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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 September 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 November 10,
2003, there were 8,155,159 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, 2003 and December 31, 2002
(Dollars in thousands, except par value)
September 30, December 31,
2003 2002
------------- -----------
(Unaudited)
ASSETS
Real estate $ 33,876 $ 31,108
Cash and cash equivalents 39,522 33,601
Investments - available for sale (aggregate cost of $78,762) 78,772 --
Deposits and other assets 1,636 1,026
Deferred income taxes 20,333 44,742
Note receivable -- 6,566
--------- ---------
TOTAL $ 174,139 $ 117,043
========= =========
LIABILITIES
Note payable to Leucadia Financial Corporation $ 24,430 $ 23,628
Notes payable to trust deed holders 13,682 16,704
Deferred revenue 50,650 32,621
Accounts payable and accrued liabilities 7,362 6,323
Non-refundable option payment 2,876 1,818
Liability for environmental remediation 10,598 10,816
Income taxes payable 4,463 2,875
Other liabilities 7,022 5,476
--------- ---------
Total liabilities 121,083 100,261
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 7,493 15,132
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized;
8,155,159 and 8,155,084 shares outstanding 82 82
Additional paid-in capital 380,545 380,364
Deferred compensation pursuant to stock incentive plans (5) (418)
Accumulated other comprehensive income 6 --
Accumulated deficit (335,065) (378,378)
--------- ---------
Total stockholders' equity 45,563 1,650
--------- ---------
TOTAL $ 174,139 $ 117,043
========= =========
See notes to interim consolidated financial statements.
2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2003 and 2002
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2003 2002 2003 2002
------- ------ ------ ------
REVENUES
Sales of real estate $ 29,667 $ -- $ 115,127 $ 4,285
Co-op marketing and advertising fees 249 600 832 1,496
Development management fee income from San Elijo Hills -- 57 -- 1,610
Income from options on real estate properties -- -- -- 300
--------- --------- --------- ---------
29,916 657 115,959 7,691
--------- --------- --------- ---------
EXPENSES
Cost of sales 8,002 -- 25,134 809
Provision for environmental remediation -- 11,160 -- 11,160
Interest expense relating to Leucadia Financial Corporation 678 714 1,990 2,079
General and administrative expenses 3,022 1,266 7,472 3,472
Administrative services fees to Leucadia Financial Corporation 30 30 90 90
--------- --------- --------- ---------
11,732 13,170 34,686 17,610
--------- --------- --------- ---------
Income (loss) from operations 18,184 (12,513) 81,273 (9,919)
Other income 665 30 1,310 201
--------- --------- --------- ---------
Income (loss) before income taxes and minority interest 18,849 (12,483) 82,583 (9,718)
Income tax provision (8,290) (16) (33,872) (69)
--------- --------- --------- ---------
Income (loss) before minority interest 10,559 (12,499) 48,711 (9,787)
Minority interest (2,234) 157 (5,398) (750)
--------- --------- --------- ---------
Net income (loss) $ 8,325 $ (12,342) $ 43,313 $ (10,537)
========= ========= ========= =========
Basic income (loss) per common share $ 1.02 $ (2.17) $ 5.31 $ (1.85)
========= ========= ========= =========
Diluted income (loss) per common share $ 1.01 $ (2.17) $ 5.26 $ (1.85)
========= ========= ========= =========
See notes to interim consolidated financial statements.
