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, 2008
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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X
----- -----
Non-accelerated filer Smaller reporting company
----- -----
(Do not check if a smaller reporting company)
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, 2008, there were
7,879,978 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, 2008 and December 31, 2007
(Dollars in thousands, except par value)
September 30, December 31,
2008 2007
------------- ------------
(Unaudited)
ASSETS
Real estate $ 99,579 $ 88,200
Cash and cash equivalents 11,868 10,574
Investments-available for sale (amortized cost of $73,744 and $95,877) 73,857 95,940
Accounts receivable, deposits and other assets 2,380 1,288
Deferred income taxes 23,009 23,253
--------- ---------
TOTAL $ 210,693 $ 219,255
========= =========
LIABILITIES
Notes payable $ 8,211 $ 8,953
Deferred revenue 8,006 14,349
Accounts payable and accrued liabilities 4,935 6,489
Liability for environmental remediation 10,286 10,437
Income taxes payable -- 66
Other liabilities 1,050 2,077
--------- ---------
Total liabilities 32,488 42,371
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 15,135 14,767
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized;
8,274,909 and 8,274,384 shares outstanding 83 83
Additional paid-in capital 381,706 381,602
Accumulated other comprehensive income 68 38
Accumulated deficit (218,787) (219,606)
--------- ---------
Total stockholders' equity 163,070 162,117
--------- ---------
TOTAL $ 210,693 $ 219,255
========= =========
See notes to interim consolidated financial statements.
2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2008 and 2007
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
----------------------------- --------------------------
2008 2007 2008 2007
---- ---- ---- ----
REVENUES
Sales of real estate $ 2,343 $ 4,420 $ 7,988 $ 18,192
Co-op marketing and advertising fees 71 199 136 492
------- ------- ------- --------
2,414 4,619 8,124 18,684
------- ------- ------- --------
EXPENSES
Cost of sales 118 1,567 873 5,631
General and administrative expenses 2,616 2,535 9,094 8,405
Administrative services fees to Leucadia National
Corporation 45 45 135 135
------- ------- ------- --------
2,779 4,147 10,102 14,171
------- ------- ------- --------
Income (loss) from operations (365) 472 (1,978) 4,513
Interest and other income, net 1,281 2,080 2,412 4,288
------- ------- ------- --------
Income before income taxes and minority interest 916 2,552 434 8,801
Income tax benefit (provision) 574 232 753 (2,329)
------- ------- ------- --------
Income before minority interest 1,490 2,784 1,187 6,472
Minority interest (5) (74) (368) (1,086)
------- ------- ------- --------
Net income $ 1,485 $ 2,710 $ 819 $ 5,386
======= ======= ======= ========
Basic income per common share $ 0.18 $ 0.33 $ 0.10 $ 0.65
====== ====== ====== ======
Diluted income per common share $ 0.18 $ 0.33 $ 0.10 $ 0.65
====== ====== ====== ======
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, 2008 and 2007
(In thousands, except par value)
(Unaudited)
Common Accumulated
Stock Additional Other Total
$.01 Par Paid-In Comprehensive Accumulated Stockholders'
Value Capital Income Deficit Equity
---------- ----------- ------------- -------------- ---------------
Balance, January 1, 2007 $ 83 $ 381,478 $ 27 $ (226,808) $ 154,780
---------
Cumulative effect of change in accounting
principle as of January 1, 2007 -- FASB
Interpretation No. 48 382 382
---------
Comprehensive income:
Net change in unrealized gain on
investments, net of taxes of $37 57 57
Net income 5,386 5,386
---------
Comprehensive income 5,443
---------
Share-based compensation expense 77 77
Exercise of options to purchase common
shares, including excess tax benefit 16 16
---- --------- ---- ---------- ---------
Balance, September 30, 2007 $ 83 $ 381,571 $ 84 $ (221,040) $ 160,698
==== ========= ==== ========== =========
Balance, January 1, 2008 $ 83 $ 381,602 $ 38 $ (219,606) $ 162,117
---------
Comprehensive income:
Net change in unrealized gain on
investments, net of taxes of $20 30 30
Net income 819 819
---------
Comprehensive income 849
---------
Share-based compensation expense 90 90
Exercise of options to purchase common
shares, including excess tax benefit 14 14
---- --------- ---- ---------- ---------
Balance, September 30, 2008 $ 83 $ 381,706 $ 68 $ (218,787) $ 163,070
==== ========= ==== ========== =========
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, 2008 and 2007
(In thousands)
(Unaudited)
2008 2007
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 819 $ 5,386
Adjustments to reconcile net income to net cash used for operating activities:
Minority interest 368 1,086
Provision for deferred income taxes 224 1,293
Share-based compensation expense 90 77
Excess tax benefit from exercise of stock options -- (10)
Net securities gains (2) --
Accretion of discount on available for sale investments (1,806) (3,446)
Changes in operating assets and liabilities:
Real estate (11,349) (7,622)
Accounts receivable, deposits and other assets (792) (65)
Notes payable (17) (69)
Deferred revenue (6,343) (15,714)
Accounts payable and accrued liabilities (1,554) (752)
