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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, 2002
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 Identification No.)
of Incorporation or Organization)
1903 Wright Place
Suite 220
Carlsbad, California 92008
(760) 918-8200
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(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].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [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 June 30, 2002, the aggregate
market value of the Registrant's Common Stock held by non-affiliates was
approximately $36,783,000 on that date.
As of March 14, 2003, there were 81,550,844 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 2003 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
================================================================================
1
PART I
Item 1. Business.
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THE COMPANY
Introduction
HomeFed Corporation ("HomeFed") was incorporated in Delaware in 1988. As
used herein, the term "Company" refers to HomeFed and its subsidiaries, except
as the context may otherwise require. 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 Company also investigates the
acquisition of new real estate projects, although no assurance can be given that
the Company will find new investments providing a satisfactory return or, if
found, that the Company will have access to the capital necessary to make new
real estate investments. 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 the owner of 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 develops and markets 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
Acquisition of CDS Holding Corporation ("CDS"). On October 21, 2002, the
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Company purchased from Leucadia National Corporation (together with its
subsidiaries, "Leucadia") all of the issued and outstanding shares of capital
stock of CDS, which through its majority-owned subsidiaries is the owner of the
San Elijo Hills project. The San Elijo Hills project, a master-planned community
located in the City of San Marcos in San Diego County, California, will be a
community of approximately 3,400 homes and apartments as well as commercial
properties that are expected to be completed during the course of this decade.
Since August 1998, the Company has been the development manager for 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 management agreement provided that the
Company would participate in the net cash flow of the project through the
payment of a success fee, and that the Company receive fees for the field
overhead, management and marketing services it provides, based on the revenues
of the project. No success fee had been paid prior to the Company's acquisition
of CDS.
2
The $25,000,000 purchase price consisted of $1,000,000 in cash and
24,742,268 shares of the Company's common stock, representing approximately
30.3% of the Company's outstanding shares. Prior to the acquisition of CDS, the
Company had the right to receive a substantial portion of CDS's share of the
project's net cash flow through the success fee arrangement. Since it already
owned the value represented by the success fee, the principal assets the Company
received through the purchase of the stock of CDS included cash and cash
equivalents of approximately $20,000,000, which will be used for future
development and other project related expenses, the value of CDS's residual
equity interest net of the success fee, and Leucadia's commitment to continue to
provide project improvement bonds which are required prior to the commencement
of any project development. After the acquisition of CDS, since the Company was
both an indirect owner of the San Elijo Hills project and the holder of the
rights to the success fee, the development management agreement was amended to
eliminate the success fee provisions.
Through its majority owned subsidiaries, CDS has an effective 68% indirect
equity interest in the San Elijo Hills project, due to minority interests held
by former owners of the project before CDS acquired its interest. However, CDS
has the right to the return of funds advanced to the project and to receive a
preferred return on its investment before any amounts are distributed to the
minority shareholders. For more information on the minority interests, see Note
6 to Consolidated Financial Statements.
The Company has included the financial position and results of operations
of CDS in its consolidated financial statements from October 21, 2002, the date
CDS was acquired. In order to determine the book value of the acquired assets
and liabilities, generally accepted accounting principles require an initial
allocation of the purchase price among individual assets and liabilities to be
based upon their relative fair values at the date of acquisition, which were
primarily determined based upon independent third-party appraisals. Further,
since the Company believes that the acquisition of CDS will enable it to
generate taxable income that will be offset by some of the Company's net
operating loss carryforwards ("NOLs"), it must record a deferred tax asset in
the purchase price allocation. If the aggregate fair values of the net assets
acquired exceed the purchase price, as was the case with CDS, generally accepted
accounting principles require that the excess be applied to reduce the fair
values of certain non-current assets, but not to reduce the deferred tax asset.
As a result of the application of these rules and the amount of cash and cash
equivalents acquired, only immaterial amounts were allocated to non-current
assets, including real estate. For more information on the accounting for the
acquisition of CDS, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 2 to Consolidated
Financial Statements.
Development Activity. The table below summarizes sales activity at the San
--------------------
Elijo Hills project prior to the Company's acquisition of CDS. Since the Company
was not the owner of the project, it did not reflect these sales in its
statements of operations. However, the Company did earn fees for these sales as
development manager, which are reflected in its statements of operations and
shown in the table.
Year Ended December 31,
(Dollars in thousands)
------------------------------------------
2002 (1) 2001 2000
---- -------- --------
Number of units sold (2) 365 691 528
Aggregate sales proceeds, net of closing costs:
Residential sites $28,100 $ 70,100 $ 71,100
Non-residential sites $ -- $ 13,400 $ --
Development management fees earned $ 1,610 $ 4,775 $ 3,464
(1) Reflects activity in 2002 prior to the Company's acquisition of CDS on
October 21, 2002.
(2) Units are comprised of single family lots and multi-family units.
3
In December 2002, one neighborhood consisting of 92 single family lots was
sold for an aggregate purchase price of $24,700,000, net of closing costs. Of
this amount, CDS received $17,100,000 in cash, $6,600,000 in a non-interest
bearing promissory note that will be paid by the purchaser upon completion of
certain improvements to the property and the balance was used to pay closing
costs and to satisfy trust deed indebtedness on the underlying land. The amount
due from the purchaser is secured by a first trust deed on the property. The
Company has recorded a gain on the sale of $2,800,000 in 2002 results of
operations and has deferred $16,300,000 of gain under the percentage of
completion method of accounting. For additional information on this sale, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
As of December 31, 2002, land representing 1,722 units, consisting of 1,369
single family lots, 81 multi-family units and 272 very low income apartment
units remain to be sold in the project. In addition, the project has certain
commercial lots and school sites that it expects to sell. The Company has
entered into agreements with home builders to sell 430 single family lots for
aggregate cash proceeds of $98,700,000, and received non-refundable option
payments from the purchasers totaling $8,000,000. These option payments will be
applied to reduce the amount due from the purchasers at closing.
The very low income apartment units that are planned represent an
obligation to provide affordable housing in the project. The Company does not
expect to earn a profit from the development of these units, and the issuance of
building permits for lots not currently under contract may be delayed until this
obligation is satisfied, thereby affecting the timing of future lot sales. In
addition, in order for the City of San Marcos to issue building permits to the
Company's prospective lot purchasers for lot sales not already under contract,
improvements to certain off site roads need to be under construction. The
Company is not responsible or obligated to make these improvements nor does it
have any control over the commencement of these improvements. In addition, the
road improvements will require other parties to acquire land and obtain
environmental permits prior to the commencement of construction. Although the
Company has been informed that these permits will be obtained and all necessary
land acquired such that the project will not be materially delayed, no assurance
can be given that the improvements will be under construction in a timely
manner.
Otay Ranch
In October 1998, the Company and Leucadia formed Otay Land Company, LLC
(the "Otay Land Company") to purchase approximately 4,850 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 $12,100,000 as capital and Leucadia has
contributed $10,000,000 as a preferred capital interest; the Company is the
managing member of Otay Land Company.
In 1993, the City of Chula Vista and the County of San Diego approved a
General Development Plan for the larger planning area. Although there is no
specified 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. 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
public transportation system, park systems and schools. Actual development of
any of these will require that further entitlements and approvals be obtained.
Any development within the larger Otay Ranch master-planned community must be
consistent with this General Development Plan. While the General Development
Plan can be amended, subject to approval by either or both of the City of Chula
Vista and the County of San Diego, Otay Land Company has certain vested and
contractual rights that protect its development interests in Chula Vista,
covering approximately 42% of its developable land.
In June 2002, Otay Land Company sold 85 acres of mostly developable land
for a sales price of $4,300,000. The sales proceeds were in addition to an
aggregate of $1,080,000 of option payments previously received from the
purchaser. The cash generated from this sale is not available for general
corporate use by the Company; however, as permitted by the provisions of the
Otay Land Company operating agreement, it was retained by Otay Land Company to
fund its project costs and operating expenses. Any distribution of available
cash from Otay Land Company must first be paid to Leucadia to satisfy its
cumulative preferred return and its preferred capital interest before any
distributions can be paid to the Company.
4
Of the approximately 4,760 acres currently owned by Otay Land Company, the
total developable area is approximately 1,430 acres, including approximately 380
acres of land designated as "Limited Development Area and Common Use Area." The
remaining approximately 3,330 acres are designated as various qualities of
non-developable open space mitigation land. Under the General Development Plan,
1.188 acres of open space mitigation land from within the Otay Ranch project
must be dedicated to the government for each 1.0 acre of land that is developed,
excluding land designated Limited Development Area and Common Use Area.
Otay Land Company has accepted an offer to sell approximately 1,445 acres
of land for a sales price of $22,500,000. The land to be sold includes 561
developable acres, 218 acres of Limited Development Area and Common Use Area and
666 acres of open space mitigation land. Closing of the transaction is subject
to the approval of federal government agencies. If the transaction closes, this
sale would result in a pre-tax gain of approximately $17,600,000, and the sales
proceeds would give Otay Land Company the ability to completely satisfy the
preferred capital interest and preferred return due to Leucadia (aggregating
$12,500,000 at December 31, 2002, inclusive of the incremental 2% annual
cumulative preferred return payable only to the extent there are profits). The
Company's obligation to sell this land to the offeror expires if the transaction
does not close by April 30, 2003.
Prior to the amendment and settlement discussed below, the schedule under
the General Development Plan for Otay Ranch called for the conveyance of
mitigation land from an identified initial area in which the Company owned 437
acres of mitigation land. Not all owners of developable land in the project have
enough mitigation land in this initial area of conveyance to enable them to meet
the mitigation requirements. Early in 2002, the City of Chula Vista proposed an
amended conveyance schedule that the Company initially had opposed. In August
2002, the Company reached an agreement with the City of Chula Vista and another
party in settlement of the Company's objection to the amendment of the
conveyance schedule, and the amendment was adopted. Under the settlement, among
other things, the Company withdrew its objection to the revised conveyance
schedule and the City agreed to acquire the Company's 437 acres of mitigation
land by eminent domain proceedings. As required by these proceedings, in 2002
the City of Chula Vista paid the Company an amount equal to the City's good
faith estimate of the value of this property, which totaled $2,524,000, although
title to the property has not yet been transferred to the City. The City is in
the process of appraising the property and an adjustment of the amount paid to
the Company, either up or down, could result if their appraisal is different
from the initial good faith estimate. Any increase or decrease to the amount
that the Company could ultimately receive for this property, as well as whether
all of the 437 acres actually will be transferred, will be based upon the
results of the eminent domain proceedings, the outcome of which cannot be
predicted. The Company has reflected the amounts received to date as a liability
and has not recognized any income; however, the proceeds have been remitted to
Leucadia to reduce its preferred capital interest.
