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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, 2004
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 1, 2004, there
were 8,258,059 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, 2004 and December 31, 2003
(Dollars in thousands, except par value)
September 30, December 31,
2004 2003
------------ -----------
(Unaudited)
ASSETS
Real estate $ 41,405 $ 37,612
Cash and cash equivalents 30,144 43,503
Restricted cash 3,956 4,609
Investments-available for sale (aggregate cost of $81,803 and $88,503) 81,785 88,519
Deposits and other assets 1,397 995
Deferred income taxes 29,146 41,772
----------- -----------
TOTAL $ 187,833 $ 217,010
=========== ===========
LIABILITIES
Note payable to Leucadia Financial Corporation $ -- $ 24,716
Notes payable to trust deed holders 12,758 13,580
Deferred revenue 42,233 53,491
Accounts payable and accrued liabilities 7,676 10,985
Liability for environmental remediation 10,113 10,785
Income taxes payable 538 503
Other liabilities 9,785 13,509
----------- -----------
Total liabilities 83,103 127,569
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 6,806 13,111
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized;
8,258,059 and 8,155,159 shares outstanding 83 82
Additional paid-in capital 381,177 380,545
Deferred compensation pursuant to stock incentive plans (1) (4)
Accumulated other comprehensive income (loss) (11) 9
Accumulated deficit (283,324) (304,302)
----------- -----------
Total stockholders' equity 97,924 76,330
----------- -----------
TOTAL $ 187,833 $ 217,010
=========== ===========
See notes to interim consolidated financial statements.
2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2004 and 2003
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
REVENUES
Sales of real estate $ 16,366 $ 29,667 $ 72,168 $ 115,127
Co-op marketing and advertising fees 1,290 249 2,440 832
---------- ---------- ---------- ----------
17,656 29,916 74,608 115,959
---------- ---------- ---------- ----------
EXPENSES
Cost of sales 2,886 8,002 13,042 25,134
Interest expense 67 678 847 1,990
General and administrative expenses 2,990 3,022 7,970 7,472
Administrative services fees to Leucadia Financial
Corporation 30 30 90 90
---------- ---------- ---------- ----------
5,973 11,732 21,949 34,686
---------- ---------- ---------- ----------
Income from operations 11,683 18,184 52,659 81,273
Other income (expense) 461 665 (439) 1,310
---------- ---------- ---------- ----------
Income before income taxes and minority interest 12,144 18,849 52,220 82,583
Income tax provision (4,985) (8,290) (21,355) (33,872)
---------- ---------- ---------- ----------
Income before minority interest 7,159 10,559 30,865 48,711
Minority interest (4,760) (2,234) (9,887) (5,398)
---------- ---------- ---------- ----------
Net income $ 2,399 $ 8,325 $ 20,978 $ 43,313
========== ========== ========== ==========
Basic income per common share $ 0.29 $ 1.02 $ 2.54 $ 5.31
========== ========== ========== ==========
Diluted income per common share $ 0.29 $ 1.01 $ 2.54 $ 5.26
========== ========== ========== ==========
See notes to interim consolidated financial statements.
