SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
1903 Wright Place, Suite 220, Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(760) 918-8200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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 ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On May 13, 1999, there were
10,000,000 outstanding shares of the Registrant's Common Stock, par value $.01
per share.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(Dollars in thousands, except par value)
----------------------------------------
March 31, December 31,
1999 1998
--------- -----------
(Unaudited)
ASSETS
Land and real estate held for development $ 23,090 $ 4,636
Cash and cash equivalents 4,015 3,120
Restricted cash 1,320 1,127
Investment in Otay Land Company, LLC -- 10,125
Other investments -- 79
Deposits and other assets 247 164
--------- ---------
TOTAL $ 28,672 $ 19,251
========= =========
LIABILITIES
Note payable to Leucadia Financial Corporation $ 20,320 $ 19,736
Accounts payables and accrued liabilities 1,051 802
--------- ---------
Total liabilities 21,371 20,538
--------- ---------
MINORITY INTEREST 10,000 --
--------- ---------
COMMON STOCK SUBSCRIPTION
Advance under common stock subscription 6,710 6,710
--------- ---------
STOCKHOLDERS' DEFICIT
Common Stock, $.01 par value;
100,000,000 shares authorized; 100 100
10,000,000 shares outstanding
Additional paid-in capital 346,919 346,919
Accumulated deficit (356,428) (355,016)
--------- ---------
Total stockholders' deficit (9,409) (7,997)
--------- ---------
TOTAL $ 28,672 $ 19,251
========= =========
See notes to interim consolidated financial statements.
2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended March 31, 1999 and 1998
(In thousands, except per share amounts)
(Unaudited)
--------------------------------------------------
1999 1998
---- ----
Sales of residential properties $ 2,250 $ 891
Cost of sales 2,218 894
------- -------
Gross profit (loss) 32 (3)
Provision for losses on real estate investments 255 --
Interest expense relating to Leucadia Financial Corporation 584 772
General and administrative expenses 575 131
Management fees to Leucadia Financial Corporation 74 17
------- -------
Loss from operations (1,456) (923)
Other income - net 52 70
------- -------
Loss before income taxes (1,404) (853)
Income tax expense (8) (9)
------- -------
Net loss $(1,412) $ (862)
======= =======
Basic loss per common share $ (0.14) $ (0.09)
======= =======
Diluted loss per common share $ (0.14) $ (0.09)
======= =======
See notes to interim consolidated financial statements.
3
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in
Stockholders' Deficit For the three
months ended March 31, 1999 and 1998
(In thousands)
(Unaudited)
-------------------------------------
Common
Stock Additional Total
$.01 Par Paid-In Accumulated Stockholders'
Value Capital Deficit Deficit
--------- ---------- ----------- -------------
Balance, January 1, 1998 $ 100 $ 339,904 $(350,743) $ (10,739)
Net loss (862) (862)
--------- --------- --------- ---------
Balance, March 31, 1998 $ 100 $ 339,904 $(351,605) $ (11,601)
========= ========= ========= =========
Balance, January 1, 1999 $ 100 $ 346,919 $(355,016) $ (7,997)
Net loss (1,412) (1,412)
--------- --------- --------- ---------
Balance, March 31, 1999 $ 100 $ 346,919 $(356,428) $ (9,409)
========= ========= ========= =========
See notes to interim consolidated financial statements.
4
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash
Flows For the three months ended
March 31, 1999 and 1998
(In thousands)
(Unaudited)
------------------------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,412) $ (862)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Provision for losses on real estate investments 255 --
Accrued interest added to note payable to Leucadia Financial Corporation 584 --
Changes in operating assets and liabilities:
Land and real estate held for development 1,545 324
Deposits and other assets (83) 237
Accounts payable and accrued liabilities 120 52
Decrease (increase) in restricted cash (193) 3
------- -------
Net cash provided by (used in) operating activities 816 (246)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other investments 79 (1)
------- -------
Net cash provided by (used in) investing activities 79 (1)
------- -------
Net increase (decrease) in cash and cash equivalents 895 (247)
Cash and cash equivalents, beginning of period 3,120 4,195
------- -------
Cash and cash equivalents, end of period $ 4,015 $ 3,948
======= =======
See notes to interim consolidated financial statements.
5
HOMEFED CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited interim consolidated financial statements, which reflect all
adjustments (consisting only of normal recurring items) that management
believes are necessary to present fairly the financial position, results of
operations and cash flows, should be read in conjunction with the audited
consolidated financial statements for HomeFed Corporation for the year
ended December 31, 1998 which are included in the Company's Annual Report
on Form 10-K, as amended by Form 10-K/A, for such year (the "1998 10-K").
