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, 2006
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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
---- ----- ----
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 November 1, 2006, there were
8,273,834 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, 2006 and December 31, 2005
(Dollars in thousands, except par value)
September 30, December 31,
2006 2005
-------------- --------------
(Unaudited)
ASSETS
Real estate $ 75,433 $ 62,319
Cash and cash equivalents 57,472 131,688
Investments-available for sale (aggregate cost of $87,844 and $65,181) 87,899 65,190
Accounts receivable, deposits and other assets 1,978 2,988
Deferred income taxes 27,611 32,076
--------- ---------
TOTAL $ 250,393 $ 294,261
========= =========
LIABILITIES
Notes payable $ 10,186 $ 10,403
Deferred revenue 42,909 73,160
Accounts payable and accrued liabilities 11,350 12,601
Non-refundable option payments 12,583 13,583
Liability for environmental remediation 10,747 11,002
Income taxes payable 1,564 10,978
Other liabilities 3,692 3,612
--------- ---------
Total liabilities 93,031 135,339
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 9,478 17,457
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized;
8,273,834 and 8,264,334 shares issued and outstanding 83 83
Additional paid-in capital 381,347 381,224
Accumulated other comprehensive income 33 6
Accumulated deficit (233,579) (239,848)
--------- ---------
Total stockholders' equity 147,884 141,465
--------- ---------
TOTAL $ 250,393 $ 294,261
========= =========
See notes to interim consolidated financial statements.
2
HOMEFED CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2006 and 2005
(In thousands, except per share amounts)
(Unaudited)
For the Three Month Period For the Nine Month Period
Ended September 30, Ended September 30,
-------------------------- ------------------------
2006 2005 2006 2005
---- ---- ---- ----
REVENUES
Sales of real estate $ 10,108 $ 9,708 $ 47,347 $ 19,378
Co-op marketing and advertising fees 156 464 659 1,522
-------- ------- -------- --------
10,264 10,172 48,006 20,900
-------- ------- -------- --------
EXPENSES
Cost of sales 2,616 2,312 11,585 3,481
Interest expense -- 13 -- 138
General and administrative expenses 3,052 2,690 12,150 7,720
Administrative services fees to Leucadia Financial
Corporation 45 45 135 135
-------- ------- -------- --------
5,713 5,060 23,870 11,474
-------- ------- -------- --------
Income from operations 4,551 5,112 24,136 9,426
Other income, net 2,254 1,005 5,418 1,412
-------- ------- -------- --------
Income before income taxes and minority interest 6,805 6,117 29,554 10,838
Income tax provision (2,530) (2,523) (11,812) (4,518)
-------- ------- -------- --------
Income before minority interest 4,275 3,594 17,742 6,320
Minority interest (1,740) (452) (7,337) (1,321)
-------- ------- -------- --------
Net income $ 2,535 $ 3,142 $ 10,405 $ 4,999
======== ======= ======== ========
Basic income per common share $ 0.31 $ 0.38 $ 1.26 $ 0.61
====== ====== ====== ======
Diluted income per common share $ 0.31 $ 0.38 $ 1.26 $ 0.60
====== ====== ====== ======
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, 2006 and 2005
(In thousands, except par value and per share amounts)
(Unaudited)
Common Accumulated
Stock Additional Other Total
$.01 Par Paid-In Comprehensive Accumulated Stockholders'
Value Capital Income (Loss) Deficit Equity
--------- --------- -------------- ----------- ------------
Balance, January 1, 2005 $ 83 $ 381,192 $ (14) $ (267,510) $ 113,751
---------
Comprehensive income:
Net change in unrealized gain 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 $ 381,224 $ 2 $ (266,641) $ 114,668
===== ========= ===== ========== =========
Balance, January 1, 2006 $ 83 $ 381,224 $ 6 $ (239,848) $ 141,465
---------
Comprehensive income:
Net change in unrealized gain on
investments, net of taxes of $19 27 27
Net income 10,405 10,405
---------
Comprehensive income 10,432
---------
Share-based compensation expense 51 51
Exercise of options to purchase
common shares 72 72
Dividends ($0.50 per common share) (4,136) (4,136)
----- --------- ----- ---------- ---------
Balance, September 30, 2006 $ 83 $ 381,347 $ 33 $ (233,579) $ 147,884
===== ========= ===== ========== =========