3
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the nine month periods ended September 30, 2004 and 2003
(Dollars in thousands, except par value)
(Unaudited)
Deferred
Common Compensation Accumulated
Stock Additional Pursuant to Other Total
$.01 Par Paid-In Stock Incentive Comprehensive Accumulated Stockholders'
Value Capital Plans Income (Loss) Deficit Equity
-------- ---------- -------------- ------------- ---------- -----------
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
===== ========== ====== ======= ========== ==========
Balance, January 1, 2004 $ 82 $ 380,545 $ (4) $ 9 $ (304,302) $ 76,330
Comprehensive income:
Net change in unrealized gain
(loss) on investments (20) (20)
Net income 20,978 20,978
----------
Comprehensive income 20,958
----------
Amortization related to stock options 3 3
Exercise of options to purchase
common shares 1 632 633
----- ---------- ------ ------- ---------- ----------
Balance, September 30, 2004 $ 83 $ 381,177 $ (1) $ (11) $ (283,324) $ 97,924
===== ========== ====== ======= ========== ==========
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, 2004 and 2003
(In thousands)
(Unaudited)
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,978 $ 43,313
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 9,887 5,398
Provision for deferred income taxes 12,640 24,405
Net securities gains (5) --
Amortization of deferred compensation pursuant to stock incentive plans 3 593
Loss on prepayment of Leucadia Financial Corporation note 1,606 --
Amortization of debt discount on note payable to Leucadia Financial Corporation 276 802
Other amortization related to investments (567) --
Changes in operating assets and liabilities:
Real estate (2,769) (1,504)
Deposits and other assets (538) (610)
Note receivable -- 6,566
Notes payable to trust deed holders (683) (922)
Deferred revenue (11,258) 18,029
Accounts payable and accrued liabilities (3,309) 1,039
Liability for environmental remediation (672) (218)
Income taxes payable 35 1,588
Other liabilities (3,724) 2,604
---------- ----------
Net cash provided by operating activities 21,900 101,083
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (other than short-term) (145,749) (78,762)
Proceeds from maturities of investments 106,085 --
Proceeds from sales of investments 46,936 --
Decrease in restricted cash 653 --
---------- ----------
Net cash provided by (used for) investing activities 7,925 (78,762)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment of Leucadia Financial Corporation note (26,462) --
Principal payments to trust deed note holders (1,163) (3,120)
Exercise of options to purchase common shares 633 1
Contribution from minority interest -- 43
Distribution to minority interest (16,192) (13,324)
---------- ----------
Net cash used for financing activities (43,184) (16,400)
---------- ----------
Net increase (decrease) in cash and cash equivalents (13,359) 5,921
Cash and cash equivalents, beginning of period 43,503 33,601
---------- ----------
Cash and cash equivalents, end of period $ 30,144 $ 39,522
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest (net of amounts capitalized) $ 410 $ 1,188
Cash paid for income taxes $ 8,712 $ 5,288
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, 2003 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
"2003 10-K"). Results of operations for interim periods are not necessarily
indicative of annual results of operations. The consolidated balance sheet
at December 31, 2003 was extracted from the Company's audited annual
consolidated financial statements and does not include all disclosures
required by accounting principles generally accepted in the United States
of America 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.
2. In March 2004, the Company prepaid in full its note payable to Leucadia
Financial Corporation ("LFC"), a subsidiary of Leucadia National
Corporation ("Leucadia"), in the amount of $26,462,000. As a result, the
Company has expensed the remaining unamortized discount on the note and
related deferred costs in the amount of $1,606,000, which is included in
the caption "Other income (expense)" in the consolidated statement of
operations for the nine months ended September 30, 2004. Interest on the
note of $373,000 and $1,188,000 was expensed and paid during the nine month
periods ended September 30, 2004 and 2003, respectively. Additionally,
$276,000 and $802,000 of debt discount was amortized as interest expense
during the nine month periods ended September 30, 2004 and 2003,
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, and the Company has paid commitment
fees of $29,000 during 2004. At September 30, 2004, no amounts were
outstanding under this facility.
4. Basic and diluted income per share of common stock was calculated by
dividing the net income by the weighted average number of shares of common
stock outstanding, and for diluted income per share, the incremental
weighted average number of shares (using the treasury stock method)
issuable upon exercise of outstanding options for the periods they were
outstanding. The number of shares used to calculate basic income per common
share was 8,258,047 and 8,155,117 for the three month periods ended
September 30, 2004 and 2003, respectively, and 8,244,682 and 8,155,095 for
the nine month periods ended September 30, 2004 and 2003, respectively. The
number of shares used to calculate diluted income per share was 8,271,794
and 8,245,138 for the three month periods ended September 30, 2004 and
2003, respectively, and 8,271,813 and 8,234,962 for the nine month periods
ended September 30, 2004 and 2003, respectively. The Company does not have
any antidilutive securities outstanding.
6
Notes to Interim Consolidated Financial Statements, continued
5. Pursuant to the administrative services agreement, LFC provides
administrative services, including providing the services of one of the
Company's officers to the Company through December 31, 2004. Administrative
fees paid to LFC were $30,000 for the three month periods ended September
30, 2004 and 2003, and $90,000 for the nine month periods ended September
30, 2004 and 2003. A subsidiary of the Company sublets a portion of its
office space to Leucadia, for which it receives monthly rental of
approximately $6,000 per month.
6. Certain of the Company's lot purchase agreements with homebuilders include
provisions that entitle the Company to a share of the revenues or profits
realized by the homebuilders 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 $1,100,000 and $400,000
under these agreements for the three month periods ended September 30, 2004
and 2003, respectively, and $1,900,000 and $5,500,000 for the nine month
periods ended September 30, 2004 and 2003, respectively.