Some owners 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 could develop within the larger Otay Ranch development area
as development progresses.
A market for the Company's excess mitigation land also exists among buyers
of such land in the San Diego County region. However, 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.
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 Otay Land Company may either develop or sell its
developable land; until such determination is made, Otay Land Company will not
know the nature or extent of the entitlements or approvals that may be required.
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. For additional information
concerning environmental matters, see "Environmental Compliance" below.
5
Other Projects
Paradise Valley. The Company owns a ten-acre site, previously zoned for
public facilities, at the Paradise Valley project, a community located in
Fairfield, California. At December 31, 2002, the book value of this site was
$1,230,000. In April 2002, the City of Fairfield approved a tentative map which
changed the zoning to allow for twenty-four 8,000 square foot residential lots
and a five-acre park. However, the Company cannot sell these lots until the City
of Fairfield issues final entitlements and the adjoining property owner
constructs an access road, both of which are expected to occur later in 2003.
Both the timing of the receipt of the final entitlements and the construction of
the access road are not within the Company's control, and Company's ability to
sell this property could be delayed. Once the final entitlements are received,
the City of Fairfield will have the right to acquire the park during the ensuing
three-year period, at its market value as of August 2001. If the City does not
exercise this right, the Company plans to seek to rezone the park for
residential use.
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.
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. Because of the
provisional nature of these approvals and the concerns of various environmental
and public interest groups, the approval process can be delayed by withdrawals
or modifications of preliminary approvals and by litigation and appeals
challenging development rights. The ability of the Company to develop projects
could be delayed or prevented due to litigation challenging previously obtained
governmental approvals. The Company may also be subject to periodic delays or
may be precluded entirely from developing in certain communities due to building
moratoriums or "slow-growth" or "no-growth" initiatives that could be
implemented in the future. Such 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.
6
Under various federal, state and local environmental laws, an owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances at that property. These
laws often impose liability without regard to whether the owner or operator knew
of, or was responsible for, the presence of the hazardous or toxic substances.
The presence of hazardous or toxic substances, or the failure to remediate these
substances when present, may adversely affect the owner's ability to sell or
rent that real property or to borrow funds using that real property as
collateral. It may impose unanticipated costs and delays on projects. Persons
who arrange for the disposal or treatment of hazardous or toxic wastes may also
be liable for the costs of the investigation, removal and remediation of those
wastes at the disposal or treatment facility, regardless of whether that
facility is owned or operated by that person. In addition to remediation actions
brought by federal, state and local agencies, the presence of hazardous
substances on a property could result in personal injury, contribution or other
claims by private parties. These claims could result in costs or liabilities
that could exceed the value of that property. We are not aware of any
notification by any private party or governmental authority of any claim in
connection with environmental conditions at any of our properties that we
believe will involve any material expenditure other than as disclosed herein.
The Company has obtained a preliminary remediation study concerning 34
acres of undeveloped land owned by Otay Land Company. The need for remediation
results from activities conducted on the land prior to the Company's ownership.
Based upon the preliminary findings of this study, the Company has estimated
that the cost to implement the most likely remediation alternative would be
approximately $11,200,000. The Company accrued that amount as an operating
expense in the third quarter of 2002. The estimated liability is neither
discounted nor reduced for potential claims for recovery from previous owners
and users of the land who may be liable, and may increase or decrease based upon
the actual extent and nature of the remediation required, the type of remedial
process approved, the expenses of the regulatory process, inflation and other
items. The Company is under no immediate obligation to commence remediation. The
Company is currently interviewing various environmental specialists and
evaluating alternative remediation processes which may impact the total cost.
Although this estimated liability is the Company's current best estimate, no
assurance can be given that the actual amount of environmental liability will
not exceed the amount of reserves for this matter or that it will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
Employees
At December 31, 2002, 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 Leucadia. Leucadia funded HomeFed's bankruptcy plan by purchasing
stock and a note of the Company. As of December 31, 2002, the principal amount
outstanding on the note was $26,462,000. The note is payable on December 31,
2007 and bears interest at 6% per year through 2004, 9% in 2005, 10% in 2006 and
11% in 2007. In 2002, the Company paid Leucadia $250,000 in connection with
amending certain terms of the note. Leucadia has also contributed $10,000,000 as
a preferred capital interest to Otay Land Company. In connection with the
Company's acquisition of CDS from Leucadia, Leucadia received 24,742,268 shares
of the Company's common stock, representing approximately 30.3% of the Company's
outstanding shares. For additional information, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
7
In 1999, Leucadia distributed all of the HomeFed common stock that it owned
to shareholders of Leucadia. As a result, at March 25, 2003, 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 8.8% and
9.5%, respectively, of the Company's outstanding common stock, before
consideration of the common shares owned by Leucadia. Mr. Steinberg is also
President and a director of Leucadia and Mr. Cumming is Chairman of the Board of
Leucadia. At March 25, 2003, 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 15.4% and 16.6%,
respectively, of Leucadia's outstanding common shares. In addition to their
ownership of HomeFed common stock (directly and through family members), as a
result of their beneficial ownership of Leucadia common shares, Messrs. Cumming
and Steinberg each may be deemed to be the beneficial owner of the shares of
HomeFed common stock beneficially owned by Leucadia.
Under the current administrative services agreement, which extends through
December 31, 2003, Leucadia provides services to the Company for a monthly fee
of $10,000. 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.
The cost of services provided by Leucadia during 2002 aggregated $120,000.
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 2002, the Company paid $87,000 in interest and
commitment fees. Effective March 1, 2002, this agreement was amended to extend
the maturity to February 28, 2007, although Leucadia had the right to terminate
the line of credit on an annual basis. In October 2002, the line of credit was
increased to $10,000,000 and Leucadia's ability to terminate the line of credit
prior to maturity was removed, unless the Company is in default. As of March 14,
2003, no amounts were outstanding under this facility.
Investor Information
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). Accordingly, the Company files
periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the "SEC"). Such reports, proxy statements and other
information may be obtained by visiting the Public Reference Room of the SEC at
450 Fifth Street, NW, Washington, D.C. 20549 or by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding the Company and other issuers that file
electronically.
The Company does not maintain a website. The Company will provide without
charge upon request copies of its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Requests
for such copies should be directed to: HomeFed Corporation, 1903 Wright Place,
Suite 220, Carlsbad, CA 92008 (telephone number (760) 918-8200), Attention:
Corporate Secretary.
Item 2. Properties.
- ------ ----------
The Company currently develops three real estate properties, the San Elijo
Hills project, the Otay Land Company project and the Paradise Valley project,
all of which are described under Item 1, Business. Real estate has an aggregate
book value of approximately $31,100,000 at December 31, 2002.
The Company leases 8,944 square feet for its corporate headquarters which
is located at 1903 Wright Place, Suite 220, Carlsbad, California 92008. A
portion of this space is sub-leased to Leucadia for a monthly rental of $8,400
in 2002 and $5,500 in 2003.
Item 3. Legal Proceedings.
- ------ -----------------
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.
Item 10. Executive Officers of the Registrant.
- ------- ------------------------------------
As of March 14, 2003, 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:
8
Name Age Position with HomeFed Office Held Since
- ---- --- --------------------- -----------------
Paul J. Borden 54 President 1998
Corinne A. Maki 46 Secretary and Treasurer 1995
Curt R. Noland 46 Vice President 1998
R. Randy Goodson 37 Vice President 2000
Simon G. Malk 33 Vice President 2000
Erin N. Ruhe 37 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 23 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 17 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 six 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.
9
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
- ------- -----------------------------------------------------------------
Matters.
--------
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, 2001
First Quarter $ 1.25 $ .79
Second Quarter .96 .75
Third Quarter 1.00 .90
Fourth Quarter .94 .82
Year ended December 31, 2002
First Quarter $ .99 $ .80
Second Quarter .99 .83
Third Quarter 1.09 .89
Fourth Quarter 1.79 .90
Year ending December 31, 2003
First quarter (through March 14, 2003) $1.55 $1.35
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 14, 2003, the closing bid price for the
Company's common stock was $1.37 per share. As of this date, there were 8,028
stockholders of record. The Company did not declare dividends on its common
stock during 2001 or 2002 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 Company and certain of its subsidiaries have tax loss carryforwards and
other tax attributes, the amount and availability of which are subject to
certain qualifications, limitations and uncertainties. In order to reduce the
possibility that certain changes in ownership could impose limitations on the
use of the tax loss carryforwards, the Company's certificate of incorporation
contains provisions which generally restrict the ability of a person or entity
from accumulating five percent or more of the common stock and the ability of
persons or entities now owning five percent or more of the common stock from
acquiring additional common stock. The restrictions will remain in effect until
the earliest of (a) December 31, 2010, (b) the repeal of Section 382 of the
Internal Revenue Code (or any comparable successor provision) and (c) the
beginning of a taxable year of the Company to which certain tax benefits may no
longer be carried forward.
The transfer agent for the Company's common stock is American Stock
Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038.
10
Item 6. Selected Financial Data.
- ------ -----------------------
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. The results of CDS are included in the Company's
consolidated results of operations from the date of acquisition (October 21,
2002). For more information on CDS, see Note 2 to Consolidated Financial
Statements.
