<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 March 31, 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
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
IN THOUSANDS, EXCEPT PER UNIT March 31
- ----------------------------- --------------------------
1999 1998
------- -------
<S> <C> <C>
REVENUES
Real estate
Residential home and land sales $ 4,300 $ 8,634
Industrial and commercial sales 19,986 2,673
Commercial operations
Income-producing properties 11,307 9,678
Valencia Water Company 2,238 1,725
------- --------
37,831 22,710
------- --------
Agriculture
Operations 485 729
Ranch sales 3,957 323
------- --------
4,442 1,052
------- --------
Total revenues $42,273 $23,762
------- --------
------- --------
CONTRIBUTION TO INCOME
Real estate
Residential home and land sales $ (207) $ 1,080
Industrial and commercial sales 8,407 (559)
Community development (2,021) (1,654)
Commercial operations
Income-producing properties 3,748 5,426
Valencia Water Company 401 318
------- --------
10,328 4,611
------- --------
Agriculture
Operations 180 669
Ranch sales 2,847 323
------- --------
3,027 992
---------- -------------
Operating income 13,355 5,603
General and administrative expense (2,652) (2,719)
Expense from unit ownership plans - (400)
Interest and other, net (2,420) (2,227)
------- --------
Net income $ 8,283 $ 257
------- --------
------- --------
Net income per unit $ 0.26 $ 0.01
------- --------
------- --------
Net income per unit - diluted $ 0.25 $ 0.01
------- --------
------- --------
Number of units used in computing per unit amounts:
Net income per unit 32,448 34,535
Net income per unit - diluted 32,752 34,986
Cash distributions per unit:
Regular $ 0.10 $ 0.10
Special 0.22 0.12
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
IN THOUSANDS 1999 1998
- ------------ --------- ------------
UNAUDITED
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 692 $ 2,188
Accounts and notes receivable 42,566 30,255
Land under development 54,546 47,667
Land held for future development 30,553 30,553
Income-producing properties, net 257,222 248,712
Property and equipment, net 60,212 58,836
Other assets and deferred charges 15,123 13,996
-------- --------
$460,914 $432,207
-------- --------
-------- --------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 27,813 $ 28,716
Accrued expenses 43,627 43,196
Deferred revenues 9,939 10,041
Mortgage and other debt 200,723 157,609
Advances and contributions from developers for
utility construction 27,498 26,466
Other liabilities 22,891 22,366
-------- --------
Total liabilities 332,491 288,394
Partners' capital
32,157 units outstanding, excluding 4,615 units in
treasury (cost-$95,873), at March 31, 1999 and
32,676 units outstanding, excluding 4,096 units in
treasury (cost-$83,530), at December 31, 1998 128,423 143,813
-------- ---------
$460,914 $432,207
-------- --------
-------- --------
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
IN THOUSANDS March 31
- ------------ ------------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,283 $ 257
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,133 2,523
Increase in land under development (16,425) (14,296)
Cost of sales and other inventory changes 9,546 6,328
(Increase) decrease in accounts and notes receivable (12,311) 669
(Decrease) increase in accounts payable, accrued
expenses and deferred revenues (574) 6,298
Cost of property sold 3,782 633
Other adjustments, net 267 1,867
-------- --------
Net cash (used in) provided by operating activities (4,299) 4,279
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of income-producing properties (14,044) (19,079)
Purchase of property and equipment (3,644) (1,745)
Distribution from (investment in) joint venture 18 (41)
-------- --------
Net cash used in investing activities (17,670) (20,865)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid (10,459) (7,598)
Increase in mortgage and other debt 43,114 21,693
Increase in advances and contributions from
developers for utility construction 1,032 840
Purchase of partnership units (12,909)
Other, net (305) 385
-------- --------
Net cash provided by financing activities 20,473 15,320
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,496) (1,266)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,188 2,770
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 692 $ 1,504
-------- --------
-------- --------
</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 months ended March 31, 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.
- - Agricultural crops are on an annual cycle and income is recognized
upon harvest. Most major crops are harvested during
the fall and winter.
- - Sales of non-developable farmland occur irregularly and are recognized
upon close of escrow provided profit recognition criteria are met.