7. In May 2004, the Company agreed to extend the lease covering its corporate
office space for an additional five years to February 2010. The new annual
minimum rent is slightly less than the amount the Company had been paying;
however, the agreement provides for rent escalation charges over the
extended term.
8. As previously mentioned in the 2003 10-K, since 1999 the San Elijo Hills
project has carried $50,000,000 of general liability and professional
liability insurance under a policy issued by the Kemper Insurance Companies
("Kemper"). Since Kemper has ceased underwriting operations and is in
run-off, the Company has been investigating replacing and/or augmenting the
coverage provided by Kemper. In May 2004, the Company purchased an excess
policy with another insurance carrier that provides up to $10,000,000 of
coverage for general liability claims, but not professional liability
claims, relating to homes sold through May 31, 2004. The policy premium was
$250,000. Since it is an excess policy, the new policy has no deductible.
However, if Kemper is unable to pay general liability claims up to the
policy limits, the Company would have a $1,000,000 deductible under the new
policy. The Company continues to investigate whether or not it is
economically viable to purchase new insurance coverage for future home
sales at the San Elijo Hills project.
9. In July 2004, the Company's board of directors approved the repurchase of
up to 500,000 shares of the Company's common stock, representing
approximately 6% of the Company's outstanding stock. No shares have been
repurchased to date.
10. On August 24, 2004, options to purchase an aggregate of 6,000 shares of
common stock were granted to members of the Board of Directors under the
Company's 1999 Stock Incentive Plan at an exercise price of $44.50 per
share, the then current market price per share. In addition, at the
Company's 2004 annual meeting the Company's shareholders approved an
amendment to the Company's 1999 Stock Incentive Plan to increase the number
of shares of common stock available for issuance under the plan by 300,000
shares.
11. As of November 1, 2004, the Company has agreements with homebuilders to
sell an additional 113 single family lots for aggregate cash proceeds of
$55,000,000, pursuant to which it had received non-refundable option
payments of $5,500,000, which were received as of September 30, 2004. In
addition, the Company has entered into an agreement with a builder to sell
131 multi-family units at a sales price of $36,000,000, pursuant to which
it received a non-refundable option payment of $3,600,000 in October 2004.
These option payments are non-refundable if the Company completes site
improvement work and fulfills its other obligations under the agreements,
and will be applied to reduce the amount due from the purchasers at
closing. Although these agreements are binding on the purchasers, should
the Company fulfill its obligations under the agreements within the
specified timeframes and a purchaser decides not to close, the Company's
recourse will be primarily limited to retaining the option payment.
7
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, 2004, net cash was provided by
operating activities, principally resulting from real estate sales proceeds at
the San Elijo Hills project. For the nine month period ended September 30, 2003,
net cash was provided by operating activities, primarily from real estate sales
proceeds at the San Elijo Hills project and 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, dividends and tax sharing payments from its subsidiaries and borrowings
from or repayment of advances by its subsidiaries. As of September 30, 2004, the
Company had aggregate cash, cash equivalents and investments of $111,900,000 to
meet its liquidity needs.
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, 2004, no amounts were
outstanding under this facility.
During 2004, dividends of $71,000,000 were paid by the Company's subsidiary that
owns the San Elijo Hills project, of which $16,200,000 was paid to the minority
interests in the San Elijo Hills project, and the balance was retained by the
Company. In March 2004, the Company prepaid its $26,462,000 borrowing from LFC
in full, using its available cash.
During the nine months ended September 30, 2004, the Company closed on the sales
of two neighborhoods in the San Elijo Hills project consisting of 94 single
family lots, 45 multi-family units and one school site for aggregate sales
proceeds of $53,200,000, net of closing costs. The sales proceeds included
$3,100,000 of non-refundable options payments that the Company had received in
2003. As of September 30, 2004, the Company has deferred recognition of
$19,500,000 of revenue from these sales since it is required to complete certain
improvements under the purchase agreements.
As of September 30, 2004, the aggregate balance of deferred revenue for all real
estate sales was $42,200,000, including amounts related to the 2004 sales. The
Company estimates that it will spend approximately $9,700,000 to complete the
required improvements, including costs related to common areas. The Company will
recognize revenues previously deferred and the related cost of sales in its
statements of operations as the improvements are completed under the percentage
of completion method of accounting.
