SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 of (I.R.S. Employer
incorporation or organization) Identification Number)
1903 Wright Place, Suite 220, Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(760) 918-8200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
------- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On November 6, 2002, there
were 81,550,844 outstanding shares of the Registrant's Common Stock, par value
$.01 per share.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(Dollars in thousands, except par value)
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS
Land and real estate held for development and sale $ 24,548 $ 23,890
Cash and cash equivalents 3,367 1,454
Deposits and other assets 454 460
--------- ---------
TOTAL $ 28,369 $ 25,804
========= =========
LIABILITIES
Note payable to Leucadia Financial Corporation $ 23,366 $ 22,508
Credit agreement with Leucadia Financial Corporation 650 --
Accounts payable and accrued liabilities 1,536 1,711
Liability for environmental remediation 10,876 --
--------- ---------
Total liabilities 36,428 24,219
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 13,958 13,208
--------- ---------
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value; 100,000,000 shares authorized;
56,808,576 and 56,808,076 shares outstanding 568 568
Additional paid-in capital 355,418 355,377
Deferred compensation pursuant to stock incentive plans (174) (276)
Accumulated deficit (377,829) (367,292)
--------- ---------
Total stockholders' deficit (22,017) (11,623)
--------- ---------
TOTAL $ 28,369 $ 25,804
========= =========
See notes to interim consolidated financial statements.
2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2002 and 2001
(In thousands, except per share amounts)
(Unaudited)
For the Three Month Period For the Nine Month Period
Ended September 30, Ended September 30,
------------------------- -------------------------
2002 2001 2002 2001
------ ------ ------- ------
REVENUES
Sales of real estate $ -- $ -- $ 4,285 $ --
Fee income from San Elijo Hills 657 1,974 3,106 3,743
Income from options on real estate properties -- 180 300 540
-------- -------- -------- --------
657 2,154 7,691 4,283
-------- -------- -------- --------
EXPENSES
Cost of sales -- -- 809 --
Provision for environmental remediation 11,160 -- 11,160 --
Interest expense relating to Leucadia Financial Corporation 714 671 2,079 1,969
General and administrative expenses 1,266 940 3,472 2,900
Administrative services fees to Leucadia Financial Corporation 30 26 90 82
-------- -------- -------- --------
13,170 1,637 17,610 4,951
-------- -------- -------- --------
Income (loss) from operations (12,513) 517 (9,919) (668)
Other income (loss), net 30 5 201 19
-------- -------- -------- --------
Income (loss) before income taxes and minority interest (12,483) 522 (9,718) (649)
Income tax provision (16) (261) (69) (267)
-------- -------- -------- --------
Income (loss) before minority interest (12,499) 261 (9,787) (916)
Minority interest 157 (250) (750) (750)
-------- -------- -------- --------
Net income (loss) $(12,342) $ 11 $(10,537) $ (1,666)
======== ======== ======== ========
Basic income (loss) per common share $ (0.22) $ 0.00 $ (0.19) $ (0.03)
======== ======== ======== ========
Diluted income (loss) per common share $ (0.22) $ 0.00 $ (0.19) $ (0.03)
======== ======== ======== ========
See notes to interim consolidated financial statements.
3
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Deficit
For the nine month periods ended September 30, 2002 and 2001
(Dollars in thousands, except par value)
(Unaudited)
Deferred
Common Compensation
Stock Additional Pursuant to Total
$.01 Par Paid-In Stock Incentive Accumulated Stockholders'
Value Capital Plans Deficit Deficit
-------- ---------- --------------- ----------- ----------
Balance, January 1, 2001 $ 568 $ 355,277 $ (351) $ (365,915) $ (10,421)
Amortization of restricted stock grants 47 47
Amortization related to stock options 79 79
Change in value of performance-based stock options 50 (50)
Net loss (1,666) (1,666)
----- ---------- ------ ---------- ---------
Balance, September 30, 2001 $ 568 $ 355,327 $ (275) $ (367,581) $ (11,961)
===== ========== ====== ========== =========
Balance, January 1, 2002 $ 568 $ 355,377 $ (276) $ (367,292) $ (11,623)
Amortization of restricted stock grants 47 47
Amortization related to stock options 95 95
Change in value of performance-based stock options 40 (40)
Exercise of options to purchase common shares 1 1
Net loss (10,537) (10,537)
----- ---------- ------ ---------- ---------
Balance, September 30, 2002 $ 568 $ 355,418 $ (174) $ (377,829) $ (22,017)
===== ========== ====== ========== =========
See notes to interim consolidated financial statements.