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, 2006 and 2005
(In thousands)
(Unaudited)
2006 2005
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,405 $ 4,999
Adjustments to reconcile net income to net cash used for
operating activities:
Minority interest 7,337 1,321
Provision for deferred income taxes 4,446 2,056
Share-based compensation expense 51 --
Net securities losses -- 3
Other amortization related to investments (2,807) (1,445)
Changes in operating assets and liabilities:
Real estate (12,758) (25,354)
Accounts receivable, deposits and other assets 1,010 812
Notes payable (272) --
Deferred revenue (30,251) (9,512)
Accounts payable and accrued liabilities (1,251) 1,522
Non-refundable option payments (1,000) 12,215
Liability for environmental remediation (255) (332)
Income taxes payable (9,414) 806
Other liabilities 80 (20)
-------- --------
Net cash used for operating activities (34,679) (12,929)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (176,293) (111,127)
Proceeds from maturities of investments-available for sale 149,438 116,080
Proceeds from sales of investments 6,999 15,225
-------- --------
Net cash provided by (used for) investing activities (19,856) 20,178
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments to trust deed note holders (301) (3,650)
Exercise of options to purchase common shares 72 32
Dividends paid (4,136) (4,130)
Contribution from minority interest -- 14
Distribution to minority interest (15,316) --
-------- --------
Net cash used for financing activities (19,681) (7,734)
-------- --------
Net decrease in cash and cash equivalents (74,216) (485)
Cash and cash equivalents, beginning of period 131,688 34,634
-------- --------
Cash and cash equivalents, end of period $ 57,472 $ 34,149
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest (net of amounts capitalized) $ -- $ 403
Cash paid for income taxes $ 16,780 $ 301
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, 2005, which are
included in the Company's Annual Report filed on Form 10-K for such year,
as amended (the "2005 10-K"). Results of operations for interim periods are
not necessarily indicative of annual results of operations. The
consolidated balance sheet at December 31, 2005 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.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"), which prescribes the
accounting for and disclosure of uncertainty in income tax positions. FIN
48 defines the criteria that must be met before any part of the benefit of
a tax position can be recognized in the financial statements, provides
guidance for the measurement of tax benefits recognized and guidance for
classification and disclosure. FIN 48 is effective for fiscal years
beginning after December 15, 2006, with the cumulative effect of the change
in accounting principle recorded as an adjustment to opening retained
earnings. The Company is currently evaluating the impact of adopting FIN 48
on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("SFAS 157"), which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. The Company is currently
evaluating the impact of adopting SFAS 157 on its consolidated financial
statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans--an amendment of FASB Statements No. 87, 88,
106, and 132(R)" ("SFAS 158"), which requires companies to recognize on
their balance sheet a net liability or asset for the funded status of their
defined benefit pension and other postretirement plans, recognize changes
in funded status through comprehensive income, and provide additional
footnote disclosures. SFAS 158 is effective for publicly traded calendar
year-end companies as of December 31, 2006. In addition, SFAS 158 requires
companies to measure the funded status of their plans as of the date of its
fiscal year-end, with limited exceptions, effective for fiscal years ending
after December 15, 2008. The Company does not expect that SFAS 158 will
have a material impact on its consolidated financial statements.
2. The Company has a $10,000,000 line of credit agreement with a subsidiary of
Leucadia National Corporation ("Leucadia") that matures on February 28,
2007. Loans outstanding under this line of credit bear interest at 10% per
annum. At September 30, 2006, no amounts were outstanding under this
facility.