Note 2. Details of Land Under Development
- -----------------------------------------
<TABLE>
<CAPTION>
(In $000) March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Valencia
Residential land development $ 2,558 $ 1,166
Industrial and commercial land development 36,782 32,686
Homes completed or under construction
with venture partners 14,056 13,525
Agriculture 1,150 290
------- -------
Total land under development $54,546 $47,667
------- -------
------- -------
</TABLE>
Note 3. Details for Earnings per Unit Calculation
- -------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED) Income Units
(in 000's except per unit) (numerator) (denominator) Per Unit
----------- ------------- --------
<S> <C> <C> <C>
For three months ended March 31, 1999
Net income per unit
Net income available to unitholders $8,283 32,448 $0.26
Effect of dilutive securities
Unit options - 304 (.01)
------ ------ -----
Net income per unit - diluted $8,283 32,752 $0.25
------ ------ -----
------ ------ -----
</TABLE>
5
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Note 3 (continued)
<TABLE>
<CAPTION>
Income Units
(in 000's except per unit) (numerator) (denominator) Per Unit
----------- ------------- --------
<S> <C> <C> <C>
For three months ended March 31, 1998
Net income per unit
Net income available to unitholders $257 34,535 $0.01
Effect of dilutive securities
Unit options - 451 -
---- ------ -----
Net income per unit - diluted $257 34,986 $0.01
---- ------ -----
</TABLE>
Note 4. Details of Income-Producing Properties and Property and Equipment
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In $000)
March 31, December 31,
Income-producing properties 1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Land $ 48,319 $ 48,319
Buildings 121,673 119,453
Other 8,288 14,611
Properties under development 117,445 105,772
-------- --------
295,725 288,155
Accumulated depreciation (38,503) (39,443)
-------- --------
$257,222 $248,712
-------- --------
-------- --------
Property and equipment
Land $ 3,719 $ 4,819
Buildings 5,469 5,600
Equipment 8,972 8,993
Water supply systems, orchards and other 69,088 68,688
Construction in progress 9,251 7,172
-------- --------
96,499 95,272
Accumulated depreciation (36,287) (36,436)
-------- --------
$ 60,212 $ 58,836
-------- --------
-------- --------
</TABLE>
Note 5. Business Segment Reporting (Unaudited)
- -----------------------------------
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>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------
Contribution
Revenues to Income Assets
-------- ------------ ---------
<S> <C> <C> <C>
Real Estate
Residential $ 4,300 $ (147) $ 19,492
Industrial and commercial 19,986 8,477 76,118
Community development - (1,966) 18,369
Income-producing properties 11,307 3,763 262,192
Valencia Water Company 2,238 426 57,316
Agriculture 4,442 3,047 19,798
Central administration - (2,397) 7,629
------- ------- --------
42,273 11,203 460,914
Interest and other, net - (2,420) -
All other - (500) -
$42,273 $ 8,283 $460,914
------- ------- --------
------- ------- --------
</TABLE>
6
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Comparison of First Quarter 1999 to First Quarter 1998
- ------------------------------------------------------
UNAUDITED
The amounts of increase or decrease in revenues and income from the prior
year first quarter are as follows (in 000s, except per unit):
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Amount %
-------- ------
<S> <C> <C>
REVENUES
Real Estate
Residential home and land sales $(4,334) -50%
Industrial and commercial sales 17,313 648%
Commercial operations
Income-producing properties 1,629 17%
Valencia Water Company 513 30%
------- -----
15,121 67%
------- -----
Agriculture
Operations (244) -33%
Ranch sales 3,634
1125%
------- -----
Total revenues $18,511 78%
------- -----
------- -----
CONTRIBUTION TO INCOME
Real Estate
Residential home and land sales $(1,287) -119%
Industrial and commercial sales 8,966 1604%
Community development (367) -22%
Commercial operations
Income-producing properties (1,678) -31%
Valencia Water Company 83 26%
------- -----
5,717 124%
Agriculture
Operations (489) -73%
Ranch sales 2,524 781%
------- -----
Operating income 7,752 138%
General and administrative expense 67 2%
Expense from unit ownership plans 400 100%
Interest and other, net (193) -9%
------- -----
Net income $ 8,026 3123%
------- -----
------- -----
Net income per unit $ 0.25 2500%
------- -----
------- -----
Net income per unit - diluted $ 0.24 2400%
------- -----
------- -----
Number of units used in computing per unit amounts:
Net income per unit (2,087) -6%
------- -----
------- -----
Net income per unit - diluted (2,234) -6%
------- -----
------- -----
</TABLE>
7
<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 months are
attributable to the following:
For the quarter ended March 31, 1999, revenues totaled $42.3 million and
income totaled $8.3 million compared with revenues of $23.8 million and
income of $257,000 for the first quarter of 1998. The major contributors to
1999 first quarter results were sales of the Company's remaining 85 acres at
the Cowell Ranch in northern California and the last three parcels totaling
3,077 acres at the Merced Ranch. These two transactions combined added $13.9
million to revenues and $11.1 million to income.