Non-refundable option payments (40) 350
Liability for environmental remediation (151) (184)
Income taxes payable (366) (2,712)
Other liabilities (987) (1,186)
-------- --------
Net cash used for operating activities (21,906) (23,568)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments-available for sale (other than short-term) (123,502) (153,718)
Proceeds from maturities of investments-available for sale 120,965 166,015
Proceeds from sales of investments-available for sale 26,478 636
-------- --------
Net cash provided by investing activities 23,941 12,933
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments to trust deed note holders (755) (985)
Exercise of options to purchase common shares 14 6
Excess tax benefit from exercise of stock options -- 10
-------- --------
Net cash used for financing activities (741) (969)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,294 (11,604)
Cash and cash equivalents, beginning of period 10,574 47,177
-------- --------
Cash and cash equivalents, end of period $ 11,868 $ 35,573
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest (net of amounts capitalized) $ -- $ --
Cash paid for income taxes $ 360 $ 5,025
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, 2007, which are
included in the Company's Annual Report filed on Form 10-K for such year
(the "2007 10-K"). Results of operations for interim periods are not
necessarily indicative of annual results of operations. The consolidated
balance sheet at December 31, 2007 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.
Effective January 1, 2008 (except as described below), the Company adopted
Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("SFAS 157"), and Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115" ("SFAS
159"). SFAS 157 defines fair value, establishes a framework for measuring
fair value, establishes a hierarchy that prioritizes inputs to valuation
techniques and expands disclosures about fair value measurements. The fair
value hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1), the next
priority to inputs that don't qualify as Level 1 inputs but are nonetheless
observable, either directly or indirectly, for the particular asset or
liability (Level 2), and the lowest priority to unobservable inputs (Level
3). The Company elected to defer the effectiveness of SFAS 157 for one year
only with respect to nonfinancial assets and nonfinancial liabilities that
are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. The adoption of SFAS 157 did not have any impact on the
Company's consolidated financial statements; however, fair value
measurements for new assets or liabilities and fair value measurements for
existing nonfinancial assets and nonfinancial liabilities may be materially
different under SFAS 157.
SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value (the "fair value option"), and to
report unrealized gains and losses on items for which the fair value option
is elected in earnings. SFAS 159 identifies eligible items for which the
fair value option may be elected, specifies election dates for eligible
items (including all eligible items held as of January 1, 2008) and also
permits the election of the fair value option on an
instrument-by-instrument basis subject to certain exceptions. The Company
did not elect the fair value option for any of its eligible items. However,
for eligible items for which the accounting treatment changes, or that are
acquired or entered into after SFAS 159 was adopted or otherwise become
subject to a new election date, the Company intends to make an assessment
at such time as to whether to elect the fair value option.
In March 2008, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 161, "Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133" ("SFAS 161"). SFAS 161, which is effective for fiscal
years beginning after November 15, 2008, requires enhanced disclosures
about an entity's derivative and hedging activities including the
objectives and strategies for using derivatives, disclosures about fair
value amounts of, and gains and losses on, derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. Since the Company does not currently engage in any derivative
or hedging activities, it does not expect that the adoption of SFAS 161
will have a material impact on its consolidated financial statements.
6
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141R, "Business Combinations" ("SFAS 141R") and Statement of
Financial Accounting Standards No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" ("SFAS 160"). SFAS 141R will change how
business combinations are accounted for and will impact financial
statements both on the acquisition date and in subsequent periods. SFAS 160
will change the accounting and reporting for minority interests, which will
be recharacterized as noncontrolling interests and classified as a
component of stockholders' equity. SFAS 141R and SFAS 160 are effective for
fiscal years beginning after December 15, 2008. The Company is currently
evaluating the impact of adopting SFAS 141R and SFAS 160 on its
consolidated financial statements, but expects they will have a material
impact on the accounting for future acquisitions and noncontrolling
interests.
