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, 2005
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 Exchange Act).
YES X NO
------- ------
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
------ ------
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 October 31, 2005,
there were 8,264,334 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, 2005 and December 31, 2004
(Dollars in thousands, except par value)
September 30, December 31,
2005 2004
------------------ -----------------
(Unaudited)
ASSETS
Real estate $ 73,106 $ 47,126
Cash and cash equivalents 34,149 34,634
Investments-available for sale (aggregate cost of $63,536 and $82,272) 63,539 82,249
Accounts receivable, deposits and other assets 2,509 3,321
Deferred income taxes 42,091 44,157
--------- ---------
TOTAL $ 215,394 $ 211,487
========= =========
LIABILITIES
Notes payable $ 13,596 $ 16,620
Deferred revenue 29,567 39,079
Accounts payable and accrued liabilities 9,274 7,752
Non-refundable option payments 23,884 11,669
Liability for environmental remediation 11,060 11,392
Income taxes payable 806 --
Other liabilities 3,444 3,464
--------- ---------
Total liabilities 91,631 89,976
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 9,095 7,760
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized;
8,264,334 and 8,260,059 shares outstanding 83 83
Additional paid-in capital 377,094 381,192
Accumulated other comprehensive loss 2 (14)
Accumulated deficit (262,511) (267,510)
--------- ---------
Total stockholders' equity 114,668 113,751
--------- ---------
TOTAL $ 215,394 $ 211,487
========= =========
See notes to interim consolidated financial statements.
2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2005 and 2004
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
--------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
REVENUES
Sales of real estate $ 9,708 $ 16,366 $ 19,378 $ 72,168
Co-op marketing and advertising fees 464 1,290 1,522 2,440
------- -------- -------- --------
10,172 17,656 20,900 74,608
------- -------- -------- --------
EXPENSES
Cost of sales 2,312 2,886 3,481 13,042
Interest expense 13 67 138 847
General and administrative expenses 2,690 2,744 7,720 7,124
Administrative services fees to Leucadia Financial
Corporation 45 30 135 90
------- -------- -------- --------
5,060 5,727 11,474 21,103
------- -------- -------- --------
Income from operations 5,112 11,929 9,426 53,505
Other income (expense), net 1,005 215 1,412 (1,285)
------- -------- -------- --------
Income before income taxes and minority interest 6,117 12,144 10,838 52,220
Income tax provision (2,523) (4,985) (4,518) (21,355)
------- -------- -------- --------
Income before minority interest 3,594 7,159 6,320 30,865
Minority interest (452) (4,760) (1,321) (9,887)
------- -------- -------- --------
Net income $ 3,142 $ 2,399 $ 4,999 $ 20,978
======= ======== ======== ========
Basic income per common share $ 0.38 $ 0.29 $ 0.61 $ 2.54
======= ======== ======== ========
Diluted income per common share $ 0.38 $ 0.29 $ 0.60 $ 2.54
======= ======== ======== ========
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, 2005 and 2004
(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, 2004 $ 82 $ 380,545 $ (4) $ 9 $ (304,302) $ 76,330
--------
Comprehensive income:
Net change in unrealized gain (loss) on
investments, net of taxes of $12 (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
==== ========= ===== ===== ========== ========
Balance, January 1, 2005 $ 83 $ 381,192 $ -- $ (14) $ (267,510) $113,751
--------
Comprehensive income:
Net change in unrealized gain (loss) on
investments, net of taxes of $10 16 16
Net income 4,999 4,999
--------
Comprehensive income 5,015
--------
Exercise of options to purchase
common shares 32 32
Dividends ($0.50 per common share) (4,130) (4,130)
---- --------- ----- ----- ---------- --------
Balance, September 30, 2005 $ 83 $ 377,094 $ -- $ 2 $ (262,511) $114,668
==== ========= ===== ===== ========== ========
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, 2005 and 2004
(In thousands)
(Unaudited)
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,999 $ 20,978
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Minority interest 1,321 9,887
Provision for deferred income taxes 2,056 12,640
Net securities (gains) losses 3 (5)
Amortization of deferred compensation pursuant to stock incentive plans -- 3
Loss on prepayment of Leucadia Financial Corporation note -- 1,606