Year Ended December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Revenues (1) $ 13,111 $ 6,523 $ 5,175 $ 2,643 $ 5,752
Expenses (2) 22,418 6,932 7,754 9,058 10,297
Loss before minority interest (9,375) (377) (2,409) (7,002) (4,481)
Net loss (11,086) (1,377) (3,409) (7,282) (4,481)
Basic loss per share $ (0.18) $ (0.02) $ (0.06) $ (0.22) $ (0.45)
Diluted loss per share $ (0.18) $ (0.02) $ (0.06) $ (0.22) $ (0.45)
At December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents $ 33,601 $ 1,454 $ 1,631 $ 2,795 $ 3,120
Real estate 31,108 23,890 22,979 23,707 5,008
Total assets 117,043 25,804 24,818 27,528 19,415
Note payable to Leucadia Financial Corporation 23,628 22,508 21,474 20,552 19,736
Notes payable to trust deed holders 16,704 -- -- -- --
Stockholders' equity (deficit) 1,650 (11,623) (10,421) (7,107) (8,205)
Shares outstanding 81,551 56,808 56,808 56,558 10,000
Book value per share $ 0.02 $ (0.20) $ (0.18) $ (0.13) $ (0.82)
(1) Prior to the acquisition of CDS includes development management fee income
from San Elijo Hills of $1,600,000, $4,800,000 and $3,500,000 for the years
ended December 31, 2002, 2001 and 2000, respectively. These payments will
no longer be reflected as revenues since they will be eliminated in
consolidation.
(2) For the year ended December 31, 2002, includes an $11,200,000 provision for
environmental remediation, which is more fully discussed in Results of
Operations below.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations.
--------------
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.
11
Liquidity and Capital Resources
Acquisition of CDS Holding Corporation
On October 21, 2002, the Company purchased from Leucadia all of the issued
and outstanding shares of capital stock of CDS, which through its majority-owned
subsidiaries is the owner of the San Elijo Hills project. The $25,000,000
purchase price consisted of $1,000,000 in cash and 24,742,268 shares of the
Company's common stock, representing approximately 30.3% of the Company's
outstanding shares. Since August 1998, the Company has been the development
manager for the San Elijo Hills project, for which it was entitled to
participate in the net cash flow of the project through the payment of a success
fee, and receive fees for the field overhead, management and marketing services
it provides, based on the revenues of the project. No success fee had been paid
prior to the Company's acquisition of CDS.
The Company has included the financial position and results of operations
of CDS in its consolidated financial statements from the date CDS was acquired.
At the date of acquisition, the purchase price for CDS was primarily allocated
to acquired cash and cash equivalents of approximately $20,000,000, a deferred
tax asset of approximately $45,100,000, and only immaterial amounts were
allocated to the real estate acquired and other non-current assets. The
principal liabilities of CDS and its subsidiaries included indebtedness
collateralized by the project real estate of approximately $17,600,000, and
deferred revenue of approximately $12,800,000. For additional information with
respect to the accounting for the acquisition, see Results of Operations below
and Note 2 to Consolidated Financial Statements.
Pursuant to an agreement with CDS and its subsidiaries, Leucadia has
historically provided project improvement bonds which were required prior to the
commencement of any project development. This agreement was not affected by the
Company's acquisition of CDS, and Leucadia will continue to obtain these bonds
on behalf of the project. The Company would not have been able to complete the
acquisition of CDS had CDS not had this commitment from Leucadia, as well as the
cash and cash equivalents referred to above. This liquidity is necessary so that
CDS can fund its future development and other project related expenses, which
the Company believes it will be able to do.
Other Liquidity Matters
For the year ended December 31, 2002, net cash was provided by operating
activities, principally from sales of real estate, whereas for the years ended
December 31, 2001 and 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 proceeds from the sale of real estate,
its $10,000,000 line of credit with Leucadia, fee income from the San Elijo
Hills project and dividends or borrowings from or repayment of advances by its
subsidiaries.
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 that 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.
The Company currently has a $10,000,000 line of credit agreement with
Leucadia, which has a maturity date of February 28, 2007. Loans outstanding
under this line of credit bear interest at 10% per year. As of March 14, 2003,
no amounts were outstanding under this facility.
Prior to the acquisition of CDS, in 2002 the Company received approximately
$1,600,000 of development management fees from the San Elijo Hills project,
which it recognized in its consolidated statement of operations. While
development management fees will continue to be a source of liquidity to the
parent company after the acquisition of CDS, they will no longer be reflected in
the consolidated statements of operations since they are intercompany payments
from a subsidiary and will be eliminated in consolidation. The Company also
receives co-op marketing and advertising fees from the San Elijo Hills project
that are paid by builders 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, 2002, the Company
received approximately $1,900,000 in co-op marketing and advertising fees.
12
In December 2002, one neighborhood consisting of 92 single family lots was
sold for an aggregate purchase price of $24,700,000, net of closing costs. Of
this amount, CDS received $17,100,000 in cash, $6,600,000 in a non-interest
bearing promissory note that will be paid by the purchaser upon completion of
certain improvements to the property and the balance was used to pay closing
costs and to satisfy trust deed indebtedness on the underlying land. The amount
due from the purchaser is secured by a first trust deed on the property and is
expected to be paid in the first half of 2003. The Company estimates that it
will spend approximately $4,900,000 to complete the required improvements to the
property, including costs related to common areas. The Company has recorded a
gain on the sale of $2,800,000 in 2002 results of operations and has deferred
$16,300,000 of gain under the percentage of completion method of accounting.
Otay Land Company has accepted an offer to sell approximately 1,445 acres
of land for a sales price of $22,500,000. If the transaction closes, this sale
would result in a pre-tax gain of approximately $17,600,000, and the sales
proceeds would give Otay Land Company the ability to completely satisfy the
preferred capital interest and preferred return due to Leucadia. Distributions
of net income from Otay Land Company must first be paid to Leucadia until it has
received its cumulative preferred return and repayment of its preferred capital
interest, which aggregated $12,500,000 at December 31, 2002 (inclusive of the
incremental 2% annual cumulative preferred return payable only to the extent
there are profits). Any remaining funds will be distributed to the Company. The
Company's obligation to sell this land to the offeror expires if the transaction
does not close by April 30, 2003.
As shown below, at December 31, 2002, the Company's contractual cash
obligations totaled $47,710,000. The Company's note payable to Leucadia is
collateralized by a security interest in all the assets of the Company, whether
now owned or hereafter acquired. No principal payments are due until its
maturity on December 31, 2007. The notes payable to trust deed holders are
collateralized by the San Elijo Hills project. For additional information, see
Note 5 to Consolidated Financial Statements.
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 to Leucadia $26,462 $ -- $ -- $26,462 $ --
Notes payable to trust deed holders 20,694 -- 596 596 19,502
Operating lease, net of sublease income 554 250 304 -- --
------- ----- ----- ------- -------
Total Contractual Cash Obligations $47,710 $ 250 $ 900 $27,058 $19,502
======= ===== ===== ======= =======
As of December 31, 2002, the principal amount outstanding on the note
payable to Leucadia was $26,462,000. The note is payable on December 31, 2007
and bears interest at 6% per year through December 31, 2004, 9% in 2005, 10% in
2006 and 11% in 2007. This obligation is reflected in the consolidated balance
sheet, net of debt discount, at $23,628,000 as of December 31, 2002.
As of December 31, 2002, the Company had NOLs of $240,540,000 available to
reduce its future federal income tax liabilities and NOLs of $3,569,000
available to reduce its future state income tax liabilities. A substantial
majority 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, to the extent these NOLs are
available to reduce regular taxable income.
13
Off-Balance Sheet Arrangements
The Company is required to obtain infrastructure improvement bonds
primarily for the benefit of the City of San Marcos prior to the beginning of
lot construction work and warranty bonds upon completion of such improvements at
the San Elijo Hills project. These bonds provide funds primarily to the City in
the event the Company is unable or unwilling to complete certain infrastructure
improvements in the San Elijo Hills project. Leucadia has obtained these bonds
on behalf of the Company, and the Company is responsible for paying all third
party fees related to obtaining the bonds. Should the City or others draw on the
bonds for any reason, certain of the Company's subsidiaries would be obligated
to reimburse Leucadia for the amount drawn. As of December 31, 2002, the amount
of outstanding bonds was approximately $30,000,000, none of which have been
drawn upon.
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.
Acquisition Accounting of CDS - In order to determine the book value of the
acquired assets and liabilities, generally accepted accounting principles
require an initial allocation of the purchase price among CDS's individual
assets and liabilities to be based upon their relative fair values at the date
of acquisition, which were primarily determined based upon independent
third-party appraisals. Further, since the Company believes that the acquisition
of CDS will enable it to generate taxable income that will be offset by some of
the Company's NOLs, it must record a deferred tax asset in the purchase price
allocation. If the aggregate fair values of the net assets acquired exceed the
purchase price, as was the case with CDS, generally accepted accounting
principles require that the excess be applied to reduce the fair values of
certain non-current assets, but not to reduce the deferred tax asset. As a
result of the application of these rules, at the date of acquisition the
purchase price was primarily allocated to cash and cash equivalents of
approximately $20,000,000, the deferred tax asset of approximately $45,100,000,
and only immaterial amounts were allocated to non-current assets, including real
estate. The deferred tax asset recognized represents the tax effect of the NOLs
that the Company expects to use to offset its future taxable income and the tax
effect of the difference between the book and tax bases of CDS's assets and
liabilities.
The amount recorded as a deferred tax asset was based on forecasted taxable
income of approximately $160,000,000. This estimate was based upon numerous
assumptions about the future, including future market conditions where the
Company's projects are located, regulatory requirements, estimates of future
real estate revenues and development costs, the ability of the Company to
realize taxable profits prior to the expiration of its NOLs, future interest
expense, operating and overhead costs and other factors. In addition, the
calculation of the deferred tax asset also recognizes that a substantial
majority of the Company's NOLs will not be available to offset alternative
minimum taxable income, which is currently taxed at a federal tax rate of 20%.
To the extent the Company's actual taxable income in the future exceeds its
estimate, the Company will recognize additional tax benefits; conversely, if the
actual taxable income is less than the amounts projected, an addition to the
valuation allowance would be recorded that would increase tax expense.