4
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2002 and 2001
(In thousands)
(Unaudited)
2002 2001
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,537) $ (1,666)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Minority interest 750 750
Provision for environmental remediation 11,160 --
Amortization of deferred compensation pursuant to stock incentive plans 142 126
Amortization of debt discount on note payable to Leucadia Financial Corporation 858 762
Changes in operating assets and liabilities:
Land and real estate held for development and sale (942) (624)
Deposits and other assets 6 (77)
Recreation center liability -- (41)
Accounts payable and accrued liabilities (175) (93)
-------- --------
Net cash provided by (used for) operating activities 1,262 (863)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreement with Leucadia Financial Corporation 650 500
Payments related to credit agreement with Leucadia Financial Corporation -- (500)
Exercise of options to purchase common shares 1 --
-------- --------
Net cash provided by financing activities 651 --
-------- --------
Net increase (decrease) in cash and cash equivalents 1,913 (863)
Cash and cash equivalents, beginning of period 1,454 1,631
-------- --------
Cash and cash equivalents, end of period $ 3,367 $ 768
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest (net of amounts capitalized) $ 1,221 $ 1,207
Cash paid for income taxes (net of refunds) $ 117 $ 179
See notes to interim consolidated financial statements.
5
HOMEFED CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
1. The unaudited interim consolidated financial statements, which reflect all
adjustments (consisting only of normal recurring items) that management
believes are necessary to present fairly the results of interim operations,
should be read in conjunction with the Notes to Consolidated Financial
Statements (including the Summary of Significant Accounting Policies)
included in the Company's audited consolidated financial statements for the
year ended December 31, 2001 which are included in the Company's Annual
Report filed on Form 10-K, as amended by Form 10-K/A, for such year (the
"2001 10-K"). Results of operations for interim periods are not necessarily
indicative of annual results of operations. The consolidated balance sheet
at December 31, 2001 was extracted from the Company's audited annual
consolidated financial statements and does not include all disclosures
required by generally accepted accounting principles for annual financial
statements.
Certain amounts for prior periods have been reclassified to be consistent
with the 2002 presentation.
2. Field overhead and management service fees earned from the San Elijo Hills
project were $1,610,000 and $3,274,000 for the nine month periods ended
September 30, 2002 and 2001, respectively, and $57,000 and $1,852,000 for
the three month periods ended September 30, 2002 and 2001, respectively. In
addition, the Company earned co-op marketing and advertising fees from the
project's homebuilders of $1,496,000 and $469,000 for the nine month
periods ended September 30, 2002 and 2001, respectively, and $600,000 and
$122,000 for the three month periods ended September 30, 2002 and 2001,
respectively. See Note 14 for information about the Company's acquisition
of this project on October 21, 2002.
3. The note payable to Leucadia Financial Corporation ("LFC), a subsidiary of
Leucadia National Corporation ("Leucadia"), has a principal amount of
$26,462,000. Interest on the note of $1,188,000 and $401,000 was expensed
and paid during each of the nine and three month periods ended September
30, 2002 and 2001, respectively. Additionally, interest expense includes
amortization of debt discount related to the indebtedness to LFC of
$858,000 and $762,000 for the nine month periods ended September 30, 2002
and 2001, respectively, and $297,000 and $264,000 for the three month
periods ended September 30, 2002 and 2001, respectively. 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 from the then
existing 6% to 9% for the period from December 31, 2004 to December 31,
2005, 10% for the period from December 31, 2005 to December 31, 2006 and
11% thereafter. In connection with these amendments, the Company paid LFC a
$250,000 fee.
4. In March 2001, the Company entered into a $3,000,000 line of credit
agreement with LFC. Loans outstanding under this line of credit bear
interest at 10% per annum. Effective March 1, 2002, this agreement was
amended to extend the maturity to February 28, 2007, unless earlier
terminated by LFC not later than November 15 of any year, effective
February 28 of the following year. At September 30, 2002, $650,000 was
outstanding under this facility. Interest on the line of credit of $33,000
and $19,000 was expensed and paid during the nine month periods ended
September 30, 2002 and 2001, respectively. On October 9, 2002, this line of
credit with LFC was increased from $3,000,000 to $10,000,000, and LFC's
ability to terminate the line of credit as of November 15 of any year was
removed.