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 joint-venture program, the Company recognizes its
portion of revenues and income upon close of escrow to the homebuyer.
During the first quarter of 1999, merchant builders and the Company's joint
ventures sold 122 homes, compared with 170 homes sold in the year earlier
quarter. The decline is due to current supply constraints in Valencia's new
home inventory, as five residential housing projects sold out during 1998,
two sold out in the 1999 first quarter and three additional projects sold out
and are waiting for the homes to close escrow.
Merchant Builder Program
- ------------------------
During the first quarter of 1999, no lot sales closed escrow and a net loss
of $207,000 was recorded for the residential division after deducting
operating expenses. However, 1,200 residential lots will be marketed in 1999.
The major emphasis for lot sales is at Bridgeport, the Company's new lake
lifestyle village, where two builders are currently in escrow with 273 lots
on 33 acres for $26.4 million with closings scheduled later this year. All
escrow closings are subject to market and other conditions.
Bridgeport, when fully developed, will offer a broad spectrum of housing
opportunities including homes on a gated island, and its amenities include a
private beach club, an elementary school and park. There is substantial
interest by merchant builders in the remaining lots in Bridgeport and three
builders have been selected to bid on each of the remaining parcels. The
Company is in serious negotiations with Kaufman & Broad Home Corporation for
the remaining 294 lots in the Hasley Hills area north of Valencia. This
summer, Kaufman & Broad expects to begin selling homes on 445 residential
lots purchased from the Company last year in the Hasley Hills area.
In the 1998 first quarter, 37 residential lots in Valencia NorthPark closed
escrow adding $2.6 million to revenues and $724,000 to income. The 1998 first
quarter also included revenues totaling $1.9 million and income of $603,000
recognized from prior residential lot sales under percentage of completion
accounting. At March 31, 1998, 445 unimproved residential lots were in escrow
for $12.5 million.
Joint Venture Program
- ---------------------
In the 1999 first quarter, 26 escrow closings at Cheyenne, a joint venture
with EPAC for 166 townhomes, contributed $4.2 million to revenues and
$304,000 to income. At March 31, 1999, 95 homes remained in this project of
which 31 homes were in escrow and 19 had been reserved. At Avignon, also a
joint venture with EPAC, of the 48 homes remaining in this luxury 76-townhome
project, 26 homes were in escrow and three had been reserved at March 31,
1999. To increase absorption in a strong market, the Company is now
concentrating its efforts on lot sales to merchant buildings and no new joint
ventures are planned in 1999.
During the first quarter of 1998, 18 escrow closings at Nouvelle, a joint
venture with Warmington Homes, contributed $4.0 million to revenues and
$351,000 to income. Cheyenne opened during the 1998 first quarter and, at the
end of the quarter, 45 of the 49 homes released for sale had been reserved.
At Avignon, of 29 homes released for sale, 12 were in escrow and seven were
reserved at March 31, 1998. A total of 32 joint-venture homes were in escrow
at March 31, 1998.
INDUSTRIAL AND COMMERCIAL SALES
In the 1999 first quarter, escrow closed on four industrial parcels in
Valencia Commerce Center. Sale of these parcels, totaling 15.1 acres,
contributed $6.9 million to revenues and $1.0 million to income. One of the
parcels, consisting of 8.5 acres, will be developed with a
170,000-square-foot build-to-suit with escrow closing on the
8
<PAGE>
building upon completion. Also during the quarter, escrow closed on the
Company's last remaining large parcel at the Cowell Ranch in northern
California. The sale contributed $8.2 million to income in the first quarter
of 1999.