Profit Recognition on Sales of Real Estate - Profit from the sale of real
estate is recognized in full at the time title is conveyed to the buyer if the
profit is determinable, collectibility of the sales price is reasonably assured
(demonstrated by meeting minimum down payment and continuing investment
requirements), and the earnings process is virtually complete, such that the
seller is not obligated to perform significant activities after the sale and has
transferred to the buyer the usual risks and rewards of ownership. When it is
determined that all the conditions for full profit recognition have not been
met, revenue and profit is deferred using the deposit, installment, cost
recovery or percentage of completion method of accounting, as appropriate
depending upon the specific terms of the transaction.
14
Determining the amount of revenue and profit to be deferred when the
Company remains obligated to perform significant activities after the sale
requires an estimate of the cost of those future activities, and an allocation
of the profit to be recognized between performance at the date of the sale and
when the future activities are completed. The Company believes it can reasonably
estimate its future costs and profit allocation, however, such estimates are
based on numerous assumptions and require management's judgment. Actual costs
that are higher or lower than the Company's estimates will impact its
recognition of profit in the future.
Provision for Losses on Real Estate - The Company's real estate is carried
at the lower of cost or fair value less costs to sell. Management periodically
assesses the recoverability of its real estate investments by comparing the
carrying amount 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.
Income Taxes - The Company records a valuation allowance to reduce its
deferred tax asset to an amount that the Company expects is more likely than not
to be realized. If the Company's estimate of the realizability of its deferred
tax asset changes in the future, an adjustment to increase or decrease income
would be recorded in such period. The valuation allowance is determined after
considering all relevant facts and circumstances, but is significantly
influenced by the Company's projection of taxable income in the future. Since
any projection of future profitability is inherently unreliable, changes in the
valuation allowance should be expected.
Provision for Environmental Remediation - The Company records environmental
liabilities when it is probable that a liability has been incurred and the
amount or range of the liability is reasonably estimable. The Company has
obtained a preliminary remediation study concerning 34 acres of undeveloped land
owned by Otay Land Company. The need for remediation results from activities
conducted on the land prior to the Company's ownership. Based upon the
preliminary findings of this study, the Company has estimated that the cost to
implement the most likely remediation alternative would be approximately
$11,200,000. The Company accrued that amount as an operating expense in 2002.
The estimated liability is neither discounted nor reduced for potential claims
for recovery from previous owners and users of the land who may be liable, and
may increase or decrease based upon the actual extent and nature of the
remediation required, the type of remedial process approved, the expenses of the
regulatory process, inflation and other items. The Company is under no immediate
obligation to commence remediation. The Company is currently interviewing
various environmental specialists and evaluating alternative remediation
processes which may impact the total cost. Although this estimated liability is
the Company's current best estimate, no assurance can be given that the actual
amount of environmental liability will not exceed the amount of reserves for
this matter or that it will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Statement of Operations
Sales of real estate for 2002 reflect approximately $5,000,000 related to
the San Elijo Hills project (after the acquisition of CDS) and $4,300,000 from
the sale of 85 acres of developable land at the Otay Ranch project. In December
2002, one San Elijo Hills neighborhood consisting of 92 single family lots was
sold for an aggregate purchase price of approximately $24,700,000, net of
closing costs, of which approximately $3,600,000 was recognized as revenue and
the balance was deferred. The Company will recognize the balance of the deferred
revenue upon completion of the required improvements to the property, including
costs related to common areas, under the percentage of completion method of
accounting. In addition, the Company recognized $1,400,000 of deferred revenue
that was reflected as a liability on the acquired CDS balance sheet. There were
no real estate sales in 2001. Sales of real estate in 2000 reflect the sale of
two clustered housing development sites at the Paradise Valley project.
Although the historical book value of the San Elijo Hills' project land was
$47,800,000 at the date of acquisition, the initial value recorded by the
Company upon the application of purchase accounting was not material. As
discussed above, the principal reason for the difference is that under generally
accepted accounting principles, allocation of the purchase price to deferred tax
assets takes precedence over allocations to certain non-current assets. In
addition, the purchase price allocation to the deferred tax asset included a
reversal of a portion of the valuation allowance related to the Company's NOLs,
which the Company now expects to use as a result of the taxable income it now
expects to generate. Therefore, when the acquired real estate is sold, the gross
profit percentage on those sales will reflect a benefit from the historical cost
reduction.
15
During 2002, the gross profit recognized on sales of real estate aggregated
$3,000,000 and $3,500,000 for the San Elijo Hills and Otay Ranch projects,
respectively. In addition to the impact of purchase price allocation described
above, cost of sales recorded for the San Elijo project is based upon an
allocation of the real estate investment to the individual parcels within the
San Elijo Hills project. Cost of sales for the Otay Land project is also based
upon a similar allocation of project costs to individual parcels based upon
their relative fair values.
Prior to the acquisition of CDS, the Company recognized development
management fee income in its consolidated statements of operations. Development
management fee income from the San Elijo Hills project was approximately
$1,600,000, $4,800,000 and $3,500,000 for the years ended December 31, 2002,
2001 and 2000, respectively. The decrease in 2002 primarily reflects lower field
overhead and management services fees, due to reduced sales of real estate at
the San Elijo Hills project in 2002, and the cessation of recognizing such fee
income from the date of acquisition of CDS. Development management 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).
The Company recorded co-op marketing and advertising fees of approximately
$1,900,000, $1,000,000 and $40,000 for the years ended December 31, 2002, 2001
and 2000, respectively. The Company records these fees when the San Elijo Hills
project builders sell homes, and are generally based upon a fixed percentage of
the homes' selling price.
Income from options on real estate properties reflects non-refundable fees
of approximately $300,000, $700,000 and $100,000 in 2002, 2001 and 2000,
respectively, received to extend the closing date on the sale of the 85 acres of
developable land at the Otay Ranch project, which closed in June 2002. Income
from options on real estate properties in 2000 also reflects extension fees
relating to home site sales at the Paradise Valley project.
As more fully discussed above, the Company recorded a provision of
approximately $11,200,000, representing its estimated cost of environmental
remediation. The Company accrued this expense in the third quarter of 2002,
which is shown in consolidated results of operations as "Provision for
environmental remediation."
Interest expense reflects the interest due on indebtedness to Leucadia of
approximately $1,700,000, $1,600,000 and $1,600,000 for 2002, 2001 and 2000,
respectively. Interest expense also includes amortization of debt discount
related to the indebtedness to Leucadia of $1,100,000, $1,000,000 and $900,000
for 2002, 2001 and 2000, respectively.
General and administrative expenses increased in 2002 as compared to 2001
primarily due to expenses of $400,000 related to CDS, which was acquired in
October 2002, greater legal and professional fees, increased stock compensation
expense and increased salaries. The increase in legal and professional fees
principally reflects costs associated with the Otay Ranch project and expenses
related to acquisition opportunities. The increase in stock compensation expense
related to performance options granted in 2000 reflects the appreciation of the
Company's stock price in 2002.
General and administrative expenses increased in 2001 as compared to 2000
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.
The decrease in other income in 2002 as compared to 2001 primarily relates
to a reimbursement in 2001 for fees and improvements totaling approximately
$700,000 related to property previously sold, partially offset by increased
interest income, the gain on a sale of a foreclosed property and proceeds
received upon the dissolution of a partnership in excess of its recorded
investment balance. The increase in other income in 2001 as compared to 2000
principally reflects the reimbursement in 2001 for fees and improvements
discussed above, partially offset by reduced interest income.
16
The increase in minority expense in 2002 as compared to 2001 relates to
minority interest of CDS.
Income taxes paid for 2002 principally relate to state income taxes,
reduced by a refund of prior year federal alternative minimum tax payments.
Income taxes for 2001 principally relate to the payment of federal alternative
minimum tax and state income tax. Income taxes paid for 2000 principally relate
to state franchise taxes. In 2002 and 2000, the Company did not recognize income
tax benefits for its losses due to the uncertainty of sufficient future taxable
income which is required in order to recognize such tax benefits. The Company
expects that its effective federal income tax rate in the future will
approximate the federal statutory rate. For more information, see Note 9 to
Consolidated Financial Statements.
Recently Issued Accounting Standards
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which is effective
for exit or disposal activities initiated after December 31, 2002. SFAS 146
addresses issues regarding the recognition, measurement and reporting of costs
associated with exit and disposal activities, including restructuring
activities. SFAS 146 requires a liability be recognized at fair value for costs
associated with exit or disposal activities only when the liability is incurred
as opposed to at the time the Company commits to an exit plan as permitted under
Emerging Issues Task Force Issue No. 94-3. In November 2002, the FASB issued
FASB Interpretation No. 45 ("FIN 45"), which requires a guarantor for certain
guarantees to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN 45 are applied on a
prospective basis to guarantees issued or modified after December 31, 2002. In
addition, FIN 45 modified the disclosure requirements for such guarantees
effective for interim or annual periods ending after December 15, 2002. In
January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), which
addresses consolidation of variable interest entities, which are entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. FIN 46 applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 may be applied prospectively with a
cumulative effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements with a cumulative effect
adjustment as of the beginning of the first year restated. The Company does not
currently expect that the implementation of these standards will have a material
effect on the Company's consolidated results of operations or financial
condition.
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 adversely 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.
17
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.
Such forward-looking statements are made pursuant to the safe-harbor provisions
of the Private Securities Litigation Reform Act of 1995.
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.
In addition to risks set forth in the Company's other public filings with
the Securities and Exchange Commission, the following important factors could
cause actual results to differ materially from any results projected,
forecasted, estimated or budgeted:
o changes in general economic and market conditions or prevailing
interest rate levels, including mortgage rates;
o changes in domestic laws and government regulations or requirements;
o changes in real estate pricing environments;
o regional or general changes in asset valuation;
o changes in implementation and/or enforcement of governmental rules and
regulations;
o demographic and economic changes in the United States generally and
California in particular;
o increases in real estate taxes and other local government fees;
o significant competition from other real estate developers and
homebuilders;
o decreased consumer spending for housing;
o delays in construction schedules and cost overruns;
o availability and cost of land, materials and labor and increased
development costs many of which the Company would not be able to
control;
o damage to properties or condemnation of properties;
o the occurrence of significant natural disasters;
o imposition of limitations on the Company's ability to develop its
properties resulting from environmental laws and regulations and
developments in or new applications thereof;
o the inability to insure certain risks economically;
o 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;
o the availability of reliable energy sources in California and consumer
confidence in the dependability of such energy sources;
o changes in the composition of the Company's assets and liabilities
through acquisitions or divestitures;
o the actual cost of environmental liabilities concerning land owned in
San Diego County, California exceeding the amount reserved for such
matter; and
o the Company's ability to generate sufficient taxable income to fully
realize the deferred tax asset, net of the valuation allowance.