6
Notes to Interim Consolidated Financial Statements, continued
5. 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 commissioned a 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 has
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. 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.
6. Basic income (loss) per share of Common Stock was calculated by dividing
net income (loss) by the sum of the weighted average number of common
shares outstanding and, for diluted earnings (loss) per share, the
incremental weighted average number of shares issuable upon exercise of
outstanding options for the periods they were outstanding. The number of
shares used to calculate basic earnings (loss) per share amounts was
56,808,125 and 56,807,845 for the nine month periods ended September 30,
2002 and 2001, respectively, and 56,808,223 and 56,807,883 for the three
month periods ended September 30, 2002 and 2001, respectively. The number
of shares used to calculate diluted earnings (loss) per share was
56,808,125 and 56,807,845 for the nine month periods ended September 30,
2002 and 2001, respectively, and 56,808,223 and 57,205,282 for the three
month periods ended September 30, 2002 and 2001, respectively. Options to
purchase 358,043 and 368,259 weighted average shares for the nine month
period ended September 30, 2002 and 2001, respectively, and 413,767
weighted average shares for the three month period ended September 30, 2002
were not included in the computation of diluted loss per share as those
options were antidilutive.
7. Under the current administrative services agreement, which was amended as
of January 1, 2002 to extend through December 31, 2002, LFC provides
administrative services, including providing the services of one of the
Company's executive officers, for a monthly fee of $10,000. Administrative
fees paid to LFC were $90,000 and $82,000 for the nine month periods ended
September 30, 2002 and 2001, respectively, and $30,000 and $26,000 for the
three month periods ended September 30, 2002 and 2001, respectively.
The Company's corporate office is in part of an office building subleased
from Leucadia for a monthly amount equal to its share of Leucadia's cost
for such space and furniture. In connection with these rentals, the Company
expensed $183,000 and $185,000 for the nine month periods ended September
30, 2002 and 2001, respectively, and $59,000 and $61,000 for the three
month periods ended September 30, 2002 and 2001, respectively.
8. In June 2002, the partnership relating to the development in La Quinta,
California, in which one of the Company's subsidiaries was a partner, was
dissolved. In connection therewith, the subsidiary is no longer required to
maintain a minimum net worth of $1,000,000 in connection with an indemnity
agreement.
9. In June 2002, Otay Land Company sold 85 acres of developable land for total
cash proceeds of $4,285,000, which included $500,000 previously received as
a non-refundable deposit. Cost of sales related to this transaction
aggregated $809,000, consisting of land costs, closing costs and
commissions. Land costs allocated to the parcel of land sold were
determined based on the relative fair values of the various land components
prior to development and are charged to cost of sales at the time of the
sale.
7
Notes to Interim Consolidated Financial Statements, continued
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 LLC agreement, (the "Agreement"), it has been 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. At
September 30, 2002, Leucadia's preferred capital interest and cumulative
preferred return, which is reflected as minority interest in the
consolidated balance sheet, totaled $13,958,000. Minority interest expense
for the periods ended September 30, 2002 reflects the reversal of $407,000
recorded in the second quarter of 2002, representing Leucadia's incremental
2% annual cumulative preferred return that is payable out of and to the
extent there are profits under the Agreement. Such amount was reversed in
the third quarter of 2002 because as of September 30, 2002, Otay Land
Company no longer had cumulative profits.
10. Income tax expense for the periods ended September 30, 2002 and 2001
principally relates to federal and state minimum taxes incurred. The
Company has not recognized income tax benefits for its operating losses and
deferred tax assets due to the uncertainty of sufficient future taxable
income that is required in order to record such tax benefits.
11. On July 10, 2002, options to purchase an aggregate of 6,000 shares of
Common Stock were granted to members of the Board of Directors under the
Company's 1999 Stock Incentive Plan at an exercise price of $.95 per share,
the then current market price per share.
12. 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. Other owners of developable land in the project have not had
enough mitigation land in this initial area of conveyance to enable them to
proceed with immediate development without the acquisition of additional
mitigation land. The City of Chula Vista proposed an amended conveyance
schedule that the Company had previously opposed.
On August 27, 2002, the Company reached 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. The
amount that the Company could ultimately receive for this property will be
based upon appraisals, the value of which currently cannot be estimated,
but is not expected to be less than book value.
