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 September 30, 1997 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 September 30, 1997 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 Nine Months Ended September 30 September 30 ------------------------- ------------------------- In thousands except per unit 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------- REVENUES Real estate Residential home and land sales Valencia $ 38,478 $ 23,120 $ 56,867 $ 49,750 McDowell Mountain Ranch -- -- -- 49,101 Industrial and other sales 13,743 2,049 38,754 4,455 Commercial operations 12,091 10,365 32,750 27,835 --------- --------- --------- --------- 64,312 35,534 128,371 131,141 --------- --------- --------- --------- Agriculture Operations 2,929 3,030 5,700 5,475 Ranch sales 62 600 17,962 6,745 --------- --------- --------- --------- 2,991 3,630 23,662 12,220 --------- --------- --------- --------- Total revenues $ 67,303 $ 39,164 $ 152,033 $ 143,361 ========= ========= ========= ========= CONTRIBUTION TO INCOME Real estate Residential home and land sales Valencia $ 13,005 $ 6,332 $ 13,948 $ 8,922 McDowell Mountain Ranch -- -- -- 25,954 Industrial and other sales 1,157 (616) 15,254 (1,234) Community development (2,213) (2,625) (7,573) (7,996) Commercial operations 4,866 4,740 14,047 12,796 --------- --------- --------- --------- 16,815 7,831 35,676 38,442 --------- --------- --------- --------- Agriculture Operations 379 285 1,508 1,332 Ranch sales 45 472 16,995 6,344 --------- --------- --------- --------- 424 757 18,503 7,676 --------- --------- --------- --------- Operating income 17,239 8,588 54,179 46,118 General and administrative expense (2,438) (1,911) (6,799) (6,339) Interest and other, net (2,262) (2,509) (7,137) (6,908) --------- --------- --------- --------- Net income $ 12,539 $ 4,168 $ 40,243 $ 32,871 ========= ========= ========= ========= Net income per unit $ 0.36 $ 0.12 $ 1.16 $ 0.93 ========= ========= ========= ========= Number of units used in computing per unit amounts 34,809 35,269 34,758 35,507 Cash distributions per unit: Regular $ 0.10 $ 0.10 $ 0.30 $ 0.30 Special 0.08 2 3 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS September 30, December 31, In thousands 1997 1996 - ------------------------------------ ------------- ------------ Unaudited ASSETS Cash and cash equivalents $ 2,955 $ 2,412 Accounts and notes receivable 18,019 25,557 Land under development 59,722 63,266 Land held for future development 32,551 32,357 Income producing properties, net 213,838 182,641 Property and equipment, net 58,445 57,064 Other assets and deferred charges 13,890 13,147 -------- -------- $399,420 $376,444 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Accounts payable $ 17,886 $ 11,451 Accrued expenses 39,453 38,101 Deferred revenues 6,378 2,483 Mortgage and other debt 148,827 163,256 Advances and contributions from developers for utility construction 21,024 19,075 Other liabilities 21,986 21,425 -------- -------- Total liabilities 255,554 255,791 Partners' capital 34,488 units outstanding, excluding 2,285 units in treasury, at September 30, 1997 and 34,701 units outstanding, excluding 2,071 units in treasury, at December 31, 1996 143,866 120,653 -------- -------- $399,420 $376,444 ======== ======== 3 4 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Nine Months Ended In thousands September 30 - -------------------------------------------------------- ----------------------- 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 40,243 $ 32,871 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,154 5,799 Decrease in land under development 3,794 12,915 Decrease in accounts and notes receivable 7,538 8,934 Increase in accounts payable, accrued expenses and deferred revenues 11,682 3,949 Cost of property sold 14,707 409 Other adjustments, net 1,669 943 -------- -------- Net cash provided by operating activities 86,787 65,820 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Development of income-producing properties (50,791) (50,068) Purchase of property and equipment (4,092) (6,811) -------- -------- Net cash used in investing activities (54,883) (56,879) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Distributions paid (13,135) (10,622) (Decrease) increase in mortgage and other debt (14,429) 13,869 Increase in advances and contributions from developers for utility construction 1,949 792 Purchase of partnership units (5,746) (13,043) -------- -------- Net cash used in financing activities (31,361) (9,004) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 543 (63) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,412 4,285 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,955 $ 4,222 ======== ======== 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 nine months ended September 30, 1997 and 1996 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 32 of the December 31, 1996 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) September 30, December 31, 1997 1996 ------------- ------------ (Unaudited) Valencia Residential land development $ 538 $ 1,093 Industrial and commercial land development 48,579 49,580 Homes completed or under construction with venture partners 8,484 12,371 Agriculture 2,121 222 ------- ------- Total land under development $59,722 $63,266 ======= ======= - -------------------------------------------------------------------------------- Note 3. Details for Earnings per Unit Calculation Three months ended Nine months ended September 30, September 30, -------------------------- -------------------------- (Unaudited) 1997 1996 1997 1996 ----------- ---------- ---------- ---------- ---------- Average number of units outstanding during the period 34,464,082 35,164,797 34,522,690 35,384,490 Net units issuable in connection with dilutive options based upon use of the treasury stock method 344,852 104,233 235,290 122,852 ---------- ---------- ---------- ---------- Average number of primary units 34,808,934 35,269,030 34,757,980 35,507,342 ========== ========== ========== ========== 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 Third Quarter and Nine Months of 1997 to Third Quarter and Nine Months of 1996 Unaudited The amounts of increase or decrease in revenues and income from the prior year third quarter and nine months are as follows (in 000s, except per unit): Third Quarter Nine Months ------------------------ ----------------------- Increase (Decrease) Increase (Decrease) ------------------------ ----------------------- Amount % Amount % -------- -------- -------- -------- REVENUES Real Estate Residential home and land sales Valencia $ 15,358 66% $ 7,117 14% McDowell Mountain Ranch -- -- (49,101) -100% Industrial and other sales 11,694 571% 34,299 770% Commercial operations 1,726 17% 4,915 18% -------- -------- -------- -------- 28,778 81% (2,770) -2% Agriculture Operations (101) -3% 225 4% Ranch sales (538) -90% 11,217 166% -------- -------- -------- -------- Total revenues $ 28,139 72% $ 8,672 6% ======== ======== ======== ======== CONTRIBUTION TO INCOME Real Estate Residential home and land sales Valencia $ 6,673 105% $ 5,026 56% McDowell Mountain Ranch -- -- (25,954) -100% Industrial and other sales 1,773 288% 16,488 1336% Community development 412 16% 423 5% Commercial operations 126 3% 1,251 10% -------- -------- -------- -------- 8,984 115% (2,766) -7% Agriculture Operations 94 33% 176 13% Ranch sales (427) -90% 10,651 168% -------- -------- -------- -------- Operating income 8,651 101% 8,061 17% General and administrative expense (527) -28% (460) -7% Interest and other, net 247 10% (229) -3% -------- -------- -------- -------- Net income $ 8,371 201% $ 7,372 22% ======== ======== ======== ======== Net income per unit $ 0.24 200% $ 0.23 25% ======== ======== ======== ======== Number of units used in computing per unit amounts (460) -1% (749) -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 nine months are attributable to the following: For the three months ended September 30, 1997, revenues totaled $67.3 million and income totaled $12.5 million compared with revenues of $39.2 million and income of $4.2 million for the 1996 third quarter. The primary contributors to 1997 third quarter results were sales of North Hills, a 50-acre parcel of 366 entitled, unimproved, high margin lots, and 251 additional, improved residential lots in Valencia. In addition, three industrial parcels and one build-to-suit project in Valencia Commerce Center closed escrow contributing to the quarter's revenues and income. For the 1997 nine-month period, revenues totaled $152.0 million and income totaled $40.2 million. Revenues and income totaled $143.4 million and $32.9 million, respectively, for the prior year nine-month period which included the sale of the McDowell Mountain Ranch project in April, 1996 for $43.6 million adding $24.4 million to income. RESIDENTIAL HOME AND LAND SALES VALENCIA The Company generates revenues and income from Valencia residential projects by selling residential lots to merchant builders and home sales through joint ventures. 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 in home construction on lots it owns by establishing joint ventures with builders who have created innovative new home designs, targeting niche markets unmet by merchant builders. Under the joint-venture program the Company recognizes its portion of revenues and income upon close of escrow to the homebuyer. By participating in joint ventures, the Company generates increased income as it receives a portion of the homebuilding profits in return for sharing in the risk of homebuilding and financing construction costs. Currently there are 12 active builders in Valencia, offering 12 different product lines. These merchant builders, including the Company's homebuilding joint-ventures, sold 206 homes in Valencia in the 1997 third quarter, up from 148 homes sold in the year earlier quarter, representing the most homes sold in a quarter in Valencia since the 1989 third quarter. During the three months ended September 30, 1997, 155 homes closed escrow in Valencia, with 104 by merchant builders on lots previously sold by the Company and the remaining 51 by the Company's joint ventures. This compares with 1996 third quarter escrow closings of 149 homes with 71 by joint ventures. The close-out of several joint-venture projects this year will result in lower joint venture home sales for all of 1997 and is consistent with the Company's strategy to concentrate on lot sales to merchant builders in an improving real estate market. Merchant Builder Program Residential