1 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 June 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to For Quarter Ended June 30, 1996 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) (805) 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 ------- ------- 2 Part I. Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENTS OF INCOME Unaudited Three Months Ended Six Months Ended June 30 June 30 -------------------- ------------------ In thousands, except units 1996 1995 1996 1995 - ----------------------------------------------------------------------------------- REVENUES Real estate Residential home and land sales Valencia $16,732 $ 9,987 $ 26,630 $17,931 McDowell Mountain Ranch 43,570 1,182 49,101 3,383 Industrial and other sales 270 19,732 2,406 25,143 Commercial operations 9,161 9,510 17,470 18,343 ------- ------- -------- ------- 69,733 40,411 95,607 64,800 ------- ------- -------- ------- Agriculture Operations 1,738 2,068 2,445 2,721 Ranch sales - - 6,145 - ------- ------- -------- ------- 1,738 2,068 8,590 2,721 ------- ------- -------- ------- Total revenues $71,471 $42,479 $104,197 $67,521 ======= ======= ======== ======= CONTRIBUTION TO INCOME Real estate Residential home and land sales Valencia $ 2,070 $ 1,003 $ 2,590 $ 1,143 McDowell Mountain Ranch 24,352 (224) 25,954 61 Industrial and other sales (1,017) 11,939 (618) 13,651 Community development (2,944) (390) (5,371) (2,208) Commercial operations 3,973 4,656 8,056 8,962 ------- ------- -------- ------- 26,434 16,984 30,611 21,609 ------- ------- -------- ------- Agriculture Operations 285 339 1,047 747 Ranch sales - - 5,872 - ------- ------- -------- ------- 285 339 6,919 747 ------- ------- -------- ------- Operating income 26,719 17,323 37,530 22,356 General and administrative expense (2,228) (2,265) (4,428) (4,315) Interest and other, net (2,019) (2,910) (4,399) (5,507) ------- ------- -------- ------- Net income $22,472 $12,148 $ 28,703 $12,534 ======= ======= ======== ======= Net income per unit $ 0.64 $ 0.33 $ 0.81 $ 0.34 ======= ======= ======== ======= Number of units used in computing per unit amounts 35,361 36,181 35,630 36,347 Cash distributions per unit $ 0.10 $ 0.10 $ 0.20 $ 0.20 2 3 Part I. Financial Information Item 1 - Financial Statements CONSOLIDATED BALANCE SHEETS June 30, December 31, In thousands, except units 1996 1995 - --------------------------------------------------------------------------------------------- (Unaudited) ASSETS Cash and cash equivalents $ 3,207 $ 4,285 Accounts and notes receivable 15,502 25,156 Land under development 80,241 88,457 Land held for future development 32,371 32,459 Property and equipment, net 214,309 186,697 Other assets and deferred charges 14,438 12,699 -------- -------- $360,068 $349,753 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Accounts payable $ 13,016 $ 11,285 Accrued expenses 38,169 32,999 Deferred revenues 1,756 4,041 Mortgage and other debt 147,709 152,302 Advances and contributions from developers for utility construction 17,589 17,811 Other liabilities 20,184 18,459 -------- -------- Total liabilities 238,423 236,897 Partners' capital 35,160,591 units outstanding, excluding 1,611,552 units in treasury, at June 30, 1996 and 35,910,243 units outstanding, excluding 861,900 units in treasury at December 31, 1995 121,645 112,856 -------- -------- $360,068 $349,753 ======== ======== 3 4 Part I. Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Six months ended June 30, ---------------------- In thousands 1996 1995 - ------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 28,703 $ 12,534 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,792 3,924 Increase in land under development (36,038) (37,574) Cost of sales and other inventory changes 44,254 21,930 Decrease in accounts and notes receivable 9,654 1,464 Increase (decrease) in accounts payable, accrued expenses and deferred revenues 4,616 (6,749) Cost of property sold 294 4,879 Other adjustments, net 220 (97) -------- -------- Net cash provided by operating activities 55,495 311 -------- -------- Cash flows from investing activities: Purchase of property and equipment (31,610) (4,524) -------- -------- Cash flows from financing activities: Distributions paid (7,105) (7,293) Increase in mortgage and other debt 12,400 30,680 Decrease in mortgage and other debt (16,993) (16,595) (Decrease) increase in advances and contributions from developers for utility construction (222) 1,651 Purchase of partnership units (13,043) (8,547) -------- -------- Net cash used by financing activities (24,963) (104) -------- -------- Net decrease in cash and cash equivalents (1,078) (4,317) Cash and cash equivalents, beginning of period 4,285 7,656 -------- -------- Cash and cash equivalents, end of period $ 3,207 $ 3,339 ======== ======== 4 5 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 transactions are eliminated. The Company's unaudited interim financial statements have been prepared substantially 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 six months ended June 30, 1996 and 1995 have been made. Certain reclassifications have been made to prior periods' amounts to conform to the current period presentation. 