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.
18
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 15(a) below.
Item 9. Changes and Disagreements with Accountants on Accounting
- ------- --------------------------------------------------------
and Financial Disclosure.
------------------------
Not applicable.
19
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 2003 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.
- ------- --------------------------------------------------------------
Equity Compensation Plan Information
The following table summarizes information regarding the Company's equity
compensation plans as of December 31, 2002. All outstanding awards relate to the
Company's common stock.
Number of securities
remaining available
for future issuance
Number of Securities Weighted-average under equity
to be issued upon exercise price of compensation plans
exercise of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
- ------------- -------------------------------- -------------------- ------------------------
Equity compensation
plans approved by
security holders 1,197,250 $ .63 552,000
Equity compensation
plans not approved
by security holders -- -- --
--------- ----- -------
Total 1,197,250 $ .63 552,000
========= ===== =======
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.
20
Item 14. Controls and Procedures.
- ------- ----------------------
(a) Based on their evaluation as of a date within 90 days of the filing
date of this Annual Report on Form 10-K, the Company's chief executive officer
and chief financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act are
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b) There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
21
PART IV
Item 15. 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, 2002 and 2001 F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-3
Consolidated Statements of Changes in Stockholders'
Equity (Deficit)for the years ended December 31, 2002, 2001
and 2000 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 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.
The Company filed a Current Report on Form 8-K dated October 22, 2002
which set forth information under Item 2. Acquisition of Assets, Item
5. Other Events and Item 7. Financial Statements and Exhibits.
(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).
3.2 By-laws of the Company as amended through December 14, 1999
(incorporated by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (the "1999
10-K")).
22
3.3 Amendment to Amended and Restated Bylaws of the Company, dated July
10, 2002 (incorporated by reference to Exhibit 3.3 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
2002).
3.4 Certificate of Amendment of the Certificate of Incorporation of the
Company, dated July 10, 2002 (incorporated by reference to Exhibit 3.4
to the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2002).
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 current report on Form 8-K dated August 14, 1998).
23
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 current
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 current 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 quarterly 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 quarterly 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 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).
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 (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2001).
24
10.26 Amendment No. 3 dated as of December 31, 2001 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2001).
10.27 Third Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of June 21, 2002, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts - California, LLC
(incorporated by reference to Exhibit 10.27 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 2002).
10.28 Stock Purchase Agreement dated as of October 21, 2002, by and between
HomeFed Corporation and Leucadia National Corporation (incorporated by
reference to Exhibit 10.1 to the Company's current report on Form 8-K
dated October 22, 2002).
10.29 Registration Rights Agreement dated as of October 21, 2002, by and
between HomeFed Corporation and Leucadia National Corporation
(incorporated by reference to Exhibit 10.2 to the Company's current
report on Form 8-K dated October 22, 2002).
10.30 Second Amendment and Restated Loan Agreement dated as of October 9,
2002, by and between HomeFed Corporation and Leucadia Financial
Corporation (incorporated by reference to Exhibit 10.3 to the
Company's current report on Form 8-K dated October 22, 2002).
10.31 Second Amendment and Restated Variable Rate Secured Note dated as of
October 9, 2002 (incorporated by reference to Exhibit 10.4 to the
Company's current report on Form 8-K dated October 22, 2002).
10.32 Amended and Restated Line Letter dated as of October 9, 2002, by and
between HomeFed Corporation and Leucadia Financial Corporation
(incorporated by reference to Exhibit 10.5 to the Company's current
report on Form 8-K dated October 22, 2002).
10.33 Amended and Restated Term Note dated as of October 9, 2002
(incorporated by reference to Exhibit 10.6 to the Company's current
report on Form 8-K dated October 22, 2002).
10.34 Amendment No. 4 dated as of May 28, 2002 to the Administrative
Services Agreement dated as of March 1, 2000.
10.35 Amendment No. 5 dated as of November 15, 2002 to the Administrative
Services Agreement dated as of March 1, 2000.
10.36 Amendment dated as of October 21, 2002 to the Development Management
Agreement dated as of August 14, 1998.
10.37 Contribution Agreement between the Company and San Elijo Hills
Development Company, LLC, dated as of October 21, 2002.
10.38 Agreement and Guaranty, dated as of October 1, 2002 between Leucadia
National Corporation and CDS Holding Corporation.
10.39 Obligation agreement, dated as of October 1, 2002, between Leucadia
National Corporation and San Elijo Ranch, Inc.
21 Subsidiaries of the Company.
99.1 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
25
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 28, 2003 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 28, 2003 By /s/ JOSEPH S. STEINBERG
-------------------------------------
Joseph S. Steinberg, Chairman
of the Board and Director
Date: March 28, 2003 By /s/ PAUL J. BORDEN
--------------------------------------
Paul J. Borden, President and Director
(Principal Executive Officer)
Date: March 28, 2003 By /s/ ERIN N. RUHE
--------------------------------------
Erin N. Ruhe
Vice President and Controller
(Principal Financial and Accounting
Officer)
Date: March 28, 2003 By /s/ PATRICK D. BIENVENUE
--------------------------------------
Patrick D. Bienvenue, Director
Date: March 28, 2003 By /s/ TIMOTHY CONSIDINE
--------------------------------------
Timothy Considine, Director
Date: March 28, 2003 By /s/ IAN M. CUMMING
-------------------------------------
Ian M. Cumming, Director
Date: March 28, 2003 By /s/ MICHAEL A. LOBATZ
--------------------------------------
Michael A. Lobatz, Director
26
CERTIFICATIONS
I, Paul J. Borden, certify that:
1. I have reviewed this annual report on Form 10-K of HomeFed Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 By: /s/ Paul J. Borden
-------------------
Paul J. Borden
President
27
CERTIFICATIONS
I, Erin N. Ruhe, certify that:
1. I have reviewed this annual report on Form 10-K of HomeFed Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 By: /s/ Erin N. Ruhe
-----------------------------------
Erin N. Ruhe
Vice President and Controller
28
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
(incorporated by reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999 (the "1999 10-K")).
3.3 Amendment to Amended and Restated Bylaws of the Company, dated July 10,
2002 (incorporated by reference to Exhibit 3.3 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 2002).
3.4 Certificate of Amendment of the Certificate of Incorporation of the
Company, dated July 10, 2002 (incorporated by reference to Exhibit 3.4
to the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2002).
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).
29
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 current 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 current 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 current 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 quarterly 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
quarterly 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).
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).
30
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 (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2001).
10.26 Amendment No. 3 dated as of December 31, 2001 to the Administrative
Services Agreement dated as of March 1, 2000 (incorporated by reference
to Exhibit 10.26 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2001).
10.27 Third Amendment to Option and Purchase Agreement and Escrow
Instructions, dated as of June 21, 2002, by and between Otay Land
Company, LLC and Lakes Kean Argovitz Resorts - California, LLC
(incorporated by reference to Exhibit 10.27 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 2002).
10.28 Stock Purchase Agreement dated as of October 21, 2002, by and between
HomeFed Corporation and Leucadia National Corporation (incorporated by
reference to Exhibit 10.1 to the Company's current report on Form 8-K
dated October 22, 2002).
10.29 Registration Rights Agreement dated as of October 21, 2002, by and
between HomeFed Corporation and Leucadia National Corporation
(incorporated by reference to Exhibit 10.2 to the Company's current
report on Form 8-K dated October 22, 2002).
10.30 Second Amendment and Restated Loan Agreement dated as of October 9,
2002, by and between HomeFed Corporation and Leucadia Financial
Corporation (incorporated by reference to Exhibit 10.3 to the Company's
current report on Form 8-K dated October 22, 2002).
10.31 Second Amendment and Restated Variable Rate Secured Note dated as of
October 9, 2002 (incorporated by reference to Exhibit 10.4 to the
Company's current report on Form 8-K dated October 22, 2002).
10.32 Amended and Restated Line Letter dated as of October 9, 2002, by and
between HomeFed Corporation and Leucadia Financial Corporation
(incorporated by reference to Exhibit 10.5 to the Company's current
report on Form 8-K dated October 22, 2002).
10.33 Amended and Restated Term Note dated as of October 9, 2002 (incorporated
by reference to Exhibit 10.6 to the Company's current report on Form 8-K
dated October 22, 2002).
10.34 Amendment No. 4 dated as of May 28, 2002 to the Administrative Services
Agreement dated as of March 1, 2000.
10.35 Amendment No. 5 dated as of November 15, 2002 to the Administrative
Services Agreement dated as of March 1, 2000.
10.36 Amendment dated as of October 21, 2002 to the Development Management
Agreement dated as of August 14, 1998.
10.37 Contribution Agreement between the Company and San Elijo Hills
Development Company, LLC, dated as of October 21, 2002.
10.38 Agreement and Guaranty, dated as of October 1, 2002, between Leucadia
National Corporation and CDS Holding Corporation.
10.39 Obligation Agreement, dated as of October 1, 2002, between Leucadia
National Corporation and San Elijo Ranch, Inc.