3
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the nine month periods ended September 30, 2003 and 2002
(Dollars in thousands, except par value)
(Unaudited)
Deferred
Common Compensation Accumulated Total
Stock Additional Pursuant to Other Stockholders'
$.01 Par Paid-In Stock Incentive Comprehensive Accumulated Equity
Value Capital Plans Income Deficit (Deficit)
----- ---------- --------- --------- -------- ---------
Balance, January 1, 2002 $ 57 $ 355,888 $ (276) $ -- $ (367,292) $ (11,623)
Comprehensive loss:
Net loss (10,537) (10,537)
---------
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
------ ---------- ------ ------- ---------- ---------
Balance, September 30, 2002 $ 57 $ 355,929 $ (174) $ -- $ (377,829) $ (22,017)
====== ========== ====== ======= ========== =========
Balance, January 1, 2003 $ 82 $ 380,364 $ (418) $ -- $ (378,378) $ 1,650
Comprehensive income:
Net change in unrealized gain (loss) on
investments 6 6
Net income 43,313 43,313
---------
Comprehensive income 43,319
---------
Amortization of restricted stock grants 11 11
Amortization related to stock options 582 582
Change in value of performance-based stock
options 180 (180) --
Exercise of options to purchase common shares 1 1
------ ---------- ------ ------- ---------- ---------
Balance, September 30, 2003 $ 82 $ 380,545 $ (5) $ 6 $ (335,065) $ 45,563
====== ========== ====== ======= ========== =========
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, 2003 and 2002
(In thousands)
(Unaudited)
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 43,313 $ (10,537)
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 5,398 750
Provision for environmental remediation -- 11,160
Provision for deferred income taxes 24,405 --
Amortization of deferred compensation pursuant to stock incentive plans 593 142
Amortization of debt discount on note payable to Leucadia Financial Corporation 802 858
Changes in operating assets and liabilities:
Real estate (1,504) (942)
Deposits and other assets (610) 6
Note receivable 6,566 --
Notes payable to trust deed holders (922) --
Deferred revenue 18,029 --
Accounts payable and accrued liabilities 1,039 (175)
Liability for environmental remediation (218) --
Non-refundable option payment 1,058 --
Income taxes payable 1,588 --
Other liabilities 1,546 --
--------- ---------
Net cash provided by operating activities 101,083 1,262
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (other than short-term) (78,762) --
--------- ---------
Net cash used for investing activities (78,762) --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution from minority interest 43 --
Distribution to minority interest (13,324) --
Principal payments to trust deed note holders (3,120) --
Borrowings under credit agreement with Leucadia Financial Corporation -- 650
Exercise of options to purchase common shares 1 1
--------- ---------
Net cash (used for) provided by financing activities (16,400) 651
--------- ---------
Net increase in cash and cash equivalents 5,921 1,913
Cash and cash equivalents, beginning of period 33,601 1,454
--------- ---------
Cash and cash equivalents, end of period $ 39,522 $ 3,367
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest (net of amounts capitalized) $ 1,188 $ 1,221
Cash paid for income taxes $ 5,288 $ 117
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 are entitled to receive cash payments for
the value of their fractional interests. The Company's transfer agent
aggregated all fractional interests and sold them at prevailing market
prices. Stockholders 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 Company's investment portfolio and its cash equivalents are comprised
entirely of highly rated investment grade securities issued by agencies of
the U.S. government. The Company classifies investments with maturities of
less than three months at the time of acquisition as cash equivalents. As
of September 30, 2003, cash equivalents aggregated $15,000,000. Securities
with maturities greater than three months at the time of acquisition are
classified as investments available for sale, and are carried at estimated
fair value with unrealized gains and losses reflected as a separate
component of shareholders' equity, net of taxes.
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 was expensed and paid
during each of the nine month periods ended September 30, 2003 and 2002.
Additionally, $802,000 and $858,000 of debt discount on the note was
amortized as interest expense during the nine month periods ended September
30, 2003 and 2002, respectively.
6
Notes to Interim Consolidated Financial Statements, continued
4. 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 September 30, 2003, no amounts
were outstanding under this facility.
5. 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 8,155,095 and
5,680,813 for the nine month periods ended September 30, 2003 and 2002,
respectively, and 8,155,117 and 5,680,822 for the three month periods ended
September 30, 2003 and 2002, respectively. The number of shares used to
calculate diluted earnings (loss) per share was 8,234,962 and 5,680,813 for
the nine month periods ended September 30, 2003 and 2002, respectively, and
8,245,138 and 5,680,822 for the three month periods ended September 30,
2003 and 2002, respectively. Options to purchase 35,804 and 41,377 weighted
average shares for the nine and three month periods ended September 30,
2002, respectively, were not included in the computation of diluted loss
per share as those options were antidilutive.
