<PAGE>
UNITED STATES
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, 1999
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 1-7585
THE NEWHALL LAND AND FARMING COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
(Exact name of Registrant as specified in its charter)
California 95-3931727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23823 Valencia Boulevard, Valencia, CA 91355
(Address of principal executive offices) (Zip Code)
(661) 255-4000
(Registrant's telephone number, including area code)
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
--- ---
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Statements of Income
(In thousands, except per unit)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Real estate
Residential home and land sales $36,829 $19,261 $ 61,383 $ 63,377
Industrial and commercial sales 16,566 42,549 63,231 145,471
Commercial operations
Income-producing properties 13,164 8,788 36,185 28,264
Valencia Water Company 3,765 3,391 8,702 7,326
-------------- -------------- -------------- -------------
70,324 73,989 169,501 $244,438
-------------- -------------- -------------- -------------
Agriculture
Operations 2,880 3,005 5,057 5,294
Ranch sales 1,067 3,957 1,390
-------------- -------------- -------------- -------------
2,880 4,072 9,014 6,684
-------------- -------------- -------------- -------------
Total revenues $73,204 $78,061 $178,515 $251,122
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
CONTRIBUTION TO INCOME
Real estate
Residential home and land sales $10,917 $ 5,054 $ 14,489 $ 23,799
Industrial and commercial sales 3,981 13,748 25,798 44,221
Community development (2,203) (2,625) (8,043) (6,856)
Commercial operations
Income-producing properties 4,236 4,010 12,187 14,571
Valencia Water Company 1,031 1,003 2,108 1,734
-------------- -------------- -------------- -------------
17,962 21,190 46,539 77,469
-------------- -------------- -------------- -------------
Agriculture
Operations 271 (1,371) 862 (516)
Ranch sales 775 2,847 1,098
-------------- -------------- -------------- -------------
271 (596) 3,709 582
-------------- -------------- -------------- -------------
Operating income 18,233 20,594 50,248 78,051
General and administrative expense (3,805) (3,187) (9,861) (9,590)
Expense from unit ownership plans (400)
Interest and other, net (2,531) (1,116) (7,484) (5,772)
-------------- -------------- -------------- -------------
Net income $11,897 $16,291 $ 32,903 $ 62,289
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Net income per unit $ 0.38 $ 0.48 $ 1.03 $ 1.81
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Net income per unit - diluted $ 0.38 $ 0.47 $ 1.03 $ 1.79
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Number of units used in computing per unit amounts:
Net income per unit 31,341 33,998 31,821 34,357
Net income per unit - diluted 31,611 34,382 32,100 34,781
Cash distributions per unit:
Regular $ 0.10 $ 0.10 $ 0.30 $ 0.30
Special 0.22 0.12
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,881 $ 2,188
Accounts and notes receivable 51,317 30,255
Land under development 45,722 47,667
Land held for future development 29,149 30,553
Income-producing properties, net 281,870 248,712
Property and equipment, net 61,641 58,836
Investment in joint ventures 16,554 468
Other assets and deferred charges 17,365 13,528
------------------ -----------------
$507,499 $432,207
------------------ -----------------
------------------ -----------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 36,507 $ 28,716
Accrued expenses 44,255 43,196
Deferred revenues 31,905 10,041
Mortgage and other debt 230,472 157,609
Advances and contributions from developers for
utility construction 25,118 26,466
Other liabilities 22,968 22,366
------------------ -----------------
Total liabilities 391,225 288,394
Partners' capital
30,926 units outstanding, excluding 5,846 units in treasury (cost-$126,386),
at September 30, 1999 and
32,676 units outstanding, excluding 4,096 units in
treasury (cost-$83,530), at December 31, 1998 116,274 143,813
------------------ -----------------
$507,499 $432,207
------------------ -----------------
------------------ -----------------
</TABLE>
3
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,903 $ 62,289
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 11,092 7,370
Increase in land under development (71,861) (52,081)
Cost of sales and other inventory changes 73,806 65,703
Increase in accounts and notes receivable (21,062) (10,523)
Increase in accounts payable, accrued expenses
and deferred revenues 30,714 31,702
Cost of property sold 12,593 67,478
Other adjustments, net 1,579 25
------------------- ------------------
Net cash provided by operating activities 69,764 171,963
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of income-producing properties (56,401) (78,148)
Purchase of property and equipment (6,657) (5,985)
Investment in joint ventures (4,062) (198)
------------------- ------------------
Net cash used in investing activities (67,120) (84,331)
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid (16,716) (14,509)
Increase (decrease) in mortgage and other debt 60,839 (39,522)
(Decrease) increase in advances and contributions from
developers for utility construction (1,348) 4,987
Purchase of partnership units (44,667) (38,770)
Other, net 941 1,001
------------------- ------------------
Net cash used in financing activities (951) (86,813)
------------------- ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,693 819
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,188 2,770
------------------- ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,881 $ 3,589
------------------- ------------------
------------------- ------------------
Supplemental schedule of non-cash investing and financing activities:
Note payable in connection with investment in joint venture $ 12,024
-------------------
-------------------
</TABLE>
4
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of The Newhall Land
and Farming Company and its subsidiaries, all of which are wholly-owned
(collectively, "the Company"). All significant intercompany balances and
transactions are eliminated.
The Company's unaudited interim financial statements have been prepared in
conformity with generally accepted accounting principles used in the preparation
of the Company's annual financial statements. In the opinion of the Company, all
adjustments necessary for a fair statement of the results of operations for the
three and nine months ended September 30, 1999 and 1998 have been made. The
interim statements are condensed and do not include some of the information
necessary for a more complete understanding of the financial data. Accordingly,
your attention is directed to the footnote disclosures found on pages 30 through
38 of the December 31, 1998 Annual Report to Partners and particularly to Note 2
therein which includes a summary of significant accounting policies. Certain
reclassifications have been made to prior periods' amounts to conform to the
current period presentation.
Interim financial information for the Company has substantial limitations as an
indicator for the calendar year because:
- - Land sales occur irregularly and are recognized at the close of escrow
or on the percentage of completion basis if the Company has an
obligation to complete certain future improvements and provided profit
recognition criteria are met.
- - Sales of income properties and non-developable farmland occur
irregularly and are recognized upon close of escrow provided profit
recognition criteria are met.
