mitigation and other costs, may restrict or prohibit development in certain
areas and may delay completion of the Company's development projects. Delays
arising from compliance with environmental laws and regulations could adversely
affect the Company's ability to complete its projects, significantly increase
the costs of doing so or cause potential customers to purchase competitors'
products. To date, environmental laws have not had a material adverse effect on
the Company, and management is not currently aware, except as otherwise
disclosed, of any environmental compliance matters that would have a material
adverse effect on the Company.
Employees
At December 31, 2001, the Company and its consolidated subsidiaries had 20
full-time employees.
Relationship with Leucadia; Administrative Services Agreement
Since emerging from bankruptcy in 1995, administrative services and, prior
to November 2000, certain managerial support services, have been provided to
HomeFed by a subsidiary of Leucadia. Leucadia funded HomeFed's bankruptcy plan
by purchasing stock and debt of the Company. As of December 31, 2001, the
Company owed $26,462,000 principal amount to Leucadia, which is payable on
December 31, 2004 and bears interest at 6% per year. Leucadia has also
contributed $10,000,000 as a preferred capital interest to Otay Land Company.
For additional information, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
6
In 1999, Leucadia National Corporation completed the distribution of
HomeFed Common Stock to shareholders of Leucadia. As a result, Joseph S.
Steinberg, Chairman of the Board of HomeFed, and Ian M. Cumming, a director of
HomeFed, together with their respective family members (excluding trusts for the
benefit of Mr. Steinberg's children) beneficially own approximately 12.7% and
13.6%, respectively, of the Company's outstanding Common Stock. Mr. Steinberg is
also President and a director of Leucadia National Corporation and Mr. Cumming
is Chairman of the Board of Leucadia National Corporation. At March 12, 2002,
Mr. Steinberg and Mr. Cumming beneficially owned (together with their respective
family members but excluding trusts for the benefit of Mr. Steinberg's children)
approximately 16.8% and 18.0%, respectively, of Leucadia National Corporation's
outstanding common shares.
Under the current administrative services agreement, Leucadia provides
services to the Company on a month-to-month basis. Pursuant to this agreement,
Leucadia provides the services of Ms. Corinne A. Maki, the Company's Treasurer
and Secretary, in addition to various administrative functions. Ms. Maki is an
officer of subsidiaries of Leucadia National Corporation. The cost of services
provided by Leucadia during 2001 aggregated $107,000.
In March 2001, the Company entered into a $3,000,000 line of credit
agreement with Leucadia. Loans outstanding under this line of credit bear
interest at 10% per year; in 2001, the Company incurred and paid $24,000 in
interest. Effective March 1, 2002, this agreement was amended to extend the
maturity to February 28, 2007, unless earlier terminated by Leucadia not later
than November 15 of any year, effective February 28 of the following year. As of
March 12, 2002, no amounts were outstanding under this facility.
Item 2. Properties.
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The Company owns approximately 10 acres at the Paradise Valley project and
approximately 4,800 non-adjoining acres at the Company's Otay Ranch project, as
described under Item 1 - "Business." Land held for development and sale has an
aggregate book value of $23,890,000 at December 31, 2001.
The Company's corporate headquarters are located at 1903 Wright Place,
Suite 220, Carlsbad, California 92008 in part of an office building sub-leased
from Leucadia for a monthly amount equal to its share of Leucadia's cost for
such space and furnishings. The agreement pursuant to which the space and
furnishings are provided extends through February 28, 2005 (coterminous with
Leucadia's occupancy of the space) and provides for a monthly rental of $19,000
effective March 1, 2001, which increased to $20,000 effective March 1, 2002.
Item 3. Legal Proceedings.
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The Company is not a party to legal proceedings other than ordinary,
routine litigation, incidental to its business or not material to the Company's
consolidated financial position or results of operations.
7
Item 10. Executive Officers of the Registrant.
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As of March 12, 2002, the executive officers of the Company, their ages,
the positions held by them and the periods during which they have served in such
positions are as follows:
Name Age Position with HomeFed Office Held Since
- ---- --- --------------------- -----------------
Paul J. Borden 53 President 1998
Corinne A. Maki 45 Secretary and Treasurer 1995
Curt R. Noland 45 Vice President 1998
R. Randy Goodson 36 Vice President 2000
Simon G. Malk 32 Vice President 2000
Erin N. Ruhe 36 Vice President and Controller 2000
The officers serve at the pleasure of the Board of Directors of HomeFed.
The recent business experience of our executive officers is summarized as
follows:
Paul J. Borden. Mr. Borden has served as a director and President of
HomeFed since May 1998. Mr. Borden had been a Vice President of Leucadia from
August 1988 through October 2000, responsible for overseeing many of Leucadia's
real estate investments.
Corinne A. Maki. Ms. Maki, a certified public accountant, has served as
Treasurer of HomeFed since February 1995 and Secretary since February 1998.
Prior to that, Ms. Maki served as an Assistant Secretary of HomeFed since August
1995. Ms. Maki has also been a Vice President of Leucadia Financial Corporation,
a subsidiary of Leucadia, holding the offices of Controller, Assistant Secretary
and Treasurer since October 1992. Ms. Maki has been employed by Leucadia since
December 1991.
Curt R. Noland. Mr. Noland has served as Vice President of HomeFed since
October 1998. He spent the last 22 years in the land development industry in San
Diego County as a design consultant, merchant builder and a master developer.
From November 1997 until joining HomeFed, Mr. Noland was employed by the prior
development manager of San Elijo Hills and served as Director of Development for
San Elijo Hills. Prior to November 1997, Mr. Noland was employed for eight years
by Aviara Land Associates, LP, a 1,000 acre master-planned resort community in
Carlsbad, California. He is also a licensed civil engineer and real estate
broker.
R. Randy Goodson. Mr. Goodson has served as Vice President of HomeFed since
April 2000. Mr. Goodson has spent 16 years as a real estate consultant,
developer and investor. Prior to joining HomeFed, he was a principal in a San
Diego company involved in real estate development and consulting, which provided
consulting services to San Elijo Hills and HomeFed. Mr. Goodson is a licensed
California real estate broker and a member of the Urban Land Institute.
Simon G. Malk. Mr. Malk has served as Vice President of HomeFed since April
2000. For the prior seven years, Mr. Malk was a principal of a San Diego company
involved in residential real estate development and consulting.
Erin N. Ruhe. Ms. Ruhe has served as Vice President of HomeFed since April
2000 and has been employed by HomeFed as Controller since January 1999.
Previously, Ms. Ruhe was Vice President since December 1995 and Controller since
November 1994 of HSD Venture, a real estate subsidiary of Leucadia.
8
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
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The following table sets forth certain information concerning the market
price of the Company's Common Stock for each quarterly period within the two
most recent fiscal years.
High Low
---- ---
Year ended December 31, 2000
First Quarter $ .875 $ .062
Second Quarter .720 .550
Third Quarter .730 .600
Fourth Quarter .875 .570
Year ended December 31, 2001
First Quarter $1.250 $ .790
Second Quarter .960 .750
Third Quarter 1.000 .900
Fourth Quarter .940 .820
Year ending December 31, 2002
First quarter (through March 12, 2002) $ .940 $ .800
The Company's Common Stock is traded in the over-the-counter market. The
Company's Common Stock is not listed on any stock exchange, and price
information for the Common Stock is not regularly quoted on any automated
quotation system. The prices above are based on the high and low sales price per
share, as published by the National Association of Securities Dealers OTC
Bulletin Board Service. On March 12, 2002, the closing bid price for the
Company's Common Stock was $.83 per share. As of this date, there were 8,094
stockholders of record. The Company did not declare dividends on its Common
Stock during 2000 or 2001 and it does not anticipate that it will pay dividends
for the foreseeable future.
The Company's Common Stock does not currently meet the minimum requirements
for listing on a national securities exchange or inclusion on the Nasdaq Stock
Market. If the Company's Common Stock becomes eligible to be listed or included
on the Nasdaq Stock Market, the Company will consider its alternatives with
respect to the trading market for the Company's Common Stock.
