10QSB 1 form10q2q04.txt 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, 2003 [ ]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 12, 2004: No Par Value Common: 712,537 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, 2003 ASSETS Cash and cash equivalents ........................ $ 6,232,197 Restricted cash .................................. 2,006,392 Receivables ...................................... 152,983 Land and improvements held for future development ............................ 13,624,641 Income producing properties, net ................. 11,107,399 Property and equipment, net of accumulated depreciation of $631,425 ...................... 295,276 Other assets...................................... 173,999 ------------ $ 33,592,887 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities ......................... $ 955,337 Deferred income taxes ............................ 7,328,247 Notes and mortgages .............................. 11,509,834 Income taxes payable ............................. 455,833 ------------ Total liabilities ............... 20,249,251 Stockholders' equity Common stock - no par value; authorized, 736,668 shares; issued and outstanding, 712,540 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 .................... 550,956 Retained earnings ............................. 12,699,080 13,343,636 ------------ ------------ $ 33,592,887 ============ 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, 2003 2002 ----------- ----------- Revenues Land ...................................... $ 3,516,292 $ 841,075 Rentals ................................... 303,276 300,880 ----------- ----------- 3,819,568 1,141,955 Costs and expenses Cost of land revenues ..................... 778,841 476,483 Cost of rentals ........................... 90,016 81,746 General and administrative ................ 649,069 649,553 ----------- ----------- 1,517,926 1,207,782 ----------- ----------- Operating income (loss) ................ 2,301,642 (65,827) Other (income) expense Interest income ........................... (11,765) (24,127) Gain on sale of assets .................... -- (379,887) Other ..................................... -- (6,610) Interest expense .......................... 170,937 183,408 ----------- ----------- 159,172 (227,216) ----------- ----------- Earnings before income taxes ........... 2,142,470 161,389 Income tax expense ........................... 857,000 51,000 ----------- ----------- NET EARNINGS ........................... $ 1,285,470 $ 110,389 =========== =========== Weighted average common shares outstanding ............................... 797,640 805,378 =========== =========== Earnings per common share, basic and diluted ......................... $ 1.61 $ .14 =========== =========== 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, 2003 2002 ----------- ----------- Revenues Land ...................................... $ 6,029,370 $ 6,947,416 Rentals ................................... 606,551 604,160 ----------- ----------- 6,635,921 7,551,576 Costs and expenses Cost of land revenues ..................... 1,870,463 1,047,558 Cost of rentals ........................... 171,127 164,587 General and administrative ................ 1,373,065 1,280,514 ----------- ----------- 3,414,655 2,492,659 ----------- ----------- Operating income ....................... 3,221,266 5,058,917 Other (income) expense Interest income ........................... (23,139) (32,477) Gain on sale of assets .................... (250) (379,887) Other ..................................... 794 (21,048) Interest expense .......................... 330,917 365,765 ----------- ----------- 308,322 (67,647) ----------- ----------- Earnings before income taxes ........... 2,912,944 5,126,564 Income tax expense ........................... 1,165,000 2,050,000 ----------- ----------- NET EARNINGS ........................... $ 1,747,944 $ 3,076,564 =========== =========== Weighted average common shares outstanding ............................... 797,640 805,386 =========== =========== Earnings per common share, basic and diluted ......................... $ 2.19 $ 3.82 =========== =========== 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, 2003 2002 ------------ ------------- Cash flows from operating activities Cash received from land sales and collections on real estate contracts receivable ................. $ 6,181,348 $ 6,944,530 Development and closing costs paid ............ (5,149,889) (1,824,762) Cash received from rental operations .......... 606,551 614,570 Cash paid for rental operations ............... (17,869) (3,117) Cash paid for property taxes .................. (48,615) (57,238) Interest received ............................. 16,397 32,768 Interest paid ................................. (322,919) (356,223) Income taxes paid ............................. (745,000) (446,931) General and administrative costs paid ......... (1,540,602) (1,012,167) Other ......................................... (794) 21,048 ------------ ------------ Net cash (used in) provided by operating activities ........................ (1,021,392) 3,912,478 ------------ ------------ Cash flows from investing activities Distributions from partnerships and joint ventures .......................... -- 28,700 Capital expenditures .......................... (17,112) (10,504) Proceeds from note receivable-related party ... -- 2,121 Proceeds from sale of assets .................. 250 628,812 ------------ ------------ Net cash (used in) provided by investing activities ........................ (16,862) 649,129 ------------ ------------ Cash flows from financing activities Borrowing on notes and mortgages .............. 5,500,323 1,306,080 Repayments of notes and mortgages ............. (3,785,357) (1,441,320) Payment of dividends .......................... (799,822) (852,735) Purchase of common stock ...................... (500) -- ------------ ------------ Net cash provided by (used in) financing activities ....................... 914,644 (987,975) ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ......................... (123,610) 3,573,632 Cash and cash equivalents at beginning of period .......................... 6,355,807 3,236,467 ------------ ------------ Cash and cash equivalents at end of period ................................ $ 6,232,197 $ 6,810,099 ============ ============ Reconciliation of net earnings to net cash (used in) provided by operating activities Net earnings ................................... $ 1,747,944 $ 3,076,564 Adjustments to reconcile net earnings to net cash (used in) provided by operating activities Depreciation .............................. 171,624 171,106 Gain on sale of assets .................... (250) (379,887) Change in Receivables ............................... (54,714) (30,417) Real estate contracts ..................... -- 35,424 Land and improvements held for future development and income producing properties .................... (3,287,672) (780,335) Other assets .............................. 4,862 45,158 Accounts payable, accrued expenses and other liabilities ................... (23,186) 171,796 Income taxes payable ...................... 420,000 1,603,069 ------------ ------------ Net cash (used in) provided by operating activities ......................... $ (1,021,392) $ 3,912,478 ============ ============ The accompanying notes are an integral part of these statements. WESTLAND DEVELOPMENT CO., INC. NOTES TO THE FINANCIAL STATEMENTS (unaudited) December 31, 2003 1. The balance sheet at December 31, 2003, statements of cash flows for the six month periods ended December 31, 2003 and December 31, 2002 and statements of operations for the three and six month periods ended December 31, 2003 and December 31, 2002 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, 2003. The results of operations for the three or six month periods ended December 31, 2003 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 and common stock issuable without further consideration, which for the three month periods ended December 31, 2003 and 2002 were 797,640 and 805,378, respectively and for the six month periods then ended were 797,640 and 805,386. 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, 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 ========== ======== =========== ========== Three months ended December 31, 2002: Revenues $ 841,075 $300,880 $ -- $1,141,955 Costs and expenses 476,483 81,746 649,553 1,207,782 ---------- -------- ----------- ---------- Operating income (loss) 364,592 219,134 (649,553) (65,827) Interest income -- -- (24,127) (24,127) Other income -- -- (6,610) (6,610) Gain on sale of assets -- -- (379,887) (379,887) Interest expense -- 175,974 7,434 183,408 ---------- -------- ----------- ---------- Earnings (loss) before income taxes $ 364,592 $ 43,160 $ (246,363) $ 161,389 ========== ======== =========== ========== 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 ========== ======== =========== ========== Six months ended December 31, 2002: Revenues $6,947,416 $604,160 $ -- $7,551,576 Costs and expenses 1,047,558 164,587 1,280,514 2,492,659 ---------- -------- ----------- ---------- Operating income (loss) 5,899,858 439,573 (1,280,514) 5,058,917 Interest income -- -- (32,477) (32,477) Other income -- -- (21,048) (21,048) Gain on sale of assets -- -- (379,887) (379,887) Interest expense -- 353,537 12,228 365,765 ---------- -------- ----------- ---------- Earnings (loss) before income taxes $5,899,858 $ 86,036 $ (859,330) $5,126,564 ========== ======== =========== ========== 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. The Company has also accrued a liability of approximately $200,000 for one-half of the estimated unpaid costs of development by a buyer of a commercial tract of land for which the Company is responsible. The Company believes the buyer has not complied with the contract terms and the Company will not pay any remaining amounts until a full accounting and settlement is provided by the buyer. However, the ultimate amount paid for these claims, if any, is subject to change and management believes such claims may be settled by the conveyance of land to the claimees. 