- - Agricultural crops are on an annual cycle and income is recognized upon
harvest. Most major crops are harvested during the fall and winter.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NOTE 2. DETAILS OF LAND UNDER DEVELOPMENT
SEPTEMBER 30, DECEMBER 31,
(IN $000) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Valencia
Residential land development $ 8,055 $ 1,166
Industrial and commercial land development 37,396 32,686
Homes completed or under construction
with venture partners (275) 13,525
Agriculture 546 290
- -------------------------------------------------------------------------------------------------------------------
Total land under development $45,722 $47,667
--------------------------------------
--------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NOTE 3. DETAILS FOR EARNINGS PER UNIT CALCULATION
INCOME UNITS PER UNIT
(IN 000'S EXCEPT PER UNIT) (NUMERATOR) (DENOMINATOR)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For three months ended September 30, 1999
Net income per unit
Net income available to unitholders $11,897 31,341 $0.38
Effect of dilutive securities
Unit options -- 270 --
- -------------------------------------------------------------------------------------------------------------------
Net income per unit - diluted $11,897 31,611 $0.38
------------------------------------------------
------------------------------------------------
</TABLE>
5
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Note 3 (continued)
<TABLE>
<CAPTION>
INCOME UNITS PER UNIT
(IN 000'S EXCEPT PER UNIT) (NUMERATOR) (DENOMINATOR)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For three months ended September 30, 1998
Net income per unit
Net income available to unitholders $16,291 33,998 $ .48
Effect of dilutive securities
Unit options -- 384 (.01)
- -------------------------------------------------------------------------------------------------------------------
Net income per unit - diluted $16,291 34,382 $ .47
------------------------------------------------
------------------------------------------------
For nine months ended September 30, 1999
Net income per unit
Net income available to unitholders $32,903 31,821 $1.03
Effect of dilutive securities
Unit options -- 279 --
- -------------------------------------------------------------------------------------------------------------------
Net income per unit - diluted $32,903 32,100 $1.03
------------------------------------------------
------------------------------------------------
For nine months ended September 30, 1998
Net income per unit
Net income available to unitholders $62,289 34,357 $1.81
Effect of dilutive securities
Unit options -- 424 (.02)
- -------------------------------------------------------------------------------------------------------------------
Net income per unit - diluted $62,289 34,781 $1.79
------------------------------------------------
------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
NOTE 4. DETAILS OF INCOME-PRODUCING PROPERTIES AND PROPERTY AND EQUIPMENT
SEPTEMBER 30, DECEMBER 31,
(IN $000S) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income-producing properties
Land $ 53,808 $ 48,319
Buildings 194,722 119,453
Other 15,791 14,611
Properties under development 62,143 105,772
- -------------------------------------------------------------------------------------------------------------------
326,464 288,155
Accumulated depreciation (44,594) (39,443)
- -------------------------------------------------------------------------------------------------------------------
$281,870 $248,712
-------------------------------------------
-------------------------------------------
Property and equipment
Land $ 3,704 $ 4,819
Buildings 5,469 5,600
Equipment 9,848 8,993
Water supply systems, orchards and other 73,991 68,688
Construction in progress 6,150 7,172
- -------------------------------------------------------------------------------------------------------------------
99,162 95,272
Accumulated depreciation (37,521) (36,436)
- -------------------------------------------------------------------------------------------------------------------
$ 61,641 $ 58,836
-------------------------------------------
-------------------------------------------
</TABLE>
6
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
NOTE 5. BUSINESS SEGMENT REPORTING
The following table provides financial information regarding revenues from
external customers, income and total assets for the Company's business segments
and also provides a reconciliation to the Company's consolidated totals:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------
CONTRIBUTION
(IN $000S) REVENUES TO INCOME ASSETS
- ---------- -------- ------------ ---------
<S> <C> <C> <C>
Real Estate
Residential $ 61,383 $ 14,693 $ 25,495
Industrial and commercial 63,231 26,036 84,631
Community development - (7,856) 18,655
Income-producing properties 36,185 12,238 288,994
Valencia Water Company 8,702 2,193 59,158
Agriculture 9,014 3,777 18,433
Central administration - (8,994) 12,133
-------- ------------ ---------
178,515 42,087 507,499
Interest and other, net - (7,484) -
All other - (1,700) -
-------- ------------ ---------
$178,515 $ 32,903 $ 507,499
======== ============ =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------
CONTRIBUTION
(IN $000S) REVENUES TO INCOME ASSETS
- ---------- -------- ------------ ---------
<S> <C> <C> <C>
Real Estate
Residential $ 63,377 $ 24,129 $ 19,828
Industrial and commercial 145,471 44,716 56,477
Community development - (6,295) 17,540
Income-producing properties 28,264 14,670 240,046
Valencia Water Company 7,326 1,899 53,229
Agriculture 6,684 747 17,296
Central administration - (8,105) 6,697
-------- ------------ ---------
251,122 71,761 411,113
Interest and other, net - (5,772) -
All other - (3,700) -
-------- ------------ ---------
$251,122 $ 62,289 $ 411,113
======== ============ =========
</TABLE>
7
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Comparison of Third Quarter and Nine Months of 1999 to Third Quarter and Nine Months of 1998
- ---------------------------------------------------------------------------------------------------------------------------------
The amounts of increase or decrease in revenues and income from the prior year third quarter and nine
months are as follows (in 000s, except per unit):
THIRD QUARTER NINE MONTHS
------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
------------------------------- ----------------------------------
AMOUNT % AMOUNT %
--------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Real Estate
Residential home and land sales $ 17,568 91% $ (1,994) -3%
Industrial and commercial sales (25,983) -61% (82,240) -57%
Commercial operations
Income-producing properties 4,376 50% 7,921 28%
Valencia Water Company 374 11% 1,376 19%
--------------- ----------- -------------- -------------
(3,665) -5% (74,937) -31%
Agriculture
Operations (125) -4% (237) -4%
Ranch sales (1,067) -100% 2,567 185%
--------------- ----------- -------------- -------------
Total revenues $ (4,857) -6% $ (72,607) -29%
=============== =========== ============== =============
CONTRIBUTION TO INCOME
Real Estate
Residential home and land sales $ 5,863 116% $ (9,310) -39%
Industrial and commercial sales (9,767) -71% (18,423) -42%
Community development 422 16% (1,187) -17%
Commercial operations
Income-producing properties 226 6% (2,384) -16%
Valencia Water Company 28 3% 374 22%
--------------- ----------- -------------- -------------
(3,228) -15% (30,930) -40%
Agriculture
Operations 1,642 120% 1,378 267%
Ranch sales (775) -100% 1,749 159%
--------------- ----------- -------------- -------------
Operating income (2,361) -11% (27,803) -36%
General and administrative expense (618) -19% (271) -3%
Expense from unit ownership plans - - 400 100%
Interest and other, net (1,415) -127% (1,712) -30%
--------------- ----------- -------------- -------------
Net income $ (4,394) -27% $ (29,386) -47%
=============== =========== ============== =============
Net income per unit $ (0.10) -21% $ (0.78) -43%
=============== =========== ============== =============
Net income per unit - diluted $ (0.09) -19% $ (0.76) -42%
=============== =========== ============== =============
Number of units used in computing per unit amounts:
Net income per unit (2,657) -8% (2,536) -7%
=============== =========== ============== =============
Net income per unit - diluted (2,771) -8% (2,681) -8%
=============== =========== ============== =============
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The increases and decreases in revenues and income for the three and nine
months are attributable to the following:
For the 1999 third quarter, revenues totaled $73.2 million and net income
totaled $11.9 million compared to revenues for the 1998 third quarter of
$78.1 million and income of $16.3 million. Third quarter 1999 revenues and
income were below that of the comparable 1998 period primarily due to record
high industrial land sales totaling 59.2 acres in the 1998 third quarter,
which added $33.7 million to revenues and $11.9 million to earnings. The
lower industrial land sales in the 1999 third quarter were partially offset
by finished residential lot sales in the Company's new lake community of
Bridgeport.
