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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 June 30, 2003
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act).
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On August 5, 2003, there
were 8,155,084 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
June 30, 2003 and December 31, 2002
(Dollars in thousands, except par value)
June 30, December 31,
2003 2002
---------- -----------
(Unaudited)
ASSETS
Real estate $ 34,519 $ 31,108
Cash and cash equivalents 103,028 33,601
Deposits and other assets 3,159 1,026
Deferred income taxes 25,767 44,742
Note receivable -- 6,566
--------- ---------
TOTAL $ 166,473 $ 117,043
========= =========
LIABILITIES
Note payable to Leucadia Financial Corporation $ 24,153 $ 23,628
Notes payable to trust deed holders 14,605 16,704
Deferred revenue 58,316 32,621
Accounts payable and accrued liabilities 6,428 6,323
Non-refundable option payments 1,818 1,818
Liability for environmental remediation 10,690 10,816
Income taxes payable 3,218 2,875
Other liabilities 4,342 5,476
--------- ---------
Total liabilities 123,570 100,261
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 5,673 15,132
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized;
8,155,084 shares outstanding 82 82
Additional paid-in capital 380,544 380,364
Deferred compensation pursuant to stock incentive plans (6) (418)
Accumulated deficit (343,390) (378,378)
--------- ---------
Total stockholders' equity 37,230 1,650
--------- ---------
TOTAL $ 166,473 $ 117,043
========= =========
See notes to interim consolidated financial statements.
2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended June 30, 2003 and 2002
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
---------------------- ---------------------
2003 2002 2003 2002
------- ------- ------ -------
REVENUES
Sales of real estate $ 78,444 $ 4,285 $ 85,460 $ 4,285
Co-op marketing and advertising fees 203 426 583 896
Development management fee income from San Elijo Hills -- 1,553 -- 1,553
Income from options on real estate properties -- 120 -- 300
-------- -------- -------- -------
78,647 6,384 86,043 7,034
-------- -------- -------- -------
EXPENSES
Cost of sales 14,792 809 17,132 809
Interest expense relating to Leucadia Financial Corporation 663 698 1,312 1,365
General and administrative expenses 2,638 1,093 4,450 2,206
Administrative services fees to Leucadia Financial Corporation 30 34 60 60
-------- -------- -------- -------
18,123 2,634 22,954 4,440
-------- -------- -------- -------
Income from operations 60,524 3,750 63,089 2,594
Other income, net 239 55 645 171
-------- -------- -------- -------
Income before income taxes and minority interest 60,763 3,805 63,734 2,765
Income tax provision (24,330) (47) (25,582) (53)
-------- -------- -------- -------
Income before minority interest 36,433 3,758 38,152 2,712
Minority interest (2,690) (657) (3,164) (907)
-------- -------- -------- -------
Net income $ 33,743 $ 3,101 $ 34,988 $ 1,805
======== ======== ======== =======
Basic income per common share $ 4.14 $ 0.55 $ 4.29 $ 0.32
======== ======== ======== =======
Diluted income per common share $ 4.10 $ 0.54 $ 4.25 $ 0.32
======== ======== ======== =======
See notes to interim consolidated financial statements.
3
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the six month periods ended June 30, 2003 and 2002
(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 Equity (Deficit)
------ ------- ----------- ---------- ----------------
Balance, January 1, 2002 $ 57 $ 355,888 $ (276) $ (367,292) $ (11,623)
Amortization of restricted stock grants 31 31
Amortization related to stock options 48 48
Change in value of performance-based stock options (40) 40 --
Net income 1,805 1,805
----- --------- ------ ---------- ---------
Balance, June 30, 2002 $ 57 $ 355,848 $ (157) $ (365,487) $ (9,739)
===== ========= ====== ========== =========
Balance, January 1, 2003 $ 82 $ 380,364 $ (418) $ (378,378) $ 1,650
Amortization of restricted stock grants 11 11
Amortization related to stock options 581 581
Change in value of performance-based stock options 180 (180) --
Net income 34,988 34,988
----- --------- ------ ---------- ---------
Balance, June 30, 2003 $ 82 $ 380,544 $ (6) $ (343,390) $ 37,230
===== ========= ====== ========== =========
See notes to interim consolidated financial statements.