6. Pursuant to the administrative services agreement, LFC provides
administrative services to the Company through December 31, 2003, including
providing the services of one of the Company's executive officers.
Administrative fees paid to LFC were $90,000 for the each of the nine month
periods ended September 30, 2003 and 2002, and $30,000 for each of the
three month periods ended September 30, 2003 and 2002. The Company shares
office space with Leucadia and 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 office furniture. Effective January 2003, the monthly rental
fee is $5,500.
7. 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.
In September 2003, the joint venture sold twenty-four 8,000 square foot
residential lots in the Paradise Valley project, representing approximately
7 acres of the 12 acre project. The Company received net proceeds of
$2,150,000 from the venture, and recognized pre-tax income on this sale of
$1,350,000, of which approximately $250,000 was allocated to the other
joint venture partner and was reflected as minority interest. In October
2003, the joint venture sold the remaining 5 acres to the City of
Fairfield, California. The Company received net proceeds of $730,000 from
the venture and will recognize pre-tax income of approximately $440,000 in
the fourth quarter, of which approximately $70,000 will be allocated to the
minority interest.
8. 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 homebuilders in exchange for a payment of approximately
$3,050,000, which was recognized as real estate revenues in the second
quarter of 2003.
7
Notes to Interim Consolidated Financial Statements, continued
9. 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 $5,500,000 and $400,000 for the nine and three month
periods ended September 30, 2003, respectively.
10. 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.
11. 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 10, 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.
12. During the nine month period ended September 30, 2003, the Company closed
on the sales of six neighborhoods in the San Elijo Hills project,
consisting of 430 single family lots and 48 very low income apartment
units, for an aggregate purchase price of $99,500,000, net of closing
costs. During the three month period ended September 30, 2003, the Company
closed on the sales of two neighborhoods in the San Elijo Hills project,
consisting of 77 single family lots and 48 very low income apartment units,
for an aggregate purchase price of $19,000,000, net of closing costs. For
the nine and three month periods ended September 30, 2003, the Company
recognized revenues on sales of real estate for these closings of
$55,800,000 and $12,800,000, respectively, and recorded cost of sales of
$12,100,000 and $3,300,000, respectively. In addition, for the nine and
three month periods ended September 30, 2003, the Company recognized
revenues of $25,700,000 and $13,900,000, respectively, of previously
deferred revenues based on the completion of certain required improvements.
As of September 30, 2003, the Company estimates that it will spend
approximately $6,900,000 to complete the required improvements to the
properties sold during 2003, which represents approximately 33% of the
total cost of these neighborhoods including costs related to common areas.
Accordingly, the Company has deferred recognition of $33,900,000 of revenue
under the percentage of completion method of accounting for these sales.
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.
8
Notes to Interim Consolidated Financial Statements, continued
A summary of the revenues related to the San Elijo Hills project for the
three and nine month periods ended September 30, 2003 is as follows (in
thousands):
Three Month Period Nine Month Period
Ended September 30, 2003 Ended September 30, 2003
------------------------ ------------------------
Revenues from current period lot sales $ 12,761 $ 55,823
Recognition of previously deferred revenue 13,911 25,691
Other 408 8,527
--------- ---------
Total $ 27,080 $ 90,041
========= =========
As of November 10, 2003, the Company has agreements with home builders to
sell an additional 199 single family lots for aggregate cash proceeds of
$59,900,000, pursuant to which it had received non-refundable option
payments of $6,000,000 ($2,900,000 of which was received as of September
30, 2003). These option payments will be applied to reduce the amount due
from the purchasers at closing.