Amortization of debt discount on note payable to Leucadia Financial Corporation -- 276
Other amortization related to investments (1,445) (567)
Changes in operating assets and liabilities:
Real estate (25,354) (2,769)
Accounts receivable, deposits and other assets 812 (538)
Notes payable -- (683)
Deferred revenue (9,512) (11,258)
Accounts payable and accrued liabilities 1,522 (3,309)
Non-refundable option payments 12,215 2,375
Liability for environmental remediation (332) (672)
Income taxes payable 806 35
Other liabilities (20) (6,099)
------- --------
Net cash provided by (used for) operating activities (12,929) 21,900
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (other than short-term) (111,127) (145,749)
Proceeds from maturities of investments-available for sale 116,080 106,085
Proceeds from sales of investments 15,225 46,936
Decrease in restricted cash -- 653
-------- --------
Net cash provided by investing activities 20,178 7,925
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment of Leucadia Financial Corporation note -- (26,462)
Principal payments to notes payable holders (3,650) (1,163)
Exercise of options to purchase common shares 32 633
Dividends paid (4,130) --
Contribution from minority interest 14 --
Distribution to minority interest -- (16,192)
-------- --------
Net cash used for financing activities (7,734) (43,184)
-------- --------
Net decrease in cash and cash equivalents (485) (13,359)
Cash and cash equivalents, beginning of period 34,634 43,503
-------- --------
Cash and cash equivalents, end of period $ 34,149 $ 30,144
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest (net of amounts capitalized) $ 403 $ 410
Cash paid for income taxes $ 301 $ 8,712
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 of normal recurring items or items discussed
herein) 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, 2004, 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 "2004 10-K"). Results of operations for
interim periods are not necessarily indicative of annual results of
operations. The consolidated balance sheet at December 31, 2004 was derived
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. In April 2005, the
Securities and Exchange Commission amended the effective date of Statement
of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS
123R"), from the first interim or annual period after June 15, 2005 to the
beginning of the next fiscal year that begins after June 15, 2005. The
Company has not determined whether SFAS 123R will have a material impact on
its consolidated financial statements.
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 154, "Accounting Changes
and Error Corrections-a replacement of APB Opinion No. 20 and FASB
Statement No. 3" ("SFAS 154"), which is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. SFAS 154 applies to all voluntary changes in accounting principles,
and changes the accounting and reporting requirements for a change in
accounting principle. SFAS 154 requires retrospective application to prior
periods' financial statements of a voluntary change in accounting principle
unless it is impracticable. APB 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of
the period of the change the cumulative effect of changing to the new
accounting principle. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, nonfinancial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS 154 carries forward without change the guidance
in APB 20 for reporting the correction of an error in previously issued
financial statements, a change in accounting estimate and a change in
reporting entity, as well as the provisions of SFAS 3 that govern reporting
accounting changes in interim financial statements. The Company does not
expect that SFAS 154 will have a material impact on its consolidated
financial statements.
Certain amounts for prior periods have been reclassified to be consistent
with the 2005 presentation.
6
Notes to Interim Consolidated Financial Statements, continued
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 expensed the remaining unamortized discount and related deferred
costs in the amount of $1,600,000, which is included in the caption "Other
income (expense), net" in the consolidated statements of operations.
Interest on the note of $370,000 was expensed and paid during the nine
month period ended September 30, 2004. Additionally, $280,000 of debt
discount on the note was amortized as interest expense during the nine
month period ended September 30, 2004.