The transfer agent for the Company's Common Stock is American Stock
Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038.
Item 6. Selected Financial Data.
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The following selected financial data have been summarized from the
Company's consolidated financial statements and are qualified in their entirety
by reference to, and should be read in conjunction with, such consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contained in Item 7 of this Report.
Effective September 20, 1999, Otay Land Company is included in the Company's
consolidated financial statements; previously this investment had been accounted
for under the equity method.
9
Year Ended December 31,
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2001 2000 1999 1998 1997
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(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Fee income from San Elijo Hills $ 5,803 $ 3,508 $ -- $ -- $ --
Sales of residential properties -- 1,575 2,600 5,752 4,011
Income from options on real estate properties 720 92 43 -- --
Interest expense 2,646 2,510 2,404 2,828 2,997
Loss from operations (414) (2,579) (6,415) (4,545) (3,864)
Net loss (1,377) (3,409) (7,282) (4,481) (3,577)
Basic loss per common share $ (0.02) $ (0.06) $ (0.22) $ (0.45) $ (0.36)
======= ======= ======= ======= =======
Diluted loss per common share $ (0.02) $ (0.06) $ (0.22) $ (0.45) $ (0.36)
======= ======= ======= ======= =======
Year Ended December 31,
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2001 2000 1999 1998 1997
-------- ------- ------- ------- ------
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents $ 1,454 $ 1,631 $ 2,795 $ 3,120 $ 4,195
Land and real estate held for development and sale 23,890 22,979 23,707 5,008 10,408
Total assets 25,804 24,818 27,528 19,415 16,213
Notes payable to Leucadia Financial Corporation 22,508 21,474 20,552 19,736 26,085
Stockholders' deficit (11,623) (10,421) (7,107) (8,205) (10,739)
Shares outstanding 56,808 56,808 56,558 10,000 10,000
Book value per common share $ (0.20) $ (0.18) $ (0.13) $ (0.82) $ (1.07)
Basic and diluted loss per share of Common Stock was calculated by dividing
the net loss by the weighted average shares of Common Stock outstanding. The
number of shares used to calculate basic and diluted loss per Common Share was
56,807,903, 56,762,061 and 32,577,357 for the years ending December 31, 2001,
2000 and 1999, respectively. The calculation of diluted loss per share does not
include common stock equivalents of 359,841 and 25,372 for the years ending
December 31, 2001 and 2000, respectively, which are antidilutive. The number of
shares used to calculate book value per Common Share was 56,808,076, 56,807,826
and 56,557,826 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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The purpose of this section is to discuss and analyze the Company's
consolidated financial condition, liquidity and capital resources and results of
operations. This analysis should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this Report.
Liquidity and Capital Resources
For the years ended December 31, 2001 and December 31, 2000, net cash was
used for operating activities, principally to pay interest and general and
administrative expenses. The Company's principal sources of funds are fee income
earned from the San Elijo Hills project, proceeds from the sale of real estate,
its $3,000,000 line of credit from Leucadia and dividends or borrowings from its
subsidiaries.
10
For each of the three years in the period ended December 31, 2001, the
Company has reported a net loss and experienced a net decrease in cash and cash
equivalents. The Company expects that its cash on hand, together with the
sources described above, will be sufficient to meet its cash flow needs for the
foreseeable future. If, at any time in the future, the Company's cash flow is
insufficient to meet its then current cash requirements, the Company could
accelerate its subsidiaries' sale of real estate projects held for development
or seek to borrow funds. However, because all of the Company's assets are
pledged to Leucadia to collateralize its $26,462,000 borrowing from Leucadia, it
may be unable to obtain financing from sources other than Leucadia. Further, if
the Company were to sell its real estate projects in order to meet its liquidity
needs, it may have to do so at a time when the potential sales prices are not
attractive or are not reflective of the values which the Company believes are
inherent in the projects. Accordingly, while the Company believes it can
generate sufficient liquidity to meet its obligations through sales of assets,
any such sales could be at prices that would not maximize the Company's value to
its shareholders.
In March 2001, the Company entered into a $3,000,000 line of credit
agreement with Leucadia. Effective March 1, 2002, this agreement was amended to
extend the maturity to February 28, 2007, unless earlier terminated by Leucadia
not later than November 15 of any year, effective February 28 of the following
year. Loans outstanding under this line of credit bear interest at 10% per year.
As of March 12, 2002, no amounts were outstanding under this facility.
Under the Development Agreement, the Company is responsible for the overall
management of the San Elijo Hills project, including arranging financing,
coordinating marketing and sales activity, and acting as construction manager.
The Development Agreement provides that the Company will receive certain fees in
connection with the project. These fees consist of field overhead and management
service fees (the "development management fees"). These fees are based on a
fixed percentage, aggregating 5.72%, of gross revenues of the project, less
certain expenses allocated to the project, and are expected to cover the
Company's cost of providing services under the Development Agreement. The
Company also receives co-op marketing and advertising fees that are paid at the
time builders sell homes, are generally based upon a fixed percentage of the
homes' selling price and are recorded as revenue when the home is sold. For the
year ended December 31, 2001, the Company received approximately $5,800,000 in
fees under the Development Agreement, including approximately $1,000,000 in
co-op marketing and advertising fees. The Development Agreement also provides
for a success fee to the Company out of the project's net cash flow, if any, as
described below, up to a maximum amount. Whether the success fee, if it is
earned, will be paid to the Company prior to the conclusion of the project will
be at the discretion of the project owner.
The Development Agreement is terminable by either the project owner or the
Company. In a termination, the Company would receive the accrued but unpaid
portion of the development management fees and the success fee. The accrued
development management fees will only include the fee for sales that have
already closed escrow or that are in escrow for sale on the termination date and
actually close pursuant to such escrow within 120 days after the termination
date. The Development Agreement provides that the project owner will make a
reasonable determination of the amount of the accrued success fee payable with
respect to such sales that have closed on or before 120 days after the
termination date based upon the project owner's reasonable estimates of the then
existing net cash flow minus the amount of the Indebtedness as defined below.
To determine "net cash flow" for purposes of calculating the success fee,
all cash expenditures of the project will be deducted from total revenues of the
project. Examples of "expenditures" for these purposes include land development
costs, current period operating costs, and indebtedness, either collateralized
by the project (which cannot exceed $23,959,000, the balance at December 31,
2001, including interest), or owed by the project's owner to Leucadia
($12,753,000 at December 31, 2001) (collectively, "Indebtedness"). As a success
11
fee, the Company is entitled to receive payments out of net cash flow, if any,
up to the aggregate amount of the Indebtedness (as of the date the Development
Agreement was signed). The balance of the net cash flow, if any, will be paid to
the Company and the project owner in equal amounts. However, the amount of the
success fee cannot be more than 68% of net cash flow minus the amount of the
Indebtedness. The Company believes that any success fee that it may receive will
be its principal source of revenue earned through its participation in the San
Elijo Hills project pursuant to the Development Agreement. There can be no
assurance, however, that the Company will receive any success fee at all for
this project. As of December 31, 2001, the Company has not recognized any
success fee income as none would have been contractually earned.
As shown below, at December 31, 2001, the Company's contractual cash
obligations totaled $27,229,000. The Company's note payable is collateralized by
a security interest in all assets of the borrower, whether now owned or
hereafter acquired. No principal payments are due until its maturity on December
31, 2004. At December 31, 2001, the Company did not have any commercial
commitments.
Payments Due by Period (in thousands)
---------------------------------------------------------------------
Total
Amounts Less Than 1 After 5
Contractual Obligations Committed Year 1-3 Years 4-5 Years Years
- ----------------------- --------- ---- --------- --------- -----
Note payable $ 26,462 $ -- $ 26,462 $ -- $ --
Operating Lease 767 235 490 42 --
-------- ----- --------- ------- ------
Total Contractual Cash Obligations $ 27,229 $ 235 $ 26,952 $ 42 $ --
======== ===== ========= ======= ======
As of December 31, 2001, the Company owed $26,462,000 principal amount to
Leucadia, which is payable on December 31, 2004 and bears interest at 6% per
year (the "note payable"). This obligation is reflected in the consolidated
balance sheet, net of debt discount, at $22,508,000 as of December 31, 2001.