During September 2003, the Company sold land zoned for 156 very low income
apartment units in the San Elijo Hills project and received a $2,700,000
non-interest bearing promissory note. The note matures on the earlier of
the date the buyer obtains financing for the property or December 31, 2003.
The note is only secured by the land sold, it represents 100% of the
selling price and the buyer has not made any cash investment in the
property. Although the buyer does have title to the property currently, the
Company has not recorded any revenue or cost of sales relating to this
sale, nor has it reflected the promissory note as an asset, because
accounting requirements as to the adequacy of the buyer's initial
investment have not been satisfied.
13. 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.
14. 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.
15. 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.
16. In October 2003, approximately 1,800 acres of land (consisting almost
entirely of non-developable open space mitigation land) owned by Otay Land
Company was burned by the fires that swept through Southern California.
This represents approximately 55% of the total land owned by the Otay Land
Company, and approximately 70% of its open space mitigation land. While the
Company is continuing to assess the impact of these fires, it does not
currently believe that the fires will have a material adverse effect on the
property's value. Subsequent fires or any other events that adversely
affect the indigenous habitat or prevent the return of species which
previously used the property could adversely impact the value of the land.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations.
Liquidity and Capital Resources
For the nine month period ended September 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 nine month period ended September 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 believes it could
accelerate its subsidiaries' sale of real estate projects held for development
or seek to borrow additional 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.
At September 30, 2003, cash, cash equivalents and investments held by entities
which own the San Elijo Hills project aggregated $90,300,000. Such assets are
being held in reserve for future development costs at the San Elijo Hills
project, and therefore have not been distributed to the Parent Company or to the
minority interest.
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 September 30, 2003, no amounts were
outstanding under this facility.
During the nine months ended September 30, 2003, the Company closed on the sales
of six neighborhoods in the San Elijo Hills project consisting of 430 single
family lots and 48 very low income apartment units for aggregate sales proceeds
of $99,500,000, net of closing costs. The sales proceeds included $8,000,000 of
non-refundable options payments that the Company had received previously, of
which $6,200,000 was received in 2003. As of September 30, 2003, the Company
estimates that it will spend approximately $6,900,000 to complete the required
improvements to the properties sold during 2003, representing approximately 33%
of the total cost of these neighborhoods including costs related to common
areas. Accordingly, the Company has deferred recognition of $33,900,000 of
revenue under the percentage of completion method of accounting for these sales.
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 November 10, 2003, the Company has agreements with home builders to sell
an additional 199 single family lots for aggregate cash proceeds of $59,900,000,
pursuant to which it had received non-refundable option payments of $6,000,000
($2,900,000 of which was received as of September 30, 2003). These option
payments will be applied to reduce the amount due from the purchasers at
closing.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Excluding the lots to be sold pursuant to these agreements, the Company
currently estimates that the remaining real estate to be developed and sold at
the San Elijo Hills project includes 680 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
224 additional 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.
The Company is in discussions with the City of San Marcos/Redevelopment Agency
of San Marcos (the "City") concerning an amendment to the San Elijo Hills
project development agreement. The amendment, among other things, would increase
the Company's involvement in the development of certain roads serving the San
Elijo Hills project. The amendment would obligate the Company to contribute
$11,000,000 to fund a portion of the cost of building these roads, with the
balance of the cost to be funded by the City. The Company cannot currently
estimate with certainty when it would be required to spend the $11,000,000 if it
enters into the amendment; however, it expects it will commence funding during
2004. It is anticipated that the Company will be able to recover any such
funding through a special tax to be levied against future property owners of a
portion of the San Elijo Hills project, although no assurance can be given that
the Company will ultimately be able to fully recover such funding.
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.
In April 2003, the Company completed certain improvements pertaining to the
December 2002 sale of one neighborhood at the San Elijo Hills project 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.