For the nine months ended September 30, 1999, revenues totaled $178.5 million
and income totaled $32.9 million. This compares to revenues of $251.1 million
and income of $62.3 million for the nine months ended September 30, 1998.
Results for the first nine months of 1999 were below 1998 nine-month results
primarily due to the 1998 second quarter sale of Valencia Marketplace, a
retail power center, which contributed $90.9 million to revenues and $32.5
million to net income through the first nine months of 1998.
RESIDENTIAL HOME AND LAND SALES
Revenues and income are recorded by the Company on residential lot sales when
title is transferred to the merchant builder who, in turn, builds homes for
sale. The Company also participates, on a limited basis, in home construction
on lots it owns by establishing joint ventures with builders who have created
innovative home designs, targeting niche markets not met by merchant
builders. Through the homebuilding joint-venture program, the Company
recognizes its portion of revenues and income upon close of escrow to the
homebuyer. At September 30, 1999, the Company had two homebuilding joint
venture projects which are expected to be completed this year. As previously
reported, the Company is taking advantage of the strong market and increasing
absorption by concentrating its efforts on lot sales to merchant builders. No
new homebuilding joint ventures are currently planned in Valencia.
For most of the 1999 third quarter, continued constraints in the supply of
Valencia new home inventory slowed merchant builder home sales as one more
residential housing project sold out, bringing the total to five sold out
projects this year. Additionally four more projects are expected to sell out
during the remainder of the year. During the third quarter of 1999, merchant
builder sales and the Company's joint ventures sold 110 homes in Valencia
compared with 132 homes in the year earlier quarter but ahead of the 99 homes
sold in the 1999 second quarter. For the nine months ended September 30,
1999, a total of 319 new homes were sold in Valencia compared with 462 sold
during the first nine months of 1998.
The inventory of new homes available for sale in Valencia began to increase
late in the third quarter and this trend is expected to continue over the
next year. Late in the 1999 third quarter, Kaufman & Broad commenced sales of
homes on lots purchased from the Company in 1998 in the Hasley Hills area
just north of the master-planned community of Valencia. The first homes
closed escrow in Taylor Woodrow's 316-home, gated community called Woodlands
at Valencia in the 1999 third quarter and models are now open for all four
product lines. Shea Homes started selling homes in October 1999 on lots
purchased from the Company in 1998 in the Decoro Highlands section of
Valencia.
MERCHANT BUILDER PROGRAM
During the third quarter of 1999, the Company closed escrow on 154 finished
lots for $18.5 million, contributing $9.3 million to income under percentage
of completion accounting. These lots are in Bridgeport, the Company's new
lifestyle village which contains nine neighborhoods surrounding a lake.
Finished lot prices in Bridgeport are the highest residential per acre prices
in the Company's history. Results for the quarter and nine-month period also
include $1.1 million received from price and profit participation agreements
relating to Valencia lot sales in prior years. Results for the 1999
nine-month period also include the sale of 193 residential lots in Bridgeport
for a multi-family project which added $9.5 million to income and $3.8 to
income under percentage of completion accounting.
In the 1998 third quarter, the sale of 168 lots for high-density housing
closed escrow contributed $6.2 million to revenues and $3.8 million to
income. This sale brought total residential lot sales for the first nine
months of 1998 to 1,108 totaling $40.8 million in revenues and $23.7 million
in income.
At September 30, 1999, 163 lots in Bridgeport were in escrow, including 85
lots that closed escrow in early October for $11.4 million, with closings for
the balance of these lots scheduled during the fourth quarter. Also in
9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
escrow at September 30, 1999, were an additional 294 unimproved lots to
Kaufman & Broad located adjacent to their current project in Hasley Hills.
Escrow is scheduled to close later this year and is expected to contribute
over $16 million to fourth quarter revenues. All escrow closings are subject
to market and other conditions.
JOINT VENTURE PROGRAM
For the quarter ended September 30, 1999, the Company's two homebuilding
joint ventures closed escrow on 65 homes, which contributed $16.7 million to
revenues and $1.7 million to income. These projects are expected to be
completed early next year. The 1999 nine-month period includes 141 home
closings adding $32.3 million to revenues and $3.3 million to income. As
previously reported, the Company is taking advantage of the strong market and
increasing absorption by concentrating its efforts on lot sales to merchant
builders. No new homebuilding joint ventures are planned in Valencia.
During the 1998 third quarter, a total of 57 joint-venture homes in three
projects closed escrow contributing $13.1 million to revenues and $1.4
million to income. A total of 90 joint-venture homes closed escrow during the
1998 nine-month period which contributed $20.3 million to revenues and $2.2
million to income.