4
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2003 and 2002
(In thousands)
(Unaudited)
2003 2002
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,988 $ 1,805
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 3,164 907
Provision for deferred income taxes 18,975 --
Amortization of deferred compensation pursuant to stock incentive plans 592 79
Amortization of debt discount on note payable to Leucadia Financial Corporation 525 561
Changes in operating assets and liabilities:
Real estate (2,485) (268)
Deposits and other assets (2,133) (454)
Note receivable 6,566 --
Deferred revenue 25,695 --
Accounts payable and accrued liabilities 105 (565)
Liability for environmental remediation (126) --
Income taxes payable 343 --
Other liabilities (1,134) --
-------- -------
Net cash provided by operating activities 85,075 2,065
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution from minority interest 43 --
Distribution to minority interest (12,910) --
Payments to trust deed note holders (2,781) --
Borrowings under credit agreement with Leucadia Financial Corporation -- 650
-------- -------
Net cash (used for) provided by financing activities (15,648) 650
-------- -------
Net increase in cash and cash equivalents 69,427 2,715
Cash and cash equivalents, beginning of period 33,601 1,454
-------- -------
Cash and cash equivalents, end of period $103,208 $ 4,169
======== =======
Supplemental disclosures of cash flow information:
Cash paid for interest (net of amounts capitalized) $ 787 $ 804
Cash paid for income taxes $ 3,678 $ 115
Non cash financing activities:
Contribution of real estate from minority interest $ 244 $ --
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, 2002 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
"2002 10-K"). Results of operations for interim periods are not necessarily
indicative of annual results of operations. The consolidated balance sheet
at December 31, 2002 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.
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 income and
income per share would not have been materially different from that
reported.
On July 14, 2003, following shareholder approval, the Company effected a
reverse 1-for-250 stock split (the "reverse split") followed immediately by
a forward 25-for-1 stock split (the "forward split") of its common stock,
which had the net effect of a reverse 10-for-1 stock split (the
"reverse/forward split"). Holders of fewer than 250 shares of common stock
prior to the reverse split and holders of fractional interests in common
stock following the forward split will be entitled to receive a cash
payment for the value of their fractional interests. The Company's transfer
agent will aggregate all fractional interests and sell them at prevailing
market prices. Stockholders will need to surrender their old common stock
certificates in order to receive new stock certificates and/or cash
pursuant to the reverse/forward split. Because the net result of the
reverse/forward stock split effectively was a 10-for-1 reverse stock split,
the Company also proportionately reduced the number of authorized shares of
common stock to 25,000,000. The trading symbol for the Company's common
stock, which continues to trade in the over-the-counter bulletin board, was
changed to "HOFD" effective July 14, 2003. The financial statements and
notes thereto give retroactive effect to the reverse/forward stock split
for all periods presented.
Certain amounts for prior periods have been reclassified to be consistent
with the 2003 presentation.
2. 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 $787,000 was expensed and paid during
each of the six month periods ended June 30, 2003 and 2002. Additionally,
$525,000 and $561,000 of debt discount on the note was amortized as
interest expense during the six month periods ended June 30, 2003 and 2002,
respectively.
3. The Company has a $10,000,000 line of credit agreement with LFC that has a
maturity date of February 28, 2007. Loans outstanding under this line of
credit bear interest at 10% per annum. At June 30, 2003, no amounts were
outstanding under this facility.
6
Notes to Interim Consolidated Financial Statements, continued
4. Basic and diluted income per share of common stock was calculated by
dividing the net income by the weighted average shares of common stock
outstanding. The number of shares used to calculate basic income per common
share was 8,155,084 and 5,680,808 for the periods ended June 30, 2003 and
2002, respectively. The number of shares used to calculate diluted income
per share was 8,229,874 and 5,713,826 for the six month periods ended June
30, 2003 and 2002, respectively, and 8,238,798 and 5,714,642 for the three
month periods ended June 30, 2003 and 2002, respectively.