2. During the third quarter of 2008, as a result of the expiration of the
statute of limitations, the Company recognized $1,000,000 of previously
unrecognized tax benefits which was reflected as a reduction to income tax
expense. Over the next twelve months, the Company believes it is reasonably
possible that the liability for unrecognized tax benefits will decrease by
an additional $200,000 upon the expiration of the statute of limitations.
The statute of limitations with respect to the Company's federal income tax
returns has expired for all years through 2004, and with respect to
California state income tax returns through 2003. As of September 30, 2008,
the Company's liability for unrecognized tax benefits was $500,000.
3. 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
8,274,894 and 8,274,371 for the three month periods ended September 30,
2008 and 2007, respectively, and 8,274,560 and 8,274,036 for the nine month
periods ended September 30, 2008 and 2007, respectively. The number of
shares used to calculate diluted income per share for the three and nine
month periods ended September 30, 2008 were 8,275,578 and 8,275,614,
respectively. The number of shares used to calculate diluted income per
share for the three and nine month periods ended September 30, 2007 was
8,275,946 and 8,275,621, respectively.
4. Pursuant to the administrative services agreement, Leucadia National
Corporation ("Leucadia") provides administrative and accounting services,
including providing the services of the Company's Secretary. Administrative
service fee expenses were $45,000 and $135,000 for each of the three and
nine month periods ended September 30, 2008 and 2007, respectively. The
administrative services agreement automatically renews for successive
annual periods unless terminated in accordance with its terms. The Company
subleases office space to Leucadia under a sublease agreement until
February 2010. Amounts reflected in other income pursuant to this agreement
were $3,000 for each of the three month periods ended September 30, 2008
and 2007, and $9,000 for each of the nine month periods ended September 30,
2008 and 2007.
5. Interest and other income, net includes interest income of $500,000 and
$1,300,000 for the three month periods ended September 30, 2008 and 2007,
respectively, and $2,000,000 and $4,100,000 for the nine month periods
ended September 30, 2008 and 2007, respectively.
6. Investments classified as available for sale are the only assets or
liabilities that are measured at fair value on a recurring basis at
September 30, 2008. The fair value of these investments aggregated
$73,900,000, all of which were determined using quoted prices in active
markets for identical assets (Level 1 inputs as described in SFAS 157).
7
7. As more fully discussed in the 2007 10-K, an owner of property adjacent to
the Rampage property filed a complaint against the Company and the former
owners of the Rampage property. The complaint alleged that the value of an
option to purchase a portion of the Rampage property was devalued due to
poor farming practices. During 2008, the Company decided to settle this
lawsuit for a cash payment of $1,100,000, all of which was paid and
expensed during the first quarter of 2008. The settlement agreement
required that the plaintiff purchase a 17 acre parcel at the Rampage
property for $300,000; the purchase closed during the third quarter of
2008.
8. In April 2008, the City of Chula Vista approved an agreement whereby the
Company will dedicate 50 acres of development land in the Otay Ranch
project and 160 acres of open space land in the unincorporated area of San
Diego County and has committed to pay an endowment of $2,000,000 (of which
$1,000,000 has been paid) to fund costs associated with establishing a
higher education facility on the property. Subject to numerous public
hearings and the discretionary action of the City Council, the City
committed to allocate a maximum of 6,050 residential units and 1.8 million
square feet of commercial development space to the Company's project, and
has agreed to process its development applications within two years from
submittal. If such applications are not approved and implemented on the
same terms as set forth in the agreement, the City will be required to
return to the Company the endowment funds and the dedicated land. The
Company retains the right to withdraw these development applications if it
determines, in its sole discretion, that it is economically infeasible or
undesirable to continue with such applications.
9. During May 2008 at the San Elijo Hills project, the Company sold the church
site for cash proceeds of $600,000, for which a $40,000 non-refundable
option payment had been received in October 2007, and sold the swim and
tennis club site for cash proceeds of $700,000, for which $50,000
non-refundable option payments had been received ($25,000 in each of
January and April 2008). There were no other San Elijo Hills real estate
sales during 2008.