INDUSTRIAL AND COMMERCIAL SALES
In the 1999 third quarter, $7.6 million in revenues and $407,000 in income
were recognized upon the completion and sale of a 170,000-square-foot
build-to-suit facility. The sale of the land in Valencia Commerce Center for
this facility closed escrow in the first quarter of 1999. A 4.4-acre
industrial parcel in Valencia Industrial Center also closed escrow during the
third quarter for $1.7 million adding $630,000 to income. In addition to
third quarter sales, results for the 1999 nine-month period include
industrial land closings on 20.5 acres contributing $9.8 million to revenues
and $2.0 million to income.
Commercial escrow closings during the third quarter of 1999 totaled 8.1 acres
adding $2.2 million to revenues and $1.4 million to income. These sales
included a 1.34-acre parcel adjacent to Valencia Town Center regional mall to
Ethan Allen, Inc., a leading national furniture retailer, and 6.8-acre site
in a non-prime location for a self-storage facility. In addition, the Company
recognized additional revenues of $4.5 million and income of $2.9 million in
the third quarter on percentage of completion accounting from the second
quarter sale of a 32.8-acre apartment site. The 1999 nine-month period,
includes $23.2 million in revenues and $13.8 million in income under
percentage of completion accounting from the 32.8-acre apartment site and
sale of two commercial parcels totaling 2.7 acres for $3.9 million adding
$2.3 million to income. Also included in results for the nine-month period
ended September 30, 1999, is the sale of the Company's last remaining large
parcel at the Cowell Ranch in northern California which added $10.0 million
to revenues and $8.2 million to income.
At September 30, 1999, four industrial parcels totaling 26.2 acres were in
escrow or were being held under deposit for $19.3 million, including a
110,000-square-foot build-to-suit on 5.2 acres. Closings are scheduled before
the end of 1999, and if completed as scheduled, will bring total industrial
sales to approximately 47 acres in 1999. Five commercial parcels totaling
31.7 acres, including an additional apartment site, were in escrow or were
being held under deposit at September 30, 1999 for $22.7 million with
closings scheduled during the fourth quarter of 1999 and first quarter of
2000. All escrow closings are subject to market and other conditions.
In the 1998 third quarter, escrow closed on five parcels totaling 59.1
industrial acres, including a building on 1.2 acres constructed as part of
the Company's build-to-suit/lease program. These escrow closings contributed
$33.7 million to third quarter revenues and $11.9 million to income. Also,
during the 1998 third quarter, a 12.6-acre restricted-use site for a senior
apartment project closed escrow for $1.8 million and the Company completed
the sale of its remaining industrial building in Valencia Industrial Center
consisting of a 29,000-square-foot building on 2.1 acres for $1.5 million.
These two sales added $1.3 million to 1998 third quarter income.
During the first nine months of 1998, the Company closed escrow on a record
78.4 acres of industrial land, including four buildings constructed as part
of its build-to-suit/lease program. These sales added $49.1 million to
revenues and $13.8 million to income for the nine-month period. In addition
to the sale of a 12.6-acre site for a senior apartment project and an
industrial building in Valencia Industrial Center, results for the nine-month
period includes the sale of three small commercial parcels totaling 4.6 acres
for $1.5 million adding $433,000 to income.
In the first nine months of 1999, the Company recognized $4.0 million in
revenues under percentage of completion accounting from the prior year sale
of Valencia Marketplace, a 720,000-square-foot high-volume retail center. Due
to revised costs to complete the construction and leasing of the center, no
income has been recognized in 1999
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
and the Company does not expect to recognize any additional income or loss
from the sale of this property as remaining revenues are recognized. The 1998
nine-month period included $90.9 million in revenues and $32.5 million in
income from the sale of this center under percentage of completion accounting.
COMMUNITY DEVELOPMENT
The Company's community development activities are focused on securing the
necessary entitlements as well as an intensified strategic marketing program
to support the buildout of Valencia by 2005 and begin the development of
Newhall Ranch, a new town on the Company's 12,000 acres west of Valencia. The
Company's ability to achieve its goals and increase the pace of development
is contingent upon obtaining the necessary entitlements from the County of
Los Angeles and the City of Santa Clarita.
During the 1999 first quarter, the Company received final approval from the
Los Angeles County Board of Supervisors for its 21,600-home Newhall Ranch. Of
the five villages planned, development is expected to begin with Riverwood,
an area located along Highway 126. The Company will begin processing
subdivision maps and applications for permits, which need approval before
development can begin. Initial development is expected to start in 2002.
As a result of the Los Angeles County Board of Supervisors' approval of
Newhall Ranch, four separate petitions were filed against the County of Los
Angeles and the Los Angeles County Board of Supervisors, and name the Company
as a real party in interest. The four actions were petitions for writs of
mandate and were filed in the Ventura County (California) Superior Court. The
petitions were filed by: 1) Ventura County (California), Ventura County Flood
Control District, Ventura County Air Pollution Control District and certain
municipalities located within the County of Ventura (petition filed on April
21, 1999); 2) United Water Conservation District (petition filed on April 21,
1999); 3) Sierra Club, Friends of the Santa Clara River and Santa Clarita
Organization for Planning the Environment (petition filed on April 22, 1999);
and 4) Maria Vega, et al. (petition filed on April 22, 1999). In general, the
petitions allege violation of the California Subdivision Map Act for
illegally subdividing parcels that cross the county border; violations of the
California Environmental Quality Act; inconsistency between the Los Angeles
County General Plan and Specific Plan; and violation of the housing element
of the County General Plan as it relates to affordability and discrimination.
A Ventura County Superior Court judge ruled in favor of Los Angeles County's
request that the lawsuit be transferred out of Ventura County and designated
the neutral venue of Kern County. The principal issues alleged in the
petitions have been consolidated into one case and the trial is scheduled for
March 2000. The California Attorney General recently petitioned the court for
permission to file an amicus brief indicating that the EIR did not fully
discuss environmental impacts of the project and the petition subsequently
was approved.
In May, the Los Angeles County Board of Supervisors gave final approval to
the Company's 1,711-home Valencia Westridge Golf Course Community. A focal
point of the Valencia project is a Tournament Players Club (TPC) championship
golf course, a joint venture with PGA TOUR Golf Course Properties. Subsequent
to the approval, a petition for writ of mandate was filed on June 24, 1999 in
the Los Angeles County Superior Court. The petition was filed by the Santa
Clarita Organization for Planning the Environment and the Angeles Chapter of
the Sierra Club against the County of Los Angeles, the Los Angeles County
Board of Supervisors and Valencia Water Company, and names the Company as a
real party in interest. In general, the petition alleges violations of the
Los Angeles County General Plan, the California Water Code, the County
Development Monitoring System and the California Environmental Quality Act.
