Form 10-QSB U.S. Securities and Exchange Commission Washington, D.C. 20549 (Mark One) [XX]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 2004 [ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to Commission File Number: 0-7775 WESTLAND DEVELOPMENT CO., INC. ------------------------------ (Exact name of small business issuer as specified in its charter) NEW MEXICO 85-0165021 ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 401 Coors Blvd., N.W., Albuquerque, New Mexico 87121 - ------------------------------------------------------------------------------- (Address of principal executive offices) (505)831-9600 - ------------------------------------------------------------------------------- (Issuer's telephone number) N/A - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ] State the number of shares outstanding of each of the issuer's classes of common equity as of February 22, 2005: No Par Value Common: 709,828 Class B $1.00 Par Value Common: 85,100 Transitional Small Business Format (check one) Yes [ ] No [ X ] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WESTLAND DEVELOPMENT CO., INC. BALANCE SHEET (unaudited) December 31, 2004 ASSETS Cash and cash equivalents ........................ $ 8,333,464 Receivables and prepaid expenses.................. 1,342,426 Land and improvements held for future development ............................ 17,615,789 Income producing properties, net ................. 12,452,577 Property and equipment, net of accumulated depreciation of $631,425 ...................... 336,378 Other assets...................................... 253,208 ------------ $ 40,333,842 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities ......................... $ 940,508 Deferred income .................................. 3,077,873 Deferred income taxes ............................ 7,305,989 Notes and mortgages .............................. 12,872,047 ------------ Total liabilities ............................. 24,196,417 Stockholders' equity Common stock - no par value; authorized, 736,668 shares; issued and outstanding, 709,828 shares ............................. 8,500 Class B common stock - $1.00 par value; authorized, 491,112 shares; issued and outstanding, 85,100 shares .............................. 85,100 Additional paid-in capital .................... 491,061 Retained earnings ............................. 15,552,764 16,137,425 ------------ ------------ $ 40,333,842 ============ The accompanying notes are an integral part of this statement. WESTLAND DEVELOPMENT CO., INC. STATEMENTS OF EARNINGS (unaudited) For the three months ended December 31, 2004 2003 ----------- ----------- Revenues Land ...................................... $ 6,550,644 $ 3,516,292 Rentals ................................... 335,156 303,276 ----------- ----------- 6,885,800 3,819,568 Costs and expenses Cost of land revenues ..................... 4,393,644 778,841 Cost of rentals ........................... 107,341 90,016 General and administrative ................ 515,233 649,069 ----------- ----------- 5,016,218 1,517,926 ----------- ----------- Operating income .... .................. 1,869,582 2,301,642 Other (income) expense Interest income ........................... (21,048) (11,765) Other ..................................... (80) -- Interest expense .......................... 118,855 170,937 ----------- ----------- 97,727 159,172 ----------- ----------- Earnings before income taxes ........... 1,771,855 2,142,470 Income tax expense ........................... 711,644 857,000 ----------- ----------- NET EARNINGS ........................... $ 1,060,211 $ 1,285,470 =========== =========== Weighted average common shares outstanding ............................... 794,929 797,640 =========== =========== Earnings per common share, basic and diluted ......................... $ 1.33 $ 1.61 =========== =========== The accompanying notes are an integral part of these statements. WESTLAND DEVELOPMENT CO., INC. STATEMENTS OF EARNINGS (unaudited) For the six months ended December 31, 2004 2003 ----------- ----------- Revenues Land ...................................... $ 7,970,606 $ 6,029,370 Rentals ................................... 677,513 606,551 ----------- ----------- 8,648,119 6,635,921 Costs and expenses Cost of land revenues ..................... 5,174,280 1,870,463 Cost of rentals ........................... 204,179 171,127 General and administrative ................ 1,291,617 1,373,065 ----------- ----------- 6,670,076 3,414,655 ----------- ----------- Operating income ....................... 1,978,043 3,221,266 Other (income) expense Interest income ........................... (38,080) (23,139) Gain on sale of assets .................... 4,269 (250) Other ..................................... (80) 794 Interest expense .......................... 193,710 330,917 ----------- ----------- 159,819 308,322 ----------- ----------- Earnings before income taxes ........... 1,818,224 2,912,944 Income tax expense ........................... 