During the year ended December 31, 2001, the Company paid Leucadia $1,588,000 in
interest on the note payable. In addition, Leucadia has invested $10,000,000 as
a preferred capital interest in Otay Land Company, a consolidated subsidiary of
the Company. Distributions of net income, if any, from Otay Land Company first
will be paid to Leucadia until it has received an aggregate annual cumulative
preferred return of 12% on, and repayment of, its preferred investment. Any
remaining funds will be distributed to the Company.
In accordance with the terms of a partnership agreement entered into in
1990 and amended in November 2000, a subsidiary of the company is required to
maintain a minimum net worth of $1,000,000, which the subsidiary currently
meets. The partners agreed on the minimum net worth requirement in connection
with an indemnity agreement with a third party surety that has provided surety
bonds for the construction of infrastructure in a development in La Quinta,
California.
As of December 31, 2001, the Company has net operating loss carryovers
("NOLs") of $254,542,000 available to reduce its future federal income tax
liabilities and NOLs of $17,792,000 available to reduce its future state income
tax liabilities. Most of these NOLs are not available to reduce federal
alternative minimum taxable income, which is currently taxed at the rate of 20%.
As a result, once the Company's NOLs that are available to reduce federal
alternative minimum taxable income are either used or expire, the Company will
pay federal income tax at a rate of 20% during future periods, even if NOLs are
available to reduce regular taxable income.
12
Results of Operations
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles. The preparation of these financial statements requires the Company
to make estimates and assumptions that affect the reported amounts in the
financial statements and disclosures of contingent assets and liabilities. On an
on-going basis, the Company evaluates all of these estimates and assumptions.
Actual results could differ from those estimates.
The Company's land and real estate held for development and sale is carried
at the lower of cost or fair value less costs to sell. The process involved in
the determination of fair value requires estimates as to future events and
market conditions. This estimation process assumes the Company has the ability
to complete development and dispose of its real estate properties in the
ordinary course of business based on management's present plans and intentions.
When management determines that the carrying value of specific real estate
investments should be reduced to properly record these assets at fair value less
costs to sell, this write-down is recorded as a charge to current period
operations. The provisions are based on estimates and the ultimate loss may
differ from those estimates.
The Company records a valuation allowance to reduce its deferred taxes to
the amount that is more likely than not to be realized. If the Company were to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment would increase income in
such period.
Statement of Operations
Fee income from San Elijo Hills increased in 2001 as compared to 2000 due
to increased lot sales and less direct expense incurred by the project owner
(which reduces the amount of development management fees), and increased co-op
marketing and advertising fees relating to the sale of homes by builders.
Sales of residential properties decreased in 2000 as compared to 1999. In
2000, the Company sold two clustered housing development sites at the Paradise
Valley project, while in 1999, the Company sold 75 lots and one clustered
housing development site at the Paradise Valley project.
Income from options on real estate properties in 2001 and 2000 reflects
non-refundable fees received to extend the closing date on 85 acres of
developable land at the Otay Ranch project. The Company received and recognized
$720,000 and $60,000 of such fees in 2001 and 2000, respectively. Income from
options on real estate properties in 2000 and 1999 reflect extension fees
relating to home site sales at the Paradise Valley project.
Land and real estate held for development and sale is carried at the lower
of cost or fair value less costs to sell. The provision for losses for the year
ended December 31, 1999 reflected estimated additional costs to build the
recreation center at the Paradise Valley project and estimates to reduce the
carrying value of real estate investments to fair value. Actual cost of sales
recorded during these periods reflects the level of sales activity, as well as
provisions for losses.
Interest expense for all years presented primarily reflects the annual
interest due on the note payable to Leucadia of $1,588,000, which was paid by
the Company. Interest expense also includes $1,034,000, $922,000, and $816,000
for 2001, 2000 and 1999, respectively, for amortization of debt discount related
to the note payable. For 2001, interest expense also reflects $24,000 of
interest due to Leucadia under the line of credit, which was paid by the
Company.
General and administrative expenses increased in 2001 as compared to the
prior year primarily due to increased salaries expense. This increase
principally reflects the employment of the Company's chief executive officer
during the third quarter of 2000 and of another executive officer during the
second quarter of 2000, as well as higher bonuses and salary increases. General
and administrative expenses increased in 2000 as compared to 1999 due to
increased operating activities in connection with the San Elijo Hills project
and Otay Ranch project.
13
Other income increased in 2001 as compared to 2000 primarily due to
reimbursement for fees and improvements totaling $678,000 related to property
that was previously sold, partially offset by reduced interest income.
Income taxes for 2001 principally relates to the payment of federal and
state minimum taxes. Income taxes for 2000 and 1999 principally relate to state
franchise taxes. The Company has not recognized income tax benefits for its
operating losses due to the uncertainty of sufficient future taxable income
which is required in order to recognize such tax benefits.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), which is effective for all business combinations after June 30,
2001, Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which is effective for fiscal years beginning
after December 15, 2001, and Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which is
effective for fiscal years beginning after June 15, 2002. In August 2001, the
FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which is
effective for fiscal years beginning after December 15, 2001. SFAS 141 requires
that companies use the purchase method of accounting for all business
combinations initiated after June 30, 2001 and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS 142 addresses the initial recognition and measurement of
intangible assets acquired outside a business combination and the recognition
and measurement of goodwill and other intangible assets subsequent to
acquisition. SFAS 143 requires recognition of the fair value of liabilities
associated with the retirement of long-lived assets when a legal obligation to
incur such costs arises as a result of the acquisition, construction,
development and/or the normal operation of a long-lived asset. Upon recognition
of the liability, a corresponding asset is recorded and depreciated over the
remaining life of the long-lived asset. SFAS 144 requires that one accounting
model be used for the long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and broadens the presentation of
discontinued operations to include more disposal transactions and resolves
implementation issues. The Company has reviewed the impact of the implementation
of SFAS 142, 143 and 144, and does not expect them to have a material effect on
the Company's financial position or results of operations.
Inflation
The Company, as well as the real estate development and homebuilding
industry in general, may be adversely affected by inflation, primarily because
of either reduced rates of savings by consumers during periods of low inflation
or higher land and construction costs during periods of high inflation. Low
inflation could adversely affect consumer demand by limiting growth of savings
for down payments, ultimately affecting demand for real estate and the Company's
revenues. High inflation increases the Company's costs of labor and materials.
The Company would attempt to pass through to its customers any increases in its
costs through increased selling prices. To date, high or low rates of inflation
have not had a material adverse effect on the Company's results of operations.
However, there is no assurance that high or low rates of inflation will not have
a material adverse impact on the Company's future results of operation.
Interest Rates
The Company's operations are interest-rate sensitive. Overall housing
demand is adversely affected by increases in interest costs. If mortgage
interest rates increase significantly, this may negatively impact the ability of
a home buyer to secure adequate financing. This could adversely affect the
Company's revenues, gross margins and profitability.
14
Cautionary Statement for Forward-Looking Information
Statements included in this Report may contain forward-looking statements.