In September 2008, the San Elijo Hills project repurchased a 131 unit
multifamily site for $6,000,000 that had previously been sold to a
homebuilder in October 2005 for $36,000,000. The acquisition increases the
amount of multi-family units available for sale at the project. The
Company's obligation to the homebuilder to complete certain improvements
under the original contract was terminated upon acquisition of the
property; accordingly, the Company recognized all the remainder of the
previously deferred revenue of $1,300,000 in September 2008.
As more fully disclosed in the 2007 10-K, the Company utilizes the
percentage of completion method of accounting and defers revenue
recognition if it has obligations to complete improvements on property sold
subsequent to the sale date. During the second quarter of 2008, the Company
reduced its estimated cost to complete certain improvements at the San
Elijo Hills project, and as a result recognized additional deferred revenue
that would have otherwise been recognized during the second half of 2008.
For the nine month period ended September 30, 2008, this change in estimate
increased net income by $800,000, and had a positive impact on basic and
diluted earnings per share of $0.10.
10. On July 15, 2008, 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 $40.25 per
share, the then current market price per share.
11. As more fully discussed in the 2007 10-K, a former owner of the Rampage
property was seeking to rescind the Company's purchase of the Rampage
property, as well as recover monetary damages based on allegations of
fraud, breach of contract, and various other claims. The Company denied all
of the former owner's allegations and filed a cross-complaint against him.
Recent court rulings have resulted in the fraud claims being dismissed,
which removes the alleged basis for recission. The Company does not expect
that the ultimate resolution of this matter will be material to its
consolidated financial position; however, should the Company need to accrue
or pay damages, any such loss could be material to its consolidated results
of operations or cash flows.
12. In October 2008, the Company purchased 394,931 shares of the Company's
common stock for approximately $5,900,000 in a private transaction.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations.
Liquidity and Capital Resources
For the nine month periods ended September 30, 2008 and 2007, net cash was used
for operating activities, principally for real estate expenditures at the San
Elijo Hills project, general and administrative expenses and federal and state
tax payments. The Company's principal sources of funds are proceeds from the
sale of real estate, fee income from the San Elijo Hills project, dividends and
tax sharing payments from its subsidiaries, borrowings from or repayment of
advances by its subsidiaries and cash and cash equivalents and investments. As
of September 30, 2008, the Company had aggregate cash, cash equivalents and
investments of $85,700,000 to meet its current liquidity needs and for future
investment opportunities.
As of September 30, 2008, the aggregate balance of deferred revenue for all real
estate sales was $8,000,000, which the Company estimates will be substantially
recognized as revenue by the middle of 2009. The Company estimates that it will
spend approximately $2,200,000 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.
In September 2008, the San Elijo Hills project repurchased a 131 unit
multifamily site for $6,000,000 that had previously been sold to a homebuilder
in October 2005 for $36,000,000. The acquisition increases the amount of
multi-family units available for sale at the project. The Company's obligation
to the homebuilder to complete certain improvements was terminated upon
acquisition of the property; accordingly, the Company recognized all the
remainder of the previously deferred revenue of $1,300,000 in September 2008.
As of September 30, 2008, the remaining land at the San Elijo Hills project to
be developed and sold or leased consisted of the following:
Single family lots to be developed and sold 441
Multi-family units 171
Square footage of commercial space 60,000
As more fully discussed in the 2007 10-K, there has been a slowdown in sales of
residential properties in many U.S. markets, including California and the
greater San Diego region, which negatively affected sales and profits at the San
Elijo Hills project during the last two years. Although it is not actively
soliciting bids for its remaining inventory of single family lots, the Company
has substantially completed development of all of its remaining lots at the San
Elijo Hills project, many of which are "premium" lots that were expected to
command premium prices if, and when, the market recovers. The Company is unable
to predict when local residential real estate market conditions might improve;
however, the Company intends to wait for market conditions to improve before
marketing its remaining inventory for sale. The Company believes that by
exercising patience with the current market conditions it can best maximize
shareholder value with its remaining residential lot inventory.
In addition, the weak economic conditions across the U.S. and in California, in
particular, along with the turmoil in the mortgage lending markets, have had an
adverse impact on the local residential real estate market and will further
delay the completion of lot sales at the San Elijo Hills project. Stricter
lending standards, foreclosures and weak consumer demand have caused an increase
in residential housing available for sale, which reduces demand from
homebuilders for new projects and for the Company's residential lot inventory.
