SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 July 28, 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
June 30, 2004 and December 31, 2003
(Dollars in thousands, except par value)
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Real estate $ 35,511 $ 37,612
Cash and cash equivalents 54,088 43,503
Restricted cash 3,963 4,609
Investments-available for sale (aggregate cost of $58,289 and $88,503) 58,274 88,519
Deposits and other assets 2,587 995
Deferred income taxes 32,253 41,772
--------- ---------
TOTAL $ 186,676 $ 217,010
========= =========
LIABILITIES
Note payable to Leucadia Financial Corporation $ -- $ 24,716
Notes payable to trust deed holders 12,503 13,580
Deferred revenue 57,502 53,491
Accounts payable and accrued liabilities 4,490 10,985
Liability for environmental remediation 10,258 10,785
Income taxes payable -- 503
Other liabilities 4,352 13,509
--------- ---------
Total liabilities 89,105 127,569
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 2,046 13,111
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized;
8,257,959 and 8,155,159 shares outstanding 83 82
Additional paid-in capital 381,176 380,545
Deferred compensation pursuant to stock incentive plans (2) (4)
Accumulated other comprehensive income (9) 9
Accumulated deficit (285,723) (304,302)
--------- ---------
Total stockholders' equity 95,525 76,330
--------- ---------
TOTAL $ 186,676 $ 217,010
========= =========
See notes to interim consolidated financial statements.
2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended June 30, 2004 and 2003
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
REVENUES
Sales of real estate $ 12,396 $ 78,444 $ 55,802 $ 85,460
Co-op marketing and advertising fees 964 203 1,150 583
-------- -------- -------- --------
13,360 78,647 56,952 86,043
-------- -------- -------- --------
EXPENSES
Cost of sales 502 14,792 10,156 17,132
Interest expense 65 663 780 1,312
General and administrative expenses 2,512 2,638 4,980 4,450
Administrative services fees to Leucadia Financial Corporation 30 30 60 60
-------- -------- -------- --------
3,109 18,123 15,976 22,954
-------- -------- -------- --------
Income from operations 10,251 60,524 40,976 63,089
Other income (expense) 208 239 (900) 645
-------- -------- -------- --------
Income before income taxes and minority interest 10,459 60,763 40,076 63,734
Income tax provision (4,125) (24,330) (16,370) (25,582)
-------- -------- -------- --------
Income before minority interest 6,334 36,433 23,706 38,152
Minority interest (1,556) (2,690) (5,127) (3,164)
-------- -------- -------- --------
Net income $ 4,778 $ 33,743 $ 18,579 $ 34,988
======== ======== ======== ========
Basic income per common share $ 0.58 $ 4.14 $ 2.26 $ 4.29
======== ======== ======== ========
Diluted income per common share $ 0.58 $ 4.10 $ 2.25 $ 4.25
======== ======== ======== ========
See notes to interim consolidated financial statements.
3
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the six month periods ended June 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 Deficit Equity
------------- ----------- --------------- ------------- -------------- -------------
Balance, January 1, 2003 $ 82 $ 380,364 $ (418) $ -- $ (378,378) $ 1,650
Comprehensive income:
Net income 34,988 34,988
--------
Amortization of restricted stock grants 11 11
Amortization related to stock options 581 581
Change in value of performance-based
stock options 180 (180) --
----- ---------- ------ --------- ------------ --------
Balance, June 30, 2003 $ 82 $ 380,544 $ (6) $ -- $ (343,390) $ 37,230
===== ========== ====== ========= =========== ========
Balance, January 1, 2004 $ 82 $ 380,545 $ (4) $ 9 $ (304,302) $ 76,330
Comprehensive income:
Net change in unrealized gain
(loss) on investments (18) (18)
Net income 18,579 18,579
--------
Comprehensive income 18,561
--------
Amortization related to stock options 2 2
Exercise of options to purchase
common shares 1 631 632
----- ---------- ------ --------- ----------- --------
Balance, June 30, 2004 $ 83 $ 381,176 $ (2) $ (9) $ (285,723) $ 95,525
===== ========== ====== ========= =========== ========
See notes to interim consolidated financial statements.