Results of operations for interim periods are not necessarily indicative of
annual results of operations. The consolidated balance sheet at December
31, 1998 was derived from the Company's audited consolidated financial
statements in the 1998 10-K, and does not include all disclosures required
by generally accepted accounting principles for annual financial
statements.
During the first quarter of 1999, the limited liability company agreement
governing Otay Land Company, LLC ("Otay Land Company") was amended and as a
result, the Company now has the ability to control Otay Land Company.
Accordingly 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; the noncash effects
on the Consolidated Statements of Cash Flows are a decrease in the
investment in Otay Land Company of $10,125,000 and an increase in minority
interest of $10,000,000.
2. In 1992, the Company filed for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code. The Company emerged from bankruptcy in
1995 pursuant to a plan of reorganization (the "Plan"). Leucadia Financial
Corporation ("LFC"), an indirect wholly-owned subsidiary of Leucadia
National Corporation ("Leucadia"), principally funded the Plan by
purchasing a $20,000,000 principal amount, 12% secured convertible note due
2003 (the "Convertible Note") and 2,700,000 shares of newly issued common
stock, par value $.01 per share ("Common Stock") of the Company. In
addition, LFC received 1,417,986 shares of Common Stock of the Company
under the Plan. These shares, together with the shares LFC purchased,
constituted 41.2% of the issued and outstanding Common Stock of the Company
following the bankruptcy.
3. In August 1998, in connection with the stock purchase agreements and
development management agreement referred to below, the Company and LFC
entered into an Amended and Restated Loan Agreement, pursuant to which the
Company and LFC restructured the outstanding Convertible Note held by LFC.
The Restructured Note has a principal amount of approximately $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. Interest
only on the Restructured Note is paid quarterly and all unpaid principal is
due on the maturity date. During the three- month period ended March 31,
1999, interest of approximately $391,000 was accrued on the Restructured
Note; this amount was paid to LFC in April 1999. As a result of the
restructuring of the Convertible Note, the Restructured Note was recorded
at fair value and the approximately $7,015,000 difference between such
amount and the carrying value of the Convertible Note was reflected as
additional paid-in capital. The $7,015,000 difference between the fair
value of the Restructured Note and the carrying value of the Convertible
Note will be amortized as interest expense over the term of the
Restructured Note using the interest method. Approximately $193,000 was
amortized as interest expense during the three-month period ended March 31,
1999.
4. In August and October 1998, in connection with the execution of the
development management agreement for San Elijo Hills and the restructuring
of the Convertible Note, Leucadia entered into agreements to purchase, on
or after July 5, 1999, an additional 46,557,826 shares of Common Stock for
aggregate consideration of $8,380,000. In 1998, Leucadia irrevocably
transferred all of the Common Stock that it
6
beneficially owned, together with the stock purchase agreements, to a trust
(the "Leucadia Trust") formed for the benefit of Leucadia shareholders of
record as of August 25, 1998 (the "Trust Beneficiaries"). The Leucadia
Trust currently holds the 41.2% of the Company's issued and outstanding
Common Stock that LFC acquired under the Plan, together with the stock
purchase agreements. Upon consummation of the purchases under these stock
purchase agreements, the Leucadia Trust will beneficially own 89.6% of the
issued and outstanding Common Stock of the Company. Pursuant to the terms
of the agreement governing the Leucadia Trust, the Leucadia Trust will
terminate on the earlier of: (i) the date when all of the Company's Common
Stock and any rights remaining under the stock purchase agreements have
been distributed to the Trust Beneficiaries or (ii) December 31, 2001. The
Company has been advised that, as promptly as practicable following the
purchase of Common Stock under the two stock purchase agreements and the
effectiveness of a registration statement to be filed with the Securities
and Exchange Commission, the Leucadia Trust intends to distribute to its
beneficial holders all of the Company's Common Stock then owned by the
Leucadia Trust.
5. Basic loss per share of Common Stock for all periods presented was
calculated by dividing the net loss by the 10,000,000 shares of Common
Stock outstanding for the periods.
Diluted loss per share of Common Stock was calculated as described above.
The number of shares used to calculate diluted loss per share was
10,000,000 for 1999 and 1998. The calculation of diluted loss per share
does not include Common Stock equivalents of 46,557,826 and 54,400,000 for
1999 and 1998, respectively, which are antidilutive.
6. As of October 14, 1998, the Company and Leucadia formed Otay Land Company.
The Company initially contributed $10,000,000 as capital and Leucadia
contributed $10,000,000 as a preferred capital interest. The Company also
contributed $125,000 as capital in 1998 and $450,000 during the three-month
period ended March 31, 1999. 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. Distributions
of net income from this investment first will be paid to Leucadia until it
has received an annual cumulative preferred return of 12% on, and repayment
of, its preferred investment. Any remaining funds are to be distributed to
the Company.