As of September 30, 2004, the remaining land at the San Elijo Hills project to
be developed and sold or leased consisted of the following (including real
estate under contract for sale):
Single family lots to be developed and sold 669
Multi-family units 177
Very low income apartment units 70
Square footage of commercial space 135,000
In October 2004, the school district relinquished an option it held to acquire a
ten acre school site within the project. Once the Company received notice from
the school district, underlying zoning regulations permit the construction of
135 multi-family units on the site, 67 of which were previously allocated to
single family lots. These changes are reflected in the table above.
As of November 1, 2004, the Company has agreements with homebuilders to sell an
additional 113 single family lots for aggregate cash proceeds of $55,000,000,
pursuant to which it had received non-refundable option payments of $5,500,000,
which were received as of September 30, 2004. In addition, the Company has
entered into an agreement with a builder to sell 131 multi-family units at a
sales price of $36,000,000, pursuant to which it received a non-refundable
option payment of $3,600,000 in October 2004. These option payments are
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
non-refundable if the Company completes site improvement work and fulfills its
other obligations under the agreements, and will be applied to reduce the amount
due from the purchasers at closing. Although these agreements are binding on the
purchasers, should the Company fulfill its obligations under the agreements
within the specified timeframes and a purchaser decides not to close, the
Company's recourse will be primarily limited to retaining the option payment.
The Company is currently marketing another 207 single family units for sale (of
which 79 units are luxury single family estate lots), and some of these lots are
subject to non-binding letters of intent with builders.
The Company is currently developing lots that are under contract for sale or
being marketed for sale. Before it can effectively offer any additional lots or
units for sale, the Company needs to obtain the permits to begin construction of
a remaining off-site road, construction of which it expects will commence in
2005. The Company believes it will sell all of its remaining single family
residential sites during 2005 and 2006, after which the remaining activity at
the San Elijo Hills project will be primarily concentrated on multi-family and
commercial sites. These estimates of future property available for sale and the
timing of the sales are based upon current development plans for the project and
could change based on actions of regulatory agencies and other factors that are
not within the control of the Company.
In July 2004, the Board of Directors approved the repurchase of up to 500,000
shares of the Company's common stock, representing approximately 6% of the
Company's outstanding stock. Repurchased shares would be available, among other
things, for use in connection with the Company's stock option plans. The shares
may be purchased from time to time, subject to prevailing market conditions, in
the open market, in privately negotiated transactions or otherwise. Any such
purchases may be commenced or suspended at any time without prior notice. No
shares have been purchased to date.
Results of Operations
Real Estate Sales Activity
San Elijo Hills Project:
------------------------
During 2004 and 2003, the Company closed on sales of real estate and recognized
revenues as follows:
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Single family units -- 77 94 430
Multi-family units -- -- 45 --
Very low income apartment units -- 48 -- 48
School sites -- -- 1 --
Purchase price, net of closing costs $ -- $ 19,000,000 $ 53,200,000 $ 99,500,000
Revenues recognized on closing date $ -- $ 12,800,000 $ 28,800,000 $ 55,800,000
As discussed above, a portion of the revenue from sales of real estate is
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 to revenues
recognized on the closing date reflected in the table above, revenues include
amounts that were previously deferred of $15,300,000 and $13,900,000 for the
three month periods ended September 30, 2004 and 2003, respectively, and
$35,700,000 and $25,700,000 for the nine month periods ended September 30, 2004
and 2003, respectively. Such amounts were recognized upon completion of certain
required improvements.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Revenues from sales of real estate also include amounts received pursuant to
revenue or profit sharing agreements with home builders of $1,100,000 and
$400,000 for the three month periods ended September 30, 2004 and 2003,
respectively, and $1,900,000 and $5,500,000 for the nine month periods ended
September 30, 2004 and 2003, respectively.
During the three month periods ended September 30, 2004 and 2003, cost of sales
of real estate aggregated $2,900,000 and $6,800,000, respectively. During the
nine month periods ended September 30, 2004 and 2003, cost of sales aggregated
$12,100,000 and $19,100,000, respectively.