21 Subsidiaries of the Company.
99.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
31
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' equity
(deficit) and cash flows, present fairly, in all material respects, the
financial position of HomeFed Corporation and Subsidiaries (the "Company") as of
December 31, 2002 and 2001, and the results of their operations, changes in
stockholders' equity (deficit) and their cash flows for each of the three years
in the period ended December 31, 2002, 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 14, 2003
F-1
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(Dollars in thousands, except par value)
2002 2001
---- ----
ASSETS
Real estate $ 31,108 $ 23,890
Cash and cash equivalents 33,601 1,454
Deposits and other assets 1,026 460
Deferred income taxes 44,742 --
Note receivable 6,566 --
--------- ---------
TOTAL $ 117,043 $ 25,804
========= =========
LIABILITIES
Note payable to Leucadia Financial Corporation $ 23,628 $ 22,508
Notes payable to trust deed holders 16,704 --
Deferred revenue 32,621 --
Accounts payable and accrued liabilities 6,323 1,711
Liability for environmental remediation 10,816 --
Income taxes payable 2,875 --
Other liabilities 7,294 --
--------- ---------
Total liabilities 100,261 24,219
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 15,132 13,208
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 100,000,000 shares authorized;
81,550,844 and 56,808,076 shares outstanding 816 568
Additional paid-in capital 379,630 355,377
Deferred compensation pursuant to stock incentive plans (418) (276)
Accumulated deficit (378,378) (367,292)
--------- ---------
Total stockholders' equity (deficit) 1,650 (11,623)
--------- ---------
TOTAL $ 117,043 $ 25,804
========= =========
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, 2002, 2001 and 2000
(In thousands, except per share amounts)
2002 2001 2000
-------- ------- --------
REVENUES
Sales of real estate $ 9,259 $ -- $ 1,575
Co-op marketing and advertising fees 1,942 1,028 44
Development management fee income from San Elijo Hills 1,610 4,775 3,464
Income from options on real estate properties 300 720 92
-------- -------- --------
13,111 6,523 5,175
-------- -------- --------
EXPENSES
Cost of sales 2,815 -- 1,544
Provision for environmental remediation 11,160 -- --
Interest expense relating to Leucadia Financial Corporation 2,780 2,646 2,510
General and administrative expenses 5,543 4,179 3,445
Administrative services fees to Leucadia Financial Corporation 120 107 255
-------- -------- --------
22,418 6,932 7,754
-------- -------- --------
Loss from operations (9,307) (409) (2,579)
-------- -------- --------
Other income, net 311 699 162
-------- -------- --------
Income (loss) before income taxes and minority interest (8,996) 290 (2,417)
Income tax (provision) benefit (379) (667) 8
-------- -------- --------
Loss before minority interest (9,375) (377) (2,409)
Minority interest (1,711) (1,000) (1,000)
-------- -------- --------
Net loss $(11,086) $ (1,377) $ (3,409)
======== ======== ========
Basic loss per common share $ (0.18) $ (0.02) $ (0.06)
======== ======== ========
Diluted loss per common share $ (0.18) $ (0.02) $ (0.06)
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the years ended December 31, 2002, 2001 and 2000
(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 Equity (Deficit)
-------- --------- --------------- ----------- ----------------
Balance, January 1, 2000 $ 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 performance-based
stock options 100 (100) --
Net loss (1,377) (1,377)
------ -------- ----- --------- --------
Balance, December 31, 2001 568 355,377 (276) (367,292) (11,623)
Issuance of 24,742,268 shares of Common
Stock 248 23,752 24,000
Amortization of restricted stock grants 63 63
Amortization related to stock options 295 295
Change in value of performance-based
stock options 500 (500) --
Exercise of options to purchase Common
Shares 1 1
Net loss (11,086) (11,086)
------ -------- ----- --------- --------
Balance, December 31, 2002 $ 816 $379,630 $(418) $(378,378) $ 1,650
====== ======== ===== ========= ========
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, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,086) $(1,377) $(3,409)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Minority interest 1,711 1,000 1,000
Provision for deferred income taxes 363 -- --
Provision for environmental remediation 11,160 -- --
Amortization of deferred compensation pursuant to stock incentive plans 358 175 95
Amortization of debt discount on note payable to Leucadia Financial
Corporation 1,120 1,034 922
Changes in operating assets and liabilities:
Real estate (6,855) (911) 728
Deposits and other assets 169 (252) (50)
Note receivable (6,566) -- --
Liability for environmental remediation (344) -- --
Recreation center liability -- (41) (929)
Deferred revenue 19,792 -- --
Accounts payable and accrued liabilities 183 195 (389)
Income taxes payable 286 -- --
Other liabilities 6,480 -- --
Increase in restricted cash -- -- 868
-------- -------- --------
Net cash provided by (used for) operating activities 16,771 (177) (1,164)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of CDS, net of cash acquired 18,979 -- --
-------- -------- --------
Net cash provided by investing activities 18,979 -- --
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreement with Leucadia Financial
Corporation 2,150 900 --
Payments related to credit agreement with Leucadia Financial
Corporation (2,150) (900) --
Distribution to minority interest (2,524) -- --
Payments to trust deed note holders (1,080) -- --
Exercise of options to purchase common shares 1 -- --
-------- -------- --------
Net cash used for financing activities (3,603) -- --
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,147 (177) (1,164)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,454 1,631 2,795
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,601 $ 1,454 $ 1,631
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,660 $ 1,612 $ 1,588
======== ======== ========
Cash paid (refunded) for income taxes $ (279) $ 668 $ (16)
======== ======== ========
NON-CASH INVESTING ACTIVITIES:
Common stock issued for acquisition of CDS $ 24,000 $ -- $ --
======== ======== ========
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 Resources Corporation and, since its acquisition in
October 2002, CDS Holding Corporation and its majority owned subsidiaries
("CDS"). The Company is engaged, directly and through its subsidiaries, in the
investment in and development of residential real estate properties in the state
of California. All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company's business, real estate development, is highly competitive, and
there are numerous residential real estate developers and development projects
operating in the same geographic area in which the Company operates. In
addition, 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. Timing of the
initiation and completion of development projects depends upon receipt of
necessary authorizations and approvals. Furthermore, changes in prevailing local
circumstances or applicable laws may require additional approvals, or
modifications of approvals previously obtained. 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 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. The Company's business may also be adversely affected by inflation and
is interest-rate sensitive.
Certain amounts for prior periods have been reclassified to be consistent
with the 2002 presentation.
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.
Acquisition Accounting of CDS - In order to determine the book values of
the acquired assets and liabilities, generally accepted accounting principles
require an initial allocation of the purchase price among CDS's individual
assets and liabilities to be based upon their relative fair values at the date
of acquisition, which were primarily determined based upon independent
third-party appraisals. Further, since the Company believes that the acquisition
of CDS will enable it to generate taxable income that will be offset by some of
the Company's net operating loss carryforwards ("NOLs"), it must record a
deferred tax asset in the purchase price allocation. If the aggregate fair
values of the net assets acquired exceed the purchase price, as was the case
with CDS, generally accepted accounting principles require that the excess be
applied to reduce the fair values of certain non-current assets, but not to
reduce the deferred tax asset. As a result of the application of these rules, at
the date of acquisition the purchase price was primarily allocated to cash and
cash equivalents of approximately $20,000,000, the deferred tax asset of
approximately $45,100,000, and only immaterial amounts were allocated to
non-current assets, including real estate. The deferred tax asset recognized
represents the tax effect of the NOLs that the Company expects to use to offset
its future taxable income and the tax effect of the difference between the book
and tax bases of CDS's assets and liabilities.
F-6
The amount recorded as a deferred tax asset was based on forecasted taxable
income of approximately $160,000,000. This estimate was based upon numerous
assumptions about the future, including future market conditions where the
Company's projects are located, regulatory requirements, estimates of future
real estate revenues and development costs, the ability of the Company to
realize taxable profits prior to the expiration of its NOLs, future interest
expense, operating and overhead costs and other factors. In addition, the
calculation of the deferred tax asset also recognizes that a substantial
majority of the Company's NOLs will not be available to offset alternative
minimum taxable income, which is currently taxed at a federal tax rate of 20%.
To the extent the Company's actual taxable income in the future exceeds its
estimate, the Company will recognize additional tax benefits; conversely, if the
actual taxable income is less than the amounts projected, an addition to the
valuation allowance would be recorded that would increase tax expense.
Profit Recognition on Sales of Real Estate - Profit from the sale of real
estate is recognized in full at the time title is conveyed to the buyer if the
profit is determinable, collectibility of the sales price is reasonably assured
(demonstrated by meeting minimum down payment and continuing investment
requirements), and the earnings process is virtually complete, such that the
seller is not obligated to perform significant activities after the sale and has
transferred to the buyer the usual risks and rewards of ownership. When it is
determined that all the conditions for full profit recognition have not been
met, revenue and profit is deferred using the deposit, installment, cost
recovery or percentage of completion method of accounting, as appropriate
depending upon the specific terms of the transaction.
Determining the amount of revenue and profit to be deferred when the
Company remains obligated to perform significant activities after the sale
requires an estimate of the cost of those future activities, and an allocation
of the profit to be recognized between performance at the date of the sale and
when the future activities are completed. The Company believes it can reasonably
estimate its future costs and profit allocation, however, such estimates are
based on numerous assumptions and require management's judgment. Actual costs
that are higher or lower than the Company's estimates will impact its
recognition of profit in the future.
Provision for Losses on Real Estate - The Company's real estate is carried
at the lower of cost or fair value less costs to sell. Management periodically
assesses the recoverability of its real estate investments by comparing the
carrying amount 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.
Income Taxes - The Company records a valuation allowance to reduce its
deferred tax asset to an amount that the Company expects is more likely than not
to be realized. If the Company's estimate of the realizability of its deferred
tax asset changes in the future, an adjustment to increase or decrease income
would be recorded in such period. The valuation allowance is determined after
considering all relevant facts and circumstances, but is significantly
influenced by the Company's projection of taxable income in the future. Since
any projection of future profitability is inherently unreliable, changes in the
valuation allowance should be expected.
Provision for Environmental Remediation - The Company records environmental
liabilities when it is probable that a liability has been incurred and the
amount or range of the liability is reasonably estimable. The Company has
obtained a preliminary remediation study concerning 34 acres of undeveloped land
owned by Otay Land Company. The need for remediation results from activities
conducted on the land prior to the Company's ownership. Based upon the
preliminary findings of this study, the Company has estimated that the cost to
implement the most likely remediation alternative would be approximately
$11,200,000. The Company accrued that amount as an operating expense in 2002.