3. The Company has a $10,000,000 line of credit agreement with LFC that has a
maturity date of February 28, 2007. Loans outstanding under this line of
credit bear interest at 10% per annum. At September 30, 2005, 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
8,264,058 and 8,258,047 for the three month periods ended September 30,
2005 and 2004, respectively, and 8,261,649, and 8,244,682 for the nine
month periods ended September 30, 2005 and 2004, respectively. The number
of shares used to calculate diluted income per share was 8,276,285 and
8,271,794 for the three month periods ended September 30, 2005 and 2004,
respectively, and 8,274,852 and 8,271,813 for the nine month periods ended
September 30, 2005 and 2004, respectively.
5. Pursuant to the administrative services agreement, LFC provides
administrative services, including providing the services of the Company's
Secretary, for an annual fee of $180,000 to December 31, 2005, and
thereafter for successive annual periods unless terminated in accordance
with its terms. LFC administrative fee expenses were $45,000 and $30,000
for the three month periods ended September 30, 2005 and 2004,
respectively, and $135,000 and $90,000 for the nine month periods ended
September 30, 2005 and 2004, respectively. A subsidiary of the Company
sublets a portion of its office space to Leucadia, for which it receives
monthly rental fees in the amount equal to Leucadia's pro rata share of the
Company's cost. The current rental fee is approximately $1,000 per month.
The term of the sublease is until February 2010.
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 accrued $1,900,000 and $1,100,000 under
these agreements for the three month periods ended September 30, 2005 and
2004, respectively, and $4,900,000 and $1,900,000 for the nine month
periods ended September 30, 2005 and 2004, respectively.
7. On April 19, 2005, the Company's Board of Directors declared a cash
dividend equal to $0.50 per share of the Company's common stock, payable on
May 9, 2005 to stockholders of record on April 29, 2005 (approximately
$4,100,000 in the aggregate).
8. In March 2005, the Company received a letter from an individual claiming
that he had purchased leases covering part of the stake and trellis system
at the Rampage vineyard property and requesting return of the leased
property. The Company has requested information from the individual in
order to investigate his claim. At this time the Company is unable to
determine whether the claim is valid and, if valid, what the financial
impact might be.
7
Notes to Interim Consolidated Financial Statements, continued
9. In July 2005, the Company sold approximately 600 acres of land at the
Rampage vineyard property to a neighboring land owner for approximately
$5,000,000, which resulted in the recognition of a pre-tax gain of
$3,200,000. As more fully described in the 2004 10-K, the buyer claimed to
own options to purchase this land, and had also filed a complaint against
the Company and the former owners of the Rampage vineyard property alleging
that the property has been devalued by approximately $3,000,000 due to poor
farming practices since approximately 2001. While the sale resolved any
remaining dispute with respect to the purchase options, the Company
continues to have settlement discussions concerning the farming practices
complaint. The Company is currently unable to determine if the ultimate
resolution of this matter will be material.
The Company used $3,800,000 of the net proceeds received from the sale to
fully pay the principal, interest and pre-payment penalties due under the
Rampage mortgage note, as required under the mortgage note in connection
with the sale.
10. On July 12, 2005, 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 $65.19 per
share, the then current market price per share.
11. From October 1, 2005 through October 31, 2005, the Company closed on the
sales of two neighborhoods in the San Elijo Hills project consisting of 131
multi-family lots for aggregate sales proceeds of $36,000,000, net of
closing costs, and 64 single family lots for aggregate sales proceeds of
$23,700,000, net of closing costs. The sales proceeds include $3,700,000 of
non-refundable options payments that had been received by the Company as of
September 30, 2005. The Company estimates that it will recognize a total
pre-tax gain on these sales of approximately $43,900,000, which will be
recognized over time under the percentage of completion method of
accounting.
As of October 31, 2005, the Company has agreements with home builders to
sell an additional 422 single family lots for aggregate cash proceeds of
$202,800,000, pursuant to which it received non-refundable option payments
totaling $20,200,000. 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.
8
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, 2005, net cash was used for
operating activities, principally for real estate expenditures at the San Elijo
Hills project and general and administrative expenses. For the nine month period
ended September 30, 2004, net cash was provided by operating activities,
primarily from real estate sales proceeds at the San Elijo Hills 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, 2005, the
Company had aggregate cash, cash equivalents and investments of $97,700,000 to
meet its needs and for future investment opportunities.