At March 31, 1999, five industrial parcels totaling 16.5 acres for $13.9
million including a 110,000-square-foot build-to-suit on 5.2 acres and five
commercial parcels totaling 41.5 acres for $38.4 million were in escrow with
closings scheduled during the remainder of 1999. The largest commercial
parcel, a 32.8-acre site for $31.8 million, has been approved for 900
apartments in South River adjacent to Valencia Town Center. This sale is
expected to contribute approximately $18.8 million to income in 1999 and is
scheduled to close during the second quarter. The sale is evidence of the
strong demand for apartments and the high values for land adjacent to
Valencia Town Center. All escrow closings are subject to market and other
conditions.
After two years of record land sales, which ultimately will add 5,000 new
jobs, the Company's primary marketing efforts this year are concentrated on
absorbing new space being built. While the Company's goal is to sell an
average of about 70 acres annually, this year will likely be in the 30 - 50
acre range, due to the high level of activity in 1998. However, strong
interest has been expressed in some available large parcels in Valencia
Commerce Center which may increase the activity level in 1999.
Even with record industrial sales in 1998, the vacancy rate in Valencia's two
industrial parks was 3.5% at March 31, 1999. This compares with an all-time
low of 5.4% throughout Los Angeles County where there is a shortage of
developable land and suitable buildings to meet the expansion needs of
growing companies. The Company has approximately 500 acres of industrial land
available for sale in Valencia, which will support about 10 million square
feet of building space. Industrial acreage also is planned for the Newhall
Ranch project adjacent to Valencia.
In the first quarter of 1998, two industrial parcels totaling 3.9 acres
closed escrow, contributing $1.9 million to revenues and $511,000 to income.
In addition, one small industrial building on one-half acre closed escrow as
part of the Company's build-to-suit and build-to-lease program for $720,000,
adding $94,000 to income. After deducting for operating expenses, a net loss
of $599,000 was recorded for the first quarter of 1998.
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, the next new town to be developed 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.
On March 23, 1999, the Los Angeles County Board of Supervisors gave final
approval for the 21,600-home Newhall Ranch project. The project will include
1,000 gross acres of commercial, industrial and mixed-use development and
feature the dedication of over 6,100 acres of high country and river open
space to the community. As part of the Board's action, the Environmental
Impact Report (EIR) was certified and approval given to the general plan
amendment, zoning change, and tentative parcel map associated with the
Newhall Ranch Specific Plan. In approving the parcel map, the project was
subdivided into 30 parcels, adding further value to the land. 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 final approval, four separate petitions have been 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 are 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.
The Company prepared the EIR in a thorough manner and is confident that it
can withstand legal challenge. Moreover, the Company believes that many of
the issues raised in the petitions were addressed and resolved during the
administrative process before the Los Angeles County Board of Supervisors.
9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The Board of Supervisors also gave initial approval to the Company's
1,711-home Westridge Golf Course Community on March 23, 1999. Final approval
is expected this summer. This community will surround a Tournament Players
Club (TPC) championship golf course, a joint venture between Newhall Land and
PGA TOUR Golf Course Properties.
Community development expenses increased 22% in 1999 from the prior year
first quarter primarily due to entitlement expenses for Newhall Ranch. With
the continued focus on obtaining entitlements and strategic marketing to
support forecasted demand, expenses for the year are expected to continue at
or exceed this increased level over 1998.
For the 1998 first quarter, entitlement-related expenses decreased by 22%
from the prior year quarter due to final approvals received for several
Valencia projects in 1997, including North Hills, which was sold to Taylor
Woodrow in 1997. Additional approvals received in 1997 included 458 homes in
Decoro Highlands, 900 apartments in South River and 1,100 homes in the
Bridgeport lake community.
INCOME-PRODUCING PROPERTIES
The Company's commercial portfolio is a relatively stable source of earnings
and cash flow that also provides debt capacity to grow the Company and
working capital for continuing operations. For the first quarter of 1999,
revenues increased 17% and income decreased 31% from the year earlier
quarter. Increased depreciation associated with new properties and the
strategic sale of Valencia Marketplace in June 1998 contributed to the
variances in revenues and income. These factors will result in 1999 earnings
from the portfolio being lower than in 1998.
Contributing to the income portfolio's 1999 results were excellent retail and
apartment occupancy rates and favorable rents. Among the new projects, 54,000
square feet of new retail space completed in the fourth quarter of 1998 along
Town Center Drive is 56% leased and tenant improvements are underway at Town
Center Plaza, the 26,000 square feet of retail and office space adjacent to
the new Hyatt Valencia Hotel, which is 60% leased. The entertainment complex,
which will include an IMAX 3-D Theatre, 11 additional movie screens, a
Borders bookstore, restaurants and other retail space, will open this summer
and is 80% leased.