Such statements may relate, but are not limited, to projections of revenues,
income or loss, capital expenditures, plans for growth and future operations,
competition and regulation as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted or quantified. When used in this Report, the
words "estimates", "expects", "anticipates", "believes", "plans", "intends" and
variations of such words and similar expressions are intended to identify
forward-looking statements that involve risks and uncertainties. Future events
and actual results could differ materially from those set forth in, contemplated
by or underlying the forward-looking statements. The factors that could cause
actual results to differ materially from those suggested by any such statements
include, but are not limited to, those discussed or identified from time to time
in the Company's public filings, including changes in general economic and
market conditions, changes in domestic laws and government regulations or
requirements, changes in real estate pricing environments, regional or general
changes in asset valuation, demographic and economic changes in the United
States generally and California in particular, increases in real estate taxes
and other local government fees, significant competition from other real estate
developers and homebuilders, decreased consumer spending for housing, delays in
construction schedules and cost overruns, availability and cost of land,
materials and labor, increased development costs, many of which the Company
would not be able to control, damage to properties or condemnation of
properties, the occurrence of significant natural disasters, imposition of
limitations on the Company's ability to develop its properties resulting from
developments in or new applications of environmental laws and regulations, the
inability to insure certain risks economically, the adequacy of loss reserves,
increases in prevailing interest rate levels, including mortgage rates,
increased interest costs as a result of a delay in project completion requiring
the financing to remain outstanding for a longer than projected period of time,
the availability of reliable energy sources and consumer confidence in the
dependability of such energy sources, and changes in the composition of the
Company's assets and liabilities through acquisitions or divestitures. Undue
reliance should not be placed on these forward-looking statements, which are
applicable only as of the date hereof. The Company undertakes no obligation to
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this Report or to reflect the
occurrence of unanticipated events.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
- ------- ---------------------------------------------------------
The Company does not have material market risk exposures.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
Financial Statements and supplementary data required by this Item 8 are set
forth at the pages indicated in Item 14(a) below.
Item 9. Disagreements on Accounting and Financial Disclosure.
- ------ ----------------------------------------------------
Not applicable.
15
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
The information to be included under the caption "Nominees for Election as
Directors" in HomeFed's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the 1934 Act in
connection with the 2002 annual meeting of stockholders of HomeFed (the "Proxy
Statement") is incorporated herein by reference. In addition, reference is made
to Item 10 in Part I of this Report.
Item 11. Executive Compensation.
- ------- ----------------------
The information to be included under the caption "Executive Compensation"
in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
The information to be included under the caption "Present Beneficial
Ownership of Common Stock" in the Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
The information to be included under the caption "Executive Compensation -
Certain Relationships and Related Transactions" in the Proxy Statement is
incorporated herein by reference.
16
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ------- ----------------------------------------------------------------
(a)(1) Financial Statements.
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31, 2001 and 2000 F-2
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Financial Statement Schedules.
Schedules are omitted because they are not required or are not
applicable or the required information is shown in the financial
statements or notes thereto.
(a)(3) Executive Compensation Plans and Arrangements.
1999 Stock Incentive Plan (filed as Annex A to the Company's Proxy
Statement dated November 22, 1999).
2000 Stock Incentive Plan (filed as Annex B to the Company's Proxy
Statement dated June 20, 2000).
(b) Reports on Form 8-K.
None.
(c) Exhibits.
2.1 Amended Disclosure Statement to the Company's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to
Exhibit 2.1 to the Company's current report on Form 8-K dated June 14,
1995).
2.2 The Company's Fourth Amended Plan of Reorganization Dated July 15,
1994 (incorporated by reference to Exhibit 2.2 to the Company's
current report on Form 8-K dated June 14, 1995).
2.3 Order Modifying and Confirming the Company's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to
Exhibit 2.3 to the Company's current report on Form 8-K dated June 14,
1995).
3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of the
Company (incorporated by reference to Exhibit 3.1 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
1995).
17
3.2 By-laws of the Company as amended through December 14, 1999.
10.1 Loan Agreement dated July 3, 1995 between the Company and Leucadia
Financial Corporation ("LFC") and Form of 12% Secured Convertible Note
due July 3, 2003 (incorporated by reference to Exhibit 10.2 to the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1995).
10.2 Paradise Valley Unit 1 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.3 Paradise Valley Unit 2 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.2 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.4 Paradise Valley Unit 1 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.3 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.5 Paradise Valley Unit 2 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.4 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.6 Paradise Valley Unit 3 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.5 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.7 Paradise Valley Unit 4 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.6 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.8 Real Estate Purchase Agreement and Escrow Instructions between
Southfork Partnership and Northfork Communities (incorporated by
reference to Exhibit 10.1 to the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1998).
10.9 Purchase and Sale Agreement and Escrow Instructions, dated as of
September 21, 1999, by and between Paradise Valley Communities No. 1
and Western Pacific Housing, Inc. (incorporated by reference to
Exhibit 10 to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1999).
10.10 Amended and Restated Loan Agreement between the Company and LFC, dated
as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to
the Company's report on Form 8-K dated August 14, 1998).
10.11 Development Management Agreement between the Company and Provence
Hills Development Company, LLC, dated as of August 14, 1998
(incorporated by reference to Exhibit 10.3 to the Company's report on
Form 8-K dated August 14, 1998).
18
10.12 Stock Purchase Agreement between the Company and Leucadia National
Corporation, dated as of August 14, 1998 (incorporated by reference to
Exhibit 10.1 to the Company's report on Form 8-K dated August 14,
1998).
10.13 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of September 20, 1999, between the Company and
Leucadia National Corporation (incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-2 (No.
333-79901) (the "Registration Statement")).
10.14 Stock Purchase Agreement, dated as of October 20, 1998, between the
Company and Leucadia National Corporation (incorporated by reference
to Exhibit 10.1 to the Company's report on Form 10-Q for the quarter
ended September 30, 1998).
10.15 Administrative Services Agreement, dated as of March 1, 2000, between
LFC, the Company, HomeFed Resources Corporation and HomeFed
Communities, Inc. (incorporated by reference to Exhibit 10.1 to the
Company's report on Form 10-Q for the quarter ended June 30, 2000).
10.16 Transitional Management Agreement, dated as of August 14, 1998, by and
between HomeFed and Accretive Investments, LLC (incorporated by
reference to Exhibit 10.17 to the Registration Statement).
10.17 Option and Purchase Agreement and Escrow Instructions, dated as of
October 15, 1999, by and between Otay Land Company, LLC and Lakes Kean
Argovitz Resorts-California, LLC. (incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (the "1999 10-K")).
10.18 First Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of December 8, 1999, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts-California, LLC
(incorporated by reference to Exhibit 10.18 to the Company's 1999
10-K).
10.19 Second Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of December 14, 1999, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts-California, LLC
(incorporated by reference to Exhibit 10.19 to the Company's 1999
10-K).
10.20 Purchase and Sale Agreement and Joint Escrow Instructions, dated as of
September 30, 1998, by and between Paradise Valley Communities No. 1
and Richmond American Homes of California, Inc. (incorporated by
reference to Exhibit 10.15 to the Registration Statement).
10.21 Amendment No. 1 dated as of November 1, 2000 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 (the "2000 10-K")).
10.22 Amendment No. 2 dated as of February 28, 2001 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by
reference to Exhibit 10.22 to the Company's 2000 10-K).
10.23 Line Letter dated as of March 1, 2001 from LFC to the Company
(incorporated by reference to Exhibit 10.23 to the Company's 2000
10-K).
10.24 Deferred Compensation Agreement, dated as of March 6, 2000, between
the Company and Joseph S. Steinberg (incorporated by reference to
Exhibit 10.24 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2000).
19
10.25 Amendment No. 1 dated as of March 1, 2002 to the Line Letter dated as
of March 1, 2001 from LFC to the Company.
10.26 Amendment No. 3 dated as of December 31, 2001 to the Administrative
Services Agreement dated as of March 1, 2000.