3. Basic and diluted income per share of common stock was calculated by
dividing 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
8,273,819 and 8,264,058 for the three month periods ended September 30,
2006 and 2005, respectively, and 8,271,737 and 8,261,649 for the nine month
periods ended September 30, 2006 and 2005, respectively. The number of
shares used to calculate diluted income per share was 8,274,155 and
8,276,285 for the three month periods ended September 30, 2006 and 2005,
respectively, and 8,272,998 and 8,274,852 for the nine month periods ended
September 30, 2006 and 2005, respectively.
6
Notes to Interim Consolidated Financial Statements, continued.
4. Pursuant to the administrative services agreement, Leucadia provides
administrative services, including providing the services of the Company's
Secretary, for an annual fee of $180,000. The agreement automatically
renews for successive annual periods unless terminated in accordance with
its terms. Administrative fee expenses were $45,000 for the three month
periods ended September 30, 2006 and 2005, and $135,000 for the nine month
periods ended September 30, 2006 and 2005. A subsidiary of 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 the three month periods ended September 30, 2006 and 2005,
and $9,000 and $15,000 for the nine month periods ended September 30, 2006
and 2005, respectively.
5. 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 $4,900,000 under
these agreements for the three and nine month periods ended September 30,
2005, respectively. There was no income recognized pursuant to these
agreements during the periods ended September 30, 2006.
6. During the nine months ended September 30, 2006, the Company closed on the
sale of one neighborhood in the San Elijo Hills project, consisting of 26
single family lots for an aggregate purchase price of $15,600,000, net of
closing costs. There were no sales that closed in the San Elijo Hills
project for the three months ended September 30, 2006 and for the three and
nine months ended September 30, 2005.
As of November 1, 2006, the Company has entered into agreements that have
not closed with homebuilders to sell an additional 151 single family lots
for aggregate cash proceeds of $73,200,000, pursuant to which it received
non-refundable option payments of $8,300,000 prior to 2006. 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. Assuming the Company fulfills its
obligations pursuant to these agreements in a timely manner, the contracts
provide for full or partial closings during 2006, 2007 and 2008.
In October 2006, a homebuilder who had previously agreed to purchase 106
single-family lots for cash proceeds of $43,400,000 elected not to close on
the purchase transaction and forfeited its option payment of $4,300,000.
The option payment will be recognized in income during the fourth quarter
of 2006.
During June 2006, dividends of $50,000,000 were paid by the Company's
subsidiary that owns the San Elijo Hills project, of which $15,300,000 was
paid to the minority interests in the San Elijo Hills project, and the
balance was transferred to the parent Company.
7. On March 14, 2006, the Company's Board of Directors declared a cash
dividend of $.50 per common share to stockholders of record on March 27,
2006; such dividend aggregated $4,100,000 and was paid in April 2006.
7
Notes to Interim Consolidated Financial Statements, continued.
8. Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), using
the modified prospective method. SFAS 123R requires that the cost of all
share-based payments to employees, including grants of employee stock
options, be recognized in the financial statements based on their fair
values. The cost is recognized as an expense over the vesting period of the
award. Prior to adoption of SFAS 123R, no compensation cost was recognized
in the statements of operations for the Company's share-based compensation
plans; the Company disclosed certain pro forma amounts as required.
The fair value of each option award is estimated at the date of grant using
the Black-Scholes option pricing model. As a result of the adoption of SFAS
123R, compensation cost increased by $20,000 and $50,000, respectively, for
the three and nine months period ended September 30, 2006; had the Company
used the fair value based accounting method for the three and nine month
periods ended September 30, 2005, compensation costs would have been higher
by $10,000 and $40,000, respectively. As of September 30, 2006, total
unrecognized compensation cost related to nonvested share-based
compensation plans was $250,000; this cost is expected to be recognized
over a weighted-average period of 1.7 years.