The Company's shopping centers are all performing well with high occupancy
rates. At March 31, 1999, occupancy at Valencia Town Center shopping mall was
97% leased including short-term tenants. At NorthPark Village Square,
Rite-Aid opened in a 16,700-square-foot building in February and 5,600 square
feet of additional space is being marketed. River Oaks and Castaic Village
neighborhood shopping centers were 100% and 99% leased, respectively. Plaza
del Rancho, the mixed-use project in Valencia Industrial Center, which opened
in the summer of 1998, was 93% leased with plans for expansion.
Vacancy rates at the Company's three apartment complexes have improved
following a decline in the fourth quarter of 1998 with occupancy averaging
91% at March 31, 1999. With new jobs being created throughout Valencia,
demand for apartments is increasing. To meet this demand, the Company has 525
apartments under construction or planned to start this year. Montecito, a
210-unit, high-end apartment complex in Valencia Town Center, is scheduled
for completion this summer, with move-ins scheduled beginning in June. These
rental homes, including 14 townhouses, overlook Valencia Country Club and
will command the highest rents in the Valencia area. Montecito is currently
being pre-leased, even without models. Construction is expected to start
later this year on a second apartment project with 315 units in Valencia
NorthPark. These apartments will be larger in size than Montecito, appealing
to families.
As the number of commercial income properties built each year increases,
sales of mature income properties may be made on a selective basis, allowing
the Company to benefit from strong capitalization rates and to maximize the
return on its investment in the portfolio as a whole.
VALENCIA WATER COMPANY
Valencia Water Company is a regulated public water utility and a wholly owned
subsidiary of the Company. Revenues and income from Valencia Water Company
increased 30% and 26% in 1999, respectively, from the prior year first
quarter as the utility continued to expand its metered customer base which
now exceeds 20,000. Results for 1999 should improve over the previous year,
with drier weather already experienced this year and an expanded customer
base.
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
AGRICULTURAL OPERATIONS
Revenues and income from agriculture and energy operations decreased by 33%
and 73%, respectively, for the 1999 first quarter due to lower oil and gas
prices and additional income recognized in the first quarter of 1998 for crop
price adjustments.
RANCH SALES
The Company's three remaining parcels totaling 3,077 acres at the Merced
Ranch closed escrow during the 1999 first quarter adding $4.0 million to
revenues and $2.8 million to income. The sale is part of a strategic plan to
sell land not suitable for development. As part of that plan, the remaining
36,000 acres at the Suey Ranch in Santa Barbara and San Luis Obispo counties
are being marketed. No sale of farmland was completed in the 1998 first
quarter.
GENERAL AND ADMINISTRATIVE EXPENSE
In the 1999 first quarter, general and administrative expenses were
approximately the same as the prior year quarter. For the year, general and
administrative expenses are expected to be approximately the same as in 1998.
EXPENSE FROM UNIT OWNERSHIP PLANS
In the 1998 first quarter, 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 was recorded in the 1999 first quarter.
INTEREST AND OTHER
Increased debt outstanding against lines of credit in the current year
partially offset by higher interest income from notes receivable from land
sales are the primary factors contributing to a 9% increase in net interest
expense. For the year, higher debt levels due to the continuing planned
expansion of the Company's income portfolio and unit repurchases are expected
to increase net interest expense compared to 1998.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of $692,000 and
$63.9 million in available lines of credit to fund operations, net of $25.1
million in letters of credit. Borrowings outstanding totaled $73 million
against unsecured lines of credit and $40 million against a revolving
mortgage facility. The Company believes it has adequate sources of cash from
operations and debt capacity, including lines of credit, to finance future
operations and take advantage of new development opportunities. At March 31,
1999, there was no debt against raw land or land under development
inventories.
There are no material commitments for capital expenditures other than the
Company's plans in the ordinary course of business to develop its portfolio
of income-producing properties. In 1999, the Company expects to invest
approximately $50 million in new income-producing properties. This follows
the $100 million invested in 1998. In addition, approximately $30 million is
expected to be invested into major roads and freeway improvements in 1999 to
enable the Company to close additional land sales.