13. The Company recently accepted an offer to sell approximately 1,450 acres of
developable and related mitigation land within Otay Ranch for a sales price
of $22,500,000. If the transaction closes, this sale would result in a
pre-tax gain of approximately $18,000,000 for Otay Land Company, and the
sales proceeds would give the Otay Land Company the ability to completely
satisfy the preferred capital interest and preferred return due to Leucadia
(aggregating $14,750,000 at September 30, 2002, inclusive of the
incremental 2% annual cumulative preferred return payable only to the
extent there are profits). Consummation of the transaction is subject to a
number of conditions, including obtaining necessary state and federal
governmental approvals to fund the purchase price, and other matters. No
assurance can be given that the requisite approvals will be obtained or
that the transaction will ultimately be consummated. The Company's
obligation to sell this land to the offeror expires if the transaction does
not close by February 28, 2003.
8
Notes to Interim Consolidated Financial Statements, continued
14. On October 21, 2002, the Company purchased from Leucadia all of the issued
and outstanding shares of capital stock of CDS Holding Corporation ("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. As more fully described in the 2001 10-K, the
Company has been the development manager of this project, under a
development agreement, pursuant to which the Company has been entitled to
certain fees based on the project's revenues, and a success fee.
Development of the project is underway, with land for approximately 1,600
dwelling units sold and land for approximately 1,800 of the dwelling units
and all of the commercial property remaining to be developed during the
course of this decade.
The purchase price of $25,000,000 consisted of $1,000,000 in cash and
24,742,268 newly issued shares of the Company's common stock, which
represents approximately 30.3% of the newly outstanding HomeFed stock. The
value the Company received through the purchase of CDS includes the
$15,200,000 preferred return payable by San Elijo, CDS's residual equity
interest after payment of the success fee and Leucadia's commitment to
continue to provide to San Elijo project improvement bonds which are
required prior to the commencement of any project development. The
principal assets of CDS on a consolidated basis include the project real
estate that is being developed in stages, and cash and cash equivalents of
approximately $20,200,000, which will be used for future development and
other project related expenses.
The acquisition of CDS will be accounted for as a purchase, and the Company
will consolidate CDS in its financial statements subsequent to acquisition.
The San Elijo Hills project is encumbered by trust deed indebtedness as of
September 30, 2002 in the amount of $21,800,000, which does not bear
interest. Such debt is payable in certain specified amounts upon the sale
of lots, or if there are no future lot sales, an aggregate minimum amount
of $600,000 is payable each year. Under purchase accounting, the Company
will record this obligation in its financial statements at the date of
acquisition based on the present value of amounts expected to be paid,
discounted at an appropriate interest rate.
In connection with the acquisition, the Company is in the process of
preparing historical audited financial statements of CDS and certain pro
forma financial information for filing with the Securities and Exchange
Commission. The preparation of the pro forma balance sheet information and
the accounting for this acquisition will be based upon independent
appraisals of the value of the assets and liabilities acquired, which have
not as yet been completed. However, the table below presents a preliminary
pro forma balance sheet of the Company after the acquisition of CDS, based
upon the Company's estimate of the value of the assets and liabilities
acquired. The pro forma amounts may change upon receipt of the independent
appraisals.
9
Notes to Interim Consolidated Financial Statements, continued
HomeFed Pro Forma HomeFed
Corporation Adjustments Corporation
Historical for Acquisition Pro Forma
September 30, 2002 of CDS September 30, 2002
------------------ --------------- ------------------
Assets:
Land and real estate held for development and sale $ 24,548 $ 36,280 (a) $ 60,828
Cash and cash equivalents 3,367 20,097 (b) 23,464
Deposits and other assets 454 3,781 4,235
---------- --------- --------
Total $ 28,369 $ 60,158 $ 88,527
========== ========= ========
Liabilities:
Payable to Leucadia Financial Corporation $ 24,016 $ -- $ 24,016
Trust deed indebtedness -- 16,224 (c) 16,224
Other liabilities 12,412 17,362 29,774
---------- --------- --------
Total liabilities 36,428 33,586 70,014
---------- --------- --------
Minority Interest 13,958 2,572 16,530
---------- --------- --------
Stockholders' (Deficit) Equity (22,017) 24,000 (d) 1,983
---------- --------- --------
Total $ 28,369 $ 60,158 $ 88,527
========== ========= ========
(a) Represents the estimated fair value of the real estate acquired.