Valencia Water Company, a subsidiary of the Company, was subsequently
dismissed from the petition. This petition has been consolidated with the
petition filed in 1992 concerning many of the same issues, and is scheduled
for trial in late March 2000.
The Company continues to believe that the Environmental Impact Reports on
both projects have been well documented and researched and will withstand
these legal challenges.
The Company is in the process of entitling all its remaining residential lots
in Valencia. While no additional residential land is expected to receive
final approval this year, approximately 4,400 lots are expected to be
approved in early 2000, including 1,900 lots through annexation by the City
of Santa Clarita.
The Company continues to work on entitlements with the City of Broomfield,
Colorado for a plan that includes approximately 3,000 homes and 215 acres of
office and commercial development on 1,700 acres. The Company has a
three-year option on the property located in this growing suburb between
Denver and Boulder.
11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
In the 1999 third quarter, the Company announced a joint venture with Kaufman
& Broad Home Corporation to develop the 1,900-acre City Ranch, an approved
master-planned community in north Los Angeles County in the City of Palmdale.
The Company owns a 50.1% interest in the joint venture and will act as the
master developer. The joint venture will include approximately 4,200
single-family homes, 300 apartment units and 260,000 square feet of
commercial development. The first lots are scheduled to be available to
merchant builders in late 2000 with a projected sales completion in eight
years if present trends continue. This project offers an opportunity for the
Company to supply needed entry level and first move-up housing in a
master-planned community to the rapidly growing population of Los Angeles.
Community development expenses decreased by 16% from the 1998 third quarter
primarily due to prior year expenses related to evaluation of development
opportunities outside of Valencia. For the nine-month period, community
development expenses increased by 17% primarily due to entitlement expenses
for Newhall Ranch, certain initial costs relating to commercial properties
under development and the strategic marketing program. With the continued
focus on obtaining entitlements and strategic marketing as well as litigation
costs relating to Newhall Ranch and Westridge, expenses for the year are
expected to continue at or possibly exceed this increased level over 1998.
Costs for developing Newhall Ranch subsequent to approval of the Specific
Plan are being capitalized to the project in 1999.
INCOME-PRODUCING PROPERTIES
The Company's income-producing property portfolio is a relatively stable
source of earnings and cash flow that also provides debt capacity and working
capital for continuing operations. In September 1999, the Company announced a
plan to repurchase up to 6.3 million partnership units, including units
previously authorized for repurchase. Future operations as well as unit
repurchases will be financed by the sale of up to $175 million of income
portfolio assets, accelerated land sales, additional borrowings and reduced
costs. At December 31, 1998, the income portfolio was valued at $435 million.
The income portfolio's revenues were higher for both the third quarter and
the nine-month period of 1999, up 50% and 28%, respectively, over the
comparable 1998 reporting periods. Revenues from the Company's new properties
more than offset the revenues lost from the sale of Valencia Marketplace in
June 1998. Income for the 1999 third quarter increased 6%, while declining
16% for the nine-month period compared to 1998 results. For the nine-month
period, the lower margin resulted from depreciation associated with new
properties. Earnings from the income portfolio for the 1999 full year are
expected to be about 20% lower than in 1998.
Valencia Town Center continues to be the focus of commercial development. A
108,000-square-foot entertainment complex opened in the second quarter and is
98% leased with an IMAX 3-D Theatre, 11 additional movie screens, a Borders
bookstore, three restaurants, and a small food court. In the third quarter of
1999, Twin Palms, a well-known Southern California restaurant with two other
locations in Pasadena and Newport Beach, opened in the Company's three-story
office building on Town Center Drive. Town Center Drive, which is attracting
both retail and office tenants, is 56% leased as of the end of the quarter.
The 26,000-square-foot Town Center Plaza, adjacent to the Hyatt Valencia
Hotel, is 60% leased.
Construction has begun on two office buildings, a 125,000-square-foot five
story and an 83,000-square-foot four story, for Princess Cruises under
15-year leases. Princess Cruises will be consolidating its operations,
including its executive offices, bringing their total employment in Valencia
to approximately 1,500 employees when they take occupancy in early 2001.
Also, a 16,000-square-foot building is being completed across from the
entertainment complex for additional restaurants and retail.
The Company's shopping centers have occupancy rates averaging close to 100%,
with Valencia Town Center regional mall 98% leased including short-term
tenants. NorthPark Village Square is 99% leased following a
22,600-square-foot expansion.
Office occupancy in the three-story building on Town Center Drive and the
Bank of America building adjacent to the mall is 100%. At September 30, the
six-story Princess Cruises office building was 84% leased; however, a new
lease was signed in early October bringing the percentage of leased space to
87%.
For the 1999 third quarter, occupancy at The Hilton Garden Inn was 68% with
an average daily rate of $82.79. During the same period, occupancy at Hyatt
Valencia Hotel was 66% with a $97.06 average daily rate.
12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company's three established apartment complexes averaged over 95%
occupancy for the third quarter. In July, tenants started moving into
Montecito, a 210-unit, high-end apartment complex overlooking Valencia
Country Club in Valencia Town Center. Montecito is 42% leased. As more large
employers like Princess Cruises, Explorer Insurance and Pharmavite relocate
to Valencia, demand for apartments, as well as single-family homes, is
expected to continue to increase. Additional apartment projects are planned
for Valencia; however, in the near-term, the Company expects to sell entitled
apartment land to developers for construction.
VALENCIA WATER COMPANY
Valencia Water Company is a regulated public utility and a wholly-owned
subsidiary of the Company serving over 20,000 metered customers in the
Valencia area. In the third quarter of 1999, revenues at Valencia Water
Company increased 11% over the year earlier period, as the utility benefited
from continued customer growth, while income increased 3%. For the first nine
months of 1999, revenues were up 19% and income increased 22% over the first
three quarters of 1998 as a result of growth in the customer base and drier
weather.