As of September 30, 2006, the Company has a fixed stock option plan which
provides for grants of options or rights to directors and certain employees
up to a maximum grant of 30,000 shares to any individual in a given taxable
year. The maximum number of common shares which may be acquired through the
exercise of options or rights under this plan cannot exceed 500,000. The
plan provides for the issuance of stock options and stock appreciation
rights at not less than the fair market value of the underlying stock at
the date of grant. Options granted to employees under this plan are
intended to qualify as incentive stock options to the extent permitted
under the Internal Revenue Code and become exercisable in five equal annual
instalments starting one year from date of grant. Options granted to
directors become exercisable in four equal annual instalments starting one
year from date of grant. No stock appreciation rights have been granted. As
of September 30, 2006, 481,900 shares were available for grant under the
plan.
The following summary presents the weighted-average assumptions used for
grants made during the 2006 and 2005 periods:
2006 2005
---- ----
Risk free interest rate 5.00% 3.91%
Expected volatility 35.23% 33.26%
Expected dividend yield 0.00% 0.00%
Expected life 4.3 years 4.3 years
Weighted average fair value per grant $23.83 $21.66
The expected life assumptions were based on historical behavior for the
awards identified.
8
Notes to Interim Consolidated Financial Statements, continued.
The following table summarizes information about outstanding stock options
at September 30, 2006 and changes during the nine months then ended:
Weighted- Weighted-Average Aggregate
Average Remaining Intrinsic
Shares Exercise Price Contractual Term Value
------ -------------- ---------------- --------
Outstanding at January 1, 2006 22,575 $33.24
Granted 6,000 $65.50
Exercised (9,500) $ 7.59 $550,000
========
Forfeited -- $ --
------
Outstanding at
September 30, 2006 19,075 $56.16 3.7 years $200,000
====== ====== ========= ========
Exercisable at
September 30, 2006 5,425 $45.57 2.9 years $100,000
====== ====== ========= ========
9. In 2005, the Company commenced a lawsuit to collect unpaid rent and
terminate a lease for farming rights with respect to approximately 1,000
acres of the Rampage property that is leased by one of its former owners.
During April 2006, a jury issued a verdict in favor of the former owner.
The court then entered judgment declaring that the Company is not entitled
to any additional rent payments during 2005 and the Company therefore may
not use nonpayment of rent for 2005 as a ground to terminate the former
owner's possession of the property under the terms of the lease. The
Company has appealed this decision. In a separate matter, the former owner
is also seeking to rescind the sale of the Rampage property, as well as
recover monetary damages, alleging fraud, breach of contract and various
other claims. The Company has denied all of the former owner's allegations
and filed a cross-complaint against the former owner. The cross-complaint
chiefly seeks indemnification against or compensation for damages claimed
by a neighboring land owner that purchased a portion of the Rampage
property from the Company under pre-existing option rights. The Company
also has denied all of the neighboring land owner's allegations.
The Company does not expect that the ultimate resolution of these matters
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 and cash flows during the period
recorded.
10. On July 18, 2006, 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 $65.50 per
share, the then current market price per share.
11. As previously disclosed, in 2003, Otay Land Company and its subsidiary,
Flat Rock Land Company commenced a lawsuit in the United States District
Court for the Southern District of California against certain parties to
recover the cost of remediation of approximately 30 acres of undeveloped
land at the Company's Otay Ranch project that had been used as a shooting
range prior to the Company's acquisition of the property. On July 20, 2006,
the District Court dismissed the federal environmental law claims and
refused to retain jurisdiction on the related state law claims. The Company
has appealed the District Court's decision and is pursuing litigation in
state court. The Company has not reduced its estimated liability for
environmental remediation for any potential recoveries from these parties.