(b) Represents the cash and cash equivalents held by CDS on September 30,
2002, less cash paid by CDS to Leucadia prior to the closing pursuant to
the acquisition agreement and the cash portion of the purchase price paid
by the Company.
(c) Represents the net present value of estimated future payments as of
September 30, 2002, discounted at 10%.
(d) Represents the fair market value of the common shares issued to Leucadia.
The issuance of the Company's common stock to Leucadia was made in a private
transaction pursuant to an exemption from registration under the United States
Securities Act of 1933, as amended. The Company has agreed to register such
shares pursuant to the Securities Act under certain circumstances. These
transactions were negotiated with and approved by a committee of Company
directors who are independent of Leucadia and not otherwise affiliated with
HomeFed.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations.
The following should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's 2001 10-K.
Liquidity and Capital Resources
For the nine month period ended September 30, 2002, net cash was provided by
operations, primarily from the proceeds of the sale of real estate at the Otay
Ranch project as described below. For the nine month period ended September 30,
2001, 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 the Company's real estate, its $10,000,000 line of
credit from LFC and dividends or borrowings from its subsidiaries.
In June 2002, Otay Land Company sold 85 acres of developable land for total cash
proceeds of $4,285,000, which included $500,000 previously received as a
non-refundable deposit. 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 LLC agreement, it has been 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. At September 30, 2002, Leucadia's
preferred capital interest and cumulative preferred return, which is reflected
as minority interest in the consolidated balance sheet, totaled $13,958,000.
As more fully described in the 2001 10-K, the Company has been the development
manager of the San Elijo Hills project, under a development agreement, pursuant
to which the Company has been entitled to certain fees based on the project's
revenues ("the development management fees"), and a success fee out of the
project's net cash flow, if any, up to a maximum amount. The Company also
receives co-op marketing and the advertising fees that are paid at the time
builders sell homes, are generally based upon a fixed percentage of the homes'
selling price and are recorded as revenue when the home is sold. For the nine
month periods ended September 30, 2002 and 2001, the Company recognized
development management and co-op marketing and advertising fees aggregating
$3,106,000 and $3,743,000, respectively, and $657,000 and $1,974,000 for the
three month periods ended September 30, 2002 and 2001, respectively. As of
September 30, 2002, the Company has not recognized any success fee income as
none would have been contractually earned. Subsequent to the acquisition of CDS,
the development agreement was amended to eliminate the success fee provisions,
but the development management fees will continue to be paid directly to
HomeFed.
As more fully described in Note 14 of Notes to Interim Consolidated Financial
Statements, 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 indirect subsidiary, San Elijo, is the owner of the San Elijo
Hills project. The purchase price of $25,000,000 consisted of $1,000,000 in cash
and 24,742,268 newly issued shares of the Company's common stock, which
represents approximately 30.3% of the newly outstanding HomeFed stock. The
principal assets of San Elijo include the project real estate that is being
developed in stages, and cash and cash equivalents of approximately $20,200,000,
which will be used for future development and other project related expenses.
The Company expects that the cash and cash equivalents acquired with the San
Elijo Hills project will be sufficient, along with the credit line from LFC and
the operating cash flows expected from the project, to fund future project
development. Any cash amounts in excess of reserves for future development will
be used by the San Elijo Hills project to pay down its intercompany debt,
thereby becoming a source of funds for the Company. The amount due as of the
date of acquisition was $15,200,000, and bears interest at 12%. Once this
intercompany debt is fully repaid, any distribution of available cash from the
San Elijo Hills project to the Company would be in the form of a dividend, and
would represent the Company's proportionate interest in the project (with
minority stockholders receiving dividends representing their respective
proportionate interests in the project).
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
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 LFC to
collateralize its $26,462,000 borrowing from LFC, it may be unable to obtain
financing at favorable rates, if at all, from sources other than LFC. Further,
if the Company were to sell its real estate projects in order to meet its
liquidity needs, it may have to do so at a time when the potential sales prices
are not attractive or are not reflective of the values which the Company
believes are inherent in the projects. Accordingly, while the Company believes
it can generate sufficient liquidity to meet its obligations through sales of
assets, any such sales could be at prices that would not maximize the Company's
value to its shareholders.
As of September 30, 2002, the Company owed $26,462,000 principal amount to LFC.