Otay Ranch Project:
-------------------
As more fully described in the 2003 10-K, in January 2004 the City of Chula
Vista acquired 439 acres of mitigation land from Otay Land Company by eminent
domain proceedings for aggregate proceeds of approximately $5,800,000,
substantially all of which had been received as of December 31, 2003. The
Company recognized a pre-tax gain of approximately $4,800,000 on this
transaction during the first quarter of 2004. Sales of real estate in the nine
month period ended September 30, 2003 reflects approximately $22,500,000 from
the sale of 1,445 acres within the Otay Ranch project. The Company recognized a
pre-tax gain of approximately $17,700,000 for the nine month period ended
September 30, 2003 on this transaction. There was no other real estate sales
activity at the Otay Ranch project during 2004 and 2003.
As discussed in the 2003 10-K, the Company continues to evaluate how to maximize
the value of Otay Ranch and is processing further entitlements on portions of
its property, which have not changed significantly during 2004. If the Company
decides to develop the developable land at Otay Ranch, development will not
begin for a few years and is likely to take several years to complete.
Paradise Valley Project:
------------------------
Sales of real estate for the three and nine months periods ended September 30,
2003 consist of the sale of twenty-four 8,000 square foot residential lots,
representing 7 acres of the 12 acre project, for which the Company recognized
revenues of $2,600,000. Cost of sales for this transaction aggregated
$1,200,000. The remaining 5 acres at this project were sold in October 2003.
Other Results of Operations Activity
The Company recorded co-op marketing and advertising fees of $1,290,000 and
$249,000 for the three month periods ended September 30, 2004 and 2003,
respectively, and $2,440,000 and $832,000 for the nine month periods ended
September 30, 2004 and 2003, 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.
Interest expense reflects the interest due on indebtedness to LFC of $401,000
for the three month period ended September 30, 2003, and $373,000 and $1,188,000
for the nine month periods ended September 30, 2004 and 2003, respectively.
Interest expense also includes amortization of debt discount related to the
previously outstanding indebtedness to LFC of $277,000 for the three month
period ended September 30, 2003, and $276,000 and $802,000 for the nine month
periods ended September 30, 2004 and 2003, respectively. As described above, the
LFC note was fully repaid in March 2004, and therefore these interest costs
ceased at the date of repayment. In addition, interest expense for the three and
nine month periods ended September 30, 2004 includes $67,000 and $198,000,
respectively, related to the Rampage Vineyard project as described in the 2003
10-K.
Interest expense excludes capitalized interest of $255,000 and $338,000 for the
three month periods ended September 30, 2004 and 2003, respectively, and
$1,024,000 and $1,020,000 for the nine month periods ended September 30, 2004
and 2003, respectively. Interest is capitalized for the notes payable to trust
deed holders on the San Elijo Hills project.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
For the three month period ended September 30, 2004, general and administrative
expenses declined by approximately $30,000 as compared to the corresponding
period in 2003. Salaries expenses declined by $490,000 due to reduced bonus
expense and the resignation of two executive officers in March 2004 who have not
been replaced. Professional fees declined by $80,000 primarily due to the
incurrence in the 2003 period of professional fees in connection with the
acquisition of certain Otay Ranch land by the City of Chula Vista, which was
sold during the first quarter of 2004. During this period, general and
administrative expenses reflect an increase, as compared to the corresponding
period in 2003, in farming and other expenses at the Rampage Vineyard project
and legal fees. Legal fees increased $440,000 due to the costs associated with
pursuing claims against previous owners of the 34 acres of undeveloped land that
is undergoing environmental remediation at the Otay Ranch project. In addition,
general and administrative expenses for the three month period ended September
30, 2003 included $120,000 related to the Company's reverse/forward split.
General and administrative expenses increased by approximately $500,000 during
the nine month period ended September 30, 2004 as compared to the same period in
2003, primarily due to farming and other expenses at the Rampage Vineyard
project and legal fees. Legal fees increased by $560,000 due to the costs
associated with pursuing claims relating to environmental remediation at the
Otay Ranch project, as described above. During this period, general and
administrative expenses reflect a decrease of $590,000, as compared to the same
period in 2003, in stock compensation expense related to performance options
that fully vested in April 2003, and a decrease in salaries expense of $530,000
related to reduced bonus expense and the resignation of two executive officers
in March 2004. In addition, general and administrative expenses for the 2003
period included expenses related to the Company's reverse/forward split referred
to above.