9
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, 2006 and 2005, net cash was used
for operating activities, principally for real estate expenditures at the San
Elijo Hills project and general and administrative expenses, and for the nine
month period ended September 30, 2006, net cash was also used for federal and
state tax payments. The Company's principal sources of funds are proceeds from
the sale of real estate, its unused $10,000,000 line of credit with a subsidiary
of Leucadia, 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, 2006, the Company had
aggregate cash, cash equivalents and investments of $145,400,000 to meet its
needs and for future investment opportunities.
In April 2006, the Company paid a cash dividend of $4,100,000 ($.50 per common
share) to stockholders of record on March 27, 2006, which the Company's Board of
Directors declared on March 14, 2006.
During the second quarter of 2006, dividends of $50,000,000 were paid by the
Company's subsidiary that owns the San Elijo Hills project, of which $15,300,000
was paid to the minority interests in the San Elijo Hills project, and the
balance was transferred to the parent Company. The dividends retained by the
Company did not increase the amount of consolidated liquidity reflected on the
Company's consolidated balance sheet; however, they did increase the liquidity
of the parent company.
During the nine months ended September 30, 2006, the Company closed on the sale
of one neighborhood in the San Elijo Hills project consisting of 26 single
family lots for aggregate sales proceeds of $15,600,000, net of closing costs.
At the time of closing, the Company deferred recognition of $4,600,000 of
revenue from this sale under the percentage of completion method of accounting.
The Company expects to substantially complete the required improvements by 2007
and the deferred revenue, as well as the related cost of sales, will be
recognized in the statement of operations as the improvements are completed.
As of September 30, 2006, the aggregate balance of deferred revenue for all real
estate sales was $42,900,000, which the Company estimates will be substantially
recognized as revenue during 2006 and 2007. The Company estimates that it will
spend approximately $12,000,000 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, 2006, 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 441
Multi-family units 40
Square footage of commercial space planned 115,000
Included in the table above, as of November 1, 2006, the Company has entered
into agreements that have not closed with homebuilders to sell an additional 151
single family lots for aggregate cash proceeds of $73,200,000, pursuant to which
it received non-refundable option payments of $8,300,000 prior to 2006. 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. Assuming the Company fulfills its obligations
pursuant to these agreements in a timely manner, the contracts provide for full
or partial closings during 2006, 2007 and 2008.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
The Company is currently developing all of its remaining lots at the San Elijo
Hills project, but is not actively soliciting bids for its remaining inventory
of single family lots, some of which the Company considers to be "premium" lots.
The Company believes that demand for its remaining lots may improve upon
completion of construction of the towncenter and of an off-site road that is
expected to increase traffic flow through the project. The local residential
real estate market has experienced and continues to experience a slow down in
sales activity for both new homes and resales of existing homes, and the Company
believes homebuilders are not willing to pay acceptable prices for new lot
inventory in the current market. In addition, certain homebuilders that are
under contract to purchase lots have requested concessions or modifications to
their purchase agreements which the Company has rejected, and in October 2006
one homebuilder elected not to close on a purchase transaction and forfeited an
option payment of $4,300,000. The Company's plan is to complete the development
and sale of its remaining single family residential lots during 2006, 2007 and
2008, and to continue development of common areas into 2008; however, current
market conditions could delay sales or result in sales for less than expected
amounts.
In 2006, the Company hired a contractor to construct the mixed-use retail and
residential space in the towncenter. The Company intends to construct and lease
57,000 square feet of commercial space and sell the remainder of the commercial
space to third party builders or owners, including the supermarket site and
daycare center site. The Company also intends to construct and sell the 40
multi-family residential units which will be located above the retail stores.
Estimates of future property available for sale and the timing of the sales
described above are based upon current development plans for the project and
could change based on actions of regulatory agencies, the strength of the
housing market and other factors that are not within the control of the Company.