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 25 through 31 of the December 31, 1995 Annual Report to Partners and particularly to Note 2 which includes a summary of significant accounting policies. 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 farm land occur irregularly and are recognized upon close of escrow provided profit recognition criteria are met. Note 2. Details of Land Under Development (In $000) June 30, December 31, 1996 1995 ----------- ------------ Valencia (Unaudited) Residential land development $ 7,534 $ 1,848 Industrial and commercial land development 46,888 43,256 Homes completed or under construction with venture partners 22,603 25,302 McDowell Mountain Ranch land development - 17,824 Agriculture 3,216 227 -------- ------- Total land under development $ 80,241 $88,457 ======== ======= Note 3. Details for Earnings per Unit Calculation Three months ended Six months ended June 30, June 30, ------------------------------ ------------------------------ (Unaudited) 1996 1995 1996 1995 - ----------- ---------- ---------- ---------- ---------- Average number of units outstanding during the period 35,238,950 36,167,913 35,495,544 36,333,537 Net units issuable in connection with dilutive options based upon use 121,799 12,851 134,252 13,077 of the treasury stock method ---------- ---------- ---------- ---------- Average number of primary units 35,360,749 36,180,764 35,629,796 36,346,614 ========== ========== ========== ========== 5 6 Part I. Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Comparison of Second Quarter and Six Months 1996 to Second Quarter and Six Months 1995 (unaudited) The amounts of increase or decrease in revenues and income from the prior year periods are as follows (in $000, except per unit): Increase / (Decrease) Increase / (Decrease) --------------------- --------------------- Three Months Six Months --------------------- --------------------- Revenues Amount % Amount % --------- -------- --------- -------- Real estate Residential home and land sales Valencia $ 6,745 68 % $ 8,699 49 % McDowell Mountain Ranch 42,388 3,586 45,718 1,351 Industrial and other sales (19,462) (99) (22,737) (90) Commercial operations (349) (4) (873) (5) Agriculture Operations (330) (16) (276) (10) Ranch sales - - 6,145 100 ------- ------- -------- ----- $28,992 68 % $36,676 54 % ======= ======= ======== ===== Contribution to income Real estate Residential home and land sales Valencia $ 1,067 106 % $ 1,447 127 % McDowell Mountain Ranch 24,576 10,971 25,893 42,448 Industrial and other sales (12,956) (109) (14,269) (105) Community development (2,554) (655) (3,163) (143) Commercial operations (683) (15) (906) (10) Agriculture Operations (54) (16) 300 40 Ranch sales - - 5,872 100 ------- ------- -------- ----- Operating income 9,396 54 15,174 68 General and administrative expense 37 2 (113) (3) Interest and other, net 891 31 1,108 20 ------- ------- -------- ----- Net income $10,324 85 % $16,169 129 % ======= ======= ======== ===== Net income per unit $ 0.31 94 % $ 0.47 138 % ======= ======= ======== ===== Number of units used in computing per unit amounts (in 000) (820) (2)% (717) (2)% ======= ======= ======== ===== 6 7 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 six months are attributable to the following: RESIDENTIAL HOME AND LAND SALES VALENCIA The Company generates revenues and income from Valencia residential projects in two ways. Through the merchant builder program, residential lots are sold to builders to construct homes. Generally, revenues and income are recorded upon sale of the lots to the builder. Through the joint venture program, the Company participates in home construction on lots owned by the Company by establishing homebuilding joint ventures and partnerships with regional and small builders who have created innovative new home designs. Here, the Company recognizes its portion of revenues and income upon close of escrow to the homebuyer and generally enjoys increased income as it receives a portion of the homebuilding profits in return for participating in the risk of homebuilding and financing the construction costs. New home sales in Valencia by merchant builders and joint-venture partners totaled 172 homes in the 1996 second quarter, up 91% from the year earlier quarter when 90 homes were sold. This represents the best quarterly sales results since the third quarter of 1989. For the six months ended June 30, 1996, new home sales by merchant builders and joint ventures were 65% ahead of the 1995 six month period. In addition, Valencia captured a 46% market share in the Santa Clarita Valley and more than a 10% market share of new home sales in Los