lot sales in Valencia set a quarterly record in the 1997 third quarter with the sale of 617 residential lots adding $27.3 million to revenues and $13.1 million to income. The largest transaction was the sale of 366 entitled, unimproved lots to Taylor Woodrow for $17 million contributing $10.1 million to income. In addition, escrow closed on 251 improved residential lots to three merchant builders contributing $10.3 million to revenues and $3.0 million to income under percentage of completion accounting. The 1997 nine-month period also includes the sale of 94 residential lots which added $4.0 million to revenues and $1.2 million to income. Results for the 1996 third quarter included the sale of 48 residential lots in Valencia for $3.7 million which contributed $1.0 million to income and the sale of 491 unimproved residential lots in Castaic, a community north of Valencia, for $4.5 million which contributed $4.3 million to income. The 1996 nine-month period also included the sale of 58 residential lots in Valencia contributing $4.1 million to revenues and $1.1 million to income, plus recognition of $1.3 million of deferred revenues and $266,000 of income from lot sales to merchant builders in prior years. At September 30, 1997, an additional 43 residential lots were in escrow to Richmond American with closing scheduled for later this year. All escrow closings are subject to market and other conditions. At September 30, 1996, a total of 212 single- and multi-family lots were in escrow. 7 8 PART I. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's current inventory of entitled, improved residential lots includes 168 multi-family and 37 single-family lots in Valencia NorthPark, and 752 entitled, unimproved residential lots near Castaic. The Company anticipates receiving final approval in late 1997 for the next development area in North River called Decoro Highlands, which is planned for 460 homes, including a multi-family project. In addition, entitlements for the first "lifestyle village", Lago De Valencia, is expected by the end of 1997 or early 1998. Joint Venture Program In the 1997 third quarter, the Company's joint-venture homebuilding projects closed escrow on 51 homes contributing $11.2 million to revenues and $1.0 million to income. This compares with 71 joint-venture closings during the year earlier quarter contributing $14.9 million to revenues and $1.5 million to income. The 1997 nine-month period included 111 joint-venture closings for $24.4 million adding $2.6 million to income compared to the year earlier period when 187 closings added $36.2 million to revenues and $3.9 million to income. With the close-out of the CourtHomes and Avalon joint-venture projects earlier in the year and Castlerock and Rose Arbor during the 1997 third quarter, the Company does not expect to match the number of joint-venture home sales achieved last year. Nouvelle, a joint-venture project with Warmington which opened in May, closed escrow on 14 homes in the third quarter. Models for Cheyenne, a 166 townhome project similar to the popular Montana townhomes, and Avignon, a 76-townhome project adjacent to Valencia Country Club, both joint ventures with EPAC Communities, are scheduled to open in the fourth quarter. At September 30, 1997, there were 31 joint-venture homes in escrow compared with 50 homes at the end of the year earlier period. INDUSTRIAL AND OTHER SALES During the 1997 third quarter, three parcels in Valencia Commerce Center totaling 13.5 acres closed escrow adding $5.9 million to revenues and $1.1 million to income. Demand for industrial land is increasing, reflecting low vacancy rates in the Company's two industrial/business parks and the availability of financing for projects. Industrial land development is concentrated in Valencia Commerce Center where prices for land have increased about $2 per square foot to $9.50, from the low in the early 90's. Industrial land sales and construction will absorb about 60 acres in 1997, an eight-year high, compared with 20 acres in 1996. Also in the 1997 third quarter, a 135,220-square-foot build-to-suit constructed on 6.3 acres in Valencia Commerce Center closed escrow to an institutional investor for $7.9 million contributing $1.1 million to income. Demand for buildings being constructed under the Company's industrial build-to-suit/lease program is resulting in an additional 29,000 square feet of industrial space planned for this year with 465,000 square feet expected to be built in 1998. Results for the 1997 nine-month period also includes sales of a 5.2-acre industrial parcel and 3.5 commercial acres which combined contributed $4.5 million to revenues and $2.5 million to income. Also included in 1997 nine-month results are the sale of Stonecreek, a 208-unit apartment complex, for $18.3 million adding $12.9 million to income and the sale of Orchard Plaza, a 17,400-square-foot office building, for $2.2 million adding $618,000 to income. Two industrial parcels totaling 6.2 acres closed escrow in the 1996 third quarter contributing $2.0 million to revenues and $434,000 to income. Results for the 1996 nine-month period also include the sale of a 2.7-acre commercial parcel for $1.7 million adding $861,000 to income and recognition of deferred revenues of $606,000 adding $275,000 to income. At September 30, 1997, eight parcels totaling 12.2 industrial acres, 33.5 commercial acres and two build-to-suits in Valencia Commerce Center were in escrow for $18.9 million with closings scheduled for later this year and early 1998. All escrow closings are subject to market and other conditions. At September 30, 1996, two industrial build-to-suit facilities in Valencia Commerce Center for $16.5 million and two other land sales for $2.2 million were in escrow. 