7. Pursuant to administrative services agreements, LFC provides administrative
services to the Company, including providing the services of two of the
Company's three executive officers. Effective March 1, 1999, the Company
and LFC entered into a new three year administrative services agreement
pursuant to which the Company will pay LFC an administrative fee of
$296,101 for the first annual period, with the fee for subsequent annual
periods to be negotiated. Fees paid by the Company to LFC totaled $74,000
for the three-month period ended March 31, 1999.
The Company rents office space and furnishings from a subsidiary of
Leucadia for a monthly amount equal to its share of the Leucadia
subsidiary's cost for such space and furnishings. For the three months
ended March 31, 1999, the Company accrued $37,000 in rental expense,
related to space provided by Leucadia or its affiliates, to the Leucadia
subsidiary.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations.
The following should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's 1998 10-K.
Liquidity and Capital Resources
For the three-month period ended March 31, 1999, net cash was provided by
operating activities, principally from sales of residential properties. For the
three-month period ended March 31, 1998, net cash was used in operating
7
activities principally to fund interest and general and administrative expenses.
The Company's principal sources of funds are dividends or borrowings from its
subsidiaries, any fee income earned from the San Elijo Hills project and amounts
receivable and advanced pursuant to the stock purchase agreements described
herein. The Company is dependent upon the cash flow, if any, from the sale of
real estate and management fees in order to pay its expenses, including debt
service payments.
The Company expects that its cash on hand, together with cash generated from lot
sales and the remaining purchase price due pursuant to the August 1998 stock
purchase agreement described above, will be sufficient to meet its cash flow
needs for the foreseeable future. However, the Company's ability to fund the
cost of providing services required under the Development Management Agreement
for San Elijo Hills after 1999 will depend significantly upon the receipt of
fees under the development agreement as described below. If at any time in the
future the Company's cash flow is insufficient to meet its then current cash
requirements, the Company could sell real estate projects held for development
or seek to borrow funds. However, any additional financing from an unaffiliated
party cannot be collateralized by any of the Company's assets without LFC's
consent. Accordingly, the Company may be unable to obtain financing from sources
other than LFC or its affiliates.
The Development Agreement provides that the Company will receive certain fees in
connection with the project. These fees consist of marketing and management
service fees, are based on a fixed percentage of gross revenues received in
respect of the project and are expected to cover the Company's cost of providing
these services. In addition, the Development Agreement provides for payment of a
success fee under certain circumstances to the Company based on the net cash
flow from the project (as determined in accordance with the Development
Agreement), subject to a maximum success fee; the timing of the payment of any
success fee prior to the conclusion of the project will be at the discretion of
the project owner.
In order to determine net cash flow for purposes of calculating the success fee,
all cash expenditures of any nature whatsoever, including land development
costs, current period operating costs, indebtedness either collateralized by the
project (approximately $34,900,000 at March 31, 1999) or owed by the project's
owner to Leucadia (approximately $37,300,000 at March 31, 1999) (collectively,
"Indebtedness") will be deducted from total revenues received from the project.
The Company is entitled to receive payments out of net cash flow, up to the
aggregate amount of the Indebtedness, with the balance of the net cash flow (if
any) to be paid equally to the Company and the project owner. There can be no
assurance that the Company will receive any success fee for this project. The
Company believes that any success fee that it may receive will be all of the net
income the Company may earn as a result of its participation in the San Elijo
Hills project pursuant to the Development Agreement.
As of August 14, 1998, the Company and LFC restructured the original Convertible
Note held by LFC and the related loan agreement. The Restructured Note is in the
principal amount of approximately $26,462,000, 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. Interest only on
the Restructured Note is paid quarterly and all unpaid principal is due on the
date of maturity. During the three-month period ended March 31, 1999, the
Company accrued $391,000 in interest on the Restructured Note, which was paid to
LFC on April 14, 1999.
In the first quarter of 1999, the Company sold the remaining 75 residential lots
at the Paradise Valley project for $2,250,000, less closing costs. The Company
has certain continuing obligations with respect to this project, including the
obligation to construct a recreation center. The Company estimates that
construction of the recreation center for the Paradise Valley Community will be
completed at a cost of approximately $1,100,000. This obligation is
collateralized by a $1,000,000 collateralized letter of credit. The Company
anticipates construction of the recreation center will begin in 1999.
In February 1999, one of the Company's consolidated partnerships placed
approximately $197,000 on deposit with a financial institution in Salt Lake
City, Utah to secure a standby letter of credit. The letter of credit was
8
issued to guaranty the partnership's obligation to complete landscape,
irrigation and fencing improvements at the Paradise Valley project.