This obligation is reflected in the consolidated balance sheet, net of discount,
at $23,366,000 as of September 30, 2002. During the nine months ended September
30, 2002, the Company paid LFC interest of $1,188,000 relating to this note
payable. On October 9, 2002, the maturity date of this note was extended to
December 31, 2007 and the interest rate was increased from the then existing 6%
to 9% for the period from December 31, 2004 to December 31, 2005, 10% for the
period from December 31, 2005 to December 31, 2006 and 11% thereafter. In
connection with the amendments to the note, the Company paid LFC a fee of
$250,000.
The Company has a line of credit agreement with LFC, which was amended effective
March 1, 2002, to extend the maturity to February 28, 2007, unless earlier
terminated by LFC not later than November 15 of any year, effective February 28
of the following year. On October 9, 2002, this line of credit with LFC was
increased from $3,000,000 to $10,000,000, and LFC's ability to terminate the
line of credit as of November 15 of any year was removed. Loans outstanding
under this line of credit bear interest at 10% per annum. At September 30, 2002,
$650,000 was outstanding under this facility. In October 2002, the Company
borrowed an additional $1,500,000 under this facility.
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. Other
owners of developable land in the project have not had enough mitigation land in
this initial area of conveyance to enable them to proceed with immediate
development without the acquisition of additional mitigation land. The City of
Chula Vista proposed an amended conveyance schedule that the Company had
previously opposed.
On August 27, 2002, the Company reached 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. The amount that the Company could ultimately
receive for this property will be based upon appraisals, the value of which
currently cannot be estimated, but is not expected to be less than book value.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
The Company recently accepted an offer to sell approximately 1,450 acres of
developable and related mitigation land within Otay Ranch for a sales price of
$22,500,000. If the transaction closes, this sale would result in a pre-tax gain
of approximately $18,000,000 for Otay Land Company, and the sales proceeds would
give the Otay Land Company the ability to completely satisfy the preferred
capital interest and preferred return due to Leucadia (aggregating $14,750,000
at September 30, 2002, inclusive of the incremental 2% annual cumulative
preferred return payable only to the extent there are profits). Consummation of
the transaction is subject to a number of conditions, including obtaining
necessary state and federal governmental approvals to fund the purchase price,
and other matters. No assurance can be given that the requisite approvals will
be obtained and that the transaction will ultimately be consummated. The
Company's obligation to sell this land to the offeror expires if the transaction
does not close by February 28, 2003.
Results of Operations
Sales of real estate for the nine month period ended September 30, 2002 reflects
the sale of 85 acres of developable land at the Otay Ranch project referred to
above. There were no sales of real estate during the three month period ended
September 30, 2002 or for the 2001 periods. Actual cost of sales recorded during
2002 consists of land costs, closing costs and commissions.
Fee income related to the San Elijo Hills project was $3,106,000 and $3,743,000
for the nine month periods ended September 30, 2002 and 2001, respectively, and
$657,000 and $1,974,000 for the three month periods ended September 30, 2002 and
2001, 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 during 2002. This decrease was partially offset by greater
co-op marketing and advertising fees relating to the sale of homes by builders.
Income from options on real estate properties reflects non-refundable fees
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. The Company received
$300,000 and $540,000 of such fees in the nine month periods ended September 30,
2002 and 2001, respectively, and $180,000 in the three month period ended
September 30, 2001.
The Company has commissioned a 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 has 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. 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.
Interest expense reflects the interest due on indebtedness to LFC of $1,221,000
and $1,207,000 for the nine month periods ended September 30, 2002 and 2001,
respectively, and $417,000 and $407,000 for the three month periods ended
September 30, 2002 and 2001, respectively. Interest expense also includes
amortization of debt discount related to the indebtedness to LFC of $858,000 and
$762,000 for the nine month periods ended September 30, 2002 and 2001,
respectively, and $297,000 and $264,000 for the three month periods ended
September 30, 2002 and 2001, respectively.
General and administrative expenses increased in the 2002 periods as compared to
the same periods in 2001 principally due to greater expenses related to salaries
and professional fees.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
The increase in other income for the nine month period ended September 30, 2002
as compared to the same period in 2001 primarily relates to the gain on a sale
of a foreclosed property and the proceeds received upon the dissolution of a
partnership in excess of its recorded investment balance.