Results of Operations
Real Estate Sales Activity
San Elijo Hills Project:
------------------------
There were no sales that closed during the three months ended September 30, 2006
and the three and nine months ended September 30, 2005. During the nine months
ended September 30, 2006, the Company closed on sales of real estate and
recognized revenues as follows:
For the Nine Month
Period Ended September 30, 2006
-------------------------------
Single family units 26
Multi-family units --
School sites --
Purchase price, net of closing costs $15,600,000
Revenues recognized on closing date $11,000,000
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 $10,100,000 and $2,800,000 for the
three month periods ended September 30, 2006 and 2005, respectively, and
$34,800,000 and $9,500,000 for the nine month periods ended September 30, 2006
and 2005, 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 $4,900,000 for the
three and nine month periods ended September 30, 2005, respectively. There was
no income recognized pursuant to these agreements during 2006.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
During the three month periods ended September 30, 2006 and 2005, cost of sales
of real estate aggregated $2,600,000 and $500,000, respectively. During the nine
month periods ended September 30, 2006 and 2005, cost of sales of real estate
aggregated $11,500,000 and $1,700,000, 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:
-------------------
During the nine month period ended September 30, 2006, the Company sold
approximately 115 acres of non-developable land for $1,500,000 and recognized a
gain of $1,400,000 on the sale. There was no real estate sales activity at the
Otay Ranch project for the three month periods ended September 30, 2006 and 2005
and for the nine month period ended September 30, 2005.
As discussed in the 2005 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 2006. 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.
In 2005, the Chula Vista City Council adopted an amendment to the General
Development Plan ("GDP") which modified land use designations in the Otay Ranch
area, but deferred action with regard to land uses for developable land owned by
Otay Land Company. As more fully discussed in the 2005 10-K, the Company had
supported an amendment which would have increased the number of approved
residential dwelling units from 2,880 to 6,000, and would have increased
approved commercial development space from approximately 1.5 million square feet
to approximately 1.8 million square feet. The City Council has delayed
consideration of any additional amendments to the GDP on several occasions. The
Company does not expect that the City Council will take any action regarding the
GDP amendments until after the November 2006 election, when two of the five City
Council positions, including the mayor, will be decided. The Company is unable
to predict the impact the ultimate resolution of these matters will have, nor
can any assurance be given that the City Council will approve the currently
pending amendment to the GDP.
The San Diego Chargers NFL football team is considering relocating their stadium
facility, which is currently located in the City of San Diego. The Company has
been advised that members of the Chula Vista City Council have met with the San
Diego Chargers and have discussed several possible sites for a new stadium
facility in the City of Chula Vista, including land owned by the Company.
Although the Company has provided information to the San Diego Chargers
regarding sites it owns in Chula Vista, the San Diego Chargers have many
possible locations to consider. There can be no assurance that the San Diego
Chargers, if they do relocate, would chose a relocation site owned by the
Company, or that an agreement would be reached with the San Diego Chargers on
terms acceptable to the Company.
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 and
recognized a pre-tax gain of $3,200,000.
Other Results of Operations Activity
The Company recorded co-op marketing and advertising fees of $150,000 and
$450,000 for the three month periods ended September 30, 2006 and 2005,
respectively and $650,000 and $1,500,000 for the nine month periods ended
September 30, 2006 and 2005, 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.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Interest expense includes interest related to the Rampage note payable for the
three and nine month periods ended September 30, 2005 of $10,000 and $150,000,
respectively, which was fully repaid in July 2005.
Interest expense excludes capitalized interest of $100,000 and $200,000 for the
three month periods ended September 30, 2006 and 2005, respectively, and
$350,000 and $600,000 for the nine month periods ended September 30, 2006 and
2005, respectively. Interest is capitalized for the notes payable to trust deed
holders on the San Elijo Hills project.
General and administrative expenses increased during the three month period
ended September 30, 2006 as compared to the same period in 2005 primarily due to
greater expenses related to marketing. Marketing expenses increased by $550,000
relating to increased efforts to promote the release of new neighborhoods by
homebuilders for sale at the San Elijo Hills project. In addition, compensation
expense decreased by $150,000 primarily due to a decrease in the general bonus
expense accrual for the three month 2006 period compared to the same period in
2005.