AGRICULTURAL OPERATIONS
For the third quarter and nine months ended September 30, 1999, income from
agriculture, including the Company's energy operations, were ahead of the
previous year, while revenues were below year earlier levels. The income
increases primarily were due to a $1.9 million non-cash write-off, taken in
the 1998 third quarter, for mineral rights associated with ranch land
previously sold. Additionally, during the 1999 third quarter the Company
benefited from higher oil and gas prices and excellent yields and prices on
tomatoes. For the 1998 third quarter and nine-month periods, results were
below year earlier levels primarily due to the $1.9 million non-cash
write-off of mineral rights. Additionally, lower oil and gas prices
negatively impacted results for both the 1998 third quarter and nine months.
RANCH SALES
No farm land sales were recorded during the 1999 third quarter. The
nine-month period includes the sale of the Company's three remaining parcels
at the Merced Ranch for $4.0 million contributing $2.8 million to income. The
36,000-acre Suey Ranch in Santa Barbara and San Luis Obispo Counties is being
marketed for sale as part of the Company's strategic plan to sell land not
suitable for development.
In the 1998 third quarter, a 970-acre parcel of the Merced Ranch closed
escrow for $1.1 million, contributing $775,000 to income. Results for the
1998 nine-month period also included $323,000 recognized from the 1996 sale
of 539 acres of row crop land at the Suey Ranch.
GENERAL AND ADMINISTRATIVE EXPENSE
Increases of 19% and 3% from the 1998 three- and nine-month periods,
respectively, are primarily due to land acquisition activities. With the
announcement of the major unit repurchase program in September 1999, expenses
for these activities are not expected to continue at current levels. General
and administrative expenses are expected to increase approximately 10% in
1999 from the year earlier level. For the third quarter and nine months of
1998, general and administrative expenses increased 53% and 54%,
respectively, primarily due to consulting fees related to expanded marketing
programs and improved business conditions, and non-capitalized expenses in
connection with the replacement and upgrading of the Company's accounting
system and Year 2000 repairs.
EXPENSE FROM UNIT OWNERSHIP PLANS
In the 1998 nine-month period, an expense of $400,000 was recorded for
increases in the market price of partnership units in connection with
appreciation rights on outstanding, non-qualified options granted prior to
1992. No expense related to unit ownership plans was recorded in the 1999
three- or nine-month periods.
INTEREST AND OTHER
Increases in net interest expense in the 1999 three and nine-month comparisons
are due to increased debt outstanding against lines of credit, a new $25
million mortgage financing secured by two shopping centers completed in the
1999 third quarter and a reduction in capitalized interest due to the
completion of several income portfolio projects. The increases were partially
offset in both periods by higher interest income from notes receivable from
land sales. Higher debt levels due to the Company's announced unit repurchase
plan are expected to increase net interest expense for the year by
approximately 40% compared to 1998.
13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
For the three and nine-months of 1998, decreases of 51% and 19%,
respectively, compared to the prior year periods were due to reduction in
debt from the $111 million cash sale of Valencia Marketplace in June 1998 and
an increase in interest capitalized to portfolio projects under construction.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of $3.9
million and $70.2 million in available lines of credit, net of $25.8 million
in letters of credit. Borrowings outstanding totaled $71 million against
unsecured lines of credit and $35 million against a revolving mortgage loan.
In addition, the Company had fixed rate debt totaling $124.5 million. The
Company believes it has adequate sources of cash from operations and debt
capacity, including lines of credit, to finance future operations and,
combined with anticipated land and asset sales, to fund its unit repurchases.
At September 30 1999, there was no debt against raw land or land under
development inventories.
On March 1, 1999, the Company completed the refinancing of a portfolio
mortgage with a remaining principal balance of $44.6 million. This portfolio
mortgage with Prudential had a rate of 8.995% and was secured by five of the
Company's commercial properties. These new financings total $50 million at a
rate of 6.51% and are secured by three of the Company's apartment complexes.
On September 15, 1999, a $25 million seven-year financing was completed at a
rate of 7.44% secured by River Oaks and NorthPark Village Square shopping
centers. In the fourth quarter of 1999, the Company expects to refinance its
$40 million revolving mortgage loan secured by Valencia Town Center.
There are no material commitments for capital expenditures other than the
Company's plans in the ordinary course of business to complete the
development of income properties under construction. In 1999, the Company
expects to invest approximately $60 million in the development of
income-producing properties. In addition, over $20 million is expected to be
invested in major roads and freeway improvements in 1999 to enable the
Company to close additional land sales.
In September 1999, the Company's Board of Directors approved a plan to
repurchase up to an additional 5.5 million partnership units, financed by
accelerated asset and land sales, additional borrowings and reduced costs.
Together, the new authorization and 884,446 units remaining for repurchase
from a previous authorization, equaled 6.3 million units, or just over 20%
of the Company's outstanding units at the time of the authorization. Under
the plan, the Company may repurchase partnership units from time-to-time in
open market and block transactions over a period ending December 31, 2000,
depending on market conditions.
The repurchase program is expected to be financed by the sale of up to $175
million of income portfolio assets in 2000. The income portfolio was valued
at $435 million at December 31, 1998. In the interim, unused capacity under
bank lines will be utilized. Additionally, capital spending will be reduced
as certain ready-to-build commercial sites previously scheduled for
development will be sold. During the nine months ended September 30, 1999, a
total of 1,845,826 units for $44.7 million, or an average of $24.20 per unit,
was repurchased. The repurchases are being made because management and the
Board continue to believe that the units are undervalued and that the current
market price does not reflect the Company's underlying value.
The following discussion relates to principal items on the Consolidated
Statement of Cash Flows:
OPERATING ACTIVITIES
Net cash provided by operating activities for the nine months ended September
30, 1999, totaled $69.8 million and included sales of 347 residential lots,
141 joint-venture homes, 68.5 acres of industrial and commercial land, a
170,000-square-foot industrial build-to-suit and the Company's remaining
acreage at the Merced Ranch and Cowell Ranch in central and northern
California, respectively. These sales combined generated $111.3 million in
cash and $37.6 million in notes. Notes totaling $18.3 million from current
and prior year land sales were collected during the nine months ended
September 30, 1999.
Expenditures for land under development inventories and home construction
totaled $47.6 million for the nine-month period and were offset by $73.8
million in cost of sales relief. Expenditures for Valencia area land
preparation, infrastructure and home construction totaled $65.9 million with
the remainder primarily for agricultural crop costs.
14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INVESTING ACTIVITIES
Expenditures for development of income-producing properties totaled $56.4
million for the nine-month period and were primarily related to Montecito
apartments and various retail/office/entertainment projects in Valencia Town
Center. Purchase of property and equipment was primarily for water utility
construction.