In the 1999 first quarter, the Company repurchased 542,180 of its partnership
units, or 1.7% of the amount outstanding at December 31, 1998, at an average
price of $23.81. At March 31, 1999, 729,592 units remained authorized for
repurchase from a one million unit repurchase program approved by the Board
of Directors on January 20, 1999. The unit repurchases are being made because
management and the Board believe the current price is at a significant
discount from the underlying value and does not reflect the Company's current
performance and future outlook. During 1998, a total of 1,909,613 units was
repurchased, or 5.5% of the amount outstanding at the beginning of 1998, at
an average price of $25.68.
On March 1, 1999, the Company completed the refinancing of a portfolio
mortgage with a remaining principal balance of $44.6 million. The portfolio
mortgage with Prudential had a rate of 8.995% and was secured by five of the
Company's commercial properties. The Prudential loan was replaced by three
financings totaling $50 million. The new loans are secured by the Company's
three apartment complexes and will mature in ten years. The loans were
obtained from the Federal Home Loan Mortgage Corporation at a 6.51% weighted
average interest rate.
11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Annual interest savings on the refunded portion alone are $1.1 million. Net
of the refunding payment and transaction costs, proceeds of $4.4 million were
used to pay down lines of credit.
The following discussion relates to principal items on the Consolidated
Statement of Cash Flows:
Operating Activities
- --------------------
Net cash used by operating activities totaled $4.3 million for the 1999 first
quarter. Cash provided from operating activities included sales of 15.1 acres
of industrial land, 26 joint-venture homes, three parcels totaling 3,077
acres at the Merced Ranch and the Company's remaining acreage at the Cowell
Ranch in northern California. These sales combined generated $15.2 million in
cash and $11.2 million in notes.
Expenditures for land under development inventories totaled $16.4 million and
were offset by $9.5 million in cost of sales relief. Expenditures for
Valencia area land preparation, infrastructure and home construction totaled
$15.3 million with the remainder primarily for agricultural crop costs.
Investing Activities
- --------------------
Expenditures for development of income-producing properties totaled $14.0
million for the first three months of 1999. Major expenditures included $3.4
million for Montecito apartments and $7.9 million for various
retail/office/entertainment projects in Valencia Town Center. Purchase of
property and equipment was primarily for water utility construction.
Financing Activities
- --------------------
A quarterly distribution totaling $10.5 million was paid during the 1999
first quarter which consisted of a $.10 per unit quarterly distribution and
$.22 per unit special distribution. As previously discussed, on March 1,
1999, a $44.6 million portfolio mortgage financing was replaced with three
financings totaling $50 million secured by the Company's three apartment
complexes. Borrowings against lines of credit increased by $48.2 million to
$73 million during the 1999 first quarter.
A total of 542,180 units was repurchased in the 1999 first quarter for $12.9
million, or an average price of $23.81 per unit. The Company intends to
continue buying units depending on market conditions with a goal of
repurchasing at least 2 million units in 1999.
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 are progressing
appropriately. 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, except for the payroll and human
resources subsystem which the Company plans to complete by June, 1999. The
Company has completed the modification and testing of its own internally
developed systems to be Year 2000 compliant and compatible with the new
accounting system, all of which are currently in production. The Company is
currently in the process of testing software provided by third parties for
Year 2000 compliance, all of which have been previously confirmed by the
vendor to be Year 2000 compliant. Completion of these tests is planned for
the third quarter of 1999.
COSTS: The Company estimates the total cost of its compliance efforts in
connection with the Year 2000 Issue will be less than $400,000 and will be
expensed as incurred. As of March 31, 1999, $150,000 had been expensed for
this project, including $114,000 expensed in 1998. The majority of the
expenditures are expected to be for testing existing third party supplied
software for Year 2000 compliance. 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.
12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The cost of the Year 2000 Issue and the estimated completion dates are based
on management's best estimates, which were derived utilizing assumptions of
future events, including the continued availability of certain resources,
third-party modification plans and other factors. There can be no guarantee
that these estimates will prove accurate and actual results could differ from
those estimated.
RISKS: The Company believes the worst-case scenario for the Year 2000 Issue
would be for the Company or a significant number of its business partners to
fail to successfully complete their respective Year 2000 remediation efforts
by December 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 expects to develop by June 1999 contingency
plans for business partners that do not indicate Year 2000 compliance. 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. 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 are 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 shown improvements recently, 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.