8 9 PART I. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY DEVELOPMENT The Company's community development activities are focused on securing the necessary governmental land use approvals as well as an intensified strategic marketing program to support the build-out 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 increase the pace of development is contingent upon obtaining the necessary entitlement or governmental approvals. Final approval is anticipated in late 1997 for Decoro Highlands, the next major development area in the North River area, which is planned for 460 homes, including a multi-family project. Completion of the entitlement process for several major "lifestyle villages" in Valencia is anticipated in 1998 and 1999. The Environmental Impact Report on the Company's Westridge project, which includes a Tournament Players Club (TPC) championship golf course, is expected to be released for public review before the end of the year with public hearing before the Los Angeles County Regional Planning Commission in early 1998. The project is expected to go before the Board of Supervisors later in 1998. The entitlement process continues on the 24,000-home Newhall Ranch community as the Los Angeles County Regional Planning Commission has directed its staff to prepare the final Environmental Impact Report which will become part of the recommendation to the Board of Supervisors. Hearings before the Board of Supervisors are expected to begin in spring 1998. Community development expenses increased 16% from the prior year third quarter and 5% from the prior year nine-month period. Expenditures for community development expenses are expected to continue at present high levels as the Company is placing significant emphasis on obtaining approvals for current and future developments. Although these preliminary planning and entitlement expenses reduce short-term earnings, the investment in new entitlements is vital to the Company's long-term success. Generally, the single largest increase in land value occurs when these entitlements are received. COMMERCIAL OPERATIONS Commercial operations include the Company's portfolio of income-producing properties and Valencia Water Company, a wholly-owned public water utility. The commercial portfolio is a relatively stable source of earnings and cash flow, which provides debt capacity to grow the Company and working capital for continuing operations. For the three months ended September 30, 1997, revenues and income from commercial operations increased 17% and 3%, respectively, over the same prior year period. For the first nine months of 1997, revenues and income increased 18% and 10%, respectively, over the 1996 period. Contributing to increases in revenues and income is the addition of new properties including the 720,000-square-foot Valencia Marketplace where Michael's, a national arts and crafts retailer, opened this summer joining other major retailers such as WalMart, Sport Chalet, Staples, Circuit City, Payless Shoe Source and Toys R Us. A Vons supermarket, more restaurants and other retailers are scheduled to open for the holiday shopping season. The center is 82% leased and is expected to be 75% constructed by year-end. Valencia Town Center shopping mall is continuing its strong performance with 98% of the space leased, including temporary tenants. River Oaks and Castaic Village neighborhood shopping centers are 96% and 97% leased, respectively, and NorthPark Village Square is fully leased with plans for further expansion. Also, the first tenants opened for business at Plaza Del Rancho, a mixed-use project in Valencia Industrial Center, where 82% of the leasable space is occupied or committed. SkyCrest, a new 264-unit apartment complex, set a Company record by reaching 100% leased in only ten months. With Portofino and Northglen apartment complexes fully leased, all three of the Company's apartment complexes have been increasing rental rates for incoming tenants. In response to this strong demand, additional apartment complexes are in the planning stages including one in Valencia Town Center to be located between the Spectrum Health Club and the Avignon townhome project. As previously reported, Stonecreek, a 208-unit apartment complex, was sold in the first quarter of 1997 as part of the Company's strategy to selectively sell mature properties in strong markets. 9 10 PART I. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The majority of the Company's commercial development and portfolio expansion is now occurring along Town Center Drive, a mixed used "main street" extending west from the regional mall to the 250-room Hyatt Valencia Hotel and Spectrum Health Club. Construction is well underway on the Hyatt Valencia Hotel and adjoining 20,000-square-foot conference center, and has commenced on the six-story office building where Princess Cruises will occupy the top five floors with the first floor reserved for retail. Land development will start shortly on a two-story 26,000-square-foot office/retail building and the 100,000-square-foot entertainment complex with an IMAX Theater, 12 additional movie screens, restaurants and retail shops. AGRICULTURAL OPERATIONS Income from agricultural operations increased 33% and 13% from the prior year three- and nine month periods, respectively, while revenues were approximately the same as the prior year periods. A strong market for alfalfa, higher tomato yields as well as expense reductions contributed to the results. RANCH SALES The sale of a small remaining parcel in northern California was completed during the 1997 third quarter for $62,000 adding $45,000 to income. Results for the 1997 nine-month period includes the sale of 1,674 acres of vineyard and undeveloped land at the 38,000-acre Suey Ranch for $17.9 million adding $17.0 million to income. During the 1996 third quarter, a 4.5-acre parcel in northern California closed escrow for $600,000 contributing $472,000 to income. The 1996 nine-month period also includes the sale of 539 acres of row crop land on the Suey Ranch for $6.5 million which contributed $5.9 million to income. Since 1992, the Company's strategic plan to sell land not suitable for development has resulted in the sale of 23,704 acres of land. The last major acreage to be sold under this plan involves the 3,940 acres remaining on the Merced Ranch, which is anticipated to close later this year. As previously announced, this sale is expected to add approximately $4.5 million to revenues and about $3 million to income. Currently, no other agricultural land sales are planned. GENERAL AND ADMINISTRATIVE EXPENSE A 28% increase for the third quarter and a 7% increase for the nine-month period over the corresponding period in 1996 in general and administrative expenses are primarily due to expense recorded for appreciation rights on outstanding non-qualified options granted before 1992 due to the higher market price of the Company's partnership units. General and administrative expenses for the year are expected to be slightly lower than in 1996 due to the prior year charge for curtailment of a retirement plan for outside directors and its replacement with a deferred equity compensation plan. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, the Company had cash and cash equivalents of $3.0 million and $127 million in available lines of credit to fund its development activities. The Company believes it has adequate sources of cash from operations and available debt capacity to finance future operations and take advantage of new development opportunities. There was no debt secured by raw land or land under development inventories at September 30, 1997. The Company is in the process of establishing a $200 million unsecured revolving line of credit. The three-year syndicated facility will replace five separate lines of credit totaling $119 million. Proceeds available under the line of credit will be used for general corporate purposes including development of income-producing properties in Valencia. The transaction is expected to close by the end of 1997. 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. The Company expended $50.8 million for commercial portfolio development during the nine months ended September 30, 1997. Total expenditures for 10 11 PART I. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS commercial projects are expected to reach approximately $75 million in 1997 with an additional $100 million scheduled to be invested in 1998. For additional information on income-producing properties under development see the Investing Activities section. Construction of new income properties on Company-owned land creates additional debt capacity. It is the Company's policy to limit total Company debt to approximately 60% or less of the value of the portfolio of income-producing properties. In January, 1997, the Board of Directors increased an existing unit repurchase program to a total of 2 million units, bringing units available for repurchase to 510,022. As of September 30, 1997, a total of 328,637 partnership units had been repurchased at an average price of $17.48. The following discussion relates to principal items on the Consolidated Statement of Cash Flows: Operating Activities Net cash provided by operating activities totaled $86.8 million in the nine months ended September 30, 1997 and included sales of 711 residential lots, 111 residential homes, plus 22.2 acres of industrial and commercial land which combined provided $67.8 million in cash and $1.2 million in notes receivable. Also completed were the sale of a 208-unit apartment complex for $18.3 million in cash, the sale of 1,673 acres of vineyard and undeveloped land at the Suey Ranch for $17.9 million in cash, and the sale of an industrial build-to-suit on 6.3 acres in Valencia Commerce Center for $7.9 million in cash. Additionally, notes totaling $10.3 million from land sales in prior years were collected during the nine-month period. Expenditures for land under development inventories totaled $47.0 million and were primarily for land development and infrastructure