During the three and nine month periods ended September 30, 2004, farming and
other expenses at the Rampage Vineyard project, which was acquired in November
2003, were $290,000 and $1,030,000, respectively. These expenses primarily
represent the cost of restoring approximately 310 acres of vines for future
production. Restoration involves the application of farming practices including
grafting to put the vineyard back into production. Farming related activities at
the Rampage Vineyard project are expected to continue while the Company seeks to
have the land entitled as a master-planned community. The Company has just begun
the process to obtain the necessary entitlements to develop the Rampage Vineyard
project as a master-planned community; a process that will require numerous
regulatory approvals and take several years to complete.
Other income (expense) includes an increase in investment income of
approximately $100,000 and $410,000 for the three and nine month periods ended
September 30, 2004, respectively, as compared to the same periods in 2003. This
increase is primarily due to greater interest income resulting from a larger
amount of invested assets. Other income (expense) for the three and nine month
period ended September 30, 2003 includes income from the reimbursement for
improvement costs that were previously expensed at San Elijo Hills project and
proceeds from an easement at the Otay Ranch project. Other income (expense) for
the nine month period ended September 30, 2004 includes $1,606,000 for the
remaining unamortized discount and related deferred costs on the LFC note which
was fully repaid. Other income (expense) for the nine month period ended
September 30, 2003 includes cash received to settle a dispute with one of the
Company's vendors.
The Company's effective income tax rate during the 2004 and 2003 periods are
higher than the federal statutory rate due to California state income taxes and
state franchise taxes.
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, 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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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 this and 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 prevailing interest rate levels, including mortgage rates. Any
significant increase in the prevailing low mortgage interest rate
environment could reduce consumer demand for housing.
o Changes in domestic laws and government regulations or requirements and in
implementation and/or enforcement of governmental rules and regulations.
The Company's plans for its development projects require numerous
governmental approvals, licenses, permits and agreements, which must be
obtained before development and construction may commence. The approval
process can be delayed by withdrawals or modifications of preliminary
approvals, by litigation and appeals challenging development rights and by
changes in prevailing local circumstances or applicable laws that may
require additional approvals.
o Changes in real estate pricing environments. Any significant decrease in
the prevailing price of real estate in the geographic areas in which the
Company owns, develops and sells real estate may adversely affect the
Company's results of operations.
o Regional or general increases in cost of living. Any significant increases
in the prevailing prices of goods and services that result in increased
costs of living, particularly in the regions in which the Company is
currently developing properties, may adversely affect consumer demand for
housing.
o Demographic and economic changes in the United States generally and
California in particular. The Company's operations are sensitive to
demographic and economic changes. Any economic downturn in the United
States in general, and California in particular, may adversely affect
consumer demand for housing by limiting the ability of people to save for
down payments and purchase homes. In addition, if the current trend of
population increases in California were not to continue, or in the event of
any significant reduction in job creation, demand for real estate in
California may not be as robust as current levels indicate.
o Increases in real estate taxes and other local government fees. Any such
increases may make it more expensive to own the properties that the Company
is currently developing, which would increase the carrying costs to the
Company of owning the properties and decrease consumer demand for them.
o Significant competition from other real estate developers and homebuilders.
There are numerous residential real estate developers and development
projects operating in the same geographic area in which the Company
operates. Many of the Company's competitors may have advantages over the
Company, such as more favorable locations which may provide better schools
and easier access to roads and shopping, or amenities that the Company may
not offer, as well as greater financial resources and/or access to cheaper
capital.
o Decreased consumer spending for housing. Any decrease in consumer spending
for housing may directly affect the Company's results of operations.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
o Delays in construction schedules and cost overruns. Any material delays
could adversely affect the Company's ability to complete its projects,
significantly increasing the costs of doing so, including interest costs,
or drive potential customers to purchase competitors' products. Cost
overruns, if material, could have a direct adverse impact on the Company's
results of operations.
o Availability and cost of land, materials and labor and increased
development costs, many of which the Company would not be able to control.
The Company's current and future development projects require the Company
to purchase significant amounts of land, materials and labor. If the costs
of these items increase, it will increase the costs to the Company of
completing its projects; if the Company is not able to recoup these
increased costs, its results of operations could be adversely affected.
o Damage to or condemnation of properties and occurrence of significant
natural disasters and fires. Damage to or condemnation of any of the
Company's properties, whether by natural disasters and fires or otherwise,
may either delay or preclude the Company's ability to develop and sell its
properties, or affect the price at which it may sell such properties.