Angeles County, according to an independent research group. While the Company does not participate in the revenues and income from home sales by merchant builders, the absorption of these previously sold lots is key to the Company's future success in selling additional lots to merchant builders. Merchant Builder Program The sale of 58 residential lots in NorthPark to a merchant builder contributed $4.1 million to revenues and $1.1 million to income for the 1996 second quarter and six-month period. The buyer, West Venture Homes, committed to 95 lots, with the remaining 37 lots scheduled to close escrow later this year. The 1996 second quarter also includes deferred revenues totaling $250,000 and income of $59,000 recognized from prior residential lot sales under percentage of completion accounting. Results for the 1996 six-month period include deferred revenues of $1.3 million and income of $266,000. The 1995 second quarter and six-month period included the sale of 19 lots in NorthPark to Beazer Homes contributing $1.5 million to revenues and $568,000 to income. Deferred revenues and income recognized in the 1995 three and six-month periods respectively totaled $1.1 million and $138,000. At June 30, 1996, two residential parcels totaling 94 lots were in escrow for approximately $7.9 million. In addition, 491 unimproved lots in Castaic, a community north of Valencia, are in escrow. These escrows are expected to close later this year subject to market conditions. In addition, the sale of 48 lots to Presley Homes for $3.6 million closed escrow in July and will be reflected in 1996 third quarter results. Joint Venture Program In the 1996 second quarter, escrow closings from joint ventures totaled 67 homes in five projects contributing $12.4 million to revenues and $1.4 million to income. This represents a 60% increase in closings from the prior year second quarter when 42 escrow closings in three projects contributed $7.3 million to revenues and $946,000 to income. For the 1996 six-month period, 116 escrow closings contributed $21.3 million to revenues and $2.3 million to income which represents a 35% increase in closings from the 1995 comparable period when 86 closings contributed $15.3 million to revenues and $1.9 million to income. Overall gross profit margins decreased slightly to 11% for the three and six month periods of 1996 primarily as a result of changes in product mix. A total of seven joint-venture projects were active in Valencia at June 30, 1996. Three of these projects are expected to close out by the end of 1996. Models for the Company's most recent joint-venture projects opened in May. Castlerock, a joint venture with Braemar Homes, will consist of 44 single-family homes and is designed to 7 8 Part I. Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations meet the demand for higher-priced executive homes. Carmel, a new joint venture with EPAC Communities, will consist of 52 single-family homes priced from about $200,000. At June 30, 1996, these joint ventures had 51 homes in escrow compared with 41 at June 30, 1995. McDOWELL MOUNTAIN RANCH On April 17, 1996, the Company completed the sale of the McDowell Mountain Ranch project. The sale contributed $43.6 million to revenues and $24.4 million to income. Results for the six-month period also include 219 lots sold in the first quarter of 1996 for $5.5 million adding $2.1 million to income. No lot sales were recorded during the 1995 second quarter. However, finalization of a merchant builder lot premium participation combined with recognition of deferred revenues contributed $692,000 to income in the 1995 second quarter. These factors combined with the sale of 40 lots in the first quarter of 1995 contributed a total of $3.4 million to revenues and $1.5 million to income in the 1995 six-month period. INDUSTRIAL AND OTHER SALES No industrial or commercial land sales were completed in the current year second quarter. Deferred revenues of $264,000 and income of $96,000 were recognized on prior land sales under percentage of completion accounting. Sale of a 2.7-acre commercial parcel in the 1996 first quarter contributed $1.7 million in revenues and $861,000 in income to results for the 1996 first half. The sale of the Bouquet Shopping Center in June 1995 for $17.9 million added $10.4 million to second quarter income. Also included in second quarter 1995 results was the sale of a 7.1-acre parcel for $1.7 million contributing $1.5 million to income. Results for the 1995 six-month period also include escrow closings on 8.8 commercial acres and a 1.1-acre industrial parcel in Valencia Industrial Center for $5.6 million contributing $2.2 million to income. Interest in industrial space in Valencia continues to increase as the vacancy rates in the Company's two industrial centers reached a historic low of 3.7%. Interest in the build-to-suit and build-to-lease programs continues to increase. Under these programs, the