-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CgqOq1Rv9lj7EuPiFnLQ2rCe4sYsdgUbkMVXwXOF5zqeDUFMToX+cFWVfuYrS27t R8KIdbTTrGvdSID5I7H5AA== 0000950150-98-000421.txt : 19980326 0000950150-98-000421.hdr.sgml : 19980326 ACCESSION NUMBER: 0000950150-98-000421 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWHALL LAND & FARMING CO /CA/ CENTRAL INDEX KEY: 0000751976 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] IRS NUMBER: 953931727 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08885 FILM NUMBER: 98572908 BUSINESS ADDRESS: STREET 1: 23823 VALENCIA BLVD CITY: VALENCIA STATE: CA ZIP: 91355 BUSINESS PHONE: 8052554000 MAIL ADDRESS: STREET 2: 23823 VALENCIA BLVD CITY: VALENCIA STATE: CA ZIP: 91355 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File Number 1-7585 THE NEWHALL LAND AND FARMING COMPANY ( A CALIFORNIA LIMITED PARTNERSHIP ) (Exact name of Registrant as specified in its charter) CALIFORNIA 95-3931727 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23823 VALENCIA BOULEVARD, VALENCIA, CALIFORNIA 91355 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (805) 255-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered ------------------- --------------------- Depositary Receipts New York Stock Exchange Pacific Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of depositary receipts held by non-affiliates based upon the closing price of such depositary receipts on the New York Stock Exchange on February 28, 1998 was $1,115,983,372. 2 THE NEWHALL LAND AND FARMING COMPANY 1997 FORM 10-K TABLE OF CONTENTS
Page PART I Number ------ Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II Item 5. Market for the Registrant's Depositary Units and Related Security Holder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 38 PART III Item 10. Directors and Executive Officers of the Registrant 39 Item 11. Executive Compensation 45 Item 12. Security Ownership of Certain Beneficial Owners and Management 56 Item 13. Certain Relationships and Related Transactions 56 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57 SIGNATURES 60 SCHEDULE III Real Estate and Accumulated Depreciation 62 INDEX TO EXHIBITS 65
3 PART I ITEM 1. BUSINESS INTRODUCTION The Newhall Land and Farming Company (a California Limited Partnership) ("the Company" or "the Partnership") is engaged in the development of residential, industrial and commercial real estate and in agriculture, on its approximately 91,000 acres in California. The interests in the Company (other than those held by the general partners) are represented by transferable Depositary Units listed on the New York and Pacific Stock Exchanges under the ticker symbol NHL. The Company was reorganized from a corporation to a limited partnership on January 8, 1985. The predecessor corporation was established in 1883 by the family of Henry Mayo Newhall; the shares of the corporation were listed on the New York Stock Exchange in 1970. The Company's primary business is developing master-planned communities. Since 1965, the Company has been developing the town of Valencia on a portion of the Company's landholdings in Los Angeles County which now is home to approximately 36,000 residents and 1,200 companies that provide 31,000 jobs. With approximately 7,600 acres remaining to be developed, and build-out expected by 2005, Valencia is the regional center for north Los Angeles County and the northern gateway to the entire Los Angeles metropolitan area. Regional centers generate long-term increases in land values with the more intensive development of industrial and commercial business parks and shopping centers, along with a broad range of single-family and multi-family homes. In 1994, the Company started the entitlement process on Newhall Ranch, a new master-planned community to be located on 12,000 acres adjacent to Valencia and west of Interstate 5. This 24,000-home new town will contain commercial and business park uses within its five villages and includes almost 6,000 acres of open space. In 1997, the Los Angeles County Regional Planning Commission approved the Specific Plan, the Environmental Impact Report and provided other related approvals for this project. The next step in the approval process involves public hearings before the Los Angeles County Board of Supervisors, which is expected to begin in the spring of 1998. Development is planned to begin around the year 2000. Valencia and Newhall Ranch together form one of the nation's most valuable landholdings. They are located on the Company's prime landholding approximately 30 miles north of downtown Los Angeles and just north of the San Fernando Valley, which has a population of over 1.3 million people. The property is bisected by Interstate 5, California's principal north-south freeway, and four major freeways intersect Interstate 5 within ten minutes of Valencia. This provides businesses and residents easy access to the Los Angeles metropolitan area, major airports and the ports of Los Angeles and Long Beach. In the late 1980s, the Company adopted the strategy of selling farm properties with little or no potential for development and re-deploying the proceeds into real estate operations. As of December 31, 1997, more than 30,000 acres of non-strategic farm land have been sold, including 1,673 acres of vineyard and undeveloped land at the Suey Ranch sold in 1997. Financial information concerning the Company's business segments appears in Note 10 of the Notes to Consolidated Financial Statements in this Annual Report. Information regarding competition and compliance with governmental and environmental regulations appears in the Inflation, Risks and Related Factors section of the Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report. The Company is not dependent on a single or a few customers for a significant portion of its revenues. At December 31, 1997, the Company employed 210 persons, including 7 classified as seasonal/temporary. 1 4 ITEM 1. BUSINESS (continued) APPRAISAL OF REAL PROPERTY ASSETS The Company obtains annual appraisals of substantially all of its real property assets. The independent firm of Buss-Shelger Associates, MAI real estate appraisers, appraised the market value of the Company's real property assets to be $999 million at December 31, 1997 compared to an aggregate net book cost of $299 million. The appraised properties did not include oil and gas assets, water supply systems, cash and cash equivalents and certain other assets. The net appraised value of the Company's total assets, including assets not independently appraised, was $872 million, after reducing for debt and certain other liabilities as shown in the table on page 3. For the purpose of the appraisals, market value was defined as the most probable price in terms of money which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. A significant portion of the appraised real property assets is located on the Company's 36,500 acres, 30 miles north of downtown Los Angeles and currently is undeveloped. The appraised value of undeveloped assets reflects the discount or developer's profit necessary to provide a third-party buyer with the incentive to purchase and undertake the risks inherent in the development process. Entitlements and the continuing development of Valencia enhance the appraised value of the Company's land assets. Although raw land increases in value as development opportunities arise, the most significant increase occurs when necessary land use entitlements, including zoning and mapping approvals, are obtained from city and county governments. The appraised value of the Company's land and income-producing properties in the Valencia master-planned community has increased from $222 million in 1984, the first year independent property appraisals were obtained, to $845 million in 1997. The Company's net appraised value has increased from $11.74 to $25.25 on a per unit basis over the same 14-year period. A summary of appraised values of properties owned for each of the last five years as of December 31 follows (the appraisals were performed by independent appraisers except as noted): 2 5 APPRAISED VALUES
1997 1996 1995 ---------------------------- ---------------------- ------------------- Percent Percent Percent $ in millions, except per unit Acres Amount Change Amount Change Amount Change - ----------------------------------------------------------------------------------------------------------------- Valencia and nearby properties 7,600 $ 420 --% $ 420 (7)% $ 450 (7)% Income-producing real estate 910 425 14 372 16 321 15 ------------------------------------------------------------------------------ Total Valencia area properties 8,510 845 7 792 3 771 1 Other community development properties: Newhall Ranch, McDowell Mountain (1), Cowell and Suey 48,660 84 20 70 (29) 98 14 Agricultural properties 34,050 64 3 62 3 60 (10) Mortgage and other debt (157) (4) (163) 7 (152) 4 at book carrying value All other, net, not independently appraised 36 (27) 49 (20) 61 97 ------------------------------------------------------------------------------ Net appraised value 91,220 $ 872 8% $ 810 (3)% $ 838 4% ============================================================================== Number of partnership units outstanding ( 000's ) 34,527 -- 34,701 (3)% 35,910 (2)% ===================================================================== Net appraised value per partnership unit $ 25.25 8% $ 23.35 --% $ 23.32 7% ===================================================================== 1994 1993 -------------------- -------------------- Percent Percent $ in millions, except per unit Amount Change Amount Change - ------------------------------------------------------------------------------- Valencia and nearby properties $ 486 3% $ 472 (4)% Income-producing real estate 280 3 273 5 --------------------------------------------- Total Valencia area properties 766 3 745 (1) Other community development properties: Newhall Ranch, McDowell Mountain (1), Cowell and Suey 86 30 66 22 Agricultural properties 67 (16) 80 (8) Mortgage and other debt (146) (16) (174) 32 at book carrying value All other, net, not independently appraised 31 (45) 56 19 --------------------------------------------- Net appraised value $ 804 4% $ 773 (4)% ============================================= Number of partnership units outstanding ( 000's ) 36,761 -- 36,757 -- ============================================= Net appraised value per partnership unit $ 21.86 4% $ 21.04 (4)% =============================================
Appraised values are judgments. Land and property appraisals are an estimated value based on the sale of comparably located and zoned real estate or on the present value of income anticipated from commercial properties. There is no assurance that the appraised value of property would be received if any of the assets were sold. No assumptions have been made with respect to the bulk sale of the Company's total real estate assets. Certain reclassifications within categories have been made to conform to the current year presentation; however, prior period amounts have not been restated to reflect land sale activity, unit repurchases or distributions to unitholders. For the five-year period ended 1997, the Company has invested $39 million in unit repurchases and paid out $75 million in distributions. (1) McDowell Mountain Ranch in Scottsdale, Arizona was sold in 1996. 3 6 ITEM 1. BUSINESS (continued) REAL ESTATE The Company is developing the communities of Valencia and Newhall Ranch on its remaining 20,000 contiguous acres of prime property in Los Angeles County, California. Plans for the future include 35,000 new homes and 22 million square feet of commercial and industrial development. Valencia's development is focused around a town center and is based on a master plan with residential and industrial developments forming the basic community structure. Valencia is supported by shopping centers, schools, colleges, hospital and medical facilities, golf courses, professional offices and a range of recreational amenities. A system of landscaped and lighted pedestrian walkways, known as paseos, provide most residents with access to schools, retail, parks and recreation centers avoiding automobile traffic. Approximately 7,600 acres including 11,000 homes remain to be developed in Valencia. The Company's goal is to complete the build-out Valencia by 2005. The Company also develops and operates a growing portfolio of commercial properties, and provides building-ready sites for sale to industrial and commercial developers and users. For additional information regarding the Company's business refer to Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report. RESIDENTIAL DEVELOPMENT AND LAND SALES VALENCIA Residential absorption in Valencia has been on the rise in recent years and, in 1997, new home sales in Valencia by all sellers jumped to 657, an eight-year high, representing 41% of the Santa Clarita Valley and 12% of all new home sales activity for Los Angeles County. To appeal to a wider variety of homebuyers, the Company is expanding its housing opportunities to include new "lifestyle villages" such as lake and golf-oriented communities. A total of 888 home and lot sale closings were recorded by the Company in Valencia in 1997, a 55% increase over 1996. The Company's growth goal is to increase absorption to an average of 1,500 homes per year, including apartments, a level more than twice Valencia's historical average. Plans to accelerate absorption and maximize earnings and cash flow include marketing for sale selected larger entitled, unimproved land parcels, such as the 366-home North Hills parcel sold to Taylor Woodrow in 1997. This will augment the Company's traditional finished lot sale program and joint-venture homebuilding program. Through the merchant builder lot sale program, the Company sells lots to merchant builders to construct homes and recognizes revenues and income upon sale of lots to the builder. In 1997, a record number of residential lots in Valencia, totaling 754 for the year, were sold to merchant builders including 366 entitled, unimproved lots to Taylor Woodrow. At December 31, 1997, a total of 37 residential lots were in escrow, which subsequently closed in the first quarter of 1998. The Company is in active negotiations for the sale of several parcels. Escrow closings from the Company's homebuilding joint ventures totaled 134 in 1997 and represented only 15% of the Company's total home and lot closings in Valencia in 1997 compared with 45% in 1996. This declining sales mix is expected to continue in 1998. The Company's strategy in an expanding real estate market is to accelerate absorption through an expanded merchant builder program to capture demand. 4 7 ITEM 1. BUSINESS (continued) INDUSTRIAL/COMMERCIAL DEVELOPMENT AND LAND SALES The Company develops the infrastructure, provides sites for sale to industrial/commercial users, develops industrial/commercial real estate projects on a build-to-suit basis and constructs inventory buildings for lease. Valencia's location just 30 miles from downtown Los Angeles on Interstate 5, California's major north-south freeway, provides an attractive environment for industrial, commercial, service, distribution and entertainment businesses. Valencia Commerce Center and Valencia Industrial Center are home to 600 companies which employ more than 20,000 people. The industrial real estate market has improved dramatically within the past year, driving down vacancy rates in Los Angeles County to 6.7 percent and creating a shortage of quality space. The Company is marketing industrial and commercial land as Valencia Gateway, the largest master-planned business park in Los Angeles County, encompassing 4,500 acres, with 1,350 acres remaining for future development. Industrial land sales, industrial build-to-suit and build-to-lease projects will be concentrated in Valencia Commerce Center, the Company's 1,600-acre business park. Valencia's industrial vacancy rate was at a historical low of under one percent at December 31, 1997, and with approximately 600 net acres of industrial land remaining, the Company is poised for substantial absorption gains. The goal is to absorb up to 80 net acres, or about 1.5 million square feet of new space, and bring at least 1,500 new jobs to Valencia each year. This absorption is nearly double Valencia's historical average. In 1997, sales of nine industrial parcels totaling 62.0 acres and three industrial buildings on 10.2 acres were completed. This industrial activity represents an eight-year high for the Company. Three commercial land parcels totaling 8.9 acres also were sold in 1997. The largest contributor to industrial and commercial land sales in 1997 was the sale of the 208-unit StoneCreek apartment complex. This transaction, along with the sale of the Orchard Plaza office building, are part of the Company's strategy of selling selective properties to take advantage of market conditions and re-investing the proceeds in new projects to maximize returns to unitholders. At December 31, 1997, six parcels totaling 25.4 industrial acres, 16.8 commercial acres and one build-to-suit in Valencia Commerce Center were in escrow, with closings scheduled in 1998. The Company's ability to complete sales in escrow and future land sales is subject to market conditions beyond the control of the Company. At the end of 1997, industrial buildings totaling 101,000 square feet were in various stages of development as part of the Company's build-to-suit and build-to-lease program to increase absorption of industrial land. The Company expects industrial inventory to be adequate to meet anticipated demand with over 91 fully entitled acres, 195 acres tentatively approved and 289 acres approved and unmapped. Final plans for a portion of this land are subject to review by government agencies before development can proceed. 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 development of Newhall Ranch, a new master-planned community located on the Company's 12,000 acres west of Valencia. In 1997, significant entitlement progress was made for the remaining 35,000 homes planned in Los Angeles County. Projects with nearly 2,500 new homes received final approval, including Lago de Valencia, a 1,100-home lake project. The Los Angeles County Regional Planning Commission approved the Specific Plan, the Environmental Impact Report and provided other related approvals for Newhall Ranch, a master-planned community for 24,000 homes plus commercial and business park uses in five villages. The next step in the approval process for Newhall Ranch involves public hearings before the Los Angeles County Board of Supervisors, which are expected to begin in the spring of 1998. COMMERCIAL REAL ESTATE DEVELOPMENT The Company continues its aggressive commercial portfolio expansion program to meet demand. In 1997, the City of Santa Clarita, of which Valencia is a part, was recognized by the California Retail Survey as the fastest growing retail market in California. Independent research indicates that new retail demand in the Santa Clarita Valley should exceed 600,000 square feet over the next five years. 