730,192 1,165,000 ----------- ----------- NET EARNINGS ........................... $ 1,088,032 $ 1,747,944 =========== =========== Weighted average common shares outstanding ............................... 794,930 797,640 =========== =========== Earnings per common share, basic and diluted ......................... $ 1.37 $ 2.19 =========== =========== The accompanying notes are an integral part of these statements. WESTLAND DEVELOPMENT CO., INC. STATEMENTS OF CASH FLOWS (unaudited) For the six months ended December 31, 2004 2003 ------------ ------------- Cash flows from operating activities Cash received from land sales and collections on real estate contracts receivable ................. $ 10,289,710 $ 6,181,348 Development and closing costs paid on land sales................................. (5,768,478) (5,149,889) Cash received from rental operations .......... 677,513 606,551 Cash paid for rental operations ............... (34,082) (17,869) Cash paid for property taxes .................. (10,239) (48,615) Interest received ............................. 38,080 16,397 Interest paid ................................. (197,611) (322,919) Income taxes paid ............................. (2,354,000) (745,000) General and administrative costs paid ......... (1,009,077) (1,540,602) Other ......................................... 80 (794) ------------ ------------ Net cash provided by (used in) operating activities ........................ 1,631,896 (1,021,392) ------------ ------------ Cash flows from investing activities Capital expenditures .......................... (48,027) (17,112) Proceeds from sale of assets .................. -- 250 ------------ ------------ Net cash used in investing activities ........ (48,027) (16,862) ------------ ------------ Cash flows from financing activities Borrowing on notes and mortgages .............. 9,790,745 5,500,323 Repayments of notes and mortgages ............. (11,173,800) (3,785,357) Payment of dividends .......................... (797,159) (799,822) Purchase of common stock ...................... -- (500) ------------ ------------ Net cash provided by (used in) financing activities ....................... (2,180,214) 914,644 ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS ...... (596,345) (123,610) Cash and cash equivalents at beginning of period .......................... 8,929,809 6,355,807 ------------ ------------ Cash and cash equivalents at end of period ................................ $ 8,333,464 $ 6,232,197 ============ ============ Reconciliation of net earnings to net cash (used in) provided by operating activities Net earnings ................................... $ 1,088,032 $ 1,747,944 Adjustments to reconcile net earnings to net cash (used in) provided by operating activities Depreciation .............................. 201,094 171,624 Gain on sale of assets .................... -- (250) Change in Receivables ............................... (1,250,197) (54,714) Real estate contracts ..................... (13,982) -- Land and improvements held for future development ...................... 525,209 (3,287,672) Other assets .............................. (1,136) 4,862 Accounts payable, accrued expenses and other liabilities ................... (745,632) (23,186) Income taxes payable ...................... (1,249,365) 420,000 Deferred profit............................ 3,077,873 -- ------------ ------------ Net cash provided by (used in) operating activities ......................... $ 1,631,896 $ (1,021,392) ============ ============ The accompanying notes are an integral part of these statements. WESTLAND DEVELOPMENT CO., INC. NOTES TO THE FINANCIAL STATEMENTS (unaudited) December 31, 2004 1. The balance sheet at December 31, 2004, statements of cash flows for the six month periods ended December 31, 2004 and December 31, 2003 and statements of operations for the three and six month periods ended December 31, 2004 and December 31, 2003 have been prepared by the Company without audit. In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the Company's audited financial statements at June 30, 2004. The results of operations for the three or six month periods ended December 31, 2004 are not necessarily indicative of operating results for the full year. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect certain reported amounts and disclosures; accordingly, actual results could differ from those estimates. 2. The computation of earnings per common share has been based upon the weighted average number of shares of outstanding common stock without further consideration, which for the three month periods ended December 31, 2004 and 2003 were 794,929 and 797,640, respectively and for the six month periods then ended were 794,930 and 797,640, respectively. 