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 $1,502,000. The Company has deferred gains for tax reporting for the involuntary conversion of land by governmental authorities resulting in deferred tax liabilities of approximately $7,672,000 at December 31, 2003. The deferral requires that the Company replace the land with the proceeds of conversion within specified time limits. The Company must purchase replacement property of at least $2,181,000 by June 30, 2004, $500,000 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 $870,000, $200,000 and $2,110,000 for the years ended June 30, 2004, 2005 and 2006, respectively. In March 2003, the Company signed water infrastructure construction contracts for the development of new residential and commercial properties totaling approximately $6,160,000 to be completed by June 30, 2004. The Company has negotiated bank credit lines to partially fund the construction project. At December 31, 2003, $2,496,064 had been advanced on these lines. 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, 2003, the Company's cash and cash equivalents decreased by $123,610. During this period, operations used $1,021,392 and investing activities used $16,862. Also, the Company borrowed $1,714,966, net and paid dividends of $799,822. Except for short-term borrowing, the Company's primary source of cash is the sale of land. Although rental operations generated $606,551 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 $3,208,264 on construction lines of credit. This amount fluctuates, and is paid from receipts from lot sales. The Company will 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 $3,819,568 compared to $1,141,955 during the same period in the prior fiscal year. Land revenues increased significantly primarily due to the sale of a single large parcel for approximately $2,002,000 in fiscal 2004. Improved lot sales increased by approximately $1,426,000 to $3,802,000. Costs and expenses during the three months ended December 31, 2003, were $1,517,926 compared to $1,207,782 during the comparable period in 2002. The increase was due principally to increases in cost of land revenues by approximately $302,000, due to increased lot sales. For the year to date, revenues decreased by $916,000 to $6,636,000 because large parcel sales decreased by $3,186,000 although improved lot sales increased by $2,196,000. Costs and expenses were $3,415,000 compared to $2,493,000 as cost of land sold increased by $823,000. This was due to the higher cost per parcel for improved lots. As the Company sells the remaining lots in its Cielo Oeste, Crossings and Painted Sky units this year, management expects to begin sales of lots in its sector development plan, now called The Petroglyphs, which should continue into the next few fiscal years. 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 $2,181,000 of replacemant lands and property to acquire by June 30, 2004, $500,000 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 has had very few installment sales, so income is recognized when a property is sold with financing provided by the buyer. Some of the sales are basically raw land which has little more than its original cost of $2.60 per acre. Other parcels benefit from certain infrastructure improvements such as roads financed by Special Assessment District obligations, which are generally allocated to the subject property based on site location and acreage. Improved lots bear costs such as roads, sewer, sidewalk, etc. as they are incurred by subdivision. "Soft" costs such as engineering fees and improvements which benefit an entire project are generally allocated to units based on number of lots or acreage. 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 against 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. Westland has also accrued $200,000 against possible claim on completion of an earlier project. 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. When property is improved for sale as individual lots, a commitment exists by contract obligating the purchaser prior to undertaking the development. However, 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 the properties are suitably maintained and insured and that the lessees are conducting proper operations. ITEM 3. CONTROLS AND PROCEDURES The Company's principal executive and financial officer has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date (the "Evaluation Date") of this quarterly report, and has concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate, effective and ensure that material information relating to the Company would be made known to her timely by others within the entity. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evsaluation Date, nor were there any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken. 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 12, 2004 By: Barbara Page --------------------------- Barbara Page, President, Chief Executive Officer and Chief Accounting Officer