5. Pursuant to the administrative services agreement, LFC provides
administrative services, including providing the services of one of the
Company's executive officers to the Company through December 31, 2003.
Administrative fees paid to LFC were $60,000 for the each of the six month
periods ended June 30, 2003 and 2002, and $30,000 and $34,000 for the three
month periods ended June 30, 2003 and 2002, respectively. The Company also
receives monthly rental fees from Leucadia for an amount equal to
Leucadia's pro rata share of the Company's cost for such space and
furniture. Effective January 2003, the monthly rental fee is $5,500.
6. In August 2002, the Company entered into a joint venture with another party
to develop its 10 acre parcel at the Paradise Valley project. In March
2003, the Company contributed its real estate, with a book value of
approximately $1,254,000, and cash of approximately $108,000 in exchange
for an 83% interest in the joint venture. The other party contributed cash
and an adjacent 2 acre parcel for an aggregate amount of approximately
$287,000 in exchange for a 17% interest. The Company is the manager of the
joint venture and consolidates this entity in its financial statements. No
gain or loss was recognized on the formation of this joint venture.
7. The Company's lot sales agreements with home builders generally include
provisions which restrict the purchaser from reselling the real estate to
another home builder without the Company's consent. These provisions are
intended to prevent the resale of real estate to less desirable home
builders which could jeopardize the quality of the project's neighborhoods,
as well as to insure that the Company captures the profit from the sale of
improved lots. In April 2003, the Company consented to the resale of lots
by one of its home builders in exchange for a payment of approximately
$3,050,000, which is recorded as real estate revenues.
8. Certain of the Company's lot purchase agreements with home builders include
provisions that entitle the Company to a share of the profits realized by
the home builders upon their sale of the homes, after certain thresholds
are achieved. The actual amount which could be received by the Company is
generally based on a formula and other specified criteria contained in the
lot purchase agreements, and is generally not payable and cannot be
determined with reasonable certainty until the builder has completed the
sale of a substantial portion of the homes covered by the lot purchase
agreement. The Company's policy is to accrue revenue earned pursuant to
these agreements when amounts are payable pursuant to the lot purchase
agreements. The Company has recognized real estate revenues pursuant to
these agreements of $5,100,000 and $4,800,000 for the six and three month
periods ended June 30, 2003, respectively.
9. In April 2003, Otay Land Company sold approximately 1,445 acres within the
Otay Ranch master-planned community to an unrelated third party for a sales
price of $22,500,000 in cash. As previously disclosed in the 2002 10-K, the
Company was contractually committed to sell the property if the transaction
closed by April 30, 2003. The sale resulted in a pre-tax gain of
approximately $17,700,000 during the second quarter of 2003. Otay Land
Company used a portion of the proceeds from the sale to fully satisfy the
preferred capital interest and preferred return of approximately
$12,900,000 due to Leucadia, which was reflected in the consolidated
balance sheet as minority interest.
7
Notes to Interim Consolidated Financial Statements, continued
10. In 2000, pursuant to the Company's 2000 Stock Incentive Plan, the Company
granted to two key employees options to purchase an aggregate of 100,000
shares of common stock at an exercise price of $6.10 per share, the then
current market price per share. These options were subject to forfeiture
provisions if performance criteria were not met by April 27, 2003. Upon the
closing of the Otay Land Company sale described in Note 9, the options
were no longer subject to forfeiture. As a result, the Company expensed the
remaining deferred compensation related to the performance options of
approximately $425,000 in the second quarter of 2003.
In July 2003, following shareholder approval, the Company's 1999 Stock
Incentive Plan was amended to, among other things, increase to 200,000 the
number of shares of common stock that would be available under the plan for
issuance pursuant to stock options, restricted stock or stock appreciation
rights once the reverse/forward stock split was effected.