9
Results of Operations
Real Estate Sales Activity
San Elijo Hills Project:
------------------------
During the periods ended September 30, 2008 and 2007, the Company closed on
sales of real estate and recognized revenues as follows:
For the Nine Month Period For the Nine Month Period
Ended September 30, 2008 Ended September 30, 2007
------------------------ ------------------------
Single family units -- --
Commercial lot sales - planned square feet -- 49,420
Non-residential acres sold 5.3 --
Sales price, net of closing costs $1,300,000 $1,700,000
Revenues recognized on closing date $1,300,000 $1,200,000
As discussed in the 2007 10-K, a portion of the revenue from sales of real
estate is deferred, and is recognized as revenue upon the completion of the
required improvements to the property, including costs related to common areas,
under the percentage of completion method of accounting. In addition to revenues
recognized on the closing date reflected in the table above, revenues include
amounts that were previously deferred of $800,000 and $4,400,000 for the three
month periods ended September 30, 2008 and 2007, respectively, and $5,100,000
and $16,200,000 for the nine month periods ended September 30, 2008 and 2007,
respectively. Such amounts were recognized upon the completion of certain
required improvements. In addition, the Company recognized all the remainder of
the previously deferred revenue of $1,300,000 during the three and nine months
period ended September 30, 2008 related to the acquisition of a 131 unit
multifamily site for $6,000,000 that had previously been sold to a homebuilder
in October 2005 which is described more fully above.
As more fully disclosed in the 2007 10-K, the Company utilizes the percentage of
completion method of accounting and defers revenue recognition if it has
obligations to complete improvements on property sold subsequent to the sale
date. During the second quarter of 2008, the Company reduced its estimated cost
to complete certain improvements at the San Elijo Hills project, and as a result
recognized additional deferred revenue that would have otherwise been recognized
by the middle of 2009. For the nine month period ended September 30, 2008, this
change in estimate increased net income by $800,000.
During the three month period ended September 30, 2008, cost of sales of real
estate was immaterial and during the three month period ended September 30,
2007, cost of sales aggregated $1,600,000. During the nine month periods ended
September 30, 2008 and 2007, cost of sales of real estate aggregated $800,000
and $5,600,000, respectively. Cost of sales is recognized in the same proportion
to the amount of revenue recognized under the percentage of completion method of
accounting.
Otay Ranch Project:
-------------------
There was no real estate sales activity at the Otay Ranch project during the
three and nine month periods ended September 30, 2008 and 2007. As discussed in
the 2007 10-K, the Company continues to evaluate how to maximize the value of
this investment while pursuing land sales and processing further entitlements on
portions of its property. The Otay Ranch Project is in the early stages of
development; as a result, the Company does not expect any sales activity in the
near future.
In April 2008, the City of Chula Vista approved an agreement whereby the Company
will dedicate 50 acres of development land in the Otay Ranch project and 160
acres of open space land in the unincorporated area of San Diego County and has
committed to pay an endowment of $2,000,000 (of which $1,000,000 has been paid)
to fund costs associated with establishing a higher education facility on the
property. Subject to numerous public hearings and the discretionary action of
the City Council, the City committed to allocate a maximum of 6,050 residential
units and 1.8 million square feet of commercial development space to the
Company's project, and has agreed to process its development applications within
two years from submittal. If such applications are not approved and implemented
on the same terms as set forth in the agreement, the City will be required to
return to the Company the endowment funds and the dedicated land. The Company
retains the right to withdraw these development applications if it determines,
in its sole discretion, that it is economically infeasible or undesirable to
continue with such applications.
10
Rampage Property Project:
-------------------------
As more fully described above, in connection with the settlement of a lawsuit
the Company sold a 17 acre parcel at the Rampage property for $300,000 and
recognized a $200,000 gain on the sale of real estate for the periods ended
September 30, 2008.
Other Results of Operations Activity
The Company recorded co-op marketing and advertising fees of $70,000 and
$200,000 for the three month periods ended September 30, 2008 and 2007,
respectively and $130,000 and $500,000 for the nine month periods ended
September 30, 2008 and 2007, 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.
Interest expense is capitalized for the notes payable to trust deed holders on
the San Elijo Hills project, which totaled $10,000 and $30,000 for the three
month periods ended September 30, 2008 and 2007, respectively, and $30,000 and
$100,000 for the nine month periods ended September 30, 2008 and 2007,
respectively.