General and administrative expenses increased during the nine month period ended
September 30, 2006 as compared to the same period in 2005, primarily due to
greater expenses related to legal, compensation and marketing. Legal fees
increased by $2,800,000 in connection with the litigation relating to a portion
of the Rampage vineyard property and due to the costs associated with pursuing
the claims against the former owners of the approximately 30 acres of
undeveloped land at the Otay Ranch project that, as previously disclosed, is
undergoing remediation. Compensation expense increased by $450,000 in 2006 due
to an increase in estimated general bonus expense and the hiring of real estate
brokerage employees. Compensation expense in 2005 included a $200,000 bonus
awarded to the President to pay taxes due on reimbursed expenses relating to his
temporary residence in California and the reimbursement of certain costs
incurred by a newly hired executive officer. Marketing expenses increased by
$1,000,000 relating to increased efforts to promote the release of new
neighborhoods by homebuilders for sale at the San Elijo Hills project.
The increase in other income, net for the three month period ended September 30,
2006 as compared to the same period in 2005 primarily relates to investment
income. Investment income for the three month period ended September 30, 2006
increased by $900,000, primarily due to greater interest income resulting from
higher interest rates and greater assets invested. Other income, net also
reflects sales of grapes from the harvest at the Rampage property of $1,000,000
and farming expenses of $400,000 for the three month period ended September 30,
2006; for the comparable 2005 period the Company recognized $600,000 from the
sales of grapes from the harvest and incurred farming expenses of $200,000.
Other income, net for the three months ended September 30, 2005, also reflects
$200,000 of pre-payment penalties incurred upon extinguishing the Rampage
mortgage note.
The increase in other income, net for the nine month period ended September 30,
2006 as compared to the same period in 2005 primarily relates to investment
income. Investment income for the nine month period ended September 30, 2006
increased by $3,300,000, primarily due to greater interest income resulting from
higher interest rates and greater assets invested. Other income, net also
reflects sales of grapes from the harvest at the Rampage property of $1,000,000
and farming expenses of $1,000,000 for the nine month period ended September 30,
2006; for the comparable 2005 period the Company recognized $600,000 from the
sales of grapes from the harvest and incurred farming expenses of $1,000,000. In
addition, real estate brokerage operations, which were established in July 2005,
closed on sales transactions resulting in commission income of $200,000 and
$50,000 for the nine months periods ended September 30, 2006 and 2005,
respectively. Other income, net for the nine months ended September 30, 2005,
also reflects $200,000 of pre-payment penalties incurred upon extinguishing the
Rampage mortgage note.
The Company's effective income tax rate is higher than the federal statutory
rate due to California state income 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.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted or quantified. When used in this 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; 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 2005 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, 2005, 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, 2006. 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, 2006.
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,
2006, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of shareholders at the
Company's 2005 Annual Meeting of Shareholders held on July 18, 2006.
a) Election of directors.
Number of Shares
----------------
For Withheld
--- --------
Patrick D. Bienvenue 7,876,635 75,900
Paul J. Borden 7,871,553 80,982
Timothy M. Considine 7,950,027 2,508
Ian M. Cumming 7,876,059 76,476
Michael A. Lobatz 7,950,508 2,027
Joseph S. Steinberg 7,875,996 76,539
b) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 2006.
For 7,561,108
Against 1,172
Abstentions 913
Broker non-votes 389,342
Item 6. Exhibits.
31.1 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President, Treasurer and Controller
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMEFED CORPORATION
(Registrant)
Date: November 2, 2006
By: /s/ Erin N. Ruhe
------------------
Erin N. Ruhe
Vice President, Treasurer and
Controller
(Principal Accounting Officer)
16
EXHIBIT INDEX
Exhibit Number Description
31.1 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President, Treasurer and Controller
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
17