11. During the six and three month periods ending June 30, 2003, the Company
closed on the sales of four neighborhoods in the San Elijo Hills project
consisting of 353 single family lots for an aggregate purchase price of
$80,500,000, net of closing costs. For the periods ended June 30, 2003, the
Company recognized revenues on sales of real estate and cost of sales for
these closings of $43,000,000 and $8,800,000, respectively. As of June 30,
2003, the Company estimates that it will spend approximately $7,600,000 to
complete the required improvements to these properties, representing
approximately 47% of the total cost of these neighborhoods, including costs
related to common areas. Accordingly, the Company has deferred recognition
of $37,500,000 of revenue under the percentage of completion method of
accounting. The Company expects to substantially complete the required
improvements by December 2004 and the deferred revenue, as well as the
related cost of sales, will be recognized in the statement of operations as
the improvements are completed.
As of August 11, 2003, the Company has an agreement with a home builder to
sell an additional 77 single family lots for aggregate cash proceeds of
$18,200,000, pursuant to which it had received a non-refundable option
payment for $1,800,000 as of June 30, 2003. This option payment will be
applied to reduce the amount due from the purchaser at closing.
12. On July 9, 2003, options to purchase an aggregate of 600 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 $27.40 per share, the
then current market price per share.
13. In July 2003, the Company's shareholders approved an amendment to its
certificate of incorporation to create a class of preferred stock, of which
3,000,000 shares are authorized. The Company has no current intention to
issue the preferred stock.
14. Since 1999, the San Elijo Hills project has carried $50 million of general
liability and professional liability insurance under a policy issued by the
Kemper Insurance Companies ("Kemper"). The policy covered a thirteen year
term from the initial date of coverage, and the entire premium for the life
of the policy was paid in 1999. This policy is specific to the San Elijo
Hills project; the Company has general and professional liability insurance
for other matters with different insurance companies.
Kemper has ceased underwriting operations and has submitted a voluntary
run-off plan to its insurance regulators. Although Kemper is not formally
in liquidation or under the supervision of insurance regulators, it is
uncertain whether they will have sufficient assets if, and when, the
Company makes a claim under the policy. The Company has been attempting to
replace the coverage supplied by Kemper with a new insurance company;
however, the Company has not been able to find coverage equal to that
provided by Kemper and premium rates have increased. At this time the
Company is unable to determine whether it will be able to acquire insurance
that is economically acceptable, if at all, or whether such insurance will
cover past occurrences at the San Elijo Hills project.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations.
Liquidity and Capital Resources
For the six month period ended June 30, 2003, net cash was provided by operating
activities, primarily from the proceeds of the sale of real estate at the San
Elijo Hills project and the Otay Ranch project as described below. For the six
month period ended June 30, 2002, net cash was provided by operating activities,
primarily from the proceeds of the sale of real estate at the Otay Ranch
project. The Company's principal sources of funds are proceeds from the sale of
real estate, its $10,000,000 line of credit with LFC, fee income from the San
Elijo Hills project and dividends or tax sharing payments 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 LFC to
collateralize its $26,462,000 borrowing from LFC, it may be unable to obtain
financing 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 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 LFC, which
has a maturity date of February 28, 2007. Loans outstanding under this line of
credit bear interest at 10% per annum. As of June 30, 2003, no amounts were
outstanding under this facility.
During the six months ended June 30, 2003, the Company closed on the sales of
four neighborhoods in the San Elijo Hills project consisting of 353 single
family lots for aggregate sales proceeds of $80,500,000, net of closing costs.
The sales proceeds included $6,200,000 of non-refundable options payments that
the Company had received in 2003. As of June 30, 2003, the Company estimates
that it will spend approximately $7,600,000 to complete the required
improvements to these properties, representing approximately 47% of the total
cost of these neighborhoods, including costs related to common areas.
Accordingly, the Company has deferred recognition of $37,500,000 of revenue
under the percentage of completion method of accounting. The Company expects to
substantially complete the required improvements by December 2004 and the
deferred revenue, as well as the related cost of sales, will be recognized in
the statement of operations as the improvements are completed.
As of August 11, 2003, the Company has an agreement with a home builder to sell
an additional 77 single family lots for aggregate cash proceeds of $18,200,000,
pursuant to which it had received a non-refundable option payment for $1,800,000
as of June 30, 2003. This option payment will be applied to reduce the amount
due from the purchaser at closing.