In the 1999 third quarter, the Company announced a joint venture with Kaufman
& Broad Home Corporation to develop the 1,900-acre City Ranch, an approved
master-planned community in north Los Angeles County in the City of Palmdale.
The Company's owns a 50.1% interest in the joint venture and the Company's
initial investment consisted of $4.0 million cash and a $12.0 million note.
FINANCING ACTIVITIES
Distributions totaling $16.7 million have been paid year-to-date consisting
of three quarterly distributions of $.10 per unit each and a $.22 per unit
special distribution. The next quarterly distribution will be considered by
the Board of Directors on November 17, 1999. The declaration of
distributions, and the amount declared, are determined by the Board of
Directors on a quarterly basis taking into account the Company's earnings,
financial condition and prospects.
As previously discussed, in March 1999, a $44.6 million portfolio mortgage
financing was replaced with three financings totaling $50 million secured by
three apartment complexes and, in September 1999, a new $25 million financing
was completed secured by two neighborhood shopping centers. Also, in
September 1999, a $12.0 million note was recorded in connection with the
Company's City Ranch joint venture with Kaufman & Broad. Borrowings against
lines of credit increased by $42.8 million to $106 million at September 30,
1999. Outstanding borrowings against lines of credit are expected to increase
from the current level by year-end due to the Company's announced unit
repurchase program.
A total of 1,845,826 partnership units was repurchased during the nine months
ended September 30, 1999 for $44.7 million, or an average of $24.20 per unit,
and 5,925,946 units remained authorized for repurchase.
YEAR 2000 ISSUE
The Year 2000 issue concerns the possibility that computer programs with
date-sensitive software may recognize a date using "00" as the year 1900,
rather than as the year 2000, because the programs were written using two
digits rather than four to define the applicable year. This could result in a
system failure or miscalculations causing disruptions of operations such as,
among others, a temporary inability to process transactions or engage in
normal business activities.
READINESS: The Company's Year 2000 remediation efforts have progressed within
the planned schedule. At the end of 1997, a Year 2000 Task Force was formed
to coordinate Company-wide efforts to be Year 2000 compliant. To date, the
Company has inventoried its internal systems as well as identified systems
and applications outside of the Company that may include imbedded computer
technology that could be impacted by the Year 2000 Issue.
As a result of the Company's comprehensive review of its internal systems in
1997, and for other strategic reasons, the Company has replaced its
computerized accounting system. The Company successfully converted to the new
accounting system on January 1, 1999, and the payroll and human resources
subsystem on July 1, 1999. The Company has completed the modification and
testing of its internally developed systems for Year 2000 compliance and
compatibility with the new accounting system. The Company also performed
limited Year 2000 compliance testing on software provided by third parties,
all of which have been previously confirmed by the respective vendors to be
Year 2000 compliant.
COSTS: The Company estimates the total cost of its compliance efforts in
connection with the Year 2000 Issue will be approximately $400,000 and will
be expensed as incurred. As of September 30, 1999, $387,000 had been expensed
for this project, including $114,000 expensed in 1998. The majority of the
expenditures is for testing existing third party supplied software for Year
2000 compliance and replacement of non-compliant hardware. In addition, the
cost of the new accounting system was approximately $1 million and has been
capitalized and is being amortized over its useful life.
RISKS: The Company believes the worst-case scenario for the Year 2000 Issue
would be for the Company or a significant number of its significant vendors,
consultants, suppliers and governmental agencies (collectively, "business
partners") to fail to successfully complete their respective Year 2000
remediation efforts by December
15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
31, 1999. Under this scenario, the Company's operations would most likely be
disrupted which would result in a material adverse effect on its business,
operating results and financial condition.
CONTINGENCY PLANS: The Company is dependent upon its business partners to
conduct its operations and, as a result, has asked these business partners
about their Year 2000 compliance efforts. As of September 30, 1999, all of
the business partners contacted have stated that they are either already Year
2000 compliant or will be Year 2000 compliant prior to December 31, 1999. The
Company does not plan to independently test or verify its business partners'
Year 2000 efforts. However, the Company has compiled a list of alternate
business partners in case any significant business partners fail to
successfully complete their Year 2000 remediation efforts by December 31,
1999. There can be no assurance that any contingency plans developed by the
Company will prevent any service interruption on the part of one or more of
the Company's business partners or that such service interruption would not
have a material adverse effect upon the Company's business, operating results
or financial condition. A failure of the computer systems of a significant
number of the Company's customers or business partners, or any of their
financial institutions or lenders, would likely have a material adverse
effect on the Company's business, operating results and financial condition.
INFLATION, RISKS AND RELATED FACTORS AFFECTING FORWARD-LOOKING INFORMATION
This report and other published reports by the Company contain
forward-looking statements regarding the status of proposed or pending sales
and rental activity, future planned development, plus the long-term growth
goals of the Company. The forward-looking statements made in this report are
based, in part, on present trends the Company is experiencing in residential,
industrial and commercial markets. The forward-looking statements may also
involve unknown risks, uncertainties and other factors that may cause the
Company's actual results and performance in future periods to be materially
different from any future results or performance suggested by the
forward-looking statements in this report. Such forward-looking statements
speak only as of the date of this report. The Company expressly disclaims any
obligation to update or revise any forward-looking statements found herein to
reflect any changes in Company expectations or results or any change in
events. Also, the Company's success in obtaining entitlements, governmental
and environmental regulations, timing of escrow closings, expansion of its
income portfolio and marketplace acceptance of its business strategies are
among the factors that could affect results. The following risks and related
factors, among others, should be taken into consideration in evaluating the
future prospects for the Company. Actual results may materially differ from
those predicted.
SALES OF REAL ESTATE: The majority of the Company's revenues is generated by
its real estate operations. The ability of the Company to consummate sales of
real estate is dependent on various factors including, but not limited to,
availability of financing to the buyer, regulatory and legal issues and
successful completion of the buyer's due diligence. The fact that a real
estate transaction has entered escrow does not necessarily mean that the
transaction will ultimately close. Therefore, the timing of sales may differ
from that anticipated by the Company. The inability to close sales as
anticipated could adversely impact the recognition of revenue in any specific
period.