The estimated liability is neither discounted nor reduced for potential claims
for recovery from previous owners and users of the land who may be liable, and
may increase or decrease based upon the actual extent and nature of the
remediation required, the type of remedial process approved, the expenses of the
regulatory process, inflation and other items. The Company is under no immediate
obligation to commence remediation. The Company is currently interviewing
various environmental specialists and evaluating alternative remediation
processes which may impact the total cost. Although this estimated liability is
the Company's current best estimate, no assurance can be given that the actual
amount of environmental liability will not exceed the amount of reserves for
this matter or that it will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
F-7
Real Estate - Real estate, which consists of land 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 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 equivalents are money market accounts and
short-term, highly liquid investments that are readily convertible to cash.
Recognition of Fee Income - The Company receives co-op marketing and
advertising fees from the San Elijo Hills project 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. Prior to its
acquisition of CDS, the Company recognized fee income for field overhead and
management services from the San Elijo Hills project when contractually earned.
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.
Stock-Based Compensation - 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 APB 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 2002, 2001 and 2000.
Recently Issued Accounting Standards - In July 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"), which is effective for exit or disposal activities
initiated after December 31, 2002. SFAS 146 addresses issues regarding the
recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS 146 requires a
liability be recognized at fair value for costs associated with exit or disposal
activities only when the liability is incurred as opposed to at the time the
Company commits to an exit plan as permitted under Emerging Issues Task Force
Issue No. 94-3. In November 2002, the FASB issued FASB Interpretation No. 45
("FIN 45"), which requires a guarantor for certain guarantees to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applied on a prospective basis to
guarantees issued or modified after December 31, 2002. In addition, FIN 45
modified the disclosure requirements for such guarantees effective for interim
or annual periods ending after December 15, 2002. In January 2003, the FASB
issued FASB Interpretation No. 46 ("FIN 46"), which addresses consolidation of
variable interest entities, which are entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. FIN 46 applies in the first fiscal year or interim
period beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 may be applied prospectively with a cumulative-effect adjustment as of
the date on which it is first applied or by restating previously issued
financial statements with a cumulative-effect adjustment as of the beginning of
the first year restated. The Company does not currently expect that the
implementation of these standards will have a material effect on the Company's
consolidated results of operations or financial condition.
F-8
2. ACQUISITION
On October 21, 2002, the Company purchased from Leucadia National
Corporation ("Leucadia") all of the issued and outstanding shares of capital
stock of CDS which, through its majority-owned indirect subsidiary, San Elijo
Hills Development Company, LLC ("San Elijo"), is the owner of the San Elijo
Hills project, a master-planned community located in the City of San Marcos, in
San Diego County, California. Since August 1998, the Company has been the
development manager for the San Elijo Hills project, for which it was entitled
to participate in the net cash flow of the project through the payment of a
success fee, and receive fees for the field overhead, management and marketing
services it provides, based on the revenues of the project. No success fee had
been paid prior to the Company's acquisition of CDS.
The purchase price of $25,000,000 consisted of $1,000,000 in cash and
24,742,268 shares of the Company's common stock, which represents approximately
30.3% of the Company's outstanding common shares. Prior to the acquisition,
Leucadia had also committed to continue to provide to San Elijo project
improvement bonds which are required prior to the commencement of any project
development. The results of CDS have been included in the Company's consolidated
results of operations from the date of acquisition.
The acquisition balance sheet of CDS is as follows (in thousands):
Assets:
- -------
Real estate $ 139
Cash and cash equivalents 19,979
Investments 275
Deposits and other assets 460
Deferred income taxes 45,105
-------
Total assets acquired 65,958
-------
Liabilities:
- ------------
Notes payable to trust deed holders 17,560
Deferred revenue 12,829
Accounts payable and accrued liabilities 4,429
Other liabilities 3,403
-------
Total liabilities assumed 38,221
-------
Minority Interest 2,737
-------
Purchase Price $25,000
=======
The following unaudited pro forma financial information presents results
for the years ended December 31, 2002 and 2001 as if the acquisition had
occurred at the beginning of the respective periods (in thousands, except per
share amounts):
2002 2001
---- ----
Sales of real estate $33,920 $80,721
Total revenues $36,162 $82,469
Income (loss) from operations $(2,441) $26,139
Minority interest $(2,124) $(3,337)
Net income (loss) $(3,110) $14,505
Basic earnings (loss) per common share $ (.04) $ .18
Diluted earnings (loss) per common share $ (.04) $ .18
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of either the Company's
operating results that would have occurred had the acquisition been consummated
at the beginning of the respective periods, or of the Company's future operating
results.
F-9
3. REAL ESTATE
A summary of real estate by project is as follows (in thousands):
December 31,
-----------------------
2002 2001
---- ----
Otay Ranch $23,856 $22,823
San Elijo Hills 6,023 --
Paradise Valley 1,229 1,067
------- -------
Total $31,108 $23,890
======= =======
Interest totaling $224,000, related to the San Elijo Hills project, was
incurred and capitalized in real estate during 2002. No interest was capitalized
during 2001. All of the San Elijo Hills project land is pledged as collateral
for the notes payable to trust deed holders described in Note 5, below.
4. NOTE RECEIVABLE
In December 2002, CDS sold 92 residential sites at the San Elijo Hills
project to a home builder for net proceeds of $23,657,000, consisting of cash of
$17,091,000 and a non-interest bearing note receivable in the amount of
$6,566,000. The note matures upon the completion of certain improvements to the
property, but cannot exceed one year. The note is secured by a first trust deed
on the property.
5. INDEBTEDNESS
As of August 14, 1998, the Company and Leucadia Financial Corporation
("LFC"), a subsidiary of 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, extended the maturity date from July 3, 2003 to
December 31, 2004, reduced the interest rate from 12% to 6% and eliminated 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. On October 9, 2002, the maturity date
of this note was extended from December 31, 2004 to December 31, 2007 and the
interest rate was increased to 9% for 2005, 10% for 2006 and 11% for 2007. The
effective interest rate for the year ended December 31, 2002 was 11.8%. In
connection with these amendments, the Company paid LFC a $250,000 fee.
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 based on the expected retirement date,
December 31, 2005, using the interest method. Approximately $1,120,000,
$1,034,000 and $922,000 was amortized to interest expense during 2002, 2001 and
2000, respectively. Additional interest of $1,588,000 was expensed and paid
during each of the years in the three year period ended December 31, 2002.
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, although LFC had the right to terminate the line
of credit on an annual basis. On October 9, 2002, the line of credit was
increased from $3,000,000 to $10,000,000 and LFC's ability to terminate the line
of credit prior to maturity was removed, unless the Company is in default. At
December 31, 2002 and 2001, no amounts were outstanding under this facility.
Interest on the line of credit of approximately $72,000 and $24,000 was expensed
during the years ended December 31, 2002 and 2001, respectively.
F-10
Notes payable to trust deed holders consist of non-recourse promissory
notes that mature on December 31, 2010, are non-interest bearing and are
collateralized by the San Elijo Hills project land. When a portion of the San
Elijo Hills project is sold, a specified amount is required to be paid to the
note holder in order to obtain a release of their security interest in the land.
Such amount is specified in the note agreements and takes into consideration
prior note payments. In addition, depending upon the amount of payments made to
release their security interest for prior sales, the notes may require minimum
annual payments. The minimum annual payments are currently $298,000 for annual
periods subsequent to 2003. The sum of all payments made under these notes,
whether denominated as interest, principal or otherwise, cannot exceed
approximately $42,100,000. As of December 31, 2002, $21,398,000 of payments have
been made.
The notes payable to trust deed holders were recorded at fair value at the
date of acquisition of CDS, based on the estimated future payments discounted at
6.5%. The activity for the period from date of acquisition through December 31,
2002 is as follows (in thousands):
Balance at acquisition $17,560
Principal payments (1,080)
Interest added to principal 224
-------
Balance at December 31, 2002 $16,704
=======
At the end of each reporting period, the carrying amounts of the notes are
compared to the most recent estimate of future payments. The difference is
amortized prospectively using the effective interest rate method. The effective
interest rate for the period from the date of acquisition through December 31,
2002 was 6.5%. Effective January 1, 2003, the effective interest rate was 8.8%.
Based on the Company's cash flow forecast, the expected payments to the
trust deed holders that will be allocated to principal are as follows (in
thousands): 2003 - $3,971; 2004 - $700; 2005 - $5,599; 2006 - $5,215; and 2007 -
$1,219.
6. MINORITY INTEREST
Through its ownership of CDS, the Company owns 80% of the common stock of
CDS Devco, Inc. ("Devco"), which in turns owns 85% of the common stock of San
Elijo Ranch, Inc., ("SERI"). Pursuant to a stockholders' agreement with the
holder of the minority interest in Devco, the Company is entitled to a 15%
return on all funds advanced to Devco, compounded annually, plus the return of
its capital (an aggregate of $25,767,000 as of December 31, 2002), prior to the
payment of any amounts to the minority shareholder. Once those amounts have been
paid, the minority shareholder is entitled to 20% of future cash flows, if any,
distributed to shareholders. As of December 31, 2002, no amounts have been
accrued for the Devco minority interest.
Pursuant to a stockholders' agreement with the holders of the minority
interests in SERI, Devco loans funds to SERI and charges a 12% annual rate. Once
this loan is fully repaid ($105,000 due as of December 31, 2002), the minority
shareholders of SERI are entitled to 15% of future cash flows, if any,
distributed to shareholders. As of December 31, 2002, $3,448,000 has been
accrued for the SERI minority interest. The minority shareholders of SERI are
also the holders of the notes related to the trust deeds discussed in Note 5,
above.
As of December 31, 2002 and 2001, $11,684,000 and $13,208,000,
respectively, have been accrued with respect to Leucadia's preferred capital
interest and cumulative preferred return relating to Otay Land Company, as
discussed in Note 12, below.
F-11
7. 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. Pursuant to the plan, each
director of the Company is automatically granted options to purchase 1,000
shares on the date on which the annual meeting of stockholders is held. 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 is being 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 is being amortized over the five year vesting
period of the options.