In August 2002, the Company entered into a joint venture with another party to
develop its property at the Paradise Valley project. In September 2003, the
joint venture sold twenty-four 8,000 square foot residential lots in the
Paradise Valley project, representing approximately 7 acres of the 12 acre
project. The Company received net proceeds of $2,150,000 from the venture, and
recognized pre-tax income on this sale of $1,350,000, of which approximately
$250,000 was allocated to the other joint venture partner and was reflected as
minority interest.
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 437 acres
of the Company's 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 recognize any income until such time as title
to all or a portion of the property is transferred to the City.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
RESULTS OF OPERATIONS
Real Estate Sales Activity
- --------------------------
San Elijo Hills Project:
- ------------------------
For the nine and three month periods ended September 30, 2003, the Company
recorded revenues from sales of real estate of approximately $55,800,000 and
$12,800,000, respectively. For the nine month period ended September 30, 2003,
the Company closed on the sale of six neighborhoods, consisting of 430 single
family units and 48 very low income apartment units for an aggregate purchase
price of $99,500,000. For the three month period ended September 30, 2003, the
Company closed on the sale of two neighborhoods, consisting of 77 single family
units and 48 very low income apartment units, for an aggregate purchase price of
$19,000,000. The excess of the purchase price over the revenue recognized was
deferred, and is recognized as revenues 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 previously deferred revenues of $25,700,000 and $13,900,000 for the
nine and three month periods ended September 30, 2003, respectively, based on
the completion of certain required improvements.
The Company also recognized real estate revenues pursuant to profit sharing
agreements with home builders of $5,500,000 and $400,000 for the nine and three
month periods ended September 30, 2003, respectively. Additionally, real estate
revenues for the nine month 2003 period 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.
During the nine and three month periods ended September 30, 2003, cost of sales
of real estate aggregated $19,100,000 and $6,800,000, respectively. Cost of
sales is recognized in the same proportion to the amount of revenue recognized
under the percentage of completion method of accounting.
Otay Ranch Project:
- -------------------
Sales of real estate for the nine month period ended September 30, 2003 include
$22,500,000 from the sale of 1,445 acres, which is discussed above. For the nine
month period ended September 30, 2002, sales of real estate include $4,285,000
from the sale of 85 acres of developable land.
During the nine month periods ended September 30, 2003 and 2002, cost of sales
of real estate aggregated $4,800,000 and $800,000, respectively. Cost of sales
is based upon the allocation of project costs to individual parcels, based upon
their relative fair values, in addition to closing costs and commissions, if
any.
Paradise Valley Project:
- ------------------------
Sales of real estate for the periods ended September 30, 2003 relate to the sale
of twenty-four 8,000 square foot residential lots discussed above, for which the
Company recognized revenues of $2,600,000. Cost of sales for this transaction
aggregated $1,200,000. There were no sales relating to this project in the 2002
periods.
Other Results of Operations Activity
- ------------------------------------
The Company recorded co-op marketing and advertising fees of $832,000 and
$1,496,000 for the nine month periods ended September 30, 2003 and 2002,
respectively, and $249,000 and $600,000 for the three month periods ended
September 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.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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 of such fees during the nine month period ended September 30, 2002.
As more fully discussed in the 2002 10-K, in the third quarter of 2002, the
Company recorded a provision of approximately $11,200,000, representing its
estimated cost of environmental remediation with respect to 34 acres of
undeveloped land owned by Otay Land Company. No additional accruals were made
during 2003. The Company is continuing to evaluate its remediation plans and to
pursue potential claims for recovery. The liability for environmental
remediation costs remaining at September 30, 2003 is approximately $10,600,000.
Interest expense reflects the interest due on indebtedness to LFC of $1,188,000
and $1,221,000 for the nine month periods ended September 30, 2003 and 2002,
respectively, and $401,000 and $417,000 for the three month periods ended
September 30, 2003 and 2002, respectively. Interest expense also includes
amortization of debt discount related to the indebtedness to LFC of $802,000 and
$858,000 for the nine month periods ended September 30, 2003 and 2002,
respectively, and $277,000 and $297,000 for the three month periods ended
September 30, 2003 and 2002, respectively.