21 Subsidiaries of the Company.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOMEFED CORPORATION
Date: March 25, 2002 By /s/ Erin N. Ruhe
-----------------------------------
Erin N. Ruhe
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 25, 2002 By /s/ Joseph S. Steinberg
-----------------------------------
Joseph S. Steinberg, Chairman
of the Board and Director
Date: March 25, 2002 By /s/ Paul J. Borden
-----------------------------------
Paul J. Borden, President
and Director
(Principal Executive Officer)
Date: March 25, 2002 By /s/ Erin N. Ruhe
-----------------------------------
Erin N. Ruhe
Vice President and Controller
(Principal Financial and
Accounting Officer)
Date: March 25, 2002 By /s/ Patrick D. Bienvenue
-----------------------------------
Patrick D. Bienvenue, Director
Date: March 25, 2002 By /s/ Timothy Considine
-----------------------------------
Timothy Considine, Director
Date: March 25, 2002 By /s/ Ian M. Cumming
-----------------------------------
Ian M. Cumming, Director
Date: March 25, 2002 By /s/ Michael A. Lobatz
-----------------------------------
Michael A. Lobatz, Director
21
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
- ------ ----------- ----------
2.1 Amended Disclosure Statement to the Company's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to
Exhibit 2.1 to the Company's current report on Form 8-K dated June 14,
1995).
2.2 The Company's Fourth Amended Plan of Reorganization Dated July 15,
1994 (incorporated by reference to Exhibit 2.2 to the Company's
current report on Form 8-K dated June 14, 1995).
2.3 Order Modifying and Confirming the Company's Fourth Amended Plan of
Reorganization Dated July 15, 1994 (incorporated by reference to
Exhibit 2.3 to the Company's current report on Form 8-K dated June 14,
1995).
3.1 Restated Certificate of Incorporation, as restated July 3, 1995 of the
Company (incorporated by reference to Exhibit 3.1 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
1995).
3.2 By-laws of the Company as amended through December 14, 1999.
10.1 Loan Agreement dated July 3, 1995 between the Company and Leucadia
Financial Corporation ("LFC") and Form of 12% Secured Convertible Note
due July 3, 2003 (incorporated by reference to Exhibit 10.2 to the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1995).
10.2 Paradise Valley Unit 1 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.3 Paradise Valley Unit 2 First Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.2 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.4 Paradise Valley Unit 1 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.3 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.5 Paradise Valley Unit 2 Second Closing Purchase Agreement and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.4 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.6 Paradise Valley Unit 3 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.5 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
10.7 Paradise Valley Unit 4 Option to Purchase Real Property and Escrow
Instructions, dated October 3, 1996, between Paradise Valley
Communities No. 1 and The Forecast Group (Registered Trade Name), L.P.
(incorporated by reference to Exhibit 10.6 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
E-1
10.8 Real Estate Purchase Agreement and Escrow Instructions between
Southfork Partnership and Northfork Communities (incorporated by
reference to Exhibit 10.1 to the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1998).
10.9 Purchase and Sale Agreement and Escrow Instructions, dated as of
September 21, 1999, by and between Paradise Valley Communities No. 1
and Western Pacific Housing, Inc. (incorporated by reference to
Exhibit 10 to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1999).
10.10 Amended and Restated Loan Agreement between the Company and LFC, dated
as of August 14, 1998 (incorporated by reference to Exhibit 10.2 to
the Company's report on Form 8-K dated August 14, 1998).
10.11 Development Management Agreement between the Company and Provence
Hills Development Company, LLC, dated as of August 14, 1998
(incorporated by reference to Exhibit 10.3 to the Company's report on
Form 8-K dated August 14, 1998).
10.12 Stock Purchase Agreement between the Company and Leucadia National
Corporation, dated as of August 14, 1998 (incorporated by reference to
Exhibit 10.1 to the Company's report on Form 8-K dated August 14,
1998).
10.13 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of September 20, 1999, between the Company and
Leucadia National Corporation (incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-2 (No.
333-79901) (the "Registration Statement")).
10.14 Stock Purchase Agreement, dated as of October 20, 1998, between the
Company and Leucadia National Corporation (incorporated by reference
to Exhibit 10.1 to the Company's report on Form 10-Q for the quarter
ended September 30, 1998).
10.15 Administrative Services Agreement, dated as of March 1, 2000, between
LFC, the Company, HomeFed Resources Corporation and HomeFed
Communities, Inc. (incorporated by reference to Exhibit 10.1 to the
Company's report on Form 10-Q for the quarter ended June 30, 2000).
10.16 Transitional Management Agreement, dated as of August 14, 1998, by and
between HomeFed and Accretive Investments, LLC (incorporated by
reference to Exhibit 10.17 to the Registration Statement).
10.17 Option and Purchase Agreement and Escrow Instructions, dated as of
October 15, 1999, by and between Otay Land Company, LLC and Lakes Kean
Argovitz Resorts-California, LLC (incorporated by reference to Exhibit
10.17 to the Company's 1999 10-K).
10.18 First Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of December 8, 1999, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts-California, LLC
(incorporated by reference to Exhibit 10.18 to the Company's 1999
10-K).
10.19 Second Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of December 14, 1999, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts-California, LLC
(incorporated by reference to Exhibit 10.19 to the Company's 1999
10-K).
10.20 Purchase and Sale Agreement and Joint Escrow Instructions, dated as of
September 30, 1998, by and between Paradise Valley Communities No. 1
and Richmond American Homes of California, Inc. (incorporated by
reference to Exhibit 10.15 to the Registration Statement).
E-2
10.21 Amendment No. 1 dated as of November 1, 2000 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 (the "2000 10-K")).
10.22 Amendment No. 2 dated as of February 28, 2001 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by
reference to Exhibit 10.22 to the Company's 2000 10-K).
10.23 Line Letter dated as of March 1, 2001 from LFC to the Company
(incorporated by reference to Exhibit 10.23 to the Company's 2000
10-K).
10.24 Deferred Compensation Agreement, dated as of March 6, 2000, between
the Company and Joseph S. Steinberg (incorporated by reference to
Exhibit 10.24 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2000).
10.25 Amendment No. 1 dated as of March 1, 2002 to the Line Letter dated as
of March 1, 2001 from LFC to the Company.
10.26 Amendment No. 3 dated as of December 31, 2001 to the Administrative
Services Agreement dated as of March 1, 2000.