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. The residential real estate
development industry is subject to increasing environmental, building,
construction, zoning and real estate regulations that are imposed by
various federal, state and local authorities. Environmental laws may cause
the Company to incur additional costs, and adversely affect its ability to
complete its projects in a timely and profitable manner.
o The inability to insure certain risks economically. The Company cannot be
certain that it will be able to insure certain risks economically.
o The availability of adequate water resources and reliable energy source in
the areas where the Company owns real estate projects. Any shortage of
reliable water and energy resources and drop in consumer confidence in the
dependability of such resources in areas where the Company owns land may
adversely affect the values of properties owned by the Company and curtail
development projects.
o Changes in the composition of the Company's assets and liabilities through
acquisitions or divestitures. The Company may make future acquisitions or
divestitures of assets. Any change in the composition of the Company's
assets and liabilities as a result thereof could significantly affect the
financial position of the Company and the risks that it faces.
o The actual cost of environmental liabilities concerning land owned in San
Diego County, California exceeding the amount reserved for such matter. The
actual cost of remediation of undeveloped land owned by a subsidiary could
exceed the amount reserved for such matter.
o The Company's ability to generate sufficient taxable income to fully
realize the deferred tax asset, net of the valuation allowance. The Company
and certain of its subsidiaries have NOLs and other tax attributes, but may
not be able to generate sufficient taxable income to fully realize the
deferred tax assets.
o The impact of inflation. The Company, as well as the real estate
development and homebuilding industry in general, may be adversely affected
by inflation, primarily because of either reduced rates of savings by
consumers during periods of low inflation or higher land and construction
costs during periods of high inflation.
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.
13
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, 2003, 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 September 30, 2004. 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, 2004.
(b) There were no changes in the Company's internal controls 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,
2004, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
As a result of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
issued thereunder, the Company will be required to include in its Annual
Report on Form 10-K for the year ending December 31, 2004 a report on
management's assessment of the effectiveness of the Company's internal
controls over financial reporting. The Company's independent registered
public accountants will also be required to attest to and report on
management's assessment.
As part of the process of preparing for compliance with these requirements,
in 2003, the Company initiated a review of its internal controls over
financial reporting. As part of this review, management has been engaged in
a process to document and evaluate the Company's internal controls over
financial reporting. In this regard, management has dedicated internal
resources, engaged outside consultants and adopted a detailed plan to (i)
document the Company's internal controls over financial reporting, (ii)
assess the adequacy of the Company's internal controls over financial
reporting, (iii) take steps to improve control processes where appropriate
and (iv) validate through testing that controls are functioning as
documented. This documentation, evaluation and testing process will
continue throughout the remainder of this year. There can be no assurance
that deficiencies or weaknesses in the design or operation of internal
controls over financial reporting will not be found and, if found, that the
Company will have sufficient time to remediate any such deficiencies or
weaknesses and perform testing procedures before the end of the year.
The Company believes that any system of internal accounting controls, no
matter how well designed and operated, can provide only reasonable (and not
absolute) assurance that all of its objectives will be met, including the
detection of fraud. Furthermore, no evaluation of internal accounting
controls can provide absolute assurance that all control issues and
instances of fraud, if any, have been detected.
14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of shareholders at the
Company's 2004 Annual Meeting of Shareholders held on August 24, 2004.
a) Election of directors.
Number of Shares
----------------
For Withheld
--- --------
Patrick D. Bienvenue 7,700,281 35,694
Paul J. Borden 7,700,281 35,694
Timothy M. Considine 7,704,909 31,066
Ian M. Cumming 7,731,976 3,999
Michael A. Lobatz 7,731,556 4,419
Joseph S. Steinberg 7,710,468 25,507
b) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 2004.
For 7,733,363
Against 1,468
Abstentions 1,144
Broker non-votes --
c) Amendment to the Company's 1999 Stock Incentive Plan.
For 5,764,423
Against 116,942
Abstentions 73,659
Broker non-votes 1,780,951
Item 6. Exhibits.
31.1 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President, Treasurer 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.
15
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 5, 2004 By: /s/ Erin N. Ruhe
---------------------------
Erin N. Ruhe
Vice President, Treasurer and Controller
(Principal Accounting Officer)
16
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, Treasurer 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.
17