4
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
For the six month periods ended June 30, 2004 and 2003
(In thousands)
(Unaudited)
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,579 $ 34,988
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 5,127 3,164
Provision for deferred income taxes 9,531 18,975
Net securities gains (5) --
Amortization of deferred compensation pursuant to stock incentive plans 2 592
Loss on prepayment of Leucadia Financial Corporation note 1,606 --
Amortization of debt discount on note payable to Leucadia Financial Corporation 276 525
Other amortization related to investments (309) --
Changes in operating assets and liabilities:
Real estate 2,870 (2,485)
Deposits and other assets (1,728) (2,133)
Note receivable -- 6,566
Notes payable to trust deed holders (683) (603)
Deferred revenue 4,011 25,695
Accounts payable and accrued liabilities (6,495) 105
Liability for environmental remediation (527) (126)
Income taxes payable (503) 343
Other liabilities (9,157) (1,134)
--------- ---------
Net cash provided by operating activities 22,595 84,472
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (other than short-term) (71,092) --
Proceeds from maturities of investments 54,685 --
Proceeds from sales of investments 46,936 --
Decrease in restricted cash 646 --
--------- ---------
Net cash provided by investing activities 31,175 --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment of Leucadia Financial Corporation note (26,462) --
Principal payments to trust deed holders (1,163) (2,178)
Exercise of options to purchase common shares 632 --
Contribution from minority interest -- 43
Distribution to minority interest (16,192) (12,910)
--------- ---------
Net cash (used for) financing activities (43,185) (15,045)
--------- ---------
Net increase in cash and cash equivalents 10,585 69,427
Cash and cash equivalents, beginning of period 43,503 33,601
--------- ---------
Cash and cash equivalents, end of period $ 54,088 $ 103,208
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest (net of amounts capitalized) $ 410 $ 787
Cash paid for income taxes $ 8,675 $ 3,678
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.
Certain amounts for prior periods have been reclassified to be consistent
with the 2004 presentation.
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 six months ended June 30, 2004. Interest on the note of
$373,000 and $787,000 was expensed and paid during the six month periods
ended June 30, 2004 and 2003, respectively. Additionally, $276,000 and
$525,000 of debt discount was amortized as interest expense during the six
month periods ended June 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 $19,000 during 2004. At June 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 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
8,237,926 and 8,155,084 for the six month periods ended June 30, 2004 and
2003, respectively, and 8,257,959 and 8,155,084 for the three month periods
ended June 30, 2004 and 2003, respectively. The number of shares used to
calculate diluted income per share was 8,271,749 and 8,229,874 for the six
month periods ended June 30, 2004 and 2003, respectively, and 8,271,088 and
8,238,798 for the three month periods ended June 30, 2004 and 2003,
respectively.
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 $60,000 for the six month periods ended June 30, 2004
and 2003, and $30,000 for the three month periods ended June 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 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 $800,000 and $5,100,000 under these
agreements for the six month periods ended June 30, 2004 and 2003,
respectively, and $800,000 and $4,800,000 for the three month periods ended
June 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 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.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations.
Liquidity and Capital Resources
For the six month period ended June 30, 2004, net cash was provided by operating
activities, principally resulting from real estate sales proceeds at the San
Elijo Hills project. For the six month period ended June 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 June 30, 2004, the Company had aggregate
cash, cash equivalents and investments of $112,400,000 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 June 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 six months ended June 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
June 30, 2004, the Company has deferred recognition of $23,300,000 of revenue
from these sales since it is required to complete certain improvements under the
purchase agreements.
As of June 30, 2004, the aggregate balance of deferred revenue for all real
estate sales was $57,500,000, including amounts related to the 2004 sales. The
Company estimates that it will spend approximately $15,300,000 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.
The remaining land at the San Elijo Hills project to be developed and sold or
leased consists of the following:
Single family lots to be developed and sold 736
Multi-family units 42
Very low income apartment units 70
School sites 1
Square footage of commercial space 135,000
As of July 29, 2004, the Company has entered into non-binding letters of intent
with builders to sell 241 of the single family lots reflected in the table
above. Pursuant to the letters of intent, the home builders have a specified
period (30 to 45 days) to conduct feasibility reviews and negotiate the terms of
definitive sales agreements. In addition, the Company is currently marketing
another 79 single family lots for sale.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
The Company has also entered in to a non-binding letter of intent to sell the
last remaining school site to a builder for multi-family residential
development. The school district was given an option to purchase this site
several years ago, but has informally indicated that it does not intend to
exercise its option. Underlying zoning regulations permit residential
development of this site if the school district formally notifies the Company
that it does not intend to exercise its option.
The Company had previously estimated it would complete the sale of all
residential sites during 2005; however, the Company has not received all of the
necessary permits as early as anticipated. The Company currently plans to
develop and sell the single-family sites during 2005 and 2006, after which the
remaining activity at the San Elijo Hills project will be primarily concentrated
on the multi-family and commercial sites. These estimates of future property
available for sale and the timing of the sales are derived from the current
plans for the project, and could change based upon the actions of the project's
home builders or regulatory agencies.