3. Financial information for the two industry segments, land sales and rental operations, are as follows: General Land Rentals corporate Total ---- ------- --------- ----- Three months ended December 31, 2004: Revenues $6,550,644 $335,156 $ -- $6,885,800 Costs and expenses 4,393,644 107,341 515,233 5,016,218 ---------- -------- ----------- ---------- Operating income (loss) 2,157,000 227,815 (515,233) 1,869,582 Interest income -- -- (21,048) (21,048) Other income -- -- (80) (80) Interest expense -- 118,855 -- 118,855 ---------- -------- ----------- ---------- Earnings (loss) before income taxes $2,157,000 $108,960 $ (494,105) $1,771,855 ========== ======== =========== ========== Three months ended December 31, 2003: Revenues $3,516,292 $303,276 $ -- $3,819,568 Costs and expenses 778,841 90,016 649,069 1,517,926 ---------- -------- ----------- ---------- Operating income (loss) 2,737,451 213,260 (649,069) 2,301,642 Interest income -- -- (11,765) (11,765) Other income -- -- -- -- Interest expense 26,500 117,807 26,630 170,937 ---------- -------- ----------- ---------- Earnings (loss) before income taxes $2,710,951 $ 95,453 $ (663,934) $2,142,470 ========== ======== =========== ========== Six months ended December 31, 2004: Revenues $7,970,606 $677,513 $ -- $8,648,119 Costs and expenses 5,174,280 204,179 1,291,617 6,670,076 ---------- -------- ----------- ---------- Operating income (loss) 2,796,326 473,334 (1,291,617) 1,978,043 Interest income -- -- (38,080) (38,080) Other income -- -- (80) (80) Loss on sale of assets -- -- 4,269 4,269 Interest expense 34,863 158,847 -- 193,710 ---------- -------- ----------- ---------- Earnings (loss) before income taxes $2,761,463 $314,487 $(1,257,726) $1,818,224 ========== ======== =========== ========== Six months ended December 31, 2003: Revenues $6,029,370 $606,551 $ -- $6,635,921 Costs and expenses 1,870,463 171,127 1,373,065 3,414,655 ---------- -------- ----------- ---------- Operating income (loss) 4,158,907 435,424 (1,373,065) 3,221,266 Interest income -- -- (23,139) (23,139) Other income -- -- 794 794 Gain on sale of assets -- -- (250) (250) Interest expense 36,061 263,039 31,817 330,917 ---------- -------- ----------- ---------- Earnings (loss) before income taxes $4,122,846 $172,385 $(1,382,287) $2,912,944 ========== ======== =========== ========== 4. The Company is engaged in various lawsuits either as plaintiff or defendant which have arisen in the conduct of its business which, in the opinion of management, based upon advice of counsel, would not have a material effect on the Company's financial position or operations. The Company also has certain claims asserted by other parties in conjunction with land development agreements totaling approximately $1.3 million with which the Company does not agree. The Company has paid approximately $130,000 and is disputing other charges. The Company accrued approximately $300,000 during the year ended June 30, 2002 for what it believes are the only valid other charges to the Company. However, the ultimate amount paid for these claims, if any, is subject to change and management believes such claims will be settled by the conveyance of land or other non cash assets to the claimants. The Company has entered into employment contracts with eight of its key officers and employees for periods from one to five years which are automatically renewed each year for one additional period. In the event of involuntary employee termination, these employees may receive from one to six times annual compensation. The remaining terms under the agreements range from one to six years and the maximum salaries to be paid under the remaining contract periods are approximately $1,572,200. The Company has deferred gains for tax reporting for the involuntary conversion of land by governmental authorities resulting in deferred tax liabilities. The deferral requires that the Company replace the land with the proceeds of conversion within specified time limits. As of September 30, 2004, the Company must purchase replacement property of at least $996,000 by June 30, 2005, and $5,279,000 by June 30, 2006 in order to comply with the requirements of its election for income tax deferral. If replacement property is not purchased, the Company may be required to pay income taxes on the conversions of approximately $200,000, $200,000 and $2,110,000 for the tax years ended June 30, 2004, 2005 and 2006, respectively. Note 5. Sales of developed lots to home builders are recognized on a case by case basis dependent upon the transactions satisfaction of the full accrual method requirements. Under New Mexico law, conveyance may begin once a final plat is filed for a given development. Obtaining a plat requires that the developer either complete in its entirety the infrastructure related to the project or provide financial guarantees in the form of bonds to ensure that the project will be completed. Generally, a homebuilder will contract to purchase a fixed number of lots in a given development. Westland's contracts generally require the homebuilder to conclude the purchase of a small number of contracted lots (typically 5-10) at the time the final plat is recorded. Remaining lots are then scheduled in increments x # of days from 'substantial completion'. In this event, the Company utilizes the City of Albuquerque Engineer's Acceptance Letter as the event that triggers 'substantial completion'. The vast majority of the Company's sales to homebuilders occur under non recourse cash transactions, subsequent to the 'substantial completion' of the development and as such are recorded utilizing the full accrual method. At the period ended December 31, 2004, the Company was obligated under additional construction commitments related to Sundoro Units 2 and 4. These sales have been recorded under the percentage of completion method treatment pursuant to paragraphs 41 and 42 of SFAS 66). ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains statements that are not historical but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These include statements regarding the expectations, beliefs, intentions or strategies for the future. The Company intends that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act 1995. These forward-looking statements reflect the Company's views as of the date they are made with respect to future events and financial performance but are subject to many uncertainties and risks which could cause the actual results of the Company to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties and risks include, but are not limited to: fluctuations in occupancy levels and labor costs; the availability and cost of financing to redeem common shares and to expand the Company's business; and public resistance to privatization. additional risk factors include those discussed in reports filed by the Company from time to time on forms 10-KSB, 10-QSB and 8-K. The Company does not undertake any obligation to update any forward-looking statements. Management's Discussion and Analysis should be read in conjunction with our Financial Statements and the notes to our Financial Statements. Financial condition: During the six months ended December 31, 2004, the Company's cash and cash equivalents decreased by $596,345 predominantly attributable to a federal income tax deposit of $800,000 made on December 15, 2004. During this period, operations provided $1,631,896, predominantly arising from increased land revenue, and investing activities used $48,027 as a result of equipment purchases. Also, the Company reduced its mortgage and note obligations by $1,383,055, net and paid dividends of $797,159. Except for short-term borrowing, the Company's primary source of cash is the sale of land. Although rental operations generated $677,513 through the second fiscal quarter, most of those receipts normally are used to service the mortgage debt for those properties. Other than trade payables and mortgages, the other significant debt is $3,719,664 on construction lines of credit. This amount fluctuates, and is paid from receipts from lot sales. During the current quarter the Company capitalized interest in the amount of $107,402 in accordance with FAS 34 in relation to current construction projects (predominantly the 'Petroglyph's' development) compared to $66,868 during the same quarter in fiscal year 2003. The Company plans to continue to improve its land projects to create saleable product. Results of operations: During the second quarter of the current fiscal year, the Company had revenues of $6,885,800 compared to $3,819,568 during the same period in the prior fiscal year. Improved lot sales increased by $2,821,875 to $6,550,644 in comparison to the three months ended December 31, 2003. Land segment revenues increased significantly primarily due to commencement of sales in the Sundoro subdivision. A single large sale of Sundoro Units 2 and 4 in the amount of $5,314,000 occurred in October, 2004. Of this amount the realization of $2,860,537 was deferred and will be recognized under the percentage of completion method, in accordance with SFAS 66, as development obligations related to those units are completed. Costs and expenses during the three months ended December 31, 2004, were $5,016,218 compared to $1,517,926 during the comparable period in 2003. The increase was due principally to increases in cost of land revenues by $3,614,803, due to increased lot sales. Rental revenue and cost of revenues increased by approximately $13,000 and $3,700 per month, respectively attributable to the operations of the Presidential Plaza office complex which the company acquired in June 2004. General and Administrative costs decreased by $133,816 to $515,233 compared to $649,069 during the same period in the prior fiscal year. This change was primarily attributable to a decrease in legal and consulting expenses related to the Company's law suit with El Paso Electric and Bosque land suits which were incurred in the prior year. For the six month periods ended December 31, 2004, revenues increased by $2,012,198 to $8,648,119 as a result of developed lot sales increasing by approximately $4,100,000 while raw land sales