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, 2005, no amounts were
outstanding under this facility.
As of September 30, 2005, the aggregate balance of deferred revenue for all real
estate sales was $29,600,000, which the Company estimates will be substantially
recognized as revenue by the end of 2006. The Company estimates that it will
spend approximately $6,500,000 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, 2005, 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 670
Multi-family units 171
Square footage of commercial space 135,000
From October 1, 2005 through October 31, 2005, the Company closed on the sales
of two neighborhoods in the San Elijo Hills project consisting of 131
multi-family units for aggregate sales proceeds of $36,000,000, net of closing
costs, and 64 single family lots for aggregate sales proceeds of $23,700,000,
net of closing costs. The sales proceeds include $3,700,000 of non-refundable
options payments that had been received by the Company as of September 30, 2005.
The Company plans to construct and sell or lease the remaining 40 mixed-use
multi-family residential units in the towncenter rather than sell the property
to another developer. With respect to the towncenter commercial space, the
Company plans to construct and lease approximately 57,000 square feet of the
commercial space rather than sell it to a builder. The Company has begun
discussions with prospective users of the towncenter commercial space and
expects it will begin construction of the mixed-use towncenter during 2005. The
Company intends to sell the remainder of the towncenter commercial space, which
includes the supermarket site, gas station site and daycare center site, to
third party builders or owners.
As of October 31, 2005, the Company has entered into agreements with
homebuilders to sell an additional 422 single family lots for aggregate cash
proceeds of $202,800,000, pursuant to which it has received non-refundable
option payments of $20,200,000 ($8,000,000 was received in 2004 and $12,200,000
in 2005). 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.
In July 2005, the Company sold approximately 600 acres of land at the Rampage
vineyard property to a neighboring land owner for approximately $5,000,000. The
Company used $3,800,000 of the net proceeds received from the sale to fully pay
the principal, interest and pre-payment penalties due under the Rampage mortgage
note, as required under the mortgage note in connection with the sale.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
The Company is currently developing lots that are under contract for sale or
being marketed for sale. The Company believes it will sell all of its remaining
single family residential sites by the end of 2007, 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.
On April 19, 2005, the Company's Board of Directors declared a cash dividend
equal to $0.50 per share of the Company's common stock, payable on May 9, 2005
to stockholders of record on April 29, 2005 (approximately $4,100,000 in the
aggregate).
Results of Operations
Real Estate Sales Activity
San Elijo Hills Project:
------------------------
There were no sales of real estate that closed during the periods ended
September 30, 2005 and during the three month period ended September 30, 2004.
Lot sale agreements for aggregate cash proceeds of $130,300,000 have closed or
are expected to close during the fourth quarter of 2005; the remaining lot sale
agreements are expected to close during 2006 and 2007. During the nine month
period ended September 30, 2004, the Company closed on sales of real estate and
recognized revenues as follows:
Single family units 94
Multi-family units 45
School sites 1
Purchase price, net of closing costs $ 53,200,000
Revenues recognized on closing date $ 28,800,000
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 $2,800,000 and $15,300,000 for the
three month periods ended September 30, 2005 and 2004, respectively, and
$9,500,000 and $35,700,000 for the nine month periods ended September 30, 2005
and 2004, respectively. Such amounts were recognized upon the completion of
certain required improvements.
Revenues from sales of real estate also include amounts recognized pursuant to
revenue or profit sharing with homebuilders of $1,900,000 and $1,100,000 for the
three month periods ended September 30, 2005 and 2004, respectively, and
$4,900,000 and $1,900,000 for the nine month periods ended September 30, 2005
and 2004, respectively.