21 Subsidiaries of the Company.
E-3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of HomeFed Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' deficit
and cash flows, present fairly, in all material respects, the financial position
of HomeFed Corporation and Subsidiaries (the "Company") as of December 31, 2001
and 2000, and the results of their operations, changes in stockholders' deficit
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 13, 2002
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(Dollars in thousands, except par value)
2001 2000
---- ----
ASSETS
- ------
Land and real estate held for development and sale $ 23,890 $ 22,979
Cash and cash equivalents 1,454 1,631
Deposits and other assets 460 208
--------- ---------
TOTAL $ 25,804 $ 24,818
========= =========
LIABILITIES
- -----------
Note payable to Leucadia Financial Corporation $ 22,508 $ 21,474
Recreation center liability -- 41
Accounts payable and accrued liabilities 1,711 1,516
--------- ---------
Total liabilities 24,219 23,031
--------- ---------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
MINORITY INTEREST 13,208 12,208
- ----------------- --------- ---------
STOCKHOLDERS' DEFICIT
- ---------------------
Common stock, $.01 par value, 100,000,000 shares authorized;
56,808,076 and 56,807,826 shares outstanding 568 568
Additional paid-in capital 355,377 355,277
Deferred compensation pursuant to stock incentive plans (276) (351)
Accumulated deficit (367,292) (365,915)
--------- ---------
Total stockholders' deficit (11,623) (10,421)
--------- ---------
TOTAL $ 25,804 $ 24,818
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 2001, 2000 and 1999
(In thousands, except per share amounts)
2001 2000 1999
---- ---- ----
REVENUES
- --------
Fee income from San Elijo Hills $ 5,803 $ 3,508 $ --
Sales of residential properties -- 1,575 2,600
Income from options on real estate properties 720 92 43
------- ------- -------
6,523 5,175 2,643
------- ------- -------
EXPENSES
- --------
Cost of sales -- 1,544 2,636
Provision for losses on real estate investments -- -- 365
Interest expense relating to Leucadia Financial Corporation 2,646 2,510 2,404
General and administrative expenses 4,184 3,445 3,357
Administrative services fees to Leucadia Financial Corporation 107 255 296
------- ------- -------
6,937 7,754 9,058
------- ------- -------
Loss from operations (414) (2,579) (6,415)
Equity in losses from Otay Land Company, LLC -- -- (779)
Other income, net 704 162 216
------- ------- -------
Income (loss) before income taxes and minority interest 290 (2,417) (6,978)
Income tax (provision) benefit (667) 8 (24)
------- ------- -------
Loss before minority interest (377) (2,409) (7,002)
Minority interest (1,000) (1,000) (280)
------- ------- -------
Net loss $(1,377) $(3,409) $(7,282)
======= ======= =======
Basic loss per common share $ (0.02) $ (0.06) $ (0.22)
======= ======= =======
Diluted loss per common share $ (0.02) $ (0.06) $ (0.22)
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Deficit
For the years ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except par value)
Deferred
Common Compensation
Stock Additional Pursuant to Total
$.01 Par Paid-in Stock Incentive Accumulated Stockholders'
Value Capital Plans Deficit Deficit
----- ------- ----- ------- -------
Balance, January 1, 1999 $100 $346,919 $(355,224) $(8,205)
Issuance of 46,557,826 shares of
Common Stock 466 7,914 8,380
Net loss (7,282) (7,282)
---- -------- ----- --------- --------
Balance, December 31, 1999 566 354,833 (362,506) (7,107)
Issuance of 250,000 shares of
Common Stock related to restricted
stock grants 2 186 $(188) --
Amortization of restricted stock grants 51 51
Grant of 25,000 stock options 18 (18) --
Grant of 1,000,000 stock options 240 (240) --
Amortization related to stock options 44 44
Net loss (3,409) (3,409)
---- -------- ----- --------- --------
Balance, December 31, 2000 568 355,277 (351) (365,915) (10,421)
Amortization of restricted stock grants 63 63
Amortization related to stock options 112 112
Change in value of 1,000,000 stock options 100 (100) --
Net loss (1,377) (1,377)
---- -------- ----- --------- --------
Balance, December 31, 2001 $568 $355,377 $(276) $(367,292) $(11,623)
==== ======== ===== ========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,377) $(3,409) $(7,282)
Adjustments to reconcile net loss to net cash used for
operating activities:
Provision for losses on real estate investments -- -- 365
Minority interest 1,000 1,000 280
Amortization of deferred compensation pursuant to
stock incentive plans 175 95 --
Amortization of debt discount on note payable to
Leucadia Financial Corporation 1,034 922 816
Equity in losses from Otay Land Company, LLC -- -- 779
Changes in operating assets and liabilities:
Land and real estate held for development and sale (911) 728 1,912
Deposits and other assets (252) (50) 6
Recreation center liability (41) (929) 95
Accounts payable and accrued liabilities 195 (389) 1,546
Increase in restricted cash -- 868 259
------- ------- -------
Net cash used for operating activities (177) (1,164) (1,224)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Contributions to Otay Land Company, LLC -- -- (850)
Increase in other investments -- -- 79
------- ------- -------
Net cash used for investing activities -- -- (771)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds received from the sale of Common Stock -- -- 1,670
Borrowings under credit agreement with Leucadia Financial
Corporation 900 -- --
Payments related to credit agreement with Leucadia Financial
Corporation (900) -- --
------- ------- -------
Net cash provided by financing activities -- -- 1,670
------- ------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (177) (1,164) (325)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,631 2,795 3,120
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,454 $ 1,631 $ 2,795
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,612 $ 1,588 $ 1,588
======= ======= =======
Cash paid (refunded) for income taxes $ 668 $ (16) $ 44
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated financial statements
include the accounts of HomeFed Corporation (the "Company"), Otay Land Company,
LLC ("Otay Land Company") and the Company's wholly-owned subsidiaries, HomeFed
Communities, Inc. ("HomeFed Communities") and HomeFed Resources Corporation. The
Company is engaged, directly and through its subsidiaries, in the investment in
and development of residential real estate properties in California. All
significant intercompany balances and transactions have been eliminated in
consolidation.
During the third quarter of 1999, the limited liability agreement governing
Otay Land Company was amended and as a result, the Company now has the ability
to control Otay Land Company. Accordingly, effective September 20, 1999, Otay
Land Company has been included in the Company's consolidated financial
statements. The Company previously had accounted for this investment under the
equity method of accounting.
Certain amounts for prior periods have been reclassified to be consistent
with the 2001 presentation.
Land and Real Estate Held for Development and Sale - Land and real estate
held for development and sale is carried at the lower of cost or fair value less
costs to sell. The cost of land and real estate held for development and sale
includes all expenditures incurred in connection with the acquisition,
development and construction of the property, including interest and property
taxes. Land costs included in land and real estate held for development and sale
are allocated to lots based on relative fair values prior to development and are
charged to cost of sales at the time of sale.
Cash and Cash Equivalents - Cash and cash equivalents include short-term,
highly liquid investments that are readily convertible to cash.
Critical Accounting Policies and Estimates - The preparation of financial
statements in conformity with generally accepted accounting principles requires
the Company to make estimates and assumptions that affect the reported amounts
in the financial statements and disclosures of contingent assets and
liabilities. On an on-going basis, the Company evaluates all of these estimates
and assumptions. Actual results could differ from those estimates.
Revenue Recognition - Fee income for field overhead and management services
provided, and success fee income, are recognized when contractually earned. The
Company has not recognized any success fee income as none would have been
contractually earned. The Company receives co-op marketing and advertising fees
that are paid at the time builders sell homes, are generally based upon a fixed
percentage of the homes' selling price, and are recorded as revenue when the
home is sold. Revenue from the sale of real estate is recognized at the time
title is conveyed to the buyer at the close of escrow, minimum down payment
requirements are met, the terms of any notes received satisfy continuing payment
requirements, and there are no requirements for continuing involvement with the
properties. When it is determined that the earning process is not complete,
income is deferred using the installment, cost recovery or percentage of
completion methods of accounting, as appropriate.
Provisions for Losses on Real Estate Investments - Management periodically
assesses the recoverability of its real estate investments by comparing the
carrying amount of the investments with their fair value less costs to sell. The
process involved in the determination of fair value requires estimates as to
future events and market conditions. This estimation process assumes the Company
has the ability to complete development and dispose of its real estate
properties in the ordinary course of business based on management's present
plans and intentions. When management determines that the carrying value of
specific real estate investments should be reduced to properly record these
assets at fair value less costs to sell, this write-down is recorded as a charge
to current period operations. The provisions are based on estimates and the
ultimate loss may differ from those estimates.
F-6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Capitalization of Interest and Real Estate Taxes - Interest and real estate
taxes attributable to land and property construction are capitalized and added
to the cost of those properties while the properties are being actively
developed.
Income Taxes - The Company records a valuation allowance to reduce its
deferred taxes to the amount that is more likely than not to be realized. If the
Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment would
increase income in such period.
Recently Issued Accounting Standards - In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141"), which is effective for
all business combinations after June 30, 2001, Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is
effective for fiscal years beginning after December 15, 2001, and Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), which is effective for fiscal years beginning after
June 15, 2002. In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which is effective for fiscal years beginning after
December 15, 2001. SFAS 141 requires that companies use the purchase method of
accounting for all business combinations initiated after June 30, 2001 and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS 142 addresses the
initial recognition and measurement of intangible assets acquired outside a
business combination and the recognition and measurement of goodwill and other
intangible assets subsequent to acquisition. SFAS 143 requires recognition of
the fair value of liabilities associated with the retirement of long-lived
assets when a legal obligation to incur such costs arises as a result of the
acquisition, construction, development and/or the normal operation of a
long-lived asset. Upon recognition of the liability, a corresponding asset is
recorded and depreciated over the remaining life of the long-lived asset. SFAS
144 requires that one accounting model be used for the long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
broadens the presentation of discontinued operations to include more disposal
transactions and resolves implementation issues. The Company has reviewed the
impact of the implementation of SFAS 142, 143 and 144, and does not expect them
to have a material effect on the Company's financial position or results of
operations.