to support future and pending land sales and home construction advances for the Company's joint venture homebuilding program. Investing Activities Expenditures for development of income-producing properties totaled $50.8 million for the 1997 nine-month period. Properties under construction include Valencia Marketplace, a 720,000-square-foot power center; the 250-room Hyatt Valencia Hotel and 20,000-square-foot conference center; a six-story office building where Princess Cruises will occupy the top five floors under a long-term lease; and three industrial buildings. Land development is expected to start in the fourth quarter on a two-story, 26,000-square-foot office/retail building and a 100,000-square-foot entertainment complex with an IMAX 3D Theater, 12 additional movie screens, restaurants and retail shops. The above projects will be completed in 1998. Projects completed to date in 1997 include SkyCrest, a 264-unit apartment complex; NorthPark Village Square, a neighborhood shopping center where a 21,000-square-foot expansion is planned; a 57,000-square-foot Spectrum Health Club; three industrial buildings; and Plaza del Rancho, a mixed-use project in Valencia Industrial Center where 82% of the leasable space is occupied or committed. Other purchases of properties and equipment are primarily for various tenant improvements and water utility construction costs. Financing Activities Three quarterly distributions of $.10 per unit each and a special distribution of $.08 per unit, totaling $13.1 million, have been paid year-to-date. 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 19, 1997. Borrowings against lines of credit totaled $35 million at September 30, 1997, a decrease of $14.5 million since December 31, 1996. A total of 328,637 units have been purchased for $5.7 million to date during 1997 under the Company's unit repurchase program. New Accounting Pronouncement The Company anticipates that the adoption of SFAS No. 128 - Earnings Per Share for the year ending December 31, 1997, will not result in disclosures that are materially different than those currently required by generally 11 12 PART I. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS accepted accounting principles contained in this quarterly report. This new statement simplifies the standards for computing earnings per share (unit) and makes them comparable to international standards. RISKS AND RELATED FACTORS This report and other published documents contain forward-looking statements regarding the status of proposed or pending sales and rental activity, future planned development, future results of operations and financial condition, the long-term growth of the Southern California economy and other matters. These forward-looking statements are based on present trends the Company is experiencing in residential, industrial and commercial markets. However, the timing and ability to obtain entitlements, governmental and environmental regulations, timing of escrow closings, expansion of its income portfolio and marketplace acceptance of its business strategies could adversely affect the Company's future results. The following risks and related factors, among others, should be taken into consideration in evaluating the prospects for the Company. Actual results may materially differ from those projected. 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 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 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. Geographic Concentration: With the 1996 sale of McDowell Mountain Ranch, the Company's real estate development activities currently are focused on its 20,000 acres in Los Angeles County, 30 miles north of Los Angeles. The Company's entire commercial income portfolio is located in the Valencia area. Therefore, any factors affecting that concentrated area, such as changes in the housing market or environmental factors 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, the providing of utility services such as electricity, water and waste disposal and the providing of public facilities such as schools, parks and libraries. 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 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 12 13 PART I. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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 third quarter ended September 30, 1997: None 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE NEWHALL LAND AND FARMING COMPANY (a California Limited Partnership) Registrant By Newhall Management Limited Partnership, Managing General Partner By Newhall Management Corporation, Managing General Partner Date: November 10, 1997 By /s/ THOMAS L. LEE -------------------------------------------- Thomas L. Lee, Chairman and Chief Executive Officer of Newhall Management Corporation (Principal Executive Officer) Date: November 10, 1997 By /s/ STUART R. MORK -------------------------------------------- Stuart R. Mork, Senior Vice President and Chief Financial Officer of Newhall Management Corporation (Principal Financial Officer) Date: November 10, 1997 By /s/ DONALD L. KIMBALL -------------------------------------------- Donald L. Kimball, Vice President - Finance and Controller of Newhall Management Corporation (Principal Accounting Officer) 14