5 8 ITEM 1. BUSINESS (continued) The largest project under development is Valencia Marketplace, a 720,000-square-foot, value-oriented shopping center, with one mile of freeway frontage along Interstate 5. In 1997, Circuit City, Payless Shoe Source, Vons supermarket, Nurseryland, several restaurants and small retailers joined Wal*Mart, Toys R Us, Staples and Sport Chalet, which opened in the fourth quarter of 1996. The project is 86% constructed with completion scheduled in 1998. The majority of income property development activity is focused in Valencia Town Center along pedestrian-oriented Town Center Drive, a mixed-use "main street" extending west from the Company's regional shopping mall. Projects under construction include a 250-room Hyatt Valencia Hotel with a 26,000-square-foot conference center; a 100,000-square-foot, 3-D IMAX theatre complex with 12 additional movie screens; and a six-story, 130,000-square-foot office building where Princess Cruises' customer service group will occupy the top five floors, with the ground floor reserved for retail. An additional 60,000 square feet of retail space also is under construction in Valencia Town Center. For a description of the commercial properties, major tenants and occupancy rates at December 31, 1997, see Item 2 - Properties. VALENCIA WATER COMPANY Valencia Water Company, a wholly-owned subsidiary that supplies water to Valencia and other adjacent developments, is a regulated public utility serving over 18,000 metered customers. The water supply for the service area is obtained from wells owned by Valencia Water Company and by purchases from the California State Water Project. In 1997, 56% of Valencia Water Company's water was supplied through ground sources. AGRICULTURE The Company's agricultural division consists of farming and energy operations. Approximately 55,000 acres of ranch land at the Suey and Newhall Ranches not suitable for cultivation are leased out for cattle grazing. In line with the Company's strategy of selling farm properties with little or no potential for development, 1,673 acres of vineyards and undeveloped land at the Suey Ranch were sold in 1997. An option on the remaining 3,940 acres at the Merced Ranch, which was expected to close escrow in the fourth quarter of 1997, has been cancelled. The Company will continue to market the property for sale in 1998. Agricultural operations will continue to provide returns from Newhall Orchard in Ventura County and Suey Ranch where all or some portions, unsuited for development, may be sold in the future. The 14,000-acre New Columbia Ranch provides returns primarily from leasing land to tenants. Energy operations consist of royalty interests in oil and gas assets on the Newhall Ranch and Meridian Ranch, which was sold in 1994, where the Company retains a 50% royalty interest until June 30, 2000. In total, the Company has royalty interests in 160 oil wells and 16 gas wells. Energy operations do not represent a material source of revenues and income for the Company. FARMING Large scale, highly mechanized farming operations are conducted on three of the Company's ranches. Labor intensive crops are generally grown by tenants to whom land is leased on both cash and percentage-of-crop terms. Of the Company's land devoted to farming, over 60% is leased to others. Approximately two-thirds of the Company's farm crop is marketed through agricultural cooperatives. The remainder, such as tomatoes, grapes, alfalfa and wheat, is marketed directly by the Company. The Company's ranches supply most of their water through underground sources and are not dependent on state or federal water projects. The Company continues to improve conservation practices to minimize the cost of irrigation and the amount of water used. The principal agricultural properties include the Merced and New Columbia Ranches in the San Joaquin Valley, the Newhall Orchard in Ventura County and the Suey Ranch in Santa Barbara and San Luis Obispo Counties. During the calendar year 1997, the Company and its tenants raised over 20 different crops. The following table shows the approximate planted acreage of significant crops during 1997: 6 9 ITEM 1. BUSINESS (continued)
Crop Acreage Crop Acreage Crop Acreage - ---- ------- ---- ------- ---- ------- Alfalfa 2,196 Corn 1,208 Oranges 847 Almonds 145 Cotton 5,999 Safflower 606 Avocado 107 Grapefruit 28 Sudan Grass 103 Barley 1,475 Grapes 288 Sugarbeets 140 Beans 1,000 Lemons 481 Tomatoes 1,156 Carrots 297 Melons 194 Vegetables 1,579 Christmas Trees 29 Oats 606 Wheat 2,332
ITEM 2. PROPERTIES LAND Listed below is the location and acreage of properties owned by the Company at December 31, 1997:
Ranch State County Acreage ------------ ----------- -------------- --------- Cowell California Contra Costa 110 Merced California Merced 3,940 New Columbia California Madera 14,000 Suey California Santa Barbara/San Luis Obispo 36,590 Newhall California Los Angeles/Ventura 36,580 ------ 91,220 ======
PLANTS AND BUILDINGS Agriculture - Various buildings located at three farming operations in California. Commercial Real Estate - Listed below are square footage, occupancy and anchor tenants of major commercial properties owned by the Company at December 31, 1997. Other commercial properties not shown in the table include various commercial and industrial buildings. The Company also has numerous land leases including 541 acres for a landfill. The commercial properties are leased to 311 tenants, not including apartment complexes. 7 10 ITEM 2. PROPERTIES (continued)
Gross Occupancy at Shopping Centers Date Open Sq. Ft. 12-31-97 Major Tenants - ------------------------- --------- ------- ------------ ------------------------- Valencia Town Center 1992 790,000 97%(4) Robinsons-May, JC Penney, Sears Castaic Village 1992 91,800 97% Ralphs, PayLess Drugstores River Oaks 1987 273,500 96% Mervyn's, Target NorthPark Village Square 1996 69,000(3) 100% Ralphs Supermarket --------- 1,224,300 --------- Office and Mixed Use Projects City Center Office Building 1991(1) 44,760 100% Bank of America Valley Business Center 1987 56,800 100% Gold's Gym Newhall Land Headquarters 1978 59,300 100% Town Center Office Building 1996 57,000 65% Dean Witter Reynolds, Inc., Valencia National Bank Plaza Del Rancho 1997 51,000 85% Carl's Jr. Restaurant --------- 268,860 --------- Build-to-Suit Facilities/Restaurants - ------------------------- Office/Records Storage 1996 35,000 100% S. C. Healthcare Management Retail Store 1994 7,000 100% Trader Joe's Restaurant 1986 11,057 100% El Torito Restaurant 1990 6,140 100% Hamburger Hamlet Restaurant 1984 3,835 100% Wendy's Restaurant (ground lease) 1986 9,487 100% Red Lobster Industrial Building 1997 71,750 100% Cosmic Plastics Spectrum / Valencia 1997 55,000 100% Spectrum Health Club --------- 199,269 ---------
Hotel Rooms - ----------------------------- ----- Valencia Hilton Garden Inn 1991 152 82% for the (75% joint venture interest) year Apartment Complexes Units - ----------------------------- ----- Portofino 1989 216 99% Northglen 1988 234 98% SkyCrest 1997 264 100% --- 714 ---
The following commercial properties were under construction at December 31, 1997:
Percent Estimated Gross Leased Shopping Centers Completion Sq. Ft. at 12-3 97 Major Tenants/Lessee - ---------------------------- ---------- ------- ---------- ---------------------------------- Valencia Marketplace 1998(2) 720,000 83% Wal*Mart, Circuit City, Toys R Us, Staples, Sport Chalet, Vons Supermarket Mixed-Use Projects Entertainment Complex 1998 100,000 IMAX / Edwards Theaters Valencia Town Center Retail 1998 60,000 Office Buildings - ---------------------------- Six-story Office Building 1998 130,000 Princess Cruises Rooms/ Hotel Sq. Ft - ---------------------------- ------- Hyatt Valencia Hotel and 250 N/A Santa Clarita Conference Center 26,000
(1) Acquired in 1991 (2) 86% constructed as of December 31, 1997 (3) Does not include 16,700 square feet for a Rite Aid drug store and 5,600 square feet of additional retail space to be constructed in 1998 (4) Including 7% for temporary tenants and signed leases to open in 1998 8 11 ITEM 2. PROPERTIES (continued) Valencia Water Company - 16 distribution reservoirs, 18 booster pumping stations, 18 wells, approximately 223 miles of pipeline and other utility facilities and an 18,000-square-foot office/warehouse building on 2.5 acres of land. All of the commercial real estate properties and the properties of Valencia Water Company are located in and around Valencia, California and are owned by the Company. A $45.3 million mortgage maturing in 1999 is secured by the Portofino, Northglen and SkyCrest apartment complexes, River Oaks shopping center, and the Company's headquarters building. At December 31, 1997, borrowings totaling $40 million were outstanding against a $40 million revolving mortgage facility secured by Valencia Town Center. An $11 million financing is secured by the water utility plant of Valencia Water Company. For additional information concerning encumbrances against Company properties, refer to Note 7 of the Notes to Consolidated Financial Statements in this Annual Report. For additional information on the Company's properties, refer to the summary of appraised values on page 3 and Schedule III - Real Estate and Accumulated Depreciation on pages 64 and 65. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various claims and litigation, including those arising from its ordinary conduct of business. Management is of the opinion that the ultimate liability from these claims and litigation will not materially affect the Company's consolidated financial condition or results of operation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S DEPOSITARY UNITS AND RELATED SECURITY HOLDER MATTERS Market Price and Distribution Data Years ended December 31
Market Price ---------------------------------- 1997 1996 Distributions - ----------------------------------------------------------------------------------------------------- Per unit High Low High Low 1997 1996 - ----------------------------------------------------------------------------------------------------- First quarter $ 18 1/8 $ 16 1/2 $ 18 3/4 $ 15 1/8 First quarter $.18 $.10 Second quarter 22 1/4 17 1/4 18 3/8 15 7/8 Second quarter .10 .10 Third quarter 24 7/8 21 1/2 17 3/4 15 Third quarter .10 .10 Fourth quarter 32 22 7/8 17 15 Fourth quarter .10 .10 - ----------------------------------------------------------------------------------------------------- Year's high and low $ 32 $ 16 1/2 $ 18 3/4 $ 15 Total distributions $.48 $.40 ===================================================================================================== 1997 1996 - ---------------------------------------------------------- December 31, closing price $30 $16 7/8 ==========================================================
The Company's partnership units are traded on the New York and Pacific Stock Exchanges under the ticker symbol NHL and, at December 31, 1997, the Company had 1,394 unitholders of record. The Company has paid uninterrupted quarterly cash distributions since 1936. The declaration of any distribution and the amount declared, is determined by the Board of Directors taking into account the Company's earnings, cash requirements, financial condition and prospects. 9 12 ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- In thousands, except per unit, percentages and sales information OPERATING RESULTS Revenues $ 207,701 $ 220,186 $ 175,597 $ 134,268 $ 105,452 $ 128,182 Operating income 63,898 60,584 46,482 34,607 28,538 31,636 General and administrative expense (1) (10,268) (9,133) (8,547) (8,578) (7,710) (6,806) Interest and other, net (9,137) (9,562) (10,618) (10,455) (8,031) (7,619) Net income 44,493 41,889 27,317 15,574 12,797 17,211 Depreciation and amortization (included in net income) (10,148) (8,857) (7,698) (7,690) (7,329) (6,471) - ----------------------------------------------------------------------------------------------------------------------------------- PER UNIT INFORMATION Net income $ 1.29 $ 1.19 $ .75 $ .42 $ .35 $ .47 Net income - assuming dilution 1.28 1.18 .75 .42 .35 .47 Distributions (including special) .48 .40 .40 .40 .40 .60 Partners' capital 4.21 3.48 3.14 3.06 3.03 3.08 Appraised value 25.25 23.35 23.32 21.86 21.04 22.01 Market price - high 32 18 3/4 17 17 1/4 17 1/2 20 3/8 low 16 1/2 15 12 1/8 12 13 1/2 12 year-end closing 30 16 7/8 17 12 1/8 16 14 1/4 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Land under development $ 53,875 $ 63,266 $ 88,457 $ 87,423 $ 73,078 $ 50,127 Income-producing properties, net 227,203 182,641 134,504 135,858 134,384 161,615 Total assets 403,932 373,488 349,753 343,792 359,898 323,082 Mortgage and other debt 156,946 163,256 152,302 145,991 174,157 131,849 Other long-term obligations 40,393 37,544 36,270 30,922 33,414 28,609 Total liabilities 258,655 252,835 236,897 231,435 248,619 210,033 Partners' capital 145,277 120,653 112,856 112,357 111,279 113,049 Market capitalization at year end 1,035,810 585,575 610,470 445,727 588,112 523,830 - ----------------------------------------------------------------------------------------------------------------------------------- STATISTICS Return on total book capital 15% 15% 10% 6% 4% 7% Total debt as a percent of total book capitalization 52% 58% 57% 57% 61% 54% Total debt as a percent of total market capitalization 13% 22% 20% 25% 23% 20% Units outstanding - weighted average 34,520 35,292 36,241 36,757 36,757 36,759 - weighted average diluted 34,750 35,411 36,272 36,789 36,790 36,796 - year end 34,527 34,701 35,910 36,761 36,757 36,760 - ----------------------------------------------------------------------------------------------------------------------------------- SALES INFORMATION Residential lots and homes sold 888 1,284(2) 1,233(2) 1,026(2) 113 487 Industrial and commercial acres sold 81.0 36.9 38.5 12.0 28.9 4.5 Farm acres sold 1,673 544 5,501 5,370 3,900 6,750 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes expense from unit ownership plans. (2) Includes lots sold at McDowell Mountain Ranch in Arizona prior to the sale of the project in 1996. 10 13
1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS Revenues $ 150,762 $ 192,886 $ 234,450 $ 203,607 $ 177,511 Operating income 43,232 48,487 81,468 68,177 49,163 General and administrative expense (1) (8,749) (5,381) (10,880) (16,281) (8,436) Interest and other, net (4,398) (4,728) (1,865) 1,722 (1,108) Net income 30,085 38,378 68,723 53,618 39,619 Depreciation and amortization (included in net income) (7,701) (8,441) (6,725) (5,149) (4,693) - -------------------------------------------------------------------------------------------------------------------- PER UNIT INFORMATION Net income $ .82 $ 1.03 $ 1.75 $ 1.36 $ .96 Net income - assuming dilution .82 1.02 1.74 1.35 .96 Distributions (including special) .80 .80 .85 .53 .43 Partners' capital 3.20 3.18 4.12 4.05 3.37 Appraised value 23.70 25.33 28.52 24.24 19.38 Market price - high 22 1/2 32 1/2 35 3/4 28 3/8 21 1/4 low 13 1/2 14 7/8 25 1/8 15 10 7/8 year-end closing 19 1/4 16 30 1/8 28 5/16 15 - -------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Land under development $ 67,769 $ 73,527 $ 94,510 $ 86,010 $ 66,164 Income-producing properties, net 116,875 91,783 92,365 71,205 40,032 Total assets 280,575 265,406 279,645 299,229 256,126 Mortgage and other debt 78,556 60,302 30,676 59,717 59,857 Other long-term obligations 27,762 25,920 16,867 15,277 13,640 Total liabilities 162,790 148,459 120,203 139,172 121,349 Partners' capital 117,785 116,947 159,442 160,057 134,777 Market capitalization at year end 707,534 588,080 1,166,048 1,119,476 600,000 - -------------------------------------------------------------------------------------------------------------------- STATISTICS Return on total book capital 15% 22% 36% 24% 20% Total debt as a percent of total book capitalization 40% 34% 16% 27% 31% Total debt as a percent of total market capitalization 10% 9% 3% 5% 9% Units outstanding - weighted average 36,755 37,393 39,286 39,561 41,220 - weighted average diluted 36,831 37,543 39,488 39,666 41,270 - year end 36,755 36,755 38,707 39,540 40,000 - -------------------------------------------------------------------------------------------------------------------- SALES INFORMATION Residential lots and homes sold 233 540 812 733 540 Industrial and commercial acres sold 73.5 24.3 23.8 104.2 44.7 Farm acres sold 2,989 3,950 - - - - --------------------------------------------------------------------------------------------------------------------
11 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Years ended December 31, 1997, 1996 and 1995 RESULTS OF OPERATIONS Net income increased to $44.5 million in 1997, the fourth consecutive year of higher earnings. The continued upswing in the California economy resulted in increased market demand and further improvements in all three segments of the Company's real estate operations in Valencia - residential, commercial and industrial. Residential lot and joint-venture home sales in Valencia reached an eight-year high, as did absorption of industrial and commercial land. The major contributors to the year's earnings were two strategic sales, a 208-unit apartment complex and a portion of the Suey Ranch, along with a high margin sale of 366 entitled, unimproved residential lots. These three sales added $53.2 million to revenues and $40.0 million to income in 1997. The primary contributor to 1996 results was the sale of the McDowell Mountain Ranch project for $43.6 million, adding $24.4 million to income. With the continuation of the economic improvement in Southern California and resulting strong real estate markets, the Company expects further improvement in earnings in 1998. A five-year summary of revenues and operating income for each of the Company's business segments is listed below: FIVE YEAR SUMMARY
Years ended December 31, ------------------------------------------------------------- In thousands 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Revenues Real estate Residential home and land sales Valencia $ 67,682 $ 79,533 $ 58,160 $ 36,022 $ 31,499 McDowell Mountain Ranch - 49,101 16,602 21,984 - Industrial and 61,996 29,844 41,396 11,667 15,811 commercial sales Commercial operations Income-producing 33,404 28,742 28,704 28,835 24,762 properties Valencia Water Company 11,170 9,762 8,631 6,479 6,426 Agriculture Operations 15,487 16,459 14,676 17,481 17,042 Ranch sales 17,962 6,745 7,428 11,800 9,912 --------- --------- --------- --------- --------- Total Revenues $ 207,701 $ 220,186 $ 175,597 $ 134,268 $ 105,452 ========= ========= ========= ========= ========= Operating Income Real estate Residential home and land sales Valencia $ 15,495 $ 14,116 $ 7,102 $ 4,487 $ 8,116 McDowell Mountain Ranch - 26,267 2,741 6,719 - Industrial and 19,216 3,775 17,702 5,048 4,422 commercial sales Community development (11,034) (11,670) (6,766) (6,679) (6,126) Commercial operations Income-producing 15,580 14,080 15,158 13,785 11,913 properties Valencia Water Company 3,268 3,212 2,387 1,370 1,671 Agriculture Operations 4,378 4,798 3,529 4,350 3,372 Ranch sales 16,995 6,006 4,629 9,227 5,170 Earthquake damage - - - (3,700) - --------- --------- --------- --------- --------- Total Operating Income $ 63,898 $ 60,584 $ 46,482 $ 34,607 $ 28,538 ========= ========= ========= ========= =========