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
13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
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 March 31, 1999, the Company had $113 million of variable debt with
interest rates ranging from 5.94% to 6.4% and $87.7 million of fixed rate
debt with interest rates ranging from 6.51% to 8.45%. 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, by expected
maturity dates, as of March 31, 1999:
<TABLE>
<CAPTION>
Expected Maturity Date Fair
DOLLARS IN THOUSANDS 1999 2000 2001 2002 2003 Thereafter Total Value
------- ------- ------ ------ ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage and Other Debt
Fixed Rate Debt $ 1,234 $ 1,481 $1,596 $1,727 $11,226 $70,459 $ 87,723 $ 87,723
Weighted Average Interest Rate 7.27% 7.19% 7.18% 7.17% 8.24% 6.89% 7.08%
Variable Rate Debt (1) $40,000 $73,000 $113,000 $113,000
Weighted Average Interest Rate 6.63% 6.17% 6.33%
</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 March 31,
1999, $73 million was outstanding against this line. The above assumes that
these variable rate credit facilities are repaid at maturity. 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 debt levels, spreading its scheduled
debt amortization, by periodically converting short-term variable debt to
long-term fixed rate debt, and by evaluating the merits of interest rate
derivative products. At March 31, 1999, the Company did not have any interest
rate derivative products or transactions.
14
<PAGE>
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.
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):
10 Amendment Number One Effective January 1, 1999 to Newhall
Executive Incentive Plan (as amended July 11, 1990)
27 Financial Data Schedule
(b) The following report was filed on Form 8-K in the first quarter ended
March 31, 1999:
<TABLE>
<CAPTION>
Date of Report Item Reported Financial Statements Filed
-------------- --------------------------------------- --------------------------
<S> <C> <C> <C>
March 24, 1999 Los Angeles County Board of Supervisors None
gives final approval to Newhall Ranch
</TABLE>
15
<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: May 10, 1999 By /s/ THOMAS L. LEE
-----------------------------------------
Thomas L. Lee, Chairman and
Chief Executive Officer of Newhall
Management Corporation
(Principal Executive Officer)
Date: May 10, 1999 By /s/ STUART R. MORK
-----------------------------------------
Stuart R. Mork, Senior Vice President
and Chief Financial Officer of Newhall
Management Corporation
(Principal Financial Officer)
Date: May 10, 1999 By /s/ DONALD L. KIMBALL
-----------------------------------------
Donald L. Kimball, Vice President -
Finance and Controller of Newhall
Management Corporation
(Principal Accounting Officer)
16
<PAGE>
Exhibit 10
THE NEWHALL LAND AND FARMING COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AMENDMENT TO NEWHALL EXECUTIVE INCENTIVE PLAN
(AS AMENDED JULY 11, 1990)
AMENDMENT NUMBER ONE EFFECTIVE JANUARY 1, 1999
The Newhall Executive Incentive Plan, as amended July 11, 1990, is
hereby further amended effective January 1, 1999 as follows:
Paragraph 4. INCENTIVE POOL is hereby amended to delete "the amount
equal to five percent (5%) of net earnings of the Partnership" and to
substitute in its place "the amount equal to seven percent (7%) of net
earnings of the Partnership".
IN WITNESS WHEREOF, The Newhall Land and Farming Company (a California
Limited Partnership) has caused this amendment of the Newhall Executive
Incentive Plan to be executed effective January 20, 1999.
The Newhall Land and Farming Company
(a California Limited Partnership)
By: Newhall Management Limited Partnership,
Managing General Partner
By: Newhall Management Corporation,
Managing General Partner
By:
------------------------------------------
Thomas H. Almas, Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 692
<SECURITIES> 0
<RECEIVABLES> 42,566
<ALLOWANCES> 1,443
<INVENTORY> 54,546
<CURRENT-ASSETS> 0
<PP&E> 422,777
<DEPRECIATION> 74,790
<TOTAL-ASSETS> 460,914
<CURRENT-LIABILITIES> 0
<BONDS> 200,723
0
0
<COMMON> 0
<OTHER-SE> 128,423
<TOTAL-LIABILITY-AND-EQUITY> 460,914
<SALES> 28,728
<TOTAL-REVENUES> 42,273
<CGS> 17,501
<TOTAL-COSTS> 28,918
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,420
<INCOME-PRETAX> 8,283
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,283
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