General and administrative expenses increased during the nine month and three
month periods ended September 30, 2003 as compared to the same periods in 2002
due to expenses of $1,310,000 and $486,000, 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
expenses related to employee compensation and legal and professional fees. The
increase in legal and professional fees principally reflects costs associated
with the Otay Ranch project, including costs incurred in connection with the
acquisition of certain Otay Ranch land by the City of Chula Vista pursuant to
the condemnation proceedings discussed above, and expenses related to the
Company's reverse/forward split. In addition, general and administrative
expenses include a charge in the second quarter of 2003 for previously deferred
stock compensation expense of $425,000, which 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, income from the reimbursement for improvement
costs that were previously expensed at the San Elijo Hills project and proceeds
from an easement at the Otay Ranch project. In addition, other income for the
nine month period ended September 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 nine and three month periods
ended September 30, 2003 as compared to the same periods in 2002 is primarily
due to the minority interest related to CDS, and for the nine month period ended
September 30, 2003, 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.
13
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 and fires;
o imposition of limitations on the Company's ability to develop its
properties resulting from environmental or other 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.
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.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The following includes "forward-looking statements" that involve risk and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
The Company's market risk arises principally from interest rate risk related to
its investment portfolio and borrowing activities.
Since December 31, 2002, the only significant change in the Company's market
risk disclosure relates to its investment in August 2003 of approximately
$93,800,000 in securities issued by agencies of the U.S. government, of which
$15,000,000 were classified as cash equivalents and $78,800,000 as investments
as of September 30, 2003. The Company's investment portfolio is classified as
available for sale, and is reflected on the balance sheet at fair value with
unrealized gains and losses reflected in shareholders' equity. The portfolio
consists of U.S. governmental agency issued securities that are rated "AAA" and
"Aaa" by Standard & Poor's and Moody's, respectively. The estimated weighted
average remaining life of these fixed income securities was approximately 0.3
years at September 30, 2003, with $33,900,000 maturing in 2003 and the remainder
in 2004. These securities have a weighted average interest rate of 1.06% at
September 30, 2003. The Company's fixed income securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if market
interest rates increase.
For additional information with respect to the Company's indebtedness, see Note
5 to Consolidated Financial Statements, included in the 2002 10-K.
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 September 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 September 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 September 30,
2003, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
15
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of shareholders at the
Company's 2003 Annual Meeting of Shareholders held on July 9, 2003.
a) Election of directors.
Number of Shares
----------------
For Withheld
--- --------
Patrick D. Bienvenue 75,196,621 756,546
Paul J. Borden 74,692,701 1,260,466
Timothy M. Considine 75,184,817 768,350
Ian M. Cumming 75,189,173 763,994
Michael A. Lobatz 75,193,400 759,767
Joseph S. Steinberg 75,165,109 788,058
b) Amendment to the Corporation's Certificate of Incorporation to
effect a reverse/forward split and reduce the number of shares of
Common Stock authorized.
For 75,625,710
Against 292,098
Abstentions 35,359
Broker non-votes --
c) Amendment to the Corporation's Restated Certificate of
Incorporation to create a class of Preferred Stock.
For 58,207,424
Against 1,334,066
Abstentions 57,460
Broker non-votes 16,354,217
d) Amendment to the Company's 1999 Stock Incentive Plan.
For 74,028,081
Against 872,787
Abstentions 1,052,299
Broker non-votes --
e) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 2003.
For 75,863,832
Against 48,941
Abstentions 40,394
Broker non-votes --
16
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 current reports on Form 8-K dated July 9, 2003,
which set forth information under Item 5. Other Events, Item 7.
Financial Statements and Exhibits and Item 9. Regulation FD
Disclosure.
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 12, 2003 By: /s/ Erin N. Ruhe
-----------------------------
Erin N. Ruhe
Vice President and Controller
(Principal Accounting Officer)
18
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.
19