2. LAND AND REAL ESTATE HELD FOR DEVELOPMENT AND SALE
A summary of land and real estate held for development and sale by project
follows:
December 31,
-------------------------
2001 2000
---- ----
Paradise Valley $ 1,067,000 $ 1,060,000
Otay Ranch 22,823,000 21,919,000
---------- ----------
Total $23,890,000 $22,979,000
=========== ===========
No interest was capitalized in land and real estate held for development
and sale during 2001 and 2000. All land and real estate held for development and
sale is property in California and is pledged as collateral under the Company's
debt agreement.
The Company expects that its cash on hand and cash generated from
operations will be sufficient to meet its cash flow needs for the foreseeable
future. If, at any time in the future, the Company's cash flow is insufficient
to meet its then current cash requirements, the Company could seek to accelerate
its subsidiaries' sale of real estate projects held for development or seek to
borrow funds. However, because all of the Company's assets are pledged to
Leucadia to collateralize its $26,462,000 borrowing from Leucadia, it may be
unable to obtain financing from sources other than Leucadia.
F-7
3. INDEBTEDNESS
As of August 14, 1998, the Company and Leucadia Financial Corporation
("LFC"), a subsidiary of Leucadia National Corporation ("Leucadia"), entered
into an Amended and Restated Loan Agreement pursuant to which the Company and
LFC amended the original loan agreement dated July 3, 1995 and restructured the
Company's outstanding 12% Secured Convertible Note due 2003 ("Convertible Note")
held by LFC. The restructured note dated August 14, 1998 (the "Restructured
Note") has a principal amount of $26,462,000 (reflecting the original
$20,000,000 principal balance of the Convertible Note, together with additions
to principal resulting from accrued and unpaid interest thereon to the date of
the restructuring, as allowed under the terms of the Convertible Note), extends
the maturity date from July 3, 2003 to December 31, 2004, reduces the interest
rate from 12% to 6% and eliminates the convertibility feature of the Convertible
Note. The Restructured Note is collateralized by a security interest in all
assets of the borrower, whether now owned or hereafter acquired. No principal
payments are due under the Restructured Note until its maturity date.
As a result of the restructuring of the Convertible Note, the Restructured
Note was recorded at fair value and the approximate $7,015,000 difference
between the fair value of the Restructured Note and the carrying value of the
Convertible Note was reflected as additional paid-in capital. This difference
will be amortized as interest expense over the term of the Restructured Note
using the interest method. Approximately $1,034,000, $922,000 and $816,000 was
amortized to interest expense during 2001, 2000 and 1999, respectively.
Additional interest of $1,588,000 was expensed and paid during each of the years
in the three year period ended December 31, 2001.
In March 2001, the Company entered into a $3,000,000 line of credit
agreement with LFC. Loans outstanding under this line of credit bear interest at
10% per annum. Effective March 1, 2002, this agreement was amended to extend the
maturity to February 28, 2007, unless earlier terminated by Leucadia not later
than November 15 of any year, effective February 28 of the following year. At
December 31, 2001, no amounts were outstanding under this facility. Interest on
the line of credit of approximately $24,000 was expensed and paid during the
year ended December 31, 2001.
4. STOCK INCENTIVE PLANS
Under the Company's 1999 Stock Incentive Plan (the "Plan"), the Company may
grant options, stock appreciation rights and restricted stock to non-employee
directors, certain non-employees and employees up to a maximum grant of 300,000
shares to any individual in a given taxable year. The maximum number of Common
Shares which may be acquired through the exercise of options or rights under the
Plan cannot exceed, in the aggregate, 750,000; the maximum number of Common
Shares that may be awarded as restricted stock cannot exceed, in the aggregate,
250,000. The Plan provides for the issuance of options and rights at not less
than 100% of the fair market value of the underlying stock at the date of grant.
Options generally become exercisable in five equal instalments starting one year
from the date of grant. No stock appreciation rights have been granted. During
2000, 250,000 shares of restricted Common Stock were issued to eligible
participants, subject to certain forfeiture provisions. In connection with this
issuance of restricted stock, the Company recorded deferred compensation of
$188,000 representing the value of stock on the date of issuance based upon
market price. This amount will be amortized over the three year vesting period
of the restricted stock at which time all remaining forfeiture provisions will
end. In addition, during 2000, options to purchase an aggregate of 25,000 shares
of Common Stock were granted to non-employees at an exercise price of $.75 per
share (market price). In connection with this issuance, the Company recorded
deferred compensation of $18,000 based upon the estimated fair value of these
options at the time of grant, using the modified Black Scholes model. This
amount will be amortized over the five year vesting period of the options.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123"), establishes a fair value method for
accounting for stock-based compensation plans, either through recognition in the
statements of operations or disclosure. As permitted, the Company applies ABP
Opinion No. 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized in the statements of
operations related to employees and directors under its stock compensation
plans. Had compensation cost for the Company's fixed stock options been recorded
in the statements of operations consistent with the provisions of SFAS 123, the
Company's net loss and loss per share would not have been materially different
from that reported in 2001 and 2000.
F-8
4. STOCK INCENTIVE PLANS, continued
A summary of activity with respect to the Company's stock options for
employees and directors for 2001 and 2000 is as follows:
Common Weighted Available
Shares Average Options for Future
Subject to Exercise Exercisable Option
Option Price at Year-End Grants
------ ----- ----------- ------
Balance at January 1, 2000 0 $0.00 0 725,000
====== =======
Granted 161,000 $0.75
-------
Balance at December 31, 2000 161,000 $0.75 0 564,000
====== =======
Granted 6,000 $0.93
Exercised (250) $0.70
-------
Balance at December 31, 2001 166,750 $0.75 32,250 558,000
======= ====== =======
The weighted-average fair value of the options granted was $.73 per share
for 2001 and 2000 as estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) expected volatility of
117.7% for 2001 and 172.1% for 2000; (2) risk-free interest rate of 4.84% for
2001 and 6.61% for 2000; (3) expected lives of 4.0 years for 2001 and 5.9 years
for 2000; and (4) dividend yield of 0% for 2001 and 2000.
The following table summarizes information about fixed stock options
outstanding at December 31, 2001.
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------
Common Weighted Weighted Common Weighted
Shares Average Average Shares Average
Range of Subject to Remaining Exercise Subject to Exercise
Exercise Prices Option Contractual Life Price Option Price
- --------------- ------ ---------------- ----- ------ -----
$0.70 - $0.93 166,750 4.2 years $0.75 32,250 $0.75
In 2000, under the Company's 2000 Stock Incentive Plan (the "2000 Plan"),
the Company granted to two key employees options to purchase an aggregate of
1,000,000 shares of Common Stock at an exercise price of $.61 per share, the
then current market price per share. No additional options are available to be
granted under the 2000 Plan. The options are subject to achievement of
performance goals as determined by the Board of Directors and are exercisable
over a six year period. Options and stock issued on exercise of an option are
subject to forfeiture if the performance goals are not met within three years
from the date of grant. Deferred compensation, representing the difference
between the exercise price and the then current market price, is subject to
change based upon fluctuations in the Company's stock price. The deferred
compensation will be amortized over the expected performance period of three
years.
F-9
5. OTHER INCOME, NET
Other income, net for each of the three years in the period ended December
31, 2001 consists of the following (in thousands):
2001 2000 1999
---- ---- ----
Interest income $ 21 $114 $216
Reimbursement for fees and improvements
for previously sold property 678 -- --
Other 5 48 --
---- ---- ----
$704 $162 $216
==== ==== ====
6. INCOME TAXES
Income taxes for 2001 principally relates to the payment of federal and
state minimum taxes. The amount of minimum taxes in 2001 primarily reflects the
recognition of success fee income for tax purposes that is not recognized as
income for accounting purposes. Income taxes for 2000 and 1999 principally
relate to state franchise taxes. The Company has not recognized any tax benefit
from its operating losses in all years presented.