ECONOMIC CONDITIONS: Real estate development is significantly impacted by
general and local economic conditions which are beyond the control of the
Company. The Company's real estate operations are concentrated in Southern
California. The regional economy is profoundly affected by the entertainment,
technology, defense and certain other segments, which have been known to
affect the region's demographics. Consequently, all sectors of real estate
development for the Company tend to be cyclical. While the economy of
Southern California has improved, there can be no assurances that present
trends will continue.
INTEREST RATES AND FINANCING: Fluctuations in interest rates and the
availability of financing have an important impact on the Company's
performance. Sales of the Company's projects could be adversely impacted by
the inability of buyers to obtain adequate financing. Further, the Company's
real estate development activities are dependent on the availability of
adequate sources of capital. Certain of the Company's credit facilities bear
interest at variable rates and would be negatively impacted by increasing
interest rates.
COMPETITION: The sale and leasing of residential, industrial and commercial
real estate is highly competitive, with competition coming from numerous and
varied sources. The degree of competition is affected by such factors as the
supply of real estate available which is comparable to that sold and leased
by the Company and the level of demand for such real estate. The Company
recently has experienced a slight decrease in its new home sale market share
at both the local and the county level, due to the temporary decline in
Valencia new home inventory. New competition is expected to deliver competing
projects in the future that could impact the Company's ability to reverse
this trend.
16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GEOGRAPHIC CONCENTRATION: The Company's real estate development activities
are focused on its 19,000 acres in Los Angeles County, 30 miles north of Los
Angeles. The Company's entire commercial income portfolio is located in the
Valencia area. Therefore, any factors affecting that concentrated area, such
as changes in the housing market, economic changes and environmental factors,
including seismic activity, which cannot be predicted with certainty, could
affect future results.
GOVERNMENT REGULATION AND ENTITLEMENT RISKS: In developing its projects, the
Company must obtain the approval of numerous governmental authorities
regulating such matters as permitted land uses, density and traffic, and the
providing of utility services such as electricity, water and waste disposal.
In addition, the Company is subject to a variety of federal, state and local
laws and regulations concerning protection of health and the environment.
This government regulation affects the types of projects which can be pursued
by the Company and increases the cost of development and ownership. The
Company devotes substantial financial and managerial resources to comply with
these requirements. To varying degrees, certain permits and approvals will be
required to complete the developments currently being undertaken, or planned
by the Company. Furthermore, the timing, cost and scope of planned projects
may be subject to legal challenges, particularly large projects with regional
impacts. In addition, the continued effectiveness of permits already granted
is subject to factors such as changes in policies, rules and regulations and
their interpretation and application. The ability to obtain necessary
approvals and permits for its projects can be beyond the Company's control
and could restrict or prevent development of otherwise desirable new
properties. The Company's results of operations in any period will be
affected by the amount of entitled properties the Company has in inventory.
INFLATION: The Company believes it is well positioned against the effects of
inflation. Historically, during periods of inflation, the Company has been
able to increase selling prices of properties to offset rising costs of land
development and construction. Recently, land values have been increasing at a
faster rate than costs. However, there are no assurances that this trend will
continue. A portion of the commercial income portfolio is protected from
inflation since percentage rent clauses and Consumer Price Index increases in
the Company's leases tend to adjust rental receipts for inflation, while the
underlying value of commercial properties has tended to rise over the long
term.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk primarily due to fluctuations in
interest rates. The Company utilizes both fixed rate and variable rate debt.
At September 30, 1999, the Company had $106 million of variable debt with
interest rates ranging from 6.63% to 8.75% and $124.5 million of fixed rate
debt with interest rates ranging from 6.51% to 8.45%.
17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The table below presents principal cash flows and related weighted average
interest rates of the Company's long-term fixed rate and variable rate debt,
as of September 30, 1999, by expected maturity dates:
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------------------------ Fair
(IN $000S) 1999 2000 2001 2002 2003 Thereafter Total Value
------------------------------------------------------------------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage and Other Debt
Fixed Rate Debt $ 1,321 $ 4,851 $ 4,994 $ 5,155 $ 14,685 $ 93,466 $ 124,472 $ 124,472
Weighted Average Interest Rate 7.28% 7.71% 7.69% 7.68% 8.16% 7.02% 7.24%
Variable Rate Debt (1) $35,000 $71,000 $ 106,000 $ 106,000
Weighted Average Interest Rate 6.63% 7.57% 7.26%
</TABLE>
(1) The Company has a $40 million revolving mortgage facility which bears
interest at LIBOR plus 1.0% or Wells Fargo Bank's prime rate, at the
election of the Company. The Company also has a $159 million unsecured
revolving line of credit on which the rate is LIBOR plus 1.2%. At September
30, 1999, $71 million was outstanding against this line. The amounts set
forth in the table above assume that the outstanding amounts under the
variable rate credit facilities will be repaid at the facilities'
respective maturity dates. Management believes these lines will be renewed
at maturity with similar terms.
There is inherent rollover risk for borrowings as they mature and are renewed
at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's future financing requirements. The Company manages its interest
rate risk by maintaining conservative ratio of fixed-rate, long-term debt to
total debt in order to maintain variable rate exposure at an acceptable level
and by taking advantage of favorable market conditions for long-term debt. In
addition, the Company's guideline for total debt is approximately 70% of the
appraised value of the income portfolio.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Please refer to "Community Development" under Part I, Item 2. - "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
concerning writs of mandate filed in April 1999 and June 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (listed by numbers corresponding to the Exhibit Table of Item
601 in Regulation S-K):
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated September 16, 1999
concerning the announcement of intended repurchases of up to
approximately 20% of the outstanding partnership units.
18
<PAGE>
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.
THE NEWHALL LAND AND FARMING COMPANY
(a California Limited Partnership)
Registrant
By Newhall Management Limited Partnership,
Managing General Partner
By Newhall Management Corporation,
Managing General Partner
Date: November 8, 1999 By /s/ THOMAS L. LEE
------------------------------------------------------
Thomas L. Lee, Chairman and Chief Executive Officer of
Newhall Management Corporation
(Principal Executive Officer)
Date: November 8, 1999 By /s/ STUART R. MORK
------------------------------------------------------
Stuart R. Mork, Senior Vice President and Chief
Financial Officer of Newhall Management Corporation
(Principal Financial Officer)
Date: November 8, 1999 By /s/ DONALD L. KIMBALL
------------------------------------------------------
Donald L. Kimball, Vice President - Finance
and Controller of Newhall Management Corporation
(Principal Accounting Officer)
19
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