In July 2004, the Board of Directors approved the repurchase of up to 500,000
shares of the Company's common stock, representing approximately 6.1% 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.
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 Six Month
Period Ended June 30, Period Ended June 30,
----------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Single family units -- 353 94 353
Multi-family units -- -- 45 --
School sites 1 -- 1 --
Purchase price, net of closing costs $ 20,200,000 $ 80,500,000 $ 53,200,000 $ 80,500,000
Revenues recognized on closing date $ 6,500,000 $ 43,000,000 $ 28,800,000 $ 43,000,000
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 $20,400,000 and $11,800,000 for the six
month periods ended June 30, 2004 and 2003, respectively, and $5,100,000 for
each of the three month periods ended June 30, 2004 and 2003. Such amounts were
recognized upon completion of certain required improvements.
Revenues from sales of real estate also include amounts received pursuant to
profit sharing agreements with home builders of $800,000 and $5,100,000 for the
six month periods ended June 30, 2004 and 2003, respectively, and $800,000 and
$4,800,000 for the three month periods ended June 30, 2004 and 2003,
respectively.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
During the six month periods ended June 30, 2004 and 2003, cost of sales
aggregated $9,200,000 and $12,300,000, respectively. During the three month
periods ended June 30, 2004 and 2003, cost of sales of real estate aggregated
$500,000 and $10,000,000, respectively. During the second quarter of 2004, the
Company determined that the total costs for a phase of the San Elijo Hills
project that is near completion will be less than previously estimated. As a
result, cost of sales was reduced by approximately $1,400,000 to reverse
estimated charges previously recorded.
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. There was no other real estate sales activity at the Otay Ranch
project during 2004. Sales of real estate in the 2003 periods reflect
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 periods ended June 30, 2003 on this transaction.
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.
Other Results of Operations Activity
The Company recorded co-op marketing and advertising fees of $1,150,000 and
$583,000 for the six month periods ended June 30, 2004 and 2003, respectively,
and $964,000 and $203,000 for the three month periods ended June 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 $373,000
and $787,000 for the six month periods ended June 30, 2004 and 2003,
respectively, and $395,000 for the three month period ended June 30, 2003.
Interest expense also includes amortization of debt discount related to the
previously outstanding indebtedness to LFC of $276,000 and $525,000 for the six
month periods ended June 30, 2004 and 2003, respectively, and $268,000 for the
three month period ended June 30, 2003. 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 six and three month
periods ended June 30, 2004 includes $132,000 and $66,000, respectively, related
to the Rampage vineyard project as described in the 2003 10-K.
General and administrative expenses increased during the six month period ended
June 30, 2004 as compared to the same period in 2003, primarily due to greater
expenses related to farming costs, marketing expenses, legal fees and stock
compensation expense. During the three month period ended June 30, 2004, the
Company incurred approximately $600,000 of farming expenses at the Rampage
vineyard project, which was purchased in November 2003. 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. During this
time the Company expects it will continue to incur farming related costs.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
The increase in marketing expenses principally reflects promotional expenses
related to the current phase of residential lots being sold at the San Elijo
Hills project. Legal fees increased due to the costs associated with pursuing
claims against previous owners of the 34 acres of undeveloped land that is
undergoing remediation at the Otay Ranch project. For the three month period
ended June 30, 2004, general and administrative expenses reflect a decrease, as
compared to the same period in 2003, in compensation expense related to
performance options which fully vested in April 2003, and in the timing of
expenses incurred for the annual stockholders' meeting. In addition, during the
three month period ended June 30, 2003, the Company incurred legal fees in
connection with the Company's reverse/forward stock split and acquisition of
certain Otay Ranch land by the City of Chula Vista, which was sold during the
first quarter of 2004.
Other income (expense) for the six month period ended June 30, 2004 includes
$1,606,000 for the remaining unamortized discount and related deferred costs on
the LFC note which was fully repaid. Investment income for the six and three
month periods ended June 30, 2004 increased by approximately $310,000 and
$70,000, respectively, as compared to the same periods in 2003, primarily due to
greater interest income resulting from a larger amount of invested assets. Other
income (expense) for the six month period ended June 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.
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 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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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.
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.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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.
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 June 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 June 30, 2004.
(b) There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the Company's fiscal quarter ended June 30, 2004,
that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
31.1 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President and Controller pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K.
None.
14
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: July 30, 2004 By: /s/ Erin N. Ruhe
-----------------------
Erin N. Ruhe
Vice President, Treasurer
and Controller
(Principal Accounting Officer)
15
EXHIBIT INDEX
Exhibit Number Description
31.1 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President and Controller pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
16