The Company and its wholly-owned subsidiaries have net operating loss
carryforwards ("NOLs") available for federal income tax purposes of $254,542,000
as of December 31, 2001. These carryforwards were generated during 1987 to 1999
and expire in 2002 to 2019. For state income tax purposes, available NOLs as of
December 31, 2001 total $17,792,000 and expire in 2002 to 2014. Most of these
NOLs are not available to reduce federal alternative minimum taxable income,
which is currently taxed at the rate of 20%. As a result, once the Company's
NOLs that are available to reduce federal alternative minimum taxable income are
either used or expire, the Company will pay federal income tax at a rate of 20%
during future periods, even if these NOLs are available to reduce regular
taxable income.
At December 31, the net deferred tax asset consisted of the following:
2001 2000
---- ----
NOL carryforwards $ 90,591,000 $ 99,685,000
Land basis 911,000 911,000
Other 6,599,000 30,000
--------- ------------
98,101,000 100,626,000
Valuation allowance (98,101,000) (100,626,000)
----------- ------------
$ 0 $ 0
============ =============
For all years presented, the valuation allowance has been provided on the
total amount of the deferred tax asset due to the uncertainty of future taxable
income necessary for realization of the deferred tax asset.
7. PROVISION FOR LOSSES ON REAL ESTATE INVESTMENTS
For the year ended December 31, 1999, the Company recorded a loss of
$365,000 due to the increase in estimated costs to build the recreation center
at the Paradise Valley project and for the revaluation of residential
properties. The loss was determined by comparing the carrying value of the
investment to its fair value less costs to sell based on offers the Company had
received and sales of comparable real estate.
F-10
8. EARNINGS PER SHARE
Basic and diluted loss per share of Common Stock was calculated by dividing
the net loss by the weighted average shares of Common Stock outstanding. The
number of shares used to calculate basic and diluted loss per Common Share was
56,807,903, 56,762,061 and 32,577,357 for 2001, 2000 and 1999, respectively.
Options to purchase 359,841 and 25,372 weighted average shares of common stock
outstanding during 2001 and 2000, respectively, were not included in the
computation of diluted loss per share as those options were antidilutive.
9. COMMITMENTS AND CONTINGENCIES
In accordance with the terms of a partnership agreement entered into in
1990 and amended in November 2000, a subsidiary of the Company is required to
maintain a minimum net worth of $1,000,000, which the subsidiary currently
meets. The partners agreed on the minimum net worth requirement in connection
with an indemnity agreement with a third party surety that has provided surety
bonds for the construction of infrastructure in a development in La Quinta,
California.
The Company is subject to various litigation which arises in the course of
its business. Based on discussions with counsel, management is of the opinion
that such litigation will have no material adverse effect on the consolidated
financial position of the Company, its consolidated results of operations or
liquidity.
10. OTHER RELATED PARTY TRANSACTIONS
The Company has entered into the following related party transactions with
Leucadia and LFC.
(a) Development Agreement. As of August 14, 1998, the Company entered into
a Development Management Agreement ("Development Agreement") with an indirect
subsidiary of Leucadia that owns certain real property located in the City of
San Marcos, County of San Diego, California, to develop a master-planned
residential project on such property. The project, known as San Elijo Hills, is
expected to be developed into a community of approximately 3,400 homes during
the course of the decade. The Development Agreement provides that the Company
will act as the development manager with responsibility for the overall
management of the project, including arranging financing for the project,
coordinating marketing and sales activity, and acting as the construction
manager. The Development Agreement provides for the Company to receive a profit
participation (as determined in accordance with the Development Agreement), and
fee income for field overhead, project management and marketing services based
on the revenues derived from the project. In 2001 and 2000, the Company recorded
$5,803,000 and $3,508,000, respectively, in fee income under the Development
Agreement, of which $1,029,000 and $44,000 was for co-op marketing and
advertising fees from builders in 2001 and 2000, respectively.
(b) Otay Land Company, LLC. As of October 14, 1998, the Company and
Leucadia formed Otay Land Company. The Company has contributed $11,825,000 as
capital and Leucadia has contributed $10,000,000 as a preferred capital
interest. The Company is the manager of Otay Land Company. Otay Land Company has
acquired, for approximately $19,500,000, approximately 4,800 acres of land,
which is part of a 22,900 acre project located south of San Diego, California,
known as Otay Ranch.
All distributions by Otay Land Company shall be distributed to the Company
and Leucadia in the following order of priority: (i) to pay Leucadia an annual
minimum cumulative preferred return of 10% on all preferred capital contributed
by Leucadia; (ii) to pay Leucadia an annual cumulative preferred return of 2% on
all preferred capital provided by Leucadia, but payable only out of and to the
extent there are profits; (iii) to repay all preferred capital provided by
Leucadia; and (iv) any remaining funds are to be distributed to the Company.
Leucadia's preferred capital interest and cumulative preferred return is
reflected as minority interest in the consolidated balance sheets.
(c) Administrative Services Agreement. Pursuant to administrative services
agreements, LFC provides administrative services to the Company on a
month-to-month basis, including providing the services of one of the Company's
executive officers. Administrative fees paid to LFC in 2001, 2000 and 1999 were
$107,000, $255,000 and $296,000, respectively.
F-11
10. OTHER RELATED PARTY TRANSACTIONS, continued
(d) The Company's corporate office is in part of an office building
subleased from Leucadia for a monthly amount equal to its share of Leucadia's
cost for such space and furniture. The agreement pursuant to which the space and
furnishings are provided extends through February 28, 2005 (coterminous with
Leucadia's occupancy of the space) and provides for a monthly rental of $19,000
effective March 1, 2001, which increased to $20,000 effective March 1, 2002. In
connection with these rentals, the Company paid Leucadia $246,000 in 2001 and
$219,000 in 2000.
(e) In March 2001, the Company entered into a $3,000,000 line of credit
agreement with Leucadia. Loans outstanding under this line of credit bear
interest at 10% per year. Effective March 1, 2002, this agreement was amended to
extend the maturity to February 28, 2007, unless earlier terminated by Leucadia
not later than November 15 of any year, effective February 28 of the following
year. At December 31, 2001, no amounts were outstanding under this facility.
Interest incurred and paid on the line of credit was approximately $24,000 for
the year ended December 31, 2001.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's material financial instruments include cash and cash
equivalents, and notes payable. In all cases, the carrying amounts of such
financial instruments approximate their fair values. In cases where quoted
market prices are not available, fair values are based on estimates using
present value techniques.
12. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
2001:
Fee income from San Elijo Hills $ 168 $ 1,601 $ 1,974 $ 2,060
======== ======= ======= =======
Income from options on real estate
properties $ 180 $ 180 $ 180 $ 180
======== ======= ======= =======
Income (loss) from operations $ (1,316) $ 129 $ 514 $ 259
======== ======= ======= =======
Net income (loss) $ (1,564) $ (113) $ 11 $ 289
======== ======= ======= =======
Basic income (loss) per common share $ (0.03) $ (0.00) $ 0.00 $ 0.01
======== ======= ======= =======
Diluted income (loss) per common share $ (0.03) $ (0.00) $ 0.00 $ 0.01
======== ======= ======= =======
2000:
Fee income from San Elijo Hills $ 878 $ 260 $ 944 $ 1,426
======== ======== ======= =======
Sales of residential properties $ -- $ 1,575 $ -- $ --
======== ======== ======= =======
Income from options on real estate
properties $ 32 $ -- $ -- $ 60
======== ======== ======= =======
Income (loss) from operations $ (659) $ (1,272) $ (901) $ 253
======== ======== ======= =======
Net income (loss) $ (875) $ (1,450) $(1,100) $ 16
======== ======== ======= =======
Basic income (loss) per common share $ (0.02) $ (0.03) $ (0.02) $ 0.00
======== ======== ======= =======
Diluted income (loss) per common share $ (0.02) $ (0.03) $ (0.02) $ 0.00
======== ======== ======= =======
In 2000, the total of quarterly per share amounts does not necessarily
equal the annual per share amount.
F-12