During the three month periods ended September 30, 2005 and 2004, cost of sales
of real estate aggregated $500,000 and $2,900,000, respectively. During the nine
month periods ended September 30, 2005 and 2004, cost of sales of real estate
aggregated $1,700,000 and $12,100,000, respectively. Cost of sales is recognized
in the same proportion to the amount of revenue recognized under the percentage
of completion method of accounting.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Otay Ranch Project:
-------------------
During 2005, there were no real estate sales at the Otay Ranch project except
for the sale of a small parcel for proceeds of $40,000. The only real estate
revenues recognized during 2004 resulted from the acquisition by the City of
Chula Vista of 439 acres of mitigation land through eminent domain proceedings
for aggregate proceeds of approximately $5,800,000. The Company recognized a
pre-tax gain of approximately $4,800,000 on this transaction during the first
quarter of 2004.
As discussed in the 2004 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 2005. 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.
Recently, the City of Chula Vista decided to postpone action on an amendment
supported by the Company to the General Development Plan for the overall Otay
Ranch area until later this year. The delay will permit the City to re-circulate
the Environmental Impact Report in response to adverse comments received by the
City during the public comment period. It is unclear whether this will affect
the number of development units or timing of development of the Company's
property within the Otay Ranch area.
Rampage Property:
----------------
In July 2005, the Company sold approximately 600 acres of land at the Rampage
vineyard property to a neighboring land owner for approximately $5,000,000,
which resulted in the recognition of a pre-tax gain of $3,200,000. As more fully
described in the 2004 10-K, the buyer claimed to own options to purchase this
land, and had also filed a complaint against the Company and the former owners
of the Rampage vineyard property alleging that the property has been devalued by
approximately $3,000,000 due to poor farming practices since approximately 2001.
While the sale resolved any remaining dispute with respect to the purchase
options, the Company continues to have settlement discussions concerning the
farming practices complaint. The Company is currently unable to determine if the
ultimate resolution of this matter will be material.
Other Results of Operations Activity
The Company recorded co-op marketing and advertising fees of $500,000 and
$1,300,000 for the three month periods ended September 30, 2005 and 2004,
respectively, and $1,500,000 and $2,400,000 for the nine month periods ended
September 30, 2005 and 2004, 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. These fees provide the Company
with funds to conduct its marketing activities for the San Elijo Hills project.
Interest expense includes interest related to the Rampage mortgage note for the
three month periods ended September 30, 2005 and 2004 of $10,000 and $70,000,
respectively, and for the nine month periods ended September 30, 2005 and 2004
of $140,000 and $200,000, respectively. As discussed above, the Rampage mortgage
note was repaid in July 2005. In addition, interest expense for the nine month
period ended September 30, 2004 reflects the interest due on the previously
outstanding indebtedness to LFC of $370,000 and amortization of debt discount
related to the indebtedness to LFC of $280,000. The note payable to LFC was
fully repaid in March 2004, and as such these interest costs ceased at the date
of repayment.
Interest expense excludes capitalized interest of $200,000 and $300,000 for the
three month periods ended September 30, 2005 and 2004, respectively, and
$600,000 and $1,000,000 for the nine month periods ended September 30, 2005 and
2004, respectively. Interest is capitalized for the notes payable to trust deed
holders on the San Elijo Hills project.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
General and administrative expenses increased during the nine month period ended
September 30, 2005 as compared to the same period in 2004 primarily due to
greater expenses related to compensation and marketing. Compensation expense
increased by $700,000 principally due to an increase in general bonus expense, a
$200,000 bonus awarded to the Company's President to pay taxes due on reimbursed
expenses relating to his temporary residence in California and the reimbursement
of certain relocation costs incurred by a newly hired executive officer.
Marketing expenses increased by $400,000 at the San Elijo Hills project,
principally due to the addition of special marketing events and increased
advertising efforts to promote the project within the surrounding community.
Such increases were partially offset by lower legal and other professional fees
in the 2005 period. General and administrative expenses in 2004 also included
$150,000 of penalty fees and interest charges related to an underpayment of
state taxes for the 2002 year.