Excluding the lots to be sold pursuant to this agreement, the Company currently
estimates that the remaining real estate to be developed and sold at the San
Elijo Hills project includes 879 single family lots, 141 multi-family units and
2 school sites. In addition, the development plan includes the development of
approximately 135,000 square feet of commercial and institutional space which
will be sold or leased. The Company is also obligated to construct 272 very low
income apartment units with minimal, if any, profit potential. All of these
amounts are estimates derived from the current plans for the project, and could
change based upon the actions of the project's home builders or regulatory
agencies.
In April 2003, Otay Land Company sold approximately 1,445 acres within the Otay
Ranch master-planned community to an unrelated third party for a sales price of
$22,500,000 in cash and recorded a pre-tax gain of approximately $17,700,000. As
previously disclosed in the 2002 10-K, the Company was contractually committed
to sell the property if the transaction closed by April 30, 2003. Otay Land
Company used a portion of the proceeds from the sale to fully satisfy the
preferred capital interest and preferred return of approximately $12,900,000 due
to Leucadia.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
In April 2003, the Company completed certain improvements pertaining to the
December 2002 sale of one neighborhood consisting of 92 single family lots. As a
result, the purchaser fully paid the non-interest bearing promissory note of
$6,600,000 referred to in the 2002 10-K.
As more fully described in the Company's 2002 10-K, in August 2002, the Company
reached an agreement with the City of Chula Vista and another party in
connection with an amendment of the conveyance schedule for mitigation land
within Otay Ranch. Under the settlement, among other things, the Company
withdrew its objection to the amendment 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 was also required to submit to the court an
appraisal of the property's value, which it did in July 2003 in the amount of
$5,700,000. The excess of the appraised value over the amount previously paid to
the Company of $3,176,000 has been paid to the Company as additional purchase
price. Any increase 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 will not recognized any income until such
time as title to all or a portion of the property is transferred to the City.
Results of Operations
Sales of real estate in the 2003 periods reflect approximately $43,000,000
related to the sales of four neighborhoods in the San Elijo Hills project and
$22,500,000 from the sale of 1,445 acres within the Otay Ranch project. The sale
closings at the San Elijo Hills project which occurred during the three month
period ended June 30, 2003, consisted of 353 single family lots for an aggregate
purchase price of $80,500,000, net of closing costs, of which approximately
$43,000,000 was recognized as revenue and the balance was deferred. The Company
will recognize the balance of the deferred revenue upon the 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 revenues of $11,800,000 and $5,100,000 for the six and three
month periods ended June 30, 2003, respectively, of previously deferred revenue
based on the completion of certain required improvements. The Company also
recognized real estate revenues pursuant to profit sharing agreements with home
builders of $5,100,000 and $4,800,000 for the six and three month periods ended
June 30, 2003, respectively. In addition, real estate revenues for the periods
ended in 2003 include $3,050,000 paid by one of San Elijo's home builders for
the Company's consent to allow the home builder to re-sell his lots to another
builder. Sales of real estate for the 2002 periods reflect the sale of 85 acres
of developable land at the Otay Ranch project.
During the six month period ended June 30, 2003, cost of sales of real estate
aggregated $12,300,000 and $4,800,000 for the San Elijo Hills and Otay Ranch
projects, respectively. During the six month period ended June 30, 2002, cost of
sales of real estate aggregated $800,000 relating to the sale of 85 acres of
developable land at the Otay Ranch project. Cost of sales for the San Elijo
Hills project is recognized in the same proportion to the amount of revenue
recognized under the percentage of completion method of accounting. Cost of
sales for the Otay Ranch project is based upon the allocation of project costs
to individual parcels based upon their relative fair values along with closing
costs and commissions, if any.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
The Company recorded co-op marketing and advertising fees of $583,000 and
$896,000 for the six month periods ended June 30, 2003 and 2002, respectively,
and $203,000 and $426,000 for the three month periods ended June 30, 2003 and
2002, 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.