A summary of activity with respect to the Company's stock options for
employees and directors for 2002, 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
====== =======
Granted 6,000 $0.95
Exercised (500) $0.82
-------
Balance at December 31, 2002 172,250 $0.76 65,750 552,000
======= ====== =======
The weighted-average fair value of the options granted was $.65 per share
for 2002 and $.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 95.5% for 2002, 117.7% for 2001 and 172.1% for 2000; (2)
risk-free interest rate of 3.5% for 2002, 4.8% for 2001 and 6.6% for 2000; (3)
expected lives of 4.0 years for 2002 and 2001 and 5.9 years for 2000; and (4)
dividend yield of 0% for all years.
The following table summarizes information about fixed stock options
outstanding at December 31, 2002.
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------
Common Weighted Common Weighted
Shares Weighted Average Shares Average
Range of Subject to Average Remaining Exercise Subject Exercise
Exercise Prices Option Contractual Life Price to Option Price
- --------------- --------- ---------------- -------- ---------- -------
$0.70 - $0.95 172,250 3.2 years $0.76 65,750 $0.75
F-12
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 is being amortized over the expected performance period of three
years.
8. OTHER INCOME, NET
Other income, net for each of the three years in the period ended December
31, 2002, consists of the following (in thousands):
2002 2001 2000
----- ----- ----
Interest income $ 96 $ 21 $ 114
Reimbursement for fees and improvements
for previously sold property -- 678 --
Gain (loss) on sale of fixed assets 113 (5) --
Proceeds received upon the dissolution of a
partnership in excess of its recorded
investment balance 50 -- --
Other 52 5 48
---- ---- -----
Total $311 $ 699 $ 162
==== ===== =====
9. INCOME TAXES
The (provision) benefit for income taxes for each of the three years in the
period ended December 31, 2002 was as follows (in thousands):
2002 2001 2000
----- ----- -----
State income taxes - current $(471) $(172) $ 8
Federal income taxes - current 455 (495) --
Federal income taxes - deferred (363) -- --
----- ----- -----
$(379) $(667) $ 8
===== ===== =====
Current income taxes for 2002 and 2001 principally relate to federal
alternative minimum tax and state income tax. Income taxes for 2000 principally
relate to state franchise taxes.
The table below reconciles the expected statutory federal income tax to the
actual income tax (provision) benefit (in thousands):
2002 2001 2000
------ ------- ------
Expected federal income tax $3,149 $(102) $ 846
State income taxes, net of federal income
tax benefit (306) (112) 5
Federal alternative minimum tax refund
(payment) 455 (495) --
Otay Land Company taxable income
allocated to Leucadia 1,024 221 17
Increase in valuation allowance (4,701) -- (860)
Other -- (179) --
----- ----- -----
Actual income tax (provision) benefit $ (379) $(667) $ 8
====== ===== =====
F-13
The Company and its wholly-owned subsidiaries have NOLs available for
federal income tax purposes of $240,540,000 as of December 31, 2002. For state
income tax purposes, available NOLs as of December 31, 2002 total $3,569,000 and
expire in 2003 to 2014. The federal NOLs were generated during 1988 to 1999 and
expire in 2003 to 2019 as follows (in thousands):
Year of Expiration Loss Carryforwards
------------------ ------------------
2003 $ 18,698
2004 7,413
2005 --
2006 150,437
2007 8,045
Thereafter 55,947
--------
$240,540
========
A substantial majority 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, to the extent
these NOLs are available to reduce regular taxable income.
At December 31, 2002 and 2001 the net deferred tax asset consisted of the
following (in thousands):
2002 2001
--------- ----------
NOL carryforwards $ 84,368 $ 90,591
Land basis 14,877 911
Other, net 7,928 6,599
-------- --------
107,173 98,101
Valuation allowance (62,431) (98,101)
-------- --------
$ 44,742 $ 0
======== ========
The valuation allowance has been provided on the deferred tax asset due to
the uncertainty of future taxable income necessary for realization of the
deferred tax asset. The decrease in the valuation allowance primarily results
from the recognition of a tax benefit for the expected use of NOLs in
conjunction with the acquisition of CDS.
10. 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
61,688,906, 56,807,903 and 56,762,061 for 2002, 2001 and 2000, respectively.
Options to purchase 421,354, 359,841 and 25,372 weighted average shares of
common stock outstanding during 2002, 2001 and 2000, respectively, were not
included in the computation of diluted loss per share as those options were
antidilutive.
11. COMMITMENTS AND CONTINGENCIES
Prior to its acquisition by the Company, a subsidiary of CDS entered into a
non-cancelable operating lease for its office space, a portion of which was
sublet to the Company and a portion of which was sublet to Leucadia. This lease
will expire in February 2005, subject to an option to extend for an additional
four years. In 2002, the base rent, which escalates 4% each year, was
approximately $240,000. Effective October 21, 2002, as a result of the
acquisition of CDS, the Company has recorded sublease income from Leucadia for a
monthly amount equal to Leucadia's share of the Company's cost for such space
and furniture. Such amount aggregated $21,000 for the period from October 21,
2002 to December 31, 2002. Effective January 2003, the monthly rental fee from
Leucadia was decreased to $5,500. Rental expense (net of sublease income) was
$227,000, $246,000 and $219,000 for 2002, 2001 and 2000, respectively.
F-14
In connection with the development of San Elijo Hills, CDS has provided a
letter of credit in the amount of approximately $273,000 which expires in
December 2003. The letter of credit is collateralized by a certificate of
deposit in the same amount, which is reflected in other assets.
The Company is required to obtain infrastructure improvement bonds
primarily for the benefit of the City of San Marcos prior to the beginning of
lot construction work and warranty bonds upon completion of such improvements in
the San Elijo Hills project. These bonds provide funds primarily to the City in
the event the Company is unable or unwilling to complete certain infrastructure
improvements in the San Elijo Hills project. Leucadia has obtained these bonds
on behalf of CDS, and CDS is responsible for paying all third party fees related
to obtaining the bonds. Should the City or others draw on the bonds for any
reason, one of CDS's subsidiaries would be obligated to reimburse Leucadia for
the amount drawn. As of December 31, 2002, the amount of outstanding bonds was
$30,022,000.
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 is not likely to have any material adverse effect on the
consolidated financial position of the Company, its consolidated results of
operations or liquidity.
12. OTHER RELATED PARTY TRANSACTIONS
The Company has entered into the following related party transactions with
Leucadia and LFC.
(a) Development Management Agreement. In August 1998, the Company entered
---------------------------------
into a development management agreement with an indirect subsidiary of Leucadia
that owned certain real property located in the city of San Marcos, County of
San Diego, California, to develop the San Elijo Hills project. The development
management agreement provided that the Company would 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 management agreement
also provided that the Company would participate in the net profits of the
project through the payment of a success fee and fee income for field overhead,
management and marketing services based on the revenues derived from the
project. As a result of the acquisition of CDS on October 21, 2002, the Company
acquired this indirect subsidiary of Leucadia. Subsequently, the development
management agreement was amended to eliminate the success fee provisions. In
2002, 2001 and 2000, the Company recorded $1,610,000, $4,775,000 and $3,464,000,
respectively, in fee income under the development management agreement.
(b) Otay Land Company, LLC. In October 1998, the Company and Leucadia
----------------------
formed Otay Land Company to purchase approximately 4,850 acres of land, which is
part of a 22,900 acre project located south of San Diego, California, known as
Otay Ranch. Otay Land Company acquired this land for $19,500,000. The Company
has contributed $12,105,000 as capital and Leucadia has contributed $10,000,000
as a preferred capital interest. The Company is the managing member of Otay Land
Company.
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.
During 2002, Otay Land Company made a distribution of $2,524,000 to Leucadia. At
December 31, 2002, Leucadia's preferred capital interest and cumulative
preferred return, which is reflected as minority interest in the consolidated
balance sheet, totaled $11,684,000.
(c) Administrative Services Agreement. Pursuant to administrative services
---------------------------------
agreements, LFC provides administrative services to the Company through December
31, 2003, including providing the services of one of the Company's executive
officers. Administrative fees paid to LFC in 2002, 2001 and 2000 were $120,000,
$107,000 and $255,000, respectively.
F-15
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's material financial instruments include cash and cash
equivalents, certificate of deposits, note receivable 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.
14. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ---------- -------- -------
(In thousands, except per share amounts)
2002:
- -----
Sales of real estate $ -- $ 4,285 $ -- $ 4,974
======== ======== ======== ========
Co-op marketing and advertising fees $ 470 $ 426 $ 600 $ 446
======== ======== ======== ========
Development management fee income
from San Elijo Hills $ -- $ 1,553 $ 57 $ --
======== ======== ======== ========
Income from options on real estate
properties $ 180 $ 120 $ -- $ --
======== ======== ======== ========
Cost of sales $ -- $ 809 $ -- $ 2,006
======== ======== ======== ========
Income (loss) from operations (a) $ (1,156) $ 3,750 $(12,513) $ 612
======== ======== ======== ========
Net income (loss) (a) $ (1,296) $ 3,101 $(12,342) $ (549)
======== ======== ======== ========
Basic income (loss) per share (b) $ (0.02) $ 0.05 $ (0.22) $ (0.01)
======== ======== ======== ========
Diluted income (loss) per share (b) $ (0.02) $ 0.05 $ (0.22) $ (0.01)
======== ======== ======== ========
2001:
- -----
Co-op marketing and advertising fees $ 168 $ 179 $ 122 $ 559
======== ======== ======== ========
Development management fee income
from San Elijo Hills $ -- $ 1,422 $ 1,852 $ 1,501
======== ======== ======== ========
Income from options on real estate
properties $ 180 $ 180 $ 180 $ 180
======== ======== ======== ========
Income (loss) from operations $ (1,313) $ 129 $ 516 $ 259
======== ======== ======== ========
Net income (loss) $ (1,564) $ (113) $ 11 $ 289
======== ======== ======== ========
Basic income (loss) per share $ (0.03) $ (0.00) $ 0.00 $ 0.01
======== ======== ======== ========
Diluted income (loss) per share $ (0.03) $ (0.00) $ 0.00 $ 0.01
======== ======== ======== ========
(a) During the third quarter of 2002, the Company recorded a provision of
$11,200,000 relating to environmental remediation.
(b) In 2002, the total of quarterly per share amounts does not necessarily
equal the annual per share amount.
F-16