The increase in other income (expense), net for the three month period ended
September 30, 2005 as compared to the same period in 2004 primarily relates to
farming operations. Other income (expense), net reflects sales of grapes from
the 2005 harvest of $600,000 and farming expenses of $200,000; during the
comparable period in 2004 the Company incurred farming expenses of $200,000 but
did not generate any farming income. In addition, interest income in 2005
increased by $300,000 as compared to the same period in 2004 primarily due to
greater interest income resulting from higher interest rates. Other income
(expense), net also reflects $200,000 of pre-payment penalties incurred upon
extinguishing the Rampage mortgage note during the third quarter of 2005.
The increase in other income (expense), net for the nine month period ended
September 30, 2005 as compared to the same period in 2004 primarily relates to
the 2004 loss on prepayment of the LFC note and related deferred costs of
$1,600,000, which was fully repaid in March 2004. In addition, interest income
in 2005 increased by $900,000 as compared to the same period in 2004 primarily
due to greater interest income resulting from higher interest rates. Other
income (expense), net reflects sales of grapes from the 2005 harvest of $600,000
and farming expenses of $1,000,000; during the comparable period in 2004 the
Company incurred farming expenses of $850,000 but did not generate any farming
income. Other income (expense), net also reflects $200,000 of pre-payment
penalties incurred upon extinguishing the Rampage mortgage note during the third
quarter of 2005.
The decrease in minority interest expense for the three and nine month periods
ended September 30, 2005 as compared to the same periods in 2004 relates to less
sales activity at the San Elijo Hills Project.
The Company's effective income tax rate during the 2005 and 2004 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 Report may contain forward-looking statements. Such
statements may relate, but are not limited, to projections of revenues, income
or loss, development 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 Report, 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 or may materially and adversely affect the
Company's actual results:
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
o Changes in prevailing interest rate levels, including mortgage rates, or
changes in consumer lending practices. Any significant increase in the
prevailing low mortgage interest rate environment or decrease in available
credit that 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 or as a result of additional time required to
obtain government 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.
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 interests 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.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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 Property in California is at risk from earthquakes. Although research on
earthquake prediction has increased in recent years, it cannot be predicted
when and where an earthquake will occur. The Company does not intend to
obtain earthquake insurance for its projects. An earthquake could cause
structural damage or destroy the Company's projects, which could have an
adverse financial impact.
o Under California law the Company could be liable for some construction
defects in homes it builds or that are built on land that it develops.
California law imposes some liabilities on developers of land on which
homes are built as well as on builders. Future construction defect
litigation could be based on a strict liability theory based on the
Company's involvement in the project or it could be related to
infrastructure improvements or grading, even if the Company is not building
homes ourselves.
o The inability to insure certain risks economically. The Company cannot be
certain that it will be able to insure all risks that it desires to insure,
that it can insure risks economically or that all of its insurers will be
financially viable if a claim is made by the Company.
o The availability of adequate water resources and reliable energy sources in
the areas where the Company owns real estate projects. Any shortage of
reliable water and energy resources or a 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 net operating loss carryforwards and
other tax attributes, but may not be able to generate sufficient taxable
income to fully realize the deferred tax asset.
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 Report or to reflect the
occurrence of unanticipated events.
14
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, 2004, and is
incorporated by reference herein.
Item 4. Controls and Procedures.
Evaluation of disclosure 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, 2005. 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, 2005.
Changes in internal control over financial reporting
(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,
2005, 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 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 July 12, 2005.
a) Election of directors.
Number of Shares
----------------
For Withheld
--- --------
Patrick D. Bienvenue 7,856,741 23,100
Paul J. Borden 7,856,807 23,034
Timothy M. Considine 7,869,648 10,193
Ian M. Cumming 7,863,220 16,621
Michael A. Lobatz 7,877,029 2,812
Joseph S. Steinberg 7,863,256 16,585
b) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 2005.
For 7,872,535
Against 4,506
Abstentions 2,800
Broker non-votes --
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.
16
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 4, 2005 By: /s/ Erin N. Ruhe
------------------
Erin N. Ruhe
Vice President, Treasurer and
Controller
(Principal Accounting Officer)
17
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.
18