Income tax expense for the periods ended September 30, 2002 and 2001 principally
relates to federal and state minimum taxes incurred. The Company has not
recognized income tax benefits for its operating losses and deferred tax assets
due to the uncertainty of sufficient future taxable income that is required in
order to record such tax benefits.
The decrease in minority interest for the three month period ended September 30,
2002 as compared to the three month period ended September 30, 2001 reflects the
reversal of $407,000 recorded in the second quarter of 2002, representing
Leucadia's incremental 2% annual cumulative preferred return that is payable out
of and to the extent there are profits under the Otay Land Company LLC
agreement. Such amount was reversed in the third quarter of 2002 because as of
September 30, 2002, Otay Land Company no longer had cumulative profits.
Cautionary Statement for Forward-Looking Information
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Interim Operations may contain forward-looking
statements. Such statements may relate, but are not limited, to projections of
revenues, income or loss, capital expenditures, plans for growth and future
operations, competition and regulation as well as assumptions relating to the
foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted or quantified. When used in this Management's
Discussion and Analysis of Financial Condition and Results of Interim
Operations, the words "estimates", "expects", "anticipates", "believes",
"plans", "intends" and variations of such words and similar expressions are
intended to identify forward-looking statements that involve risks and
uncertainties. Future events and actual results could differ materially from
those set forth in, contemplated by or underlying the forward-looking
statements.
The factors that could cause actual results to differ materially from time to
time in the Company's public filings, include:
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,
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
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,
o an adverse result in eminent domain proceedings pending in San Diego
County, California having an adverse impact on the amount the Company
ultimately could realize on the remainder of its mitigation land, and
o the CDS purchase accounting adjustments based on the receipt of independent
appraisals resulting in different values of assets and liabilities than
assumed in the pro forma disclosure.
Undue reliance should not be placed on these forward-looking statements, which
are applicable only as of the date hereof. The Company undertakes no obligation
to revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this Report or to reflect the
occurrence of unanticipated events.
Item 4. Controls and Procedures.
(a) The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the periods specified in the rules and forms of
the Securities and Exchange Commission. Such information is accumulated and
communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, including the
principal executive officer and the principal financial officer, recognizes that
any set of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives.
15
Item 4. Controls and Procedures, continued
Within 90 days prior to the filing date of this quarterly report on Form
10-Q, the Company has carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation in connection with the
preparation of this quarterly report on Form 10-Q.
16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of shareholders at the
Company's 2002 Annual Meeting of Shareholders held on July 10, 2002.
a) Election of directors.
Number of Shares
----------------
For Withheld
--- ----------
Patrick D. Bienvenue 49,996,719 191,943
Paul J. Borden 49,563,634 625,028
Timothy M. Considine 49,996,469 192,193
Ian M. Cumming 49,996,388 192,274
Michael A. Lobatz 49,996,924 191,738
Joseph S. Steinberg 49,995,823 192,839
b) Amendment to the Corporation's Certificate of Incorporation.
For 48,485,217
Against 1,595,076
Abstentions 108,369
Broker non-votes --
c) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 2002.
For 50,112,424
Against 37,541
Abstentions 38,697
Broker non-votes --
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
3.3 Amendment to Amended and Restated Bylaws of the Company,
dated July 10, 2002.
3.4 Certificate of Amendment of the Certificate of
Incorporation of the Company, dated July 10, 2002.
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.
b) Reports on Form 8-K.
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMEFED CORPORATION
(Registrant)
Date: November 14, 2002 By: /s/ Erin N. Ruhe
-----------------
Erin N. Ruhe
Vice President and Controller
(Principal Accounting Officer)
CERTIFICATIONS
I, Paul J. Borden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HomeFed Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
18
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
quarterly report whether or not 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: November 14, 2002
By: /s/ Paul J. Borden
------------------
Paul J. Borden
Principal Executive Officer
CERTIFICATIONS
I, Erin N. Ruhe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HomeFed Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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):
19
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
quarterly report whether or not 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: November 14, 2002
By: /s/ Erin N. Ruhe
----------------
Erin N. Ruhe
Principal Financial Officer
20
EXHIBIT INDEX
Exhibit Number Description
3.3 Amendment to Amended and Restated Bylaws of the Company, dated July
10, 2002.
3.4 Certificate of Amendment of the Certificate of Incorporation of the
Company, dated July 10, 2002.
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.
21