Company has over 550,000 square feet of new space completed or under construction, and plans for an additional 370,000 square feet are underway. At June 30, 1996 four commercial parcels totaling 5.2 acres to be sold for $4.2 million and two industrial parcels totaling 9.1 acres to be sold for $3.2 million are in escrow. Escrows on these parcels are expected to close later this year subject to market conditions. COMMUNITY DEVELOPMENT Increases in community development expenses of 49% and 41% from the prior year three and six month periods, respectively, excluding a prior year recovery from a lawsuit settlement, are a result of the Company's emphasis on obtaining the necessary governmental land use approvals and an intensified strategic marketing program to continue the build-out of Valencia and future development of Newhall Ranch. Community development expenses for the year are expected to increase substantially compared to 1995. In Valencia, initial entitlements for new lake and golf-oriented lifestyle villages are expected in 1997 and will position the Company to commence lot sales for these villages in 1998 or 1999. The specific plan and environmental impact report for the 12,000-acre Newhall Ranch community west of Valencia are being reviewed by Los Angeles County Regional Planning Staff with public hearings tentatively scheduled for October 1996. With final approval expected in the next two years, this 24,000-home development is expected to provide significant income to the Company after the build-out of Valencia is complete. Plans for the 1,800-home Westridge golf course community have been redesigned and will be submitted to the Los Angeles County Regional Planning staff this summer along with an updated environmental impact report. If the entitlement process proceeds as anticipated and litigation is resolved, land development on this project could begin by 1998. 8 9 Part I. Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations COMMERCIAL OPERATIONS Commercial operations include the Company's portfolio of income-producing properties and Valencia Water Company, a wholly-owned public water utility. Reductions in rental income due to sale of the Bouquet Shopping Center and a build-to-suit facility for ITT in 1995 are the principal contributors to decreases in revenues and income from the income-producing portfolio compared to the same periods in 1996. Tenant turnover at Valencia Town Center also contributed to the decreases. At June 30, 1996, the mall was 92% leased; however, with strong interest by potential tenants, occupancy is expected to return to previous levels of about 95% by the end of 1996. For all of 1996, the Company expects revenues and income from the commercial portfolio to be below last year's level due to the above sales and the fact that projects started in 1995 will not begin to contribute meaningful revenues and income until 1997. The decreases from the commercial income portfolio are partially offset in both the three and six-month periods by increases in revenues and income from Valencia Water Company due to a general rate increase approved by the California Public Utilities Commission effective January 1, 1996. Operating expenses were approximately the same as the 1995 periods. The Company currently has ten income-producing properties under development. The largest of these projects is Valencia Marketplace, a 750,000-square-foot, value-oriented retail complex which is currently 71% preleased. Phase I, which includes WalMart, Circuit City, Toys R Us, Staples and Sport Chalet, is scheduled to open in time for the 1996 holiday shopping season. Also under construction is the first phase of NorthPark Village Square, an 85,000-square-foot neighborhood shopping center with Ralphs supermarket as the anchor tenant. This center and Skycrest, a 264-unit apartment complex under construction adjacent to the shopping center, are expected to open this fall. A 57,000-square-foot office building under construction in Valencia Town Center, the first of three planned for Valencia Town Center, is 43% preleased. In addition, land preparation has started on a full-service sports and fitness complex, Spectrum/Valencia, and a 203-room hotel and conference center. AGRICULTURAL OPERATIONS Revenues and income from agricultural operations, including energy operations, were approximately the same as the prior year three and six-month periods. Contributing to an increase in income from the prior year six-month period is reversal of a $400,000 contingency associated with previously sold farm land. RANCH SALES No sale of farm land was completed in the current year second quarter or in the prior year second quarter or six-month period. In March, 1996 the Company completed the sale of 539 acres of valuable row crop land on its 38,800-acre Suey Ranch for $6.5 million which contributed $5.9 million to income. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expenses for the three and six-month periods were approximately the same as the prior year periods. The Company expects general and administrative expenses for the year to be approximately 4% higher than in 1995. INTEREST AND OTHER, NET Decreases of 31% and 20% from the respective prior year three and six-month periods are attributable to the assumption of project and bond debt by the buyer in conjunction with the sale of the McDowell Mountain Ranch project on April 17, 1996 plus an increase in capitalized interest related to ten income-producing properties under construction in Valencia. 9 10 Part I. Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations OUTLOOK The Company is on track to meet its five-year average annual earnings growth goal of more than 30% established last year. With earnings in the first half of 1996 exceeding income for all of last year, the Company is well positioned to achieve more than a 30% growth rate this year. Earnings for 1997 are not expected to increase in line with the previous two years as governmental approvals for new lake and golf-oriented lifestyle villages are not anticipated until 1997 with lot sales commencing in late 1998 or early 1999 and because of the 1996 sale of McDowell Mountain Ranch. The forward-looking statements made in this report are based on present trends the Company is experiencing in residential, commercial and industrial markets. Also, the Company's success in obtaining entitlements, governmental and environmental regulations, timing of escrows, continued expansion of its income portfolio and marketplace acceptance of Company business strategies are factors which could affect results. These risks are described in detail in the Risks and Related Factors section of this report and in the 1995 Annual Report. Negative changes in these markets or reduced support for Company strategies could reduce results. FINANCIAL CONDITION Liquidity and Capital Resources At June 30, 1996, the Company had cash and cash equivalents of $3.2 million with short-term borrowings totaling $28.4 million. Borrowings included $27 million against a $40 million revolving mortgage facility secured by Valencia Town Center and $1.4 million against lines of credit totaling $121 million. As of June 30, 1996, a total of 1,025,278 of the Company's partnership units have been repurchased for $17.0 million under a repurchase program for up to 1.5 million units approved by the Board of Directors in December, 1995. Of these units, 763,378 units were repurchased in 1996 for $13.0 million. As previously announced, a portion of the $25.9 million cash generated from the sale of the McDowell Mountain Ranch project in Scottsdale, Arizona was used for these repurchases. Additional units may be repurchased depending on market conditions. There are no material commitments for capital expenditures other than the Company's plans in the ordinary course of business to expand its portfolio of income-producing properties. At June 30, 1996, ten new commercial projects were in various stages of development and several new projects are planned to be started in the second half of 1996. Approximately $90 million is expected to be invested in these projects in 1996. A portion of the estimated construction costs for these projects is expected to be provided from a combination of available lines of credit and project financings. The following discussion relates to principal items on the Consolidated Statement of Cash Flows: Operating Activities Net cash provided by operating activities for the six-month period totaled $55.5 million and included the sale of the McDowell Mountain Ranch project in Scottsdale, Arizona which generated $25.9 million cash and the sale of 539 acres of row crop land at the Suey Ranch for $6.5 million. Sales in Valencia included, 58 residential lots to a merchant builder, 116 homes under the Company's joint venture program and a 2.7- acre commercial parcel which combined generated $26.0 million in cash. Land under development inventory expenditures totaling $36.0 million for the first half of 1996 were more than offset by $44.3 million in real estate sales activity primarily due to the sale of the McDowell Mountain Ranch project in April. Inventory expenditures in Valencia were related to land development and infrastructure to support future and pending land sales including expansion of Valencia NorthPark and home construction advances for the Company's joint venture homebuilding program. The Company's net homebuilding investment decreased by $2.7 million during the first six months of 1996 to a total $22.6 million in seven joint venture projects. At June 30, 1996, the Company's homebuilding partnerships had 59 homes under construction and 89 completed, unsold homes for sale which were included in residential land under development inventories. The majority of the completed, unsold homes are in the Rose Arbor condominium project. 10 11 Part I. Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Investing Activities Expenditures for property and equipment totaled $31.6 million and were primarily related to ten income-producing properties under development in Valencia and water utility construction. The properties under development consist of Valencia Marketplace, a 750,000-square-foot value-oriented retail complex; a build-to-lease and two build-to-suit industrial buildings in Valencia Commerce Center totaling 344,000 square feet; a 57,000-square-foot office building and a 50,000-square-foot Spectrum health club facility in Valencia Town Center; a 264-unit apartment complex and a neighborhood shopping center in Valencia NorthPark; a 51,000-square-foot retail/light industrial complex in Valencia Industrial Center; and an automotive service center which opened in April. The Company plans to start several additional income-producing projects in 1996 including land development for a 203-room full service hotel with a 20,000-square-foot conference center and an entertainment-related mixed-use project in Valencia Town Center. Financing Activities Two quarterly distributions totaling $7.1 million , or 20 cents per unit, have been paid year-to-date. An additional quarterly distribution of 10 cents per partnership unit was declared on July 17, 1996 payable September 12, 1996. The declaration of distributions, and the amount declared, is determined by the Board of Directors on a quarterly basis taking into account the Company's earnings, financial condition and prospects. The next quarterly distribution will be considered by the Board of Directors on November 20, 1996. In conjunction with the sale of the McDowell Mountain Ranch in Scottsdale, Arizona in April, project and bond debt totaling $16.3 million were assumed by the buyer. A $12.4 million increase in borrowings against a revolving mortgage facility were primarily for costs associated with ten income-producing projects under development. A total of 763,378 of the Company's partnership units have been repurchased for $13.0 million during the six-month period ending June 30, 1996 under a repurchase program for up to 1.5 million units approved by the Board of Directors in December, 1995. RISKS AND RELATED FACTORS Included in this report are forward-looking statements regarding the status of proposed or pending sales and rental activity, future planned development, plus the long-term growth goals for the Company. 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 upon 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 impacted significantly by general and local economic conditions which are often 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 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 the present trend will continue. Interest Rates and Financings: 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 ability 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. 11 12 Part I. Financial Information Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 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 comparable to that sold and leased by the Company and the level of demand for such real estate. Geographic Concentration: With the 1996 sale of McDowell Mountain Ranch, the Company's real estate development activities currently are focused on its 37,000-acres on the Newhall Ranch, 30 miles north of Los Angeles. The Company's entire commercial income portfolio is located in the Valencia area. Governmental 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, levels of population, density and traffic, and the provision 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 governmental 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 complying with these requirements and dealing with the process. 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. Part II. Other Information 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) The following report was filed on Form 8-K in the second quarter ended June 30, 1996 Date of Report Item Reported Financial Statements Filed ------------------------------------------------------------------------------------------------- April 17, 1996 Sale of McDowell Mountain Ranch None 12 13 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: August 9, 1996 By / S / THOMAS L. LEE ----------------------------------------------------------- Thomas L. Lee, Chairman and Chief Executive Officer of Newhall Management Corporation (Principal Executive Officer) Date: August 9, 1996 By / S / STUART R. MORK ----------------------------------------------------------- Stuart R. Mork, Senior Vice President and Chief Financial Officer of Newhall Management Corporation (Principal Financial Officer) Date: August 9, 1996 By / S / DONALD L. KIMBALL ----------------------------------------------------------- Donald L. Kimball, Vice President - Controller of Newhall Management Corporation (Principal Accounting Officer) 13