General and administrative expenses slightly increased during the three month
period ended September 30, 2008 as compared to the same period in 2007 primarily
due to higher legal and professional fees. Legal fees increased by $200,000 due
to increased legal activity at the San Elijo Hills project and higher fees
related to the Rampage property lawsuit. The Company also spent $400,000
investigating a potential real estate project and incurred $100,000 of
professional fees for examining alternative design options for phase two of the
mixed-use Towncenter. Compensation expense decreased by $400,000 principally due
to a reduction in estimated general bonus expense. Marketing expenses also
decreased by $200,000 for the three month 2008 period as a result of a reduction
in advertisements relating to new neighborhoods for sale at the San Elijo Hills
project.
General and administrative expenses increased during the nine month period ended
September 30, 2008 as compared to the same period in 2007 primarily due to the
settlement of a lawsuit related to the Rampage property for $1,100,000. In
addition, general and administrative expenses for the nine month period ended
2008 included a $200,000 payment to acquire an option to purchase water storage
capacity, which is a component of the Company's plan to acquire sufficient water
to develop the Rampage property as a master-planned community. The Company will
have to make additional annual option payments of similar amounts over the next
six years in order to retain the option to acquire water storage capacity. The
Company also spent $400,000 investigating a potential real estate project and
incurred $100,000 of professional fees for examining alternative design options
for phase two of the mixed-use Towncenter. Marketing expenses decreased by
$500,000 for the nine month 2008 period as a result of a reduction in
advertisements relating to new neighborhoods for sale at the San Elijo Hills
project. Compensation expense decreased by $800,000 principally due to a
decrease in estimated general bonus expense.
The decrease in interest and other income, net for the three and nine month
periods ended September 30, 2008 as compared to the same periods in 2007
primarily reflects a decline in interest income of $800,000 and $2,100,000,
respectively, due to lower interest rates and a lower amount of invested assets
due to cash used for operating activities. Other income, net also reflects an
increase in farming net income at the Rampage property of $100,000 and $600,000,
respectively for the three and nine month periods ended September 30, 2008 as
compared to the same periods in 2007.
The Company's effective income tax rate is higher than the federal statutory
rate due to California state income taxes.
11
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.
Factors that 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 include but are not limited to the
following: the performance of the real estate industry in general; changes in
mortgage interest rate levels or changes in consumer lending practices that
reduce demand for housing; recent turmoil in the mortgage lending markets; the
economic strength of the Southern California region where our business is
currently concentrated; changes in domestic laws and government regulations or
in the implementation and/or enforcement of government rules and regulations;
demographic changes in the United States generally and California in particular
that reduce the demand for housing; increases in real estate taxes and other
local government fees; significant competition from other real estate developers
and homebuilders; delays in construction schedules and cost overruns; increased
costs for land, materials and labor; imposition of limitations on our ability to
develop our properties resulting from condemnations, environmental laws and
regulations and developments in or new applications thereof; earthquakes, fires
and other natural disasters where our properties are located; construction
defect liability on structures we build or that are built on land that we
develop; our ability to insure certain risks economically; shortages of adequate
water resources and reliable energy sources in the areas where we own real
estate projects; changes in the composition of our assets and liabilities
through acquisitions or divestitures; the actual cost of environmental
liabilities concerning our land could exceed liabilities recorded; and our
ability to generate sufficient taxable income to fully realize our deferred tax
asset. For additional information see Part I, Item 1A. Risk Factors in the 2007
10-K.
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.
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, 2007, and is
incorporated by reference herein.
12
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, 2008. 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, 2008.
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,
2008, 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 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of shareholders at the
Company's 2007 Annual Meeting of Shareholders held on July 15, 2008.
a) Election of directors.
Number of Shares
----------------
For Withheld
--- --------
Patrick D. Bienvenue 8,023,423 43,518
Paul J. Borden 8,024,434 42,507
Timothy M. Considine 8,059,300 7,641
Ian M. Cumming 8,007,582 59,359
Michael A. Lobatz 8,059,474 7,467
Joseph S. Steinberg 8,023,634 43,307
b) Ratification of PricewaterhouseCoopers LLP, as independent auditors for the year ended December 31, 2008.
For 8,061,932
Against 1,612
Abstentions 3,395
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.
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: October 31, 2008 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, 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