decreased by approximately $2,100,000. Costs and expenses were $6,670,000 compared to $3,415,000 as cost of land sold increased by $3,304,000. This was due to the higher cost per parcel for improved lots. During the current period, the Company began sales of lots in its sector development plan, the 'Petroglyphs', which management expects to continue into the next few fiscal years. General and Administrative costs decreased by $81,448 to $1,291,617 compared to $1,373,065 during the same period in the prior fiscal year. This change was primarily attributable to a decrease in legal and consulting expenses related to the Company's law suit with El Paso Electric and Bosque land suits which were incurred in the prior year. For the past ten years, governmental entities have been buying land from Westland pursuant to condemnation. The Company is allowed to defer federal and state income tax on the gain from these sales if it reinvests the proceeds within a specified time. The result has been a deferred tax liability. Of the approximately $21,399,000 received, the Company has remaining approximately $996,000 of replacement lands and property to acquire by June 30, 2005, and $5,279,000 by June 30, 2006. In the event the Company does not replace the property sold pursuant to condemnation, it may need to utilize a substantial portion of its liquid investments for the payment of these taxes. Critical Accounting Policies: Income recognition and cost allocation: In recent years, the Company's sales have predominantly been made on a cash basis and have been recognized under the full accrual method pursuant to paragraph 5 of SFAS 66. Some of the sales are basically raw land which has little more than its original cost of $2.60 per acre. Preconstruction costs such as land cost, initial engineering and other preliminary costs occurring prior to platting are allocated based upon the area method as calculation of the relative fair value is impracticable. Development costs which may include engineering, roads, sewer, sidewalk, etc. and can not be reasonably identified to a specific lot, or project, are allocated based upon relative sales value (where relative sales value can be determined) or, in the event that the relative sales value can not be readily determined at the time of capitalization, are allocated using the area method, in accordance with paragraph 11 of SFAS 67. This policy has been consistently applied. Contingencies: Management continues to be diligent in recognizing possible liabilities as they become known. In fiscal 2002, the Company accrued $346,000 for possible loss due to a claim made by Bernalillo County for costs allegedly incurred in researching creation of a new municipality for Westland's sector development plan. Management believes these amounts are sufficient to liquidate alleged damages, if any. Asset Impairment: Management periodically assesses the possibility that the carrying value of its assets is greater than its realizable value. For the most part, this question is obviated because the carrying cost of land is very low compared to any reasonable sale price. Property is improved for sale as individual lots only after such land is under contract for sale. The Company owns several properties held for the production of income, designed for a specific use, which could become impaired if the lessee vacated or rescinded its lease under bankruptcy. Management periodically determines by inspection that each of the properties are suitably maintained and insured and that the lessees are conducting proper operations. ITEM 3. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company's principal executive officer who is also the chief financial and accounting officer has reviewed and evaluated the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, such officer has concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in the Company's periodic filings under the Exchange Act. There have not been any changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Other than the ordinary routine litigation incidental to the Company's business, neither the Company nor any member of management is the subject of any pending or threatened legal proceeding. ITEM 2. CHANGES IN SECURITIES NONE ITEM 3. DEFAULTS IN SENIOR SECURITIES NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE ITEM 5. OTHER INFORMATION NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 31, Certification pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 32, Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached. (b) Reports on Form 8-K. State whether any reports on Form 8-K have been filed during the quarter for which this report is filed, listing the items reported, any financial statements filed, and the dates of any such reports. NONE 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. WESTLAND DEVELOPMENT CO., INC. DATE: February 22, 2005 By: --------------------------- Barbara Page, President, Chief Executive Officer and Chief Accounting Officer