Prior to the acquisition of CDS Holding Corporation ("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 have continued to be a source of
liquidity to the parent company since the acquisition of CDS, they are no longer
reflected in the consolidated statements of operations since they are
intercompany payments from a subsidiary and are eliminated in consolidation.
Income from options on real estate properties reflects non-refundable fees to
extend the closing date on the sale of 85 acres of developable land at the Otay
Ranch project, which closed in June 2002. The Company received and recognized
$300,000 and $120,000 of such fees in the six and three month periods ended June
30, 2002, respectively.
Interest expense reflects the interest due on indebtedness to LFC of $787,000
and $804,000 for the six month periods ended June 30, 2003 and 2002,
respectively, and $395,000 and $412,000 for the three month periods ended June
30, 2003 and 2002, respectively. Interest expense also includes amortization of
debt discount related to the indebtedness to LFC of $525,000 and $561,000 for
the six month periods ended June 30, 2003 and 2002, respectively, and $268,000
and $286,000 for the three month periods ended June 30, 2003 and 2002,
respectively.
General and administrative expenses increased during the six month and three
month periods ended June 30, 2003 as compared to the same periods in 2002 due to
expenses of $824,000 and $417,000, respectively, related to CDS, which was
acquired in October 2002. In addition, general and administrative expenses
increased in the 2003 periods as compared to the 2002 periods due to greater
legal and professional fees and stock compensation expense. The increase in
legal fees principally reflects costs associated with the Otay Ranch project and
expenses related to the Company's reverse/forward split. In addition, legal and
professional fees were incurred in connection with the acquisition of certain
Otay Ranch land by the City of Chula Vista pursuant to the condemnation
proceedings discussed above. The increase in stock compensation expense was
attributable to expensing the remaining deferred compensation of $425,000 in the
second quarter of 2003 related to certain performance options which were no
longer subject to forfeiture and to an increase in the market price of the
Company's common stock.
The increase in other income for the 2003 periods as compared to the same
periods in 2002 primarily relates to greater interest income resulting from a
larger amount of invested assets. In addition, other income for the six month
period ended June 30, 2003 increased compared to the same period in 2002 due to
cash received to settle a dispute with one of the Company's vendors, partially
offset by the gain on a sale of a foreclosed property in 2002.
The increase in minority interest expense for the six and three month periods
ended June 30, 2003 as compared to the same periods in 2002 is due to the
minority interest related to CDS, which was acquired in October 2002, and
increased preferred capital interest related to Otay Ranch.
The Company's effective income tax rate in 2003 is higher than the federal
statutory rate due to California state income taxes and state franchise taxes.
Current taxes payable in 2003 principally relate to federal minimum tax and
state income and franchise taxes. Income tax expense for 2002 principally
relates to federal and state minimum taxes incurred. In 2002, the Company did
not recognize income tax benefits for its operating losses due to the
uncertainty of sufficient future taxable income that is required in order to
recognize such tax benefits.
11
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. 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 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.
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 the availability of adequate water resources in the areas where the
Company owns real estate projects and the impact that inadequate water
resources can have in curtailing development;
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.
12
Undue reliance should not be placed on these forward-looking statements, which
are applicable only as of the date hereof. The Company undertakes no obligation
to revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this Management's Discussion and
Analysis of Financial Condition and Results of Interim Operations or to reflect
the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information required under this Item is contained in Item 7A of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, and is
incorporated by reference herein.
Item 4. Controls and Procedures.
(a) The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), as of June 30, 2003. Based on their
evaluation, the Company's principal executive and principal financial
officers concluded that the Company's disclosure controls and procedures
were effective as of June 30, 2003.
(b) There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the Company's fiscal quarter ended June 30, 2003,
that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
31.1 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President and Controller pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated April 24,
2003, which sets forth information under item 5. Other Events.
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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: August 13, 2003 By: /s/ Erin N. Ruhe
--------------------
Erin N. Ruhe
Vice President and Controller
(Principal Accounting Officer)
15
EXHIBIT INDEX
Exhibit Number Description
31.1 Certification of President pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President and Controller pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
16