In connection with an indemnity agreement to a third party surety, a subsidiary
of the Company is required to maintain either a minimum net worth of $5,000,000
and a minimum cash balance of $400,000 or provide an irrevocable letter of
credit to such third party. Based upon current estimates, the amount of the
letter of credit required to satisfy this obligation would be approximately
$460,000. The Company has not elected to deliver this letter of credit, although
it may choose to do so in the future if it determines that the minimum net worth
requirement restricts its operating flexibility.
In October 1998, the Company and Leucadia formed Otay Land Company, LLC. Through
March 31, 1999, the Company invested $10,575,000 as capital and Leucadia
invested $10,000,000 as a preferred capital interest. The Company is the manager
of Otay Land Company. In 1998, Otay Land Company purchased approximately 4,800
acres of land that is part of a 22,900 acre project located south of San Diego,
California, known as Otay Ranch, for approximately $19,500,000. Distributions of
net income from this investment first will be paid to Leucadia until it has
received an annual cumulative preferred return of 12% on, and repayment of, its
preferred investment. Any remaining funds are to be distributed to the Company.
Results of Operations
Sales of residential properties increased in the three-month period ended March
31, 1999 as compared to the same period in 1998, as a result of the sale of the
remaining 75 residential lots in the Paradise Valley project in 1999. Cost of
sales recorded during these periods reflects the level of sales activity.
The provision for losses on real estate investments includes $225,000 reflecting
an increase in the Company's estimated cost to complete the recreational center
for the Paradise Valley Community.
Interest expense for 1999 reflects $391,000 due and subsequently paid to LFC on
the Restructured Note and $193,000 resulting from the amortization of a portion
of the difference between the fair value of the Restructured Note and the
carrying value of the Convertible Note. Interest expense for 1998 reflects
interest of $772,000 due on the Convertible Note which was paid by the Company.
General and administrative expenses increased in 1999 as compared to 1998 due to
the increased operating activities in connection with the San Elijo Hills
project and Otay Ranch project, including opening an office in Carlsbad,
California.
Income tax expense for all periods presented principally relates to state
franchise taxes. The Company has not recorded federal income tax benefits for
its operating losses due to the uncertainty of sufficient future taxable income
which is required in order to record such tax benefits.
The Year 2000 Issue
The Company is continuing to conduct a review of its computerized systems to
determine how its systems would be affected by the Year 2000 issues. The Company
has engaged a consultant to review certain of its computerized systems and their
Year 2000 compliance. Additionally, the Company is assessing all material third
parties with which the Company has material relationships to determine their
compliance with Year 2000 issues. The Company is seeking confirmation that all
such third parties are or will be Year 2000 compliant and expects such inquiry
to be completed by the fourth quarter of 1999.
To date the Company has not incurred any material expenses in its Year 2000
compliance efforts. No additional significant costs are anticipated and no other
information technology projects have been deferred as a result of Year 2000
issues.
9
With respect to outside parties that could affect the Company's business as a
result of Year 2000 problems, the Company believes that the most likely problems
would arise because of isolated instances of shortages of supplies. However, the
Company's suppliers are major businesses which it believes will be Year 2000
compliant. The Company has not developed a formal contingency plan but believes
there are adequate alternative suppliers which the Company could use in the
event that one of its suppliers was unable to provide supplies needed in its
operations. The Company believes that in the most reasonably likely worst case,
it would experience only a short-term problem causing a temporary disruption of
business. However, there can be no assurance that this belief will be correct or
that there will not be a material adverse effect on the Company's financial
condition or results of operations.
Cautionary Statement for Forward-Looking Information
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Interim Operations may contain forward-looking
statements. Such forward-looking statements are made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements may relate, but are not limited, to projections of revenues, income
or loss, capital expenditures, plans for growth and future operations (including
Year 2000 compatibility), 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 Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, 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 general economic and market conditions, changes in
domestic laws, regulations and taxes, changes in competition and pricing
environments, regional or general changes in asset valuation, the occurrence of
significant natural disasters, prevailing interest rate levels, the difficulty
in identifying hardware and software that may not be Year 2000 compliant, the
lack of success of third parties to adequately address the year 2000 issue, 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
Management's Discussion and Analysis of Financial Condition and Results of
Interim Operations or to reflect the occurrence of unanticipated events.
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Amended and Restated Limited Liability Company Agreement of Otay Land
Company, LLC, dated as of March 31, 1999, among HomeFed Corporation
and Leucadia National Corporation.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
11
SIGNATURES
Pursuant to the requirements 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
/s/ Corinne A. Maki
--------------------------------------------------
CORINNE A. MAKI, Treasurer
(Authorized Signatory and Principal Financial and
Accounting Officer)
Date: May 17, 1999
12
INDEX TO EXHIBITS
Exhibits
- --------
10.1 Amended and Restated Limited Liability Company Agreement of Otay
Land Company, LLC, dated as of March 31, 1999, among HomeFed
Corporation and Leucadia National Corporation.
27.1 Financial Data Schedule.
13