12 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESIDENTIAL HOME AND LAND SALES VALENCIA Newhall Land's successful strategy of selling residential lots to merchant builders and home sales through joint ventures continues to increase new home absorption in Valencia. In 1997, new home sales in Valencia by all sellers increased 20% to 657, the highest total since 1989, the peak of the last real estate market cycle in Southern California. This was the fifth consecutive year new home sales increased, reflecting the strengthened real estate market, a wider range of choices and prices offered to homebuyers, and the growing recognition that the master-planned community of Valencia offers a superior quality of life. At December 31, 1997, merchant builders and the Company's joint-venture partners combined had 171 homes in escrow, 217% higher than at the close of 1996 and 144% higher than at December 31, 1995. 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 not met by merchant builders. Through the joint-venture program, Newhall Land recognizes its portion of revenues and income upon close of escrow to the homebuyer. The Company's participation in joint ventures enables it to generate increased income as it receives a portion of the homebuilding profits in return for sharing in the risk of homebuilding, and in some cases, financing construction costs. In 1997, a total of 888 home and lot sale closings were recorded by the Company in Valencia, a 55% increase over the previous year. Results for 1996 also included the sale of 491 entitled, unimproved residential lots in Castaic, a community north of Valencia. The Company's strategy in an improving real estate market is to accelerate the pace of development in Valencia through an expanded merchant builder program to capture demand. As a result, joint ventures are declining and accounted for only 15% of the Company's Valencia home and lot closings in 1997 compared with 45% in 1996. This declining sales mix trend is expected to continue in 1998. Continued improvement in lot and home sales is dependent on economic conditions and, over the longer term, on the Company's ability to secure the necessary entitlements that will allow it to offer products that meet the needs of homebuyers. Merchant Builder Program: The Company sold a total of 754 lots in Valencia to merchant builders in 1997, an increase of 137% over 1996. These sales contributed $38.1 million to revenues and $16.6 million to income. Gross profit margins from these lot sales averaged 31% and return per net acre averaged $131,000, excluding the high margin sale of 366 entitled, unimproved lots. In 1996, 318 lots in Valencia were sold to merchant builders adding $21.9 million to revenues and $6.4 million to income. Gross profit margins from these lot sales averaged just over 29% and return per net acre averaged $123,000, an amount increased by the sale of 80 lots for a higher density, single-family project. In addition, the sale of 491 entitled, unimproved residential lots on Company-owned land in Castaic, a community north of Valencia, for $4.5 million added $4.3 million to operating income. In 1995, a total of 261 residential lots sold to merchant builders added $16.6 million to revenues and $5.3 million to income. Gross profit margins on these sales averaged just over 30% and benefited from the sale of 98 lots for a higher density, single-family project. Deferred revenues of $1.4 million and income of $422,000 were recognized in 1997 from prior residential lot sales under percentage of completion accounting. In 1996 and 1995, deferred revenues of $1.9 million and $1.7 million and income of $983,000 and $205,000 were recognized, respectively. Merchant builders in Valencia closed escrow on 404 homes in 1997, 302 homes in 1996 and 235 homes in 1995. While the Company does not participate directly in profits generated from escrow closings by merchant builders, the absorption of these previously sold lots is key to the Company's future success in selling additional lots. The Company continues to attract additional merchant builders to Valencia through its successful marketing program. During 1997, four new merchant builders purchased land in Valencia, including two international firms. At December 31, 1997, 37 residential lots were in escrow, which subsequently closed in the first quarter of 1998. The Company is in active negotiations for the sale of several parcels. At December 31, 1996, 123 residential lots were in escrow and at the end of 1995, 491 unimproved lots in Castaic were in escrow. The Company has an inventory of over 3,500 entitled residential lots and approximately 7,400 lots in various stages of the governmental process. The inventory of approved lots includes 458 homes in the next development area in North River called Decoro Highlands and the first "lifestyle village," Lago de Valencia, planned for 1,100 homes surrounding a lake, for which the Company received final approvals in December. In addition, final approval was received for 900 apartments and attached single-family homes on 32 acres in the South River residential project adjacent to Valencia Town Center. Joint-Venture Program: Escrow closings from six joint-venture projects totaled 134 homes in 1997, contributing $28.2 million to revenues and $2.9 million to income. Three joint-venture projects were sold out during 1997 and 13 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) one is expected to close out in early 1998. Average gross profit margins were 10% in 1997 with 40% of the closings being townhomes or condominiums (multi-family) or higher density single family homes. The decline in joint-venture escrow closings in 1997 is part of the Company's strategy to concentrate on residential lot sales to merchant builders during strong real estate markets. The joint-venture program closed 256 homes in 1996, adding $51.2 million to revenues and $5.4 million to income. Average gross profit margins of 10% were slightly lower in 1996 compared to 1995 because almost 60% of the closings were from multi-family and higher density single-family homes. In 1995, the joint-venture program closed 208 homes, adding $39.8 million to revenues and $4.9 million to income with average gross profit margins of 12%. During 1997, models opened on two new joint-venture projects. In May, a 72 single-family home joint venture opened in Valencia NorthPark with Warmington Homes, and in December, models opened on Avignon for 76 upscale townhomes adjacent to Valencia Country Club. Escrow closings at Avignon, a joint venture with EPAC, are expected to start in the spring of 1998. Another joint-venture project under construction with EPAC is Cheyenne, a 166-townhome development near the popular Montana Townhomes project which sold out in 1996. At December 31, 1997, 23 joint-venture homes were in escrow compared with 10 joint-venture homes in escrow at December 31, 1996 and 28 homes at the end of 1995. At December 31, 1997, the Company's homebuilding partnerships had 61 homes under construction, which were included in residential land under development inventories, and there were no completed, unsold homes. At the end of 1996, homebuilding partnerships had 70 completed, unsold homes available for sale which included 44 in the Rose Arbor condominium project, built as a single construction unit. At the end of 1995, there were 180 homes under construction and 52 completed, unsold homes available for sale. MCDOWELL MOUNTAIN RANCH In April, 1996, the Company completed the sale of the McDowell Mountain Ranch project in Scottsdale, Arizona. The sale contributed $43.6 million to revenues and $24.7 million to income. Results for 1996 also included 219 lots sold prior to sale of the planned community. Sale of these lots added $5.5 million to revenues and $2.2 million to income. In 1995, 764 lots closed escrow to merchant builders contributing $15.0 million to revenues and $5.4 million to operating income, including lot premiums. INDUSTRIAL AND COMMERCIAL SALES Revenues and income from industrial and commercial land sales showed solid gains for the second consecutive year after several slow years in a weak Southern California industrial and office market. Sale of the Company's 208-unit StoneCreek apartment complex was the largest contributor to industrial and commercial sales in 1997. This sale, along with the Orchard Plaza Office building added $20.5 million to revenues and $13.5 million to income. These transactions are part of the Company's strategy of selling selective properties to take advantage of market conditions and re-investing the proceeds in new projects to maximize returns to unitholders. Sales of nine industrial parcels totaling 62.0 acres and three industrial buildings on 10.2 acres in 1997 represent an eight-year high for the Company. These sales added $38.1 million to revenues and $7.8 million to income. Results for 1997 also include the sale of three commercial parcels totaling 8.9 acres, adding $3.2 million to revenues and $2.1 million to income. In 1996, industrial and commercial land sales included 13 parcels totaling 36.9 acres, contributing $29.2 million to revenues and $7.7 million to operating income. These sales included three industrial parcels and two industrial buildings totaling 22.4 acres which sold for $18.9 million, adding $2.5 million to income. The sale of eight commercial parcels totaling 14.5 acres for $10.3 million added $5.2 million to net income in 1996, including Valencia Autoplex, an automotive service center which opened in early 1996. Results for 1996 also included revenues of $600,000 and income of $275,000 recognized from prior commercial land sales. In 1995, 13.2 acres of industrial property sold contributed $10.8 million to revenues and $1.8 million to income and included a 9.7-acre build-to-suit in Valencia Commerce Center. The primary contributor to commercial sales in 1995 was the sale of Bouquet Shopping Center on 12.3 acres for $17.9 million, adding $11.0 million to income. In addition, seven commercial parcels totaling 25.3 acres contributed $12.7 million and $6.5 million to revenues and income, respectively. No deferred revenues or income from prior land sales were recognized in 1995. The vacancy rate in Valencia's two industrial parks averaged less than 1.0% in 1997. With more than 91 fully entitled acres available in these two parks, 195 acres tentatively approved and 289 approved and unmapped, adequate inventory should be available to meet future anticipated demand. Final plans for a portion of this land are subject to review by government agencies before development can proceed. 14 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) At December 31, 1997, six parcels totaling 25.4 industrial acres, 16.8 commercial acres and one build-to-suit in Valencia Commerce Center were in escrow for $21 million, with closings scheduled in 1998. The Company's ability to complete sales in escrow and future land sales is subject to market and other conditions beyond the control of the Company. At the end of 1997, industrial buildings totaling 101,000 square feet were in various stages of development as part of the Company's build-to-suit and build-to-lease program to increase absorption of industrial land. At December 31, 1996, 2.1 commercial acres were in escrow and, at the end of 1995, a 5.7-acre parcel in Valencia Industrial Center and a 2.7-acre commercial parcel were in escrow. On March 16, 1998, the Company announced that it has entered into an agreement to sell Valencia Marketplace, a 720,000-square-foot, high-volume retail center, where approximately 75% of the leaseable space is constructed and 84% leased. The sale price is $111 million in cash and is expected to generate earnings of $39 million upon completion of the center. At the close of escrow, revenues of approximately $87 million and earnings of approximately $32 million will be recognized under percentage of completion accounting. Additional revenues and income will be recognized as the center is completed. Escrow is scheduled to close later this year. The sale will represent a significant portion of the Company's 1998 revenues and income. COMMUNITY DEVELOPMENT Newhall Land'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 development of Newhall Ranch, the next new town to be developed on the Company's 12,000 acres west of Valencia. The Company's ability to achieve its goals and increase the pace of development is contingent upon obtaining the necessary entitlement or governmental approvals. In 1997, final approvals were received for 2,458 new homes in Valencia. These included 458 homes in Decoro Highlands, the next major development in Valencia's North River planning area; 900 apartments and single-family attached homes in South River adjacent to Valencia Town Center; and 1,100 homes in Lago de Valencia, a lake-oriented and the first of several planned "lifestyle villages." These approvals will enable Valencia to offer a wider choice of options to homebuyers. Also, final approval was received for 167,000 square feet of space in Valencia Industrial Center and 636,000 square feet of retail/commercial space. In mid-December, the Los Angeles County Regional Planning Commission approved the Specific Plan, the Environmental Impact Report and provided other related approvals for the Company's 12,000-acre Newhall Ranch project. This 24,000-home new town will contain commercial and business park uses within its five villages. This approval was an important step in the entitlement process. The next step in the approval process involves public hearings before the Los Angeles County Board of Supervisors, which is expected to begin this spring. The Company continues to work with the Regional Planning Commission on the Development Agreement for the new community, which also is subject to approval by the Los Angeles County Board of Supervisors. The Company entered an agreement in 1996 with PGA Tour Golf Course Properties to develop a Tournament Players Club (TPC) championship course in the proposed Westridge Golf Course Community, west of Interstate 5 in Valencia. The 18-hole public course will be designed, constructed and managed by PGA Tour Golf Course Properties, and is expected to be the only TPC golf course located in Los Angeles County. The Environmental Impact Report is expected to be released for public review early in 1998, and the 1,700-home project is expected to go to the Los Angeles County Planning Commission this spring and the Board of Supervisors in late 1998. Plans for the project include a housing mix ranging from apartments to large, custom homes surrounding the golf course. With the Company's efforts in obtaining additional entitlements continuing at high levels, community development expenses were approximately the same in 1997 as 1996. The 40% increase in community development expenses in 1996, excluding a 1995 recovery from a lawsuit settlement, reflects the Company's heightened focus on activities to secure the necessary governmental land use approvals as well as an intensified strategic marketing program to complete the build-out of Valencia. Expenses for community development activities in 1995 were 42% above the previous year, excluding a lawsuit recovery, due to the Company's intensified strategic marketing and predevelopment programs to meet growth targets. The Company will continue to focus on obtaining additional residential entitlements in Valencia to support the accelerated pace of development to meet forecasted demand. Entitlement efforts for Newhall Ranch are expected to escalate in 1998 as the Los Angeles County Board of Supervisors begins its review process. Therefore, the Company expects community development expenses in 1998 to increase by approximately 20%. 15 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) INCOME-PRODUCING PROPERTIES 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 1997, revenues and income from commercial operations increased 16% and 11%, respectively, over 1996. Contributing to 1997 increases in revenues and income is the addition of new properties including the 720,000-square-foot Valencia Marketplace where Circuit City, Payless Shoe Source, Vons supermarket, Nurseryland, several restaurants and small retailers joined Wal*Mart, Sport Chalet, Toys R Us and Staples, which opened in the fourth quarter of 1996. Including space occupied and under development, the center is currently 83% leased. Completion of Valencia Marketplace is scheduled for 1998. At December 31, 1997, occupancy at Valencia Town Center shopping mall was 99%, including short-term tenants. River Oaks and Castaic Village neighborhood shopping centers were 96% and 97% leased, respectively. At River Oaks, Mimi's Cafe will open in 1998 and the shopping center is scheduled for remodeling this summer. NorthPark Village Square, the Company's newest neighborhood shopping center, is fully leased and undergoing further expansion to accommodate Rite-Aid, the nation's largest drug store chain, which is scheduled to open mid-1998. Rite-Aid has leased 16,700 square feet of space, joining Ralphs supermarket as anchor tenants, plus an additional 5,600 square feet of leaseable space will be constructed in 1998. Plaza del Rancho, a 53,000-square-foot mixed-use project which opened in mid-1997 in Valencia Industrial Center near the high school, is 85% leased. Valley Business Center, a 56,800-square-foot mixed-use project, and the Bank of America building adjacent to Newhall Land's headquarters are fully occupied and the three-story office building in Valencia Town Center, completed in 1996, is now 65% leased. The Company's three apartment complexes all enjoyed high occupancy rates throughout 1997 with over 98% average occupancy at year-end. Demand for rental units is high and rents have been increased an average of 9% for new tenants through January, 1998. The 264 units at SkyCrest opened at the end of 1996 and were absorbed with little effect on other apartment complexes. This strong demand is continuing and additional apartment complexes are planned. The first, a 210-unit complex in Valencia Town Center, will start construction in 1998 and will be completed in early 1999. In 1997, the 208-unit StoneCreek apartment complex was sold as part of the Company's strategy to selectively sell mature properties in strong markets. Development activity is focused in Valencia Town Center along Town Center Drive, a mixed-use "main street" extending from the Company's regional shopping mall west past the 250-room Hyatt Valencia Hotel, currently under construction, and Spectrum health club, which opened in June, 1997. Construction also is underway on a six-story office building where Princess Cruises has entered into a long-term lease with the Company to occupy the top five floors, with the ground floor reserved for retail. Princess Cruises will relocate 600 employees to Valencia this fall, when completion is expected. In addition, a 26,000-square-foot office/retail building and a 100,000-square-foot entertainment center with an IMAX 3D Theatre, 12 additional screens, restaurants and retail shops are in various stages of development. Another 60,000 square feet of retail space is under construction in Valencia Town Center. These additions to the income portfolio will contribute additional revenues and income in 1998. In 1996, income from the Company's commercial operations declined slightly due to the sale of Bouquet Shopping Center in 1995 and reduced occupancy at Valencia Town Center. In 1995, income increased 10%. The sale of the Bouquet Shopping Center in June, 1995 was offset by high occupancy rates in all income properties, including apartment complexes which benefited from rent increases averaging 3%. As the number of commercial income properties built each year increases, sales of income properties are expected to be made on a selective basis allowing the Company to realize a greater return on its investment in the income property portfolio as a whole. On March 16, 1998, the Company announced that it has entered into an agreement to sell Valencia Marketplace with escrow scheduled to close later this year. Earnings from income-producing properties in 1998 are expected to increase slightly over 1997, assuming completion of the Valencia Marketplace sale later in the year in addition to the scheduled completion of several new income-producing properties currently under development, including the 250-room Hyatt Valencia Hotel and a six-story office building for Princess Cruises. VALENCIA WATER COMPANY Valencia Water Company is a regulated public water utility and a wholly-owned subsidiary of the Company serving approximately 18,000 metered customers in the Valencia area. In 1997, a growing customer base contributed to a 14% increase in revenues while income increased by only 2% due to higher operating expenses. In 1996, revenues and income increased 13% and 35%, respectively, due to a broader customer base and a 4% 16 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) rate increase effective January 1, 1996. Revenues and income from the water utility increased 33% and 74%, respectively, in 1995 due to a 30% rate increase effective January 1, 1995, and a disaster recovery surcharge. AGRICULTURAL OPERATIONS Agricultural revenues and income, including the Company's energy operations, declined 6% and 9%, respectively, primarily due to the sale of grape vineyards at the Suey Ranch. The decreases were partially offset by high prices and yields from citrus crops. In 1996, revenues and income increased 12% and 36%, respectively, from the prior year due to excellent prices and yields on avocados which provided record income. For 1995, revenues decreased 16% and income declined 19% from the previous year, primarily due to fewer acres being farmed as a result of previously sold farmland. RANCH SALES The sale of 1,673 acres of vineyard and undeveloped land at the 38,000-acre Suey Ranch in 1997 for $17.9 million added $17 million to income. In 1996, sale of 539 acres of crop land at the Suey Ranch for $6.5 million added $5.9 million to income and a 4.5-acre parcel in northern California closed escrow for $600,000, contributing $472,000 to income. In 1995, sale of 5,501 acres at the Merced Ranch for $7.4 million added $4.6 million to income. An option on the remaining 3,940 acres on the Company's Merced Ranch, which was expected to close escrow in the fourth quarter of 1997, has been cancelled. The Company will continue to market the property for sale in 1998. GENERAL AND ADMINISTRATIVE EXPENSE Excluding a prior year non-cash charge for curtailment of a retirement plan for directors, general and administrative expenses increased 5% in 1997, primarily due to expenses related to the Company's efforts to secure additional large landholdings for development. The $453,000 curtailment charge in 1996 was the major contributor to a 7% increase in general and administrative expenses from 1995. UNIT OWNERSHIP PLANS In 1997, an expense of $1.2 million was recorded for increases in the market price of partnership units in connection with appreciation rights on outstanding non-qualified options granted prior to 1992. In 1996 and 1995, expense of $12,000 and $30,000 respectively, was recorded for amortization of return rights on restricted units which became fully amortized in 1996. INTEREST AND OTHER The major contributor to a 4% decrease in net interest expense in 1997 and a 10% decrease in 1996 was the sale of the McDowell Mountain Ranch in April, 1996. Interest expense for increased borrowings against a revolving mortgage facility and lines of credit in 1996 was offset by interest capitalized to income portfolio projects during their construction period. The Company expects net interest expense to increase in 1998 as new income-producing properties are completed. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES In 1997, the Company replaced its existing bank lines, totaling $119 million, with a three-year, $200 million unsecured revolving line of credit bringing total unsecured credit lines to $203 million. At December 31, 1997, a total of $8.1 million was outstanding against unsecured credit lines and $40 million was outstanding against a mortgage facility. Cash and cash equivalents totaled $2.8 million at December 31, 1997 with $178.2 million in available lines of credit to fund development activities. Letters of credit against lines of credit totaled $16.7 million at the end of 1997. The Company believes it has adequate sources of cash from operations and debt capacity, including lines of credit, to finance future operations plus take advantage of new development opportunities. At December 31, 1997, there was no debt against raw land or land under development inventories in Valencia. There are no material commitments for capital expenditures other than the Company's plans in the ordinary course of business to develop its portfolio of income-producing properties. In 1997, a total of $69.4 million was invested in portfolio development and the Company expects to invest $80 to $100 million in 1998. Construction of new income-producing properties on Company-owned land creates additional debt capacity. It is the Company's policy to limit total debt to approximately 60% of the value of the portfolio of income-producing properties. On March 16, 1998, the Company announced that it has entered into an agreement to sell Valencia Marketplace, a 720,000-square-foot, high-volume retail center, for $111 million in cash with escrow scheduled to close later this year. The Company currently expects that funds from the sale will be used to reduce bank debt and to develop new commercial projects, although the relative amounts to be utilized for these respective purposes has not yet been determined. 17 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The following discussion relates to principal items in the Consolidated Statement of Cash Flows: OPERATING ACTIVITIES Net cash provided by operating activities in 1997 totaled $100.3 million and included sales of 888 residential lots and homes in Valencia plus 81.0 acres of industrial and commercial land including three build-to-suit/lease buildings; sale of a 208-unit apartment complex; and sale of 1,673 acres of land at the Suey Ranch. Combined these sales provided $146.7 million in cash and $1.2 million in notes. In addition, notes totaling $10.2 million were collected from land sales in prior years. Expenditures for land under development inventories and home construction totaled $66.8 million and were more than offset by $76.1 million in real estate cost of sales relief. Inventory expenditures in Valencia were related to land preparation and infrastructure to ready land for development or sale and home construction advances for the Company's homebuilding partnerships. The Company's net homebuilding investment totaled $11.8 million at the end of 1997. In 1996, net cash by operating activities totaled $99.3 million and included sales of 1,284 residential lots and homes in the Valencia area and McDowell Mountain Ranch, plus 36.9 acres of industrial and commercial property including two build-to-suit/lease properties; sale of the entire McDowell Mountain Ranch planned community in Arizona; and sale of 539 acres of row crop land at the Suey Ranch. Combined, these sales provided $133.8 million in cash and $12.8 million in notes. In addition, notes totaling $7.2 million from land sales in prior years were collected in 1996. Expenditures in 1996 for land under development inventories totaled $75.4 million and were more than offset by $100.6 million cost of sales relief including the sale of the McDowell Mountain Ranch project. The Company's net homebuilding investment decreased 51% in 1996 to $12.4 million. Net cash provided by operating activities in 1995 totaled $29.5 million and included sales of 1,233 residential lots and homes in Valencia and McDowell Mountain Ranch, 38.5 acres of commercial and industrial property including a build-to-suit facility, Bouquet Shopping Center, and 5,501 acres at the Merced Ranch. These sales provided the Company with $105.8 million in cash and $15.8 million in notes. Notes from prior land sales collected in 1995 totaled $6.9 million. Expenditures for land under development inventories totaling $80.9 million in 1995 were offset by real estate sales activity resulting in a $1.0 million net investment. The Company's net homebuilding investment totaled $25 million at the end of 1995. INVESTING ACTIVITIES Expenditures for income-producing properties under development in Valencia totaled $69.4 million in 1997. Major expenditures included $22.8 million for Valencia Marketplace, a 720,000-square-foot retail center; $12.5 million for the 250-room Hyatt Valencia hotel and 26,000-square-foot conference center; $13.1 million for industrial buildings under the build-to-suit/lease program; $6.3 million for a 264-unit apartment complex and $4.1 million for Plaza del Rancho, a mixed-use project in Valencia Industrial Center. The Company expects to invest $80 to $100 million for income-producing projects in 1998 which will include approximately $15 million each to complete Valencia Marketplace and the Hyatt Valencia hotel. In Valencia Town Center, approximately $45 million will be invested to complete retail and commercial development along with a 100,000 square-foot entertainment complex and a 210-unit apartment complex. Expenditures for income-producing properties during 1996 totaled $70.5 million. Major expenditures included $25.0 million for construction of Valencia Marketplace, a 720,000-square-foot, value-oriented retail center; $14.4 million for three industrial buildings under the build-to-suit/lease program; $12.1 million for a 264-unit apartment complex, $4.6 million for a neighborhood shopping center in Valencia NorthPark, $5.3 million for a 57,000-square-foot office building and $2.9 million for a 55,000-square-foot sports and fitness center in Valencia Town Center. In 1995, income property expenditures totaled $8.5 million, including $7.1 million for eight new income-producing properties. Purchase of property and equipment in 1997, 1996 and 1995 were primarily for water utility construction. Expenditures in 1995 also included construction costs for a new headquarters building for Valencia Water Company. FINANCING ACTIVITIES In 1997, the Company paid quarterly distributions totaling $16.6 million, or 48 cents per partnership unit, which included a special distribution of eight cents per partnership unit relating to the 1996 sale of the McDowell Mountain Ranch project. In 1996 and 1995, quarterly distributions of 40 cents per partnership unit totaled $14.1 million and $14.5 million, respectively. The decline in the total amount paid in 1996 is due to fewer units outstanding as result of the Company's repurchase program. The declaration of distributions is reviewed by the Board of Directors on a quarterly basis. The declaration of any distribution, and the amount declared, is 18 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) determined by the Board of Directors taking into account the Company's earnings, financial condition and prospects. The Company has repurchased its partnership units over the three year period as follows: 1997 - 328,637 units for $5.7 million; 1996 - 1,228,078 units for $20.3 million; 1995 - 861,900 units for $12.5 million. In 1997, a $6 million scheduled principal payment was paid on an unsecured financing with Metropolitan and borrowings against unsecured lines of credit decreased by $1.4 million from the prior year. A $2.4 million increase in debt is related to draws against a construction loan for the Company's homebuilding partnership with Warmington Homes to construct 72 homes in Valencia NorthPark. In conjunction with the sale of McDowell Mountain Ranch in April 1996, project and bond debt totaling $16.3 million were assumed by the buyer. At December 31, 1996, borrowings outstanding against a revolving mortgage facility and lines of credit totaled $49.5 million. The increase in borrowings was primarily for costs associated with the Company's income-producing projects under development. At December 31, 1995, borrowings outstanding against a $40 million revolving mortgage facility totaled $16 million and no borrowings were outstanding against unsecured lines of credit. At the end of 1995, $16.5 million had been expended of the $17 million of improvement district bond proceeds for infrastructure improvements at McDowell Mountain Ranch. After retirement for lots sold, $10.7 million of these improvement bonds remained as debt at the end of 1995, an increase of $4.3 million. A principal reduction of $13.3 million was paid on a portfolio mortgage financing from Prudential, secured by six of the Company's commercial properties, in conjunction with the sale of the Bouquet Shopping Center in June 1995. YEAR 2000 ISSUE The Company conducted a comprehensive review of its internal computer systems in 1997 to assess the Year 2000 issue. As a result of this review, and for other strategic reasons, the Company is in the process of replacing its computerized accounting system in 1998. The replacement cost of this new system is approximately $1 million and will be capitalized and amortized over its useful life. Modifications to other existing software to be Year 2000 compliant will be expensed as incurred. The Company is working with its primary vendors to receive confirmation on their Year 2000 compliance as well. The Company anticipates substantial completion of changes for the Year 2000 issue by December 31, 1998, allowing adequate time for testing. The Company does not expect total expenditures for the above to have a material impact on its results of operations, liquidity or capital resources. INFLATION, RISKS AND RELATED FACTORS Newhall Land's 1997 Annual Report contains 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. These forward-looking statements made in this report are based on present trends the Company is experiencing in residential, industrial and commercial markets. Also, the Company's success in obtaining entitlements, governmental and environmental regulations, timing of escrow closings, expansion of its income portfolio and marketplace acceptance of its business strategies are among the factors that could affect results. The following risks and related factors, among others, should be taken into consideration in evaluating the future prospects for the Company. Actual results may materially differ from those predicted. Sales of Real Estate: The majority of the Company's revenues are generated by its real estate operations. The ability of the Company to consummate sales of real estate is dependent on various factors, including but not limited to availability of financing to the buyer, regulatory and legal issues and successful completion of the buyer's due diligence. The fact that a real estate transaction has entered escrow does not necessarily mean that the transaction will ultimately close. Therefore, the timing of sales may differ from that anticipated by the Company. The inability to close sales as anticipated could adversely impact the recognition of revenue in any specific period. Economic Conditions: Real estate development is significantly impacted by general and local economic conditions which are beyond the control of the Company. The Company's real estate operations are concentrated in Southern California. The regional economy is profoundly affected by the entertainment, technology 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. 19 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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. While the Company recently has continued to increase its market share at both the local and the county level, new competition is expected to deliver competing projects in the future that could reverse this trend. 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, including seismic activity, which cannot be predicted with certainty, could affect future results. Government Regulation and Entitlement Risks: In developing its projects, the Company must obtain the approval of numerous governmental authorities regulating such matters as permitted land uses, density and traffic, and the providing of utility services such as electricity, water and waste disposal. In addition, the Company is subject to a variety of federal, state and local laws and regulations concerning protection of health and the environment. This government regulation affects the types of projects which can be pursued by the Company and increases the cost of development and ownership. The Company devotes substantial financial and managerial resources to complying with these requirements. To varying degrees, certain permits and approvals will be required to complete the developments currently being undertaken, or planned by the Company. Furthermore, the timing, cost and scope of planned projects may be subject to legal challenges, particularly large projects with regional impacts. In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations and their interpretation and application. The ability to obtain necessary approvals and permits for its projects can be beyond the Company's control and could restrict or prevent development of otherwise desirable new properties. The Company's results of operations in any period will be affected by the amount of entitled properties the Company has in inventory. Inflation: The Company believes it is well positioned against any effects of inflation. Historically, during periods of inflation, the Company has been able to increase selling prices of properties to offset rising costs of land development and construction. Recently, there has been a slight improvement in land values in California while costs have remained relatively constant. A portion of the commercial income portfolio is protected from inflation since percentage rent clauses in the Company's leases tend to adjust rental receipts for inflation, while the underlying value of commercial properties has tended to rise over the long term. 20 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS INCLUDED IN ITEM 8: Report of Independent Auditors Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets at December 31, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 21 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) REPORT OF INDEPENDENT AUDITORS The Board of Directors of Newhall Management Corporation and Partners of The Newhall Land and Farming Company: We have audited the accompanying consolidated balance sheets of The Newhall Land and Farming Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Newhall Land and Farming Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Los Angeles, California /s/ KPMG Peat Marwick LLP January 21, 1998 22 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Consolidated Statements of Income
Years ended December 31, ----------------------------------------- In thousands, except per unit 1997 1996 1995 - ----------------------------------------------------------------------------------------- Revenues Real estate Residential home and land sales Valencia $ 67,682 $ 79,533 $ 58,160 McDowell Mountain Ranch - 49,101 16,602 Industrial and commercial sales 61,996 29,844 41,396 Commercial operations Income-producing properties 33,404 28,742 28,704 Valencia Water Company 11,170 9,762 8,631 Agriculture Operations 15,487 16,459 14,676 Ranch sales 17,962 6,745 7,428 - ----------------------------------------------------------------------------------------- Total Revenues 207,701 220,186 175,597 - ----------------------------------------------------------------------------------------- Operating Expenses Real estate Residential home and land sales Valencia 52,187 65,417 51,058 McDowell Mountain Ranch - 22,834 13,861 Industrial and commercial sales 42,780 26,069 23,694 Community development 11,034 11,670 6,766 Commercial operations Income-producing properties 17,824 14,662 13,546 Valencia Water Company 7,902 6,550 6,244 Agriculture Operations 11,109 11,661 11,147 Ranch sales 967 739 2,799 - ----------------------------------------------------------------------------------------- Total Operating Expenses 143,803 159,602 129,115 - ----------------------------------------------------------------------------------------- Operating Income 63,898 60,584 46,482 General and administrative expense (9,068) (9,121) (8,517) Expense from unit ownership plans (1,200) (12) (30) Interest and other, net (9,137) (9,562) (10,618) - ----------------------------------------------------------------------------------------- Net Income $ 44,493 $ 41,889 $ 27,317 ========================================================================================= Net Income Per Unit $ 1.29 $ 1.19 $ .75 ========================================================================================= Net Income Per Unit - Assuming Dilution $ 1.28 $ 1.18 $ .75 =========================================================================================
See notes to consolidated financial statements 23 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Consolidated Balance Sheets
December 31, -------------------------- In thousands 1997 1996 - ------------------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 2,770 $ 2,412 Accounts and notes receivable 19,027 25,557 Land under development 53,875 63,266 Land held for future development 32,551 32,357 Income-producing properties, net 227,203 182,641 Property and equipment, net 54,876 54,108 Other assets and deferred charges 13,630 13,147 - ------------------------------------------------------------------------------------------------------------ $403,932 $373,488 ============================================================================================================ Liabilities and Partners' Capital Accounts payable $ 18,529 $ 11,451 Accrued expenses 39,635 38,101 Deferred revenues 3,152 2,483 Mortgage and other debt 156,946 163,256 Advances and contributions from developers for utility construction 18,845 18,371 Other liabilities 21,548 19,173 - ------------------------------------------------------------------------------------------------------------ Total liabilities 258,655 252,835 Commitments and contingencies (Note 9) Partners' capital 34,527 units outstanding, excluding 2,245 units in treasury, at December 31, 1997 and 34,701 units outstanding, excluding 2,071 units in treasury at December 31, 1996 145,277 120,653 - ------------------------------------------------------------------------------------------------------------ $403,932 $373,488 ============================================================================================================
See notes to consolidated financial statements 24 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Consolidated Statements of Cash Flows
Years ended December 31, ------------------------------------------ In thousands 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 44,493 $ 41,889 $ 27,317 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,148 8,857 7,698 Decrease (increase) in land under development 9,391 25,191 (1,034) Decrease (increase) in accounts and notes receivable 6,530 (401) (6,617) Increase (decrease) in accounts payable, accrued expenses and deferred revenues 9,281 3,710 (6,197) Cost of property sold 18,334 17,521 12,608 Other adjustments, net 2,134 2,561 (4,253) - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 100,311 99,328 29,522 - --------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Development of income-producing properties (69,403) (70,471) (8,503) Purchase of property and equipment (4,853) (8,813) (8,479) Distribution from (investment in) joint venture 8 (43) 262 - --------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (74,248) (79,327) (16,720) - --------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Distributions paid (16,588) (14,122) (14,527) Borrowings on mortgage and other debt 2,389 34,871 22,645 Repayment of mortgage and other debt (8,699) (23,917) (16,334) Increase in advances and contributions from developers for utility construction 474 2,193 4,154 Purchase of partnership units (5,746) (20,277) (12,518) Other, net 2,465 (622) 407 - --------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (25,705) (21,874) (16,173) - --------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 358 (1,873) (3,371) Cash and Cash Equivalents, Beginning of Year 2,412 4,285 7,656 - --------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 2,770 $ 2,412 $ 4,285 =============================================================================================================== Supplemental Disclosure of Cash Flow Information: Interest paid (net of amount capitalized) $ 10,273 $ 10,938 $ 10,306 - ---------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 25 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Consolidated Statements of Changes in Partners' Capital
Number Partners' In thousands of Units Capital - -------------------------------------------------------------------------------- Balance at December 31, 1994 36,761 $ 112,357 Net income 27,317 Distributions (14,527) Purchase of partnership units (862) (12,518) Other activity, net 11 227 - -------------------------------------------------------------------------------- Balance at December 31, 1995 35,910 112,856 Net income 41,889 Distributions (14,122) Purchase of partnership units (1,228) (20,277) Other activity, net 19 307 - -------------------------------------------------------------------------------- Balance at December 31, 1996 34,701 120,653 Net income 44,493 Distributions (16,588) Purchase of partnership units (329) (5,746) Other activity, net 155 2,465 - -------------------------------------------------------------------------------- Balance at December 31, 1997 34,527 $ 145,277 ================================================================================
See notes to consolidated financial statements 26 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 - -------------------------------------------------------------------------------- NOTE 1. ORGANIZATION The Newhall Land and Farming Company, a California Limited Partnership ("the Company" or "the Partnership"), is organized as a publicly traded master limited partnership. The general partners of the Company are Newhall Management Limited Partnership, the Managing General Partner, and Newhall General Partnership. Two executive officers and the Managing General Partner are the general partners of Newhall General Partnership. - -------------------------------------------------------------------------------- NOTE 2. INDUSTRY SEGMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: The Company operates in two reportable industry segments: real estate and agriculture. Real estate, consisting of community development including residential land sales and homebuilding, commercial and industrial land sales, and development and operation of commercial property, is the Company's predominant industry segment. The principal markets for residential land sales are in the Valencia area of Southern California, approximately 30 miles north of downtown Los Angeles. Homebuilding, commercial and industrial land sales and commercial operations are concentrated in the Valencia area. Agriculture consists primarily of farming operations conducted on the Company's ranches in California. Information as to identifiable assets, capital expenditures and depreciation for these segments is summarized in Note 10. Significant accounting policies related to the Company's segments are: Residential Home Sales: The Company's income from residential home sales comes from sales of completed single- and multi-family homes to homebuyers through joint ventures and limited partnerships. The Company increases its inventories of homes completed or under construction with venture partners as it funds the venture obligation and records revenues and income as the venture closes escrow on sales to homebuyers. Land Sales: Sales are recorded at the time escrow is closed provided that: (1) there has been a minimum down payment, ranging from 20% to 25% depending upon the type of property sold, (2) the buyer has met adequate continuing investment criteria, and (3) the Company, as the seller, has no continuing involvement in the property. Where the Company has an obligation to complete certain future development, revenue is deferred in the ratio of the cost of development to be completed to the total cost of the property being sold under percentage of completion accounting. Land under development inventories include land, direct and allocated construction costs for land and infrastructure development plus project amenities. As land is sold, estimated total costs at completion for the specific project are charged ratably to cost of sales. Income-Producing Properties: The Company owns and leases apartments, commercial and industrial buildings, shopping centers and land to tenants. Except for apartments, rents are typically based on the greater of a percentage of the lessee's gross revenues or a minimum rent. Most lease agreements require that the lessee pay all taxes, maintenance, insurance and certain other operating expenses applicable to leased properties. Apartments are rented on six-month leases and continue on a month-to-month basis thereafter. Valencia Water Company: Valencia Water Company (a California corporation), a wholly-owned subsidiary, is a public water utility subject to regulation by the California Public Utilities Commission. Water utility revenues include amounts billed monthly to customers and an estimated amount of unbilled revenues. Income taxes are included in operating expenses. Deferred income taxes are reflected in the consolidated financial statements. Community Development: Preliminary planning and entitlement costs are charged to expense when incurred. After tentative map approval, expenditures for map recordation are capitalized to the identified project. Agriculture Operations: Revenue is recognized as crops are delivered to farm cooperatives and other purchasers. Crops delivered to farm cooperatives are marketed throughout the year after harvest. At the time of delivery, the Company estimates the proceeds to be received from the cooperatives and records these amounts as unbilled receivables. During the year following harvest, the Company records any adjustments of such estimated amounts arising from changing market conditions. Net income for the years ended December 31, 27 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 1997, 1996, and 1995 increased approximately $288,000, $336,000 and $658,000, respectively, as a result of such adjustments. Costs incurred during the development stage of orchard and vineyard crops (ranging from 3 to 10 years) are capitalized and amortized over the productive life of the trees or vines. Farming costs which cannot be readily identified with a specific harvested crop or other revenue-producing activity are expensed as incurred. Farming inventories include crops in process and harvested crops and are valued at the lower of cost or market, determined on the first-in, first-out method. OTHER GENERAL ACCOUNTING POLICIES ARE: Basis of Consolidation: The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and homebuilding joint ventures. All significant intercompany balances and transactions are eliminated. Certain reclassifications have been made to prior years' amounts to conform to the current year presentation. Joint Venture: The equity method is used to account for an investment in a joint venture with Hilton Inns, Inc. which is not controlled by the Company. Cash and Cash Equivalents: The Company considers all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents. Income-Producing Properties; Property and Equipment: Property is stated at cost, less proceeds from sales of easements and rights of way. Depreciation is provided on the straight-line basis over the estimated useful lives of the various assets without regard to salvage value. Lives used for calculating depreciation are as follows: buildings - 25 to 40 years; equipment - 3 to 10 years; water supply systems, orchards and other - 5 to 75 years. Impairment of Assets: The Company adopted the provisions of SFAS No. 121--Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, on January 1, 1996. Land, land under development inventories and completed real estate projects have been reviewed for recoverability. Because the sum of the expected future net cash flows (undiscounted and without interest charges) exceeds the carrying value of the assets, no impairment loss was recognized in 1997 or 1996. Environmental Matters: Environmental clean-up costs are charged to expense or established reserves and are not capitalized. Generally, reserves are recorded for environmental clean-up costs when remediation efforts are probable and can be reasonably estimated. To date, environmental clean-up costs have not been material. Management's Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These affect the reported amounts of assets and liabilities, the disclosure of any contingent assets or liabilities and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from the estimates made. Income Taxes: The partnership is not a taxable entity; accordingly, no provision for income taxes has been made in the consolidated financial statements. Partners are taxed on their allocable share of the Company's earnings. Partners' distributive share of the income, gain, loss, deduction and credit of the Company is reportable on their income tax returns. The Revenue Act of 1987 contained provisions which, in some cases, taxes publicly traded partnerships as corporations. Since the Company was in existence on December 17, 1987, it will continue to be treated as a partnership for the 1987 through 1997 taxable years. Beginning in 1998, 90% of the partnership's gross income must be derived from rent, sales of real estate, interest, and income from other "natural resources" as provided in Internal Revenue Section 7704. The partnership's gross income currently qualifies under this provision and the Company expects to continue to be taxed as a partnership for the foreseeable future. 28 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Amounts per Partnership Unit: The following is a reconciliation of the numerators and denominators of the basic and diluted income per unit computations:
Income Units Per Unit (in 000's except per unit) (numerator) (denominator) - -------------------------------------------------------------------------------- For the year ended December 31, 1997 Net income per unit Net income available to unitholders $44,493 34,520 $1.29 Effect of dilutive securities Unit options -- 230 (.01) - -------------------------------------------------------------------------------- Net income per unit - diluted $44,493 34,750 $1.28 - ---------------------------------------------=================================== For the year ended December 31, 1996 Net income per unit Net income available to unitholders $41,889 35,292 $1.19 Effect of dilutive securities Unit options -- 119 (.01) - -------------------------------------------------------------------------------- Net income per unit - diluted $41,889 35,411 $1.18 - ---------------------------------------------=================================== For the year ended December 31, 1995 Net income per unit Net income available to unitholders $27,317 36,241 $ .75 Effect of dilutive securities Unit options -- 31 -- - -------------------------------------------------------------------------------- Net income per unit - diluted $27,317 36,272 $ .75 - ---------------------------------------------===================================
Net income per unit for prior years has been restated to conform with the requirements of SFAS No. 128 - Earnings Per Share. New Accounting Pronouncement: SFAS No. 131 - Disclosure about Segments of an Enterprise and Related Information is effective for fiscal years beginning after December 15, 1997. The Company will comply with all required disclosures of this pronouncement in 1998. This is the only new pronouncement applicable to the Company to be adopted. - -------------------------------------------------------------------------------- NOTE 3. FEDERAL INCOME TAX RESULTS OF THE PARTNERSHIP The Partnership has elected under Section 754 of the Internal Revenue Code to adjust the basis of property upon the purchase of units by investors. For investors who purchase units, this election provides for the reflection of the investor's price of the units in the tax basis of the Partnership's properties. The excess of the purchase price over the monetary assets and liabilities is allocated to real estate assets and results in a new basis which is used to calculate operating expenses for tax purposes. At December 31, 1997, the net tax basis of the Company's assets and liabilities exceeded the Company's financial statement basis of its assets and liabilities by $186,192,000. This excess amount does not reflect the step-up in asset basis allocated to individual partners upon purchase of units subsequent to the formation of the Partnership. The Partnership's tax returns for the past four years are subject to examination by federal and state taxing authorities. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws and regulations, the tax basis amounts may be subject to change at a later date upon final determination by the taxing authorities. 29 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) - -------------------------------------------------------------------------------- NOTE 4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
December 31, ----------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------- Carrying Fair Carrying Fair In thousands Amount Value Amount Value - -------------------------------------------------------------------------------------- Notes receivable from land sales $ 10,339 $ 10,339 $ 20,546 $ 20,546 Mortgage and other debt 156,946 156,946 163,256 163,256 Advances from developers for utility construction 11,730 2,895 12,149 2,927 =====================================================
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents; Accounts Receivable and Payable: The carrying amounts approximate the fair values of these instruments due to their short-term nature. Notes Receivable from Land Sales: The carrying amounts of notes receivable approximate fair value. Generally, these notes are interest-bearing with maturities of less than one year from close of escrow. If applicable, the carrying amount reflects imputed interest to reduce the note receivable to its fair value. Mortgage and Other Debt: The carrying amount of the Company's debt reflects its fair value based on current interest rates available to the Company for comparable debt. See Note 7 for interest rates on outstanding debt. Advances from Developers for Utility Construction: Generally, advances are refundable to the developer without interest at the rate of 2.5% per year over 40 years. The fair value is estimated as the discounted value (12%) of the future cash flows to be paid on the advances. - -------------------------------------------------------------------------------- NOTE 5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31, -------------------------- In thousands 1997 1996 - -------------------------------------------------------------------------------- Accounts and notes receivable Trade receivables, less allowance for doubtful accounts of $654 and $662, respectively $ 1,513 $ 2,574 Notes receivable from land sales 10,339 20,546 Unbilled accounts receivable Agricultural products 2,945 1,796 Other 565 423 Other 3,665 218 - -------------------------------------------------------------------------------- $19,027 $25,557 =========================== Land under development Valencia Residential land development $ 3,700 $ 4,347 Homes completed or under construction with venture partners 11,799 12,371 Industrial and commercial land development 38,190 46,326 Agriculture 186 222 - -------------------------------------------------------------------------------- $53,875 $63,266 ===========================
Note 5 continued on next page 30 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Note 5 (continued) December 31, --------------------------- In thousands 1997 1996 - ---------------------------------------------------------------------------- Income-producing properties Land $ 45,873 $ 40,832 Buildings 106,552 93,901 Other 15,062 12,872 - ---------------------------------------------------------------------------- 167,487 147,605 Accumulated depreciation (35,431) (32,552) - ---------------------------------------------------------------------------- 132,056 115,053 Under development 95,147 67,588 - ---------------------------------------------------------------------------- $ 227,203 $ 182,641 =============================== Property and equipment Land $ 5,004 $ 4,973 Buildings 5,600 5,580 Equipment 9,232 9,162 Water supply systems, orchards and other 66,857 66,863 Construction in progress 2,595 1,618 - ---------------------------------------------------------------------------- 89,288 88,196 Accumulated depreciation (34,412) (34,088) - ---------------------------------------------------------------------------- $ 54,876 $ 54,108 =============================== Other assets and deferred charges Prepaid expenses $ 1,091 $ 1,526 Investment in joint venture 490 498 Unamortized loan fees 1,211 655 Deferred charges and assets of Valencia Water Company 5,243 5,841 Other 5,595 4,627 - ---------------------------------------------------------------------------- $ 13,630 $ 13,147 =============================== Accrued expenses Deferred compensation $ 6,161 $ 4,808 Operating and other accruals 4,898 5,187 Project accruals 24,241 22,362 Other 4,335 5,744 - ---------------------------------------------------------------------------- $ 39,635 $ 38,101 =============================== Other liabilities Warranty and other reserves $ 6,743 $ 6,442 Deferred taxes of Valencia Water Company 5,700 5,618 Other 9,105 7,113 - ---------------------------------------------------------------------------- $ 21,548 $ 19,173 ===============================
31 34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) - -------------------------------------------------------------------------------- NOTE 6. COMMERCIAL LEASES Minimum lease payments to be received under non-cancelable operating leases as of December 31, 1997 are as follows:
In thousands --------------------------------------------------------------------- 1998 $ 20,279 1999 19,849 2000 19,448 2001 18,962 2002 17,740 Thereafter 120,704 --------------------------------------------------------------------- $ 216,982 * =========
* This amount does not include contingent rentals which may be received under certain leases based on lessee sales or apartment rentals. Contingent and apartment rentals received for the years ended December 31, 1997, 1996, and 1995 were (in thousands) $9,934, $8,991, and $9,082, respectively. - -------------------------------------------------------------------------------- NOTE 7. MORTGAGE AND OTHER DEBT
Interest December 31, ----------------------- In thousands Rates 1997 1996 - --------------------------------------------------------------------------------- Unsecured lines of credit Variable $ 8,100 $ 9,500 Prudential (portfolio mortgage) 8.995% 45,306 45,873 Prudential (ranch mortgage) 8.45% 10,800 11,040 Pacific Life (Valencia Water Company) 8.0% 11,000 11,000 Bank of America (commercial mortgage) 7.95% 3,302 3,334 Metropolitan (unsecured notes) 6.9% 18,000 24,000 Wells Fargo (Valencia Town Center) Variable 40,000 40,000 Community facilities bonds (Valencia Town Center) 4.5-7.5% 16,678 17,138 Bank of America (homebuilding joint venture) 9.0% 3,760 1,371 - --------------------------------------------------------------------------------- $156,946 $163,256 ==========================
In November, 1997, the Company replaced its existing bank lines, totaling $119 million, with a $200 million three-year, unsecured revolving line of credit led by Wells Fargo and J.P. Morgan. The interest rate is LIBOR plus 1.2% and the commitment fee is .25% per annum of the unused portion. In addition, the Company has a $1 million line of credit with Valencia National Bank and a $2 million line of credit with Wells Fargo which is restricted to use by Valencia Water Company for working capital needs. Letters of credit outstanding against available lines of credit totaled $16.7 million and $7.8 million, respectively, at December 31, 1997 and 1996. The Prudential portfolio mortgage is secured by five of the Company's commercial properties. The terms of the note require monthly principal and interest payments of $389,000 until maturity on March 1, 1999 when a principal balance of approximately $44.6 million is due. 32 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) The Prudential ranch mortgage is a non-recourse mortgage financing secured by the 14,000-acre New Columbia Ranch property. The terms of the note call for interest payments on each May 1 and November 1 and annual principal payments of $240,000 until maturity on November 1, 2003. Valencia Water Company has an $11 million financing with Pacific Life secured by the utility's property and equipment. The terms of the financing call for semi-annual interest payments with the principal payable in full at maturity on June 1, 2009. The loan is not guaranteed by the Company. The commercial mortgage with Bank of America is secured by a 50,000-square-foot office building in the vicinity of Valencia Town Center. The terms call for monthly principal and interest payments of $26,000 and a balloon payment of approximately $3.1 million at maturity on February 1, 2001. The terms of a $30 million, seven-year unsecured financing with a remaining principal balance of $18 million, call for interest payments payable semi-annually and principal payments in equal annual installments of $6 million. The note matures on December 31, 2000. The terms of the $40 million revolving mortgage credit facility call for a commitment fee of .125% per annum of the unused portion. Borrowings bear interest at LIBOR plus 1.0% or Wells Fargo's prime rate, at the election of the Company. At December 31, 1997, the interest rate on the borrowings was 6.84%. The credit facility expires in December, 1999. In October 1992, tax-exempt community facilities bonds were issued to finance a portion of the costs of certain public infrastructure improvements located within or in the vicinity of Valencia Town Center, the Company's regional shopping mall. The bonds will be repaid over 20 years from special taxes levied on the mall property. In December, 1996, the Company entered into a joint venture with Warmington Homes to construct 72 homes in Valencia NorthPark. A construction loan was obtained from Bank of America with a contractual maximum of $6.6 million and interest at the prime rate plus .75%. The loan is guaranteed by Warmington Homes and is non-recourse to the Company. Annual maturities of long-term debt are approximately (in thousands) $7,410 in 1998, $51,544 in 1999, $6,935 in 2000, $4,159 in 2001, $1,060 in 2002 and $33,978 thereafter. The unsecured lines of credit, the Wells Fargo/Morgan Guaranty note and the Bank of America homebuilding loan are lines of credit with no scheduled repayment terms. Capitalized Interest and Interest Income: During 1997, 1996 and 1995, total interest expense incurred amounted to (in thousands) $10,527, $10,325, and $11,959, net of $2,252, $2,146, and $1,072, which was capitalized, respectively. Interest income from investments and notes receivable totaled (in thousands) $1,641 in 1997, $1,504 in 1996, and $1,744 in 1995. - -------------------------------------------------------------------------------- NOTE 8. EMPLOYEE BENEFIT PLANS Incentive Compensation Plan: Under the terms of the Company's Executive Incentive Plan, the Board of Directors may authorize incentive compensation awards to key management personnel of up to five percent of each year's income. The Board of Directors authorized awards of $1,907,000, $1,481,000, and $1,101,000 for the years ended December 31, 1997, 1996, and 1995, respectively. Unit Compensation Plans: The Company has two unit-based compensation plans, which are described below. The Company applies the provisions of APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, compensation expense is only recognized for market price fluctuations in connection with option appreciation rights under the unit option plan. Had compensation costs been determined consistent with SFAS No. 123, the Company's net income and earnings per unit would have been reduced to the pro forma amounts indicated below: 33 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Years ended December 31, --------------------------------------------- In thousands, except per unit 1997 1996 1995 - --------------------------------------------------------------------------------- Net Income As reported $ 44,493 $ 41,889 $ 27,317 Pro forma 43,489 41,503 27,205 Income Per Unit As reported $ 1.28 $ 1.18 $ 0.75 Pro forma 1.25 1.17 0.75 ============================================
Pro forma net income reflects only options granted in 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. Unit Option Plan: In January, 1995, the Board of Directors approved the 1995 Option/Award Plan, which superseded the Option, Appreciation Rights and Restricted Units Plan. Under the terms of the Plan, an additional 600,000 units may be granted as options, restricted units, unit rights or appreciation rights to key employees. In November, 1997, the Plan was amended to increase the number of units which may be granted by 3,050,000 units. Options, restricted units or appreciation rights may not be granted at a price below the market price on date of grant. Non-qualified options and appreciation rights are exercisable 25% after the end of each of the first four years and terminate in ten years. The following non-qualified, market price options, all without appreciation rights, were granted: 1997 - 291,400; 1996 - 236,500; 1995 - - 222,050. In 1997, expense of $1.2 million was recorded and no expense or recovery was recorded in 1996 or 1995 for market price fluctuations in connection with option appreciation rights granted prior to 1991. Restricted unit rights granted as part of the Company's Management Unit Ownership Program vest 20% at the end of each of the first five years. The following restricted unit rights were granted: 1997 - 4,580; 1996 - 778; 1995 - 1,288. In November, 1997, the Board of Directors approved a premium price option program for key executives tied to the performance of the Company's partnership units. Options totaling 2.45 million units were granted to the Company's six top executives. The number of options granted is larger than the Company's typical market-price option program due to the increased risks associated with the premium price and forfeiture provisions and is in lieu of market price options for the six executives over the next three years. Under the terms of the program, participants are granted options in two tranches each of which has a five-year option life and becomes exercisable in three years but is subject to forfeiture if certain performance criteria are not met. The per unit weighted-average fair value of non-qualified, market price options granted in 1997, 1996 and 1995 was $7.40, $6.06 and $4.50 on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: distribution yield of 3.0%, expected volatility of 29.3%, risk-free interest rate of 6.0% and expected life 10 years; 1996 distribution yield of 3.0%, expected volatility of 29.8%, risk-free interest rate of 7.0% and expected life 10 years; 1995 - distribution yield 3.1%, expected volatility 29.7%, risk-free interest rate 6.35% and an expected life of 10 years. The per unit weighted average fair value of premium price options granted in 1997 was $3.53 for the first tranche and $3.35 for the second tranche using the Black-Scholes option pricing model with the following weighted average assumptions: distribution yield of 1.6%, expected volatility of 21.0%, risk-free interest rate of 6.40% and an expected life of five years. 34 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) At December 31, 1997, 631,283 units were available for future grants. A summary of the status of the Company's Option/Award Plan is presented below:
Weighted Average Units Exercise Price - ------------------------------------------------------------------------- Outstanding at December 31, 1994 1,131,000 $ 17.96 Granted 223,338 13.01 Exercised (146,000) 12.66 Cancelled (62,975) 19.76 - ------------------------------------------------------------------------- Outstanding at December 31, 1995 1,145,363 17.57 Granted 237,278 16.75 Exercised (10,467) 14.63 Cancelled (106,376) 17.25 - ------------------------------------------------------------------------- Outstanding at December 31, 1996 1,265,798 17.46 Granted 2,745,980 31.33 Exercised (230,511) 16.09 Cancelled (41,584) 14.94 - ------------------------------------------------------------------------- Outstanding at December 31, 1997 3,739,683 $ 27.68 - ---------------------------------------==================================
At December 31, 1997 and 1996, the number of options exercisable was 702,488 and 736,719, respectively, and the weighted average exercise price of those options was $18.12 and $18.11, respectively. The following summarizes information about outstanding options at December 31, 1997:
Range of Number Weighted Average Weighted Average Exercise Prices Outstanding Exercise Price Remaining Life - ----------------------------------------------------------------------------------------------------- $13.00-$16.75 727,738 $14.93 7.0 $19.75-$22.0625 406,000 $21.40 7.6 $29.50-$33.39 2,599,500 $32.29 4.8
The following summarizes information about exercisable options at December 31, 1997:
Range of Number Weighted Average Exercise Prices Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------- $13.00-$16.75 462,388 $14.61 $19.75-$22.0625 122,100 $19.85 $29.50-$33.39 118,000 $30.09
Employee Unit Purchase Plan: A total of 250,000 units has been reserved for issuance under the Company's Unit Purchase Plan. Under the terms of the plan, employees may have up to 15% of their base salary withheld to purchase the Company's partnership units. The purchase price is a specified percentage (no less than 85% and no more than 100%, as determined by the Plan Administrator for each purchase period) of the lower of the market price on the first day of the purchase period or the last day of the purchase period. Under the plan, the Company sold 6,049, 6,428 and 1,607 units to employees in 1997, 1996 and 1995, respectively. The weighted average fair value of these units was $3.66 for 1997, $2.80 for 1996 and $3.01 for 1995 using the Black-Scholes model with the following assumptions: expected life of seven months due to salary withholdings throughout the year; distribution yield of 3.0% and expected volatility of 20.6% for all years; risk-free interest rate of 5.45% for 1997, 6.4% for 1996 and 3.49% for 1995; and an exercise price equal to 85% of the lower of the market price on the first day of the purchase period and the market price on the last day of the purchase period. Retirement Plans: The Retirement Plan is Company funded and is qualified under ERISA. Generally, all employees of the Company and subsidiaries of the Company are eligible to participate in the Retirement Plan after one year of employment and attainment of age 21. Participants' benefits accumulated through December 35 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 31, 1996 are calculated as 40.5% of the highest average annual earnings up to Social Security covered compensation, plus 60% of average annual earnings in excess of covered compensation, reduced pro rata for years of service less than 30. Benefits which accumulate after January 1, 1997 will be calculated as 32.4% of the social security wage base and 48% of the excess over covered compensation. The Company's contribution to the Retirement Plan is determined by consulting actuaries on the basis of customary actuarial considerations, including total covered payroll of participants, benefits paid, earnings and appreciation in the Retirement Plan funds. The Board of Directors has adopted a Pension Restoration Plan, pursuant to which the Company will pay any difference between the maximum amount payable under ERISA and the amount otherwise payable under the Plan. The Company's funding policy is to contribute no more than the maximum tax-deductible amount. Plan assets are invested primarily in equity and fixed income funds. The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations were 7% and 5% in 1997, 7.25% and 5% in 1996, and 7% and 5% in 1995, respectively. The expected long-term rate of return on assets was 9% for each of the three years ended 1997. The Company also has a Supplemental Executive Retirement Plan and a Retirement Plan for Directors. The additional pension cost for these plans was $124,000 in 1997, $690,000 in 1996, and $206,000 in 1995. In 1996, a settlement and curtailment loss of $453,000 was incurred in connection with the termination of the Retirement Plan for Directors and replacement with a Deferred Equity Plan for Outside Directors. This loss is included in 1996 general and administrative expenses. The following table sets forth the plans' funded status and amounts recognized in the Company's financial statements for the Retirement and the Pension Restoration Plans:
December 31, ------------------------------------------ In thousands 1997 1996 1995 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $14,544, $13,612 and $13,996, respectively $(14,968) $(14,011) $(14,693) - ---------------------------------------========================================= Projected benefit obligation for service rendered to date $(20,281) $(18,124) $(17,931) - -------------------------------------------------------------------------------- Plan assets at fair value 18,957 16,555 16,153 - -------------------------------------------------------------------------------- Plan assets less than projected benefit obligations (1,324) (1,569) (1,778) - -------------------------------------------------------------------------------- Unrealized net gain from past experience different from that assumed and effects of changes in assumptions (2,485) (1,488) (778) Unrecognized prior service costs 961 648 709 Unrecognized net asset being recognized over 15 years (102) (136) (171) - -------------------------------------------------------------------------------- Accrued pension cost $ (2,950) $ (2,545) $ (2,018) - ---------------------------------------=========================================
Continued on next page 36 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
(continued) December 31, -------------------------------------- In thousands 1997 1996 1995 - --------------------------------------------------------------------------- Net pension cost includes the following components: Service cost-benefits earned during the period $ 555 $ 692 $ 453 Interest cost on projected benefit obligation 1,295 1,244 1,041 Actual return on plan assets (3,851) (1,771) (2,668) Net amortization and deferral 2,407 366 1,267 - --------------------------------------------------------------------------- Total $ 406 $ 531 $ 93 - -----------------------------------========================================
Employee Savings Plan: The Company has an Employee Savings Plan which is available to all eligible employees. Certain employee contributions may be supplemented by Company contributions. Company contributions approximated $319,488 in 1997, $294,000 in 1996, and $262,000 in 1995. Deferred Cash Bonus Plan: In February 1991, the Compensation Committee of the Board of Directors awarded deferred bonuses payable January 15, 1999. The amount to be paid is based upon the relative percentage return on the market value of the Company's depositary units compared to the percentage return on the Standard and Poor's 500 Index over a nine-year period. No expense has been recorded since inception of the plan. Other Benefits: The Company does not provide postretirement or postemployment benefits other than those plans described above and, as such, there is no obligation to be recognized under SFAS Nos. 106 and 112. - -------------------------------------------------------------------------------- NOTE 9. COMMITMENTS AND CONTINGENCIES The Company is involved in litigation and various claims, including those arising from its ordinary conduct of business. Management is of the opinion that the ultimate liability from this litigation will not materially affect the Company's consolidated financial condition. The Company believes it has adequate insurance to protect itself against any future material property and casualty losses. In the ordinary course of business, and as part of the entitlement and development process, the Company is required to provide performance bonds to the County of Los Angeles and the City of Santa Clarita to assure completion of certain public facilities. At December 31, 1997, the Company had performance bonds outstanding totaling approximately $134 million. As a significant landowner, developer and holder of commercial properties, there exists the possibility that environmental contamination conditions may exist that would require the Company to take corrective action. The Company believes such costs will not materially affect the Company's consolidated financial condition. - -------------------------------------------------------------------------------- NOTE 10. INDUSTRY SEGMENT INFORMATION
In thousands December 31, - ------------------------------------------------------------------------------------ Identifiable Assets (at historical cost) 1997 1996 1995 - ------------------------------------------------------------------------------------ Real estate Residential $ 16,226 $ 25,079 $ 66,365 Industrial and other 127,523 100,525 80,366 Commercial Income-producing properties 180,728 169,832 124,249 Valencia Water Company 51,058 48,109 44,000 Agriculture 20,812 21,193 23,314 Administration 7,585 8,750 9,231 - ------------------------------------------------------------------------------------ $403,932 $373,488 $347,525 =========================================
Note 10 continued on next page 37 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Note 10 (continued) Years ended December 31, ------------------------------------ Capital Expenditures 1997 1996 1995 - ------------------------------------------------------------------------ Real estate Residential $ 53 $ - $ 73 Industrial and other 13,284 14,197 1,862 Commercial Income-producing properties 56,309 56,274 6,640 Valencia Water Company 3,317 8,277 7,534 Agriculture 735 438 472 Administration 558 98 401 - ------------------------------------------------------------------------ $74,256 $79,284 $16,982 =====================================
Depreciation and Years ended December 31, ------------------------------------- Amortization 1997 1996 1995 - ------------------------------------------------------------------------ Real estate Residential $ 9 $ 21 $ 87 Industrial and other 70 77 42 Commercial Income-producing properties 7,466 5,528 5,213 Valencia Water Company 1,810 2,398 1,489 Agriculture 580 608 676 Administration 213 225 191 - ------------------------------------------------------------------------ $10,148 $ 8,857 $ 7,698 ======================================
- -------------------------------------------------------------------------------- NOTE 11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial information for the Company fluctuates due to the uneven nature of real estate closing activity and the skewing of results by individual large sales. The following is a summary of selected quarterly financial data for 1997 and 1996:
In thousands, Quarter ------------------------------------------------- except per unit First Second Third Fourth - ---------------------------------------------------------------------------------------------- Revenues 1997 $36,001 $48,729 $67,303 $55,668 1996 32,726 71,471 39,164 76,825 - ---------------------------------------------------------------------------------------------- Operating income 1997 $15,004 $21,936 $17,239 $ 9,719 1996 10,811 26,719 8,588 14,466 - ---------------------------------------------------------------------------------------------- Net income 1997 $10,553 $17,151 $12,539 $ 4,250 1996 6,231 22,472 4,168 9,018 - ---------------------------------------------------------------------------------------------- Net income per unit 1997 $ .30 $ .50 $ .36 $ .12 1996 .17 .64 .12 .26 - ---------------------------------------------------------------------------------------------- Net income per unit - assuming dilution 1997 $ .30 $ .49 $ .36 $ .12 1996 .17 .64 .12 .26 - ----------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 38 41 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Registrant was reorganized from a corporation to a California limited partnership on January 8, 1985. The general partners of the Partnership are Newhall Management Limited Partnership (the Managing General Partner) and Newhall General Partnership. Two executive officers and the Managing General Partner are the general partners of Newhall General Partnership. Newhall Management Corporation and Newhall General Partnership are the general partners of the Managing General Partner. The Managing General Partner, Newhall Management Limited Partnership, has exclusive management and control of the affairs of the Partnership and shares in Partnership income and losses on the basis of the number of Partnership units owned by it. The Managing General Partner of Newhall Management Limited Partnership, Newhall Management Corporation, will make all decisions and take all action deemed by it necessary or appropriate to conduct the business and affairs of Newhall Management Limited Partnership and, therefore, of the Partnership. The duties and responsibilities of directors are carried out by the Board of Directors of the Managing General Partner of the Managing General Partner, Newhall Management Corporation. Each voting shareholder of Newhall Management Corporation also is a director of Newhall Management Corporation ("Corporation") and only voting shareholders may be directors of that corporation. Every voting shareholder and director has a number of votes in all matters equal to the number of votes of every other voting shareholder and director. Upon ceasing to be a director, a shareholder may be a nonvoting shareholder for a period of time prior to the repurchase of his or her shares by the Corporation. See further discussion of the shareholders' agreement and voting trust agreement below. The shareholder-directors of Newhall Management Corporation are as follows: Thomas L. Lee, age 55, was appointed Chairman and Chief Executive Officer of the Corporation upon its formation in November, 1990 and of the former Managing General Partner in 1989. He joined the predecessor corporation in 1970 and has served in various executive capacities. Mr. Lee was elected as a director in 1985. He is a director of Wells Fargo & Company, Wells Fargo Bank, N.A. and CalMat, Inc. He is a trustee of California Institute of the Arts. George L. Argyros, age 61, was elected a director of the Corporation in September, 1995. He has been Chairman and Chief Executive Officer of Arnel & Affiliates, an investment company, since 1968. He is a director of U.S.C.S. International, Tecstar, First American Financial Corporation, Doskocil, Inc., Apria HealthCare Group and Rockwell International. He is a trustee of the California Institute of Technology and President and Chief Executive Officer of the Horatio Alger Association. Gary M. Cusumano, age 54, has been President and Chief Operating Officer of the Corporation and the former Managing General Partner since 1989 and was elected a director of the Corporation in July, 1995. Mr. Cusumano is a director of Zero Corporation, Watkins-Johnson Company, the California Chamber of Commerce and Henry Mayo Newhall Memorial Hospital. Thomas V. McKernan, Jr., age 53, has been a director of the Corporation since September, 1994. Mr. McKernan has been President and Chief Executive Officer of the Automobile Club of Southern California since 1991. He is a director of the American Automobile Association, Los Angeles Area Chamber of Commerce, California Chamber of Commerce, Orthopedic Hospital, The Employers Group, Payden & Rygel Mutual Funds, Ramona Girls School, and Forest Lawn Memorial Park. Henry K. Newhall, age 59, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1982. Dr. Newhall is General Manager, Technology, Oronite Additives Division of Chevron Chemical Company. He has served in various managerial and consulting positions with Chevron since 1971. Jane Newhall, age 84, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1960. Ms. Newhall, a private investor, is a director of the Henry 39 42 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) Mayo Newhall Foundation and a member of the Foundation Board of Donaldina Cameron House. She is a trustee of Mills College, the San Francisco Theological Seminary and the Graduate Theological Union. Peter T. Pope, age 63, was elected a director of the Corporation in 1992. Mr. Pope has been Chairman, President and Chief Executive Officer of Pope & Talbot, Inc. since 1990. He is a director of Pope Resources and Harmac Pacific, Inc. Carl E. Reichardt, age 66, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1980. Mr. Reichardt was Chairman of the Board of Directors of Wells Fargo & Company and Wells Fargo Bank, N.A., from 1983 until December, 1994. He is a director of Wells Fargo & Company, Wells Fargo Bank, N.A., Ford Motor Company, Columbia/HCA Healthcare Corporation, Pacific Gas and Electric Company, ConAgra, Inc., SunAmerica, Inc. and McKesson Corporation. Thomas C. Sutton, age 55, was elected a director of the Corporation in November, 1991. He has been Chairman of the Board and Chief Executive Officer of Pacific Life Insurance Company since 1990. Mr. Sutton is a director of Southern California Edison, The Irvine Company, American Council of Life Insurance, Association of California Life Insurance Companies and Pimco Advisors. He is a trustee of the Committee for Economic Development. Barry Lawson Williams, age 53, was elected a director of the Corporation in July, 1996. Mr. Williams has been President of Williams Pacific Ventures, Inc., a venture capital consulting firm which he founded, and a General Partner of WDG Ventures Ltd., a real estate development fund, since 1987. Mr. Williams is a director of Pacific Gas and Electric Company, Northwestern Mutual Life Insurance Company, CH2M Hill, Ltd., Simpson Manufacturing Company and CompUSA. Ezra K. Zilkha, age 72, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1977. Since 1956, Mr. Zilkha has been President of Zilkha & Sons, Inc., a private investment company. From 1991 to 1993 he was Chairman of Union Holdings, Inc., an industrial holding company. He is a director of Cambridge Associates and Heartland Technology, Inc. Mr. Zilkha is a trustee of The American Society of the French Legion of Honor, trustee emeritus of Wesleyan University and an honorary trustee of the Brookings Institution. He is Chairman of the Board of the International Center for the Disabled. Each of the shareholder-directors may be contacted at the principal executive offices of the Partnership and is a citizen of the United States. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Newhall Management Corporation and its officers and directors, the general partners, and persons who own more than ten percent of the Company's partnership units, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. The Company assists officers, directors and ten-percent unitholders to file their Section 16(a) reports and retains a copy of the forms filed. Written representations that all required reports have been filed are obtained at the end of each year. Based upon this information, the Company believes that, during the year ended December 31, 1997, all such filing requirements were fulfilled. The Board of Directors manages and controls the overall business and affairs of the Corporation, of the Managing General Partner, and of the Partnership. The members of the Board of Directors are elected by the shareholder-directors of the Corporation, unless there is a vacancy on the Board in which case the remaining board members may fill the vacancy, without the approval of the limited partners and with each shareholder-director of the Corporation having an equal number of votes. Because the shareholders and directors are the same persons, it is expected that the shareholders will re-elect themselves to serve as directors. It is the current policy of the Corporation that all directors of the Corporation, except for the initial directors of the former Managing General Partner and Mr. Lee, will retire at age 70. If a new director is elected, he or she is required to become a shareholder by purchasing the number of shares determined by the Board of Directors. The Limited Partnership Agreement ("the Partnership Agreement") of the Partnership requires the General Partners to own at least one percent (1%) of the total number of Partnership units outstanding at all times. In order to meet this 1% requirement, the shareholder-directors had originally contributed Partnership units as 40 43 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) capital to the former Managing General Partner. The determination as to how many Partnership units each shareholder-director would contribute was based upon the shareholdings of the shareholder-director in the predecessor corporation and his or her ability to contribute such Partnership units in order that the General Partners would own at least 1% of the total number of Partnership units outstanding at all times. Messrs. Henry Newhall and Zilkha each effectively has contributed to the Managing General Partner a total of 72,000 Partnership units. Ms. Newhall effectively has contributed to the Managing General Partner a total of 71,650 Partnership units. Messrs. Lee and Cusumano each effectively has contributed 36,000 Partnership units. Messrs. Argyros, Reichardt, Pope, Sutton, McKernan and Williams each effectively has contributed to the Managing General Partner a total of 2,000 Partnership units. Mr. Edwin Newhall Woods, who retired from the Board of Directors in September 1996, has agreed to leave 72,000 units contributed by him until his units are replaced. The Partnership units contributed to the Managing General Partner total 371,650 or 1.1% of the total number of partnership units outstanding at December 31, 1997. It should be noted that a shareholder will receive the same distributions from the Partnership with regard to his or her Partnership units regardless of whether such Partnership units are represented by limited partner interests in Newhall Management Limited Partnership or by general partner interests in Newhall Management Limited Partnership (which in turn are represented by common stock in the Corporation). All Partnership distributions and allocations to the Managing General Partner with respect to the Partnership units held by such Partner will be passed on to each limited partner of the Managing General Partner or shareholder of the Corporation as distributions in proportion to the actual number of units or shares beneficially owned by such limited partner or shareholder, as the case may be. The shareholder-directors of the Corporation and the Corporation are parties to a shareholders' agreement and a voting trust agreement. These agreements provided for the transfer of all the shares of Newhall Management Corporation to a voting trust, held in the name of the Trustee. The Secretary of Newhall Management Corporation serves as Trustee. In all matters the Trustee will vote all the shares in accordance with the direction of a majority of the shareholder-directors, with each shareholder-director having one vote on each matter (irrespective of the actual number of shares beneficially owned by such person). The shareholders' agreement and the bylaws of the Corporation restrict the ability of a shareholder-director to transfer ownership of shares of the Corporation. Certain events, such as failure to own at least one limited partner unit in Newhall Management Limited Partnership, failure to consent to a Subchapter S election under the Internal Revenue Code, failure to re-execute the trust agreement, ceasing to serve as a director, failure of a shareholder-director's spouse to sign any required consent, a material breach by a shareholder-director of the shareholders' agreement or voting trust agreement, a levy upon the shares of a shareholder, or a purported transfer of shares to someone other than a new or existing director upon approval of the Board of Directors, are considered to be repurchase events. Upon such a repurchase event, the shareholder must immediately resign as a director and the shareholder will lose voting rights under the voting trust agreement. Upon the occurrence of a repurchase event, a shareholder's shares will be repurchased by the Corporation or the Corporation may direct their purchase by a successor director. The Corporation has agreed to repurchase for cash equal to the market value of the Partnership units representing such shares (or provide for the purchase of) all shares of a shareholder-director subject to a repurchase event within one year of the repurchase event and to use its best efforts to effect such repurchase (purchase) as soon as possible after the repurchase event. There can be no assurance that the Corporation will be able to find a replacement for a departing shareholder-director who will purchase shares. The shareholders' agreement expires if Newhall Management Corporation ceases to serve as the Managing General Partner of the Managing General Partner of the Partnership, or Newhall Management Limited Partnership ceases to be the Managing General Partner of the Partnership, if all parties to the shareholders' agreement consent to its termination, or with respect to any individual shareholder, upon the repurchase of all the shareholder's shares. The term of the voting trust is limited by laws to 10 years, but a party to the voting trust will be deemed to have resigned as a director of the Corporation and will have to sell his shares, subject to repurchase by the Corporation, unless, at the times provided in the voting trust agreement, the party re-executes and renews the voting trust for the purpose of keeping it continually in effect. The voting trust agreement terminates if Newhall Management Corporation ceases to serve as a general partner of the Managing General Partner of the 41 44 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) Partnership, or Newhall Management Limited Partnership ceases to be the Managing General Partner of the Partnership, or with respect to any individual shareholder if a shareholder no longer owns any shares. The shareholder-directors, as limited partners, are also parties to the limited partnership agreement of Newhall Management Limited Partnership. The limited partnership agreement has restrictions on transfer similar to the shareholders' agreement and provides for repurchase of the limited partnership units of a limited partner upon the occurrence of repurchase events which are similar to those of the shareholders' agreement, including the cessation of being a director by a limited partner in the case of a limited partner who is a director. Upon the occurrence of a repurchase event, Newhall Management Limited Partnership would have one full year to transfer Partnership units representing the limited partner's interest to the limited partner. A limited partner could not compel the return of Partnership units for at least one year from the date a limited partner chooses to obtain return of Partnership units. Even then, Newhall Management Limited Partnership cannot, and cannot be compelled to, distribute Partnership units to the limited partner if Newhall Management Limited Partnership would thereafter own less than 1% of the Partnership's Partnership units. The limited partners, as limited partners, have no voting rights except as expressly set forth in the limited partnership agreement or granted pursuant to law. Such voting privileges include matters such as (i) electing general partners in specified instances, (ii) amending the limited partnership agreement, (iii) dissolving the limited partnership, (iv) electing a general partner to serve as the Managing General Partner, and (v) removing a general partner. Items (ii) and (iii) require the separate concurrence of the Managing General Partner. Persons other than directors of Newhall Management Corporation may serve as limited partners of Newhall Management Limited Partnership and Newhall Management Corporation has the authority pursuant to the limited partnership agreement to cause additional units to be issued. The partnership agreement provides limited instances in which a general partner shall cease to be a general partner. Newhall Management Limited Partnership will dissolve (i) when a general partner ceases to be a general partner (other than by removal) unless there is at least one other general partner or all partners agree in writing to continue the business of the partnership and to admit one or more general partners, (ii) if Newhall Management Limited Partnership becomes insolvent, (iii) upon the disposition of substantially all assets of Newhall Management Limited Partnership, (iv) 90 days after an affirmative vote of the limited partners to dissolve pursuant to the partnership agreement, or (v) upon the occurrence of any event which makes it unlawful for the business of Newhall Management Limited Partnership to be continued. Newhall General Partnership, a California general partnership, is a general partner for the purposes of continuing the business of the Partnership and serving as an interim Managing General Partner if Newhall Management Limited Partnership or its successor ceases to serve as Managing General Partner. So long as Newhall Management Limited Partnership or its successor remains as Managing General Partner, Newhall General Partnership will have no right to take part in the management and control of the affairs of the Partnership. The general partners of Newhall General Partnership are Newhall Management Limited Partnership, the chief executive officer of Newhall Management Corporation and another officer or director of Newhall Management Corporation selected from time to time by the board of directors of Newhall Management Corporation. Thomas L. Lee is the Chief Executive Officer of Newhall Management Corporation and, therefore, is a general partner of Newhall General Partnership. Gary M. Cusumano, President and Chief Operating Officer of Newhall Management Corporation, has been selected by the board of directors of Newhall Management Corporation to be a general partner of Newhall General Partnership. For as long as Newhall Management Limited Partnership serves as a general partner of the Partnership, Newhall Management Limited Partnership shall serve as a general partner of Newhall General Partnership and the individual general partners of Newhall General Partnership shall be the chief executive officer of Newhall Management Corporation and another officer or director selected by the board of directors of Newhall Management Corporation. The managing partner of Newhall General Partnership is the chief executive officer of Newhall Management Corporation and shall have management and control of the ordinary course of day to day business of Newhall General Partnership. Matters outside the ordinary course of the day to day business of Newhall General Partnership shall be decided by a majority vote of the partners except that a unanimous vote will be required to, 42 45 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) among other things, admit a new partner (other than the chief executive officer or other officer or director of Newhall Management Corporation). After giving effect to 2-for-1 unit splits on December 20, 1985 and January 29, 1990, each of the partners of Newhall General Partnership have contributed twenty Partnership units to Newhall General Partnership. No additional capital contributions are required. The income, losses and distributions allocated to Newhall General Partnership with respect to the units will be allocated among the partners of Newhall General Partnership in the ratio of the units contributed by each of them. The ability of a partner to withdraw from Newhall General Partnership or to transfer an interest in Newhall General Partnership is limited by the partnership agreement of Newhall General Partnership. Individual partners of Newhall General Partnership may not withdraw except upon appointment of a successor by the board of directors of Newhall Management Corporation. In addition, an individual general partner may not transfer his interest in Newhall General Partnership except with the written consent of Newhall Management Limited Partnership. Newhall Management Limited Partnership, as a general partner of Newhall General Partnership, may not withdraw unless: (i) it no longer serves as a general partner of the Partnership; (ii) Newhall General Partnership no longer serves as a general partner of the Partnership; or (iii) Newhall General Partnership dissolves and its business is not continued. If Newhall Management Limited Partnership no longer serves as a general partner of the Partnership, simultaneously, it will stop serving as a general partner of Newhall General Partnership. Any individual general partner of Newhall General Partnership who is serving as a general partner by virtue of holding an office or position with Newhall Management Corporation, will stop serving as a general partner of Newhall General Partnership if either (i) Newhall Management Limited Partnership is replaced as a general partner of the Partnership, or (ii) Newhall Management Limited Partnership is no longer a general partner of Newhall General Partnership and individual partners are designated pursuant to the partnership agreement. Newhall General Partnership will dissolve when the Partnership is dissolved, liquidated and wound up and any trust or other entity formed for the purpose of liquidating or winding up the Partnership is liquidated and wound up. Newhall General Partnership will dissolve earlier upon: (i) the distribution of substantially all of its property; (ii) the unanimous agreement of its partners; (iii) ceasing to serve as a general partner of the Partnership; or (iv) the occurrence of an event which would make it unlawful to conduct its business. The partnership agreement requires the Partnership to pay all of the costs and expenses incurred or accrued by the general partners in connection with the business and affairs of the Partnership as the Managing General Partner in its sole discretion authorizes or approves from time to time. These costs and expenses include overhead and operating expenses, officer, employee, director and general partner compensation and other employee benefits paid by the general partners. Such compensation and benefits may be determined and changed from time to time without the approval of the limited partners. 43 46 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
Date of Age Office --- ------ Thomas L. Lee 55 Chairman and Chief Executive Officer 07/89 Gary M. Cusumano 54 President and Chief Operating Officer 07/89 Thomas E. Dierckman 49 Senior Vice President - Valencia Division 09/94 Senior Vice President - Real Estate Operations 07/90 James M. Harter 51 Senior Vice President - Newhall Ranch Division 09/94 Senior Vice President - Community Development 08/92 Stuart R. Mork 45 Senior Vice President and Chief Financial Officer 01/96 Vice President and Chief Financial Officer 01/95 Vice President - Finance 01/94 Vice President - Finance and Treasurer 07/92 Daniel N. Bryant 38 Vice President - Asset Management 01/98 Director - Asset Management 07/96 Director - Property Management and Leasing 12/94 Vice President - Commercial/Industrial Real Estate of Valencia Company, a division of The Newhall Land and Farming Company 01/93 John R. Frye 53 Vice President - Agriculture 09/85 Donald L. Kimball 40 Vice President - Finance and Controller 01/97 Vice President - Controller 07/94 Controller 04/90 James R. Wheeler 47 Vice President Residential -- Valencia 03/96 Vice President - Mainland Division, Castle & Cooke Homes, Inc. 07/94 Vice President - The William Lyon Company 01/90
The officers serve at the pleasure of the Board of Directors. 44 47 ITEM 11. EXECUTIVE COMPENSATION The following tables set forth information as to each of the five highest paid Executive Officers and their compensation for services rendered to the Company and its subsidiaries: SUMMARY COMPENSATION TABLE
-------------------------------- --------------------------------- Annual Compensation Long Term Compensation -------------------------------- --------------------------------- Awards Payouts ------------------------ ------- Other Restricted Number of All Annual Stock Securities Other Name and Bonus Comp. Awards Underlying LTIP Comp. Principal Position Year Salary (1) (2) (3) Options/SARs Payouts (4) - ------------------------- ---- --------- --------- -------- ---------- ------------ ------- -------- Thomas L. Lee 1997 $ 362,000 $ 205,073 $ 65,650 - 730,000 $ - $ 36,605 Chairman and 1996 362,000 181,000 61,450 - 25,000 - 33,640 Chief Executive Officer 1995 322,000 117,530 62,153 - 20,000 - 29,648 Gary M. Cusumano 1997 274,000 155,221 68,500 - 574,000 - 28,829 President and 1996 264,000 132,000 66,000 - 20,000 - 26,706 Chief Operating Officer 1995 264,000 96,360 50,620 - 16,000 - 24,856 Thomas E. Dierckman 1997 214,000 84,522 4,300 - 367,000 - 14,764 Senior Vice President 1996 214,000 73,321 4,500 - 14,000 - 14,827 1995 206,000 52,600 4,544 - 12,000 - 13,304 Stuart R. Mork 1997 200,000 85,320 350 - 367,000 - 10,139 Senior Vice President 1996 200,000 80,000 365 - 14,000 - 8,058 Chief Financial Officer 1995 170,000 45,510 - - 20,000 - 6,391 James M. Harter 1997 175,000 84,655 - - 315,000 - 5,520 Senior Vice President 1996 170,000 64,600 - - 12,000 - 4,821 1995 160,000 37,000 - - 10,000 - 4,221 - ---------------------------------------------------------------------------------------------------------------
(2) Represents bonus accrued during the current calendar year based on earnings for such period and paid in the subsequent calendar year. A part of the 1997 bonus will be paid in partnership units in accordance with the Company's Management Unit Ownership Program as follows: Mr. Dierckman ($24,522), Mr. Mork ($19,905), and Mr. Harter ($84,655). Part of the 1996 bonus was paid in partnership units as follows: Mr. Lee ($31,735), Mr. Dierckman ($20,721), Mr. Mork ($17,245), and Mr. Harter ($64,600). (2) Includes general partner fees paid to Messrs. Lee and Cusumano as general partners of Newhall General Partnership of $60,000 each and director fees of $4,000 to Mr. Cusumano and $3,500 to Mr. Dierckman as directors of a wholly-owned subsidiary. (3) Messrs. Dierckman, Mork and Harter have the right to receive 855, 540, and 1,030 unit rights, respectively, which entitles them to receive one partnership unit for each unit right under certain circumstances. (4) Totals include the following: (1) Company matching contributions to the Employee Savings Plan and Savings Restoration Plan, (2) excess life insurance premiums, and (3) long-term disability insurance premiums for Messrs. Lee and Cusumano. 45 48 ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) OPTION/SAR GRANTS IN LAST FISCAL YEAR
------------------------------------------------- Individual Grants Value of ------------------------------------------------- ---------------------------- Options as of Potential Realizable Value Grant Date as at Assumed Annual Rates Computed by Number of % of Total of Stock Price Appreciation the Modified Securities Options/SARs Exercise for Option Term(3) Black-Scholes Underlying Granted To Or Base ------------------------ Options Options/SARs Employees in Price Expiration Valuation Name Granted Fiscal Year ($/Sh) Date 5% 10% Model(4) ---------------- ------------ ------------ -------- ---------- ---------- ---------- ---------- Thomas L. Lee 30,000(1) $22.0625 07-16-07 $ 416,250 $ 1,054,858 $ 222,000 319,918(2) 31.30 11-20-02 2,213,222 4,890,641 1,129,311 380,082(2) 33.39 11-20-02 2,629,442 5,810,378 1,273,275 --------- ----------- ----------- ---------- 730,000 27% 5,258,914 11,755,877 2,624,586 --------- --- ----------- ----------- ---------- Gary M. Cusumano 24,000(1) 22.0625 07-16-07 333,000 843,887 177,600 251,364(2) 31.30 11-20-02 1,738,959 3,842,644 887,315 298,636(2) 33.39 11-20-02 2,065,991 4,565,299 1,000,431 --------- - ----------- ----------- ---------- 574,000 21% 4,137,950 9,251,830 2,065,346 --------- --- ----------- ----------- ---------- Thomas E. Dierckman 17,000(1) 22.0625 07-16-07 235,875 597,753 125,800 159,959(2) 31.30 11-20-02 1,106,611 2,445,320 564,655 190,041(2) 33.39 11-20-02 1,314,721 2,905,189 636,637 --------- ----------- ----------- ---------- 367,000 13% 2,657,207 5,948,262 1,327,092 --------- --- ----------- ----------- ---------- Stuart R. Mork 17,000(1) 22.0625 07-16-07 235,875 597,753 125,800 159,959(2) 31.30 11-20-02 1,106,611 2,445,320 564,655 190,041(2) 33.39 11-20-02 1,314,721 2,905,189 636,637 --------- ----------- ----------- ---------- 367,000 13% 2,657,207 5,948,262 1,327,092 --------- --- ----------- ----------- ---------- James M. Harter 15,000(1) 22.0625 07-16-07 208,125 527,429 111,000 137,108(2) 31.30 11-20-02 948,526 2,095,993 483,991 162,892(2) 33.39 11-20-02 1,126,902 2,490,158 545,688 --------- ----------- ----------- ---------- 315,000 12% 2,283,553 5,113,580 1,140,679 --------- --- ----------- ----------- ---------- Total 2,353,000 86% $16,994,831 $38,017,811 $8,484,795 --------- --- ----------- ----------- ---------- - ---------------------------------------------------------------------------------------------------------------------
(1) Non-qualified options without appreciation rights granted at 100% of fair market value on the date of grant. Options are exercisable 25% at the end of each of the first four years following date of grant and expire ten years after date of grant. In the event of any change of control of the Company, as defined, then each option will immediately become fully exercisable as of the date of the change of control. (2) Premium price options were granted in November, 1997 to six key executives and are in lieu of market priced options for the next three years. The number of options granted is larger than the Company's typical market price option program due to the increased risks associated with the premium price and forfeiture provisions. The options were granted in two tranches, the first of which has an excercise price 25% higher than the trailing average unit price during the 30 days prior to the date of grant. The second tranche was granted at 33 1/3% higher than the same original market price. The options become excercisable in three years and have a five-year option life but are subject to forfeiture if certain performance criteria are not met. (3) The final unit price at 5% compound growth is $35.94 for the market price options and $31.96 for the premium price optons. The final unit price at 10% compound growth is $57.22 for the market price options and $40.33 for the premium price options. (4) The modified Black-Scholes Options Valuation Model modifies the Black-Scholes formula to include the impact of distributions and to allow option exercise prior to maturity. The 10-year distribution yield of 3.0% was used in the modified model. 46 49 ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Underlying Value of Unexercised Unexercised Options/SARs In-the-Money Options/SARs Shares at Fiscal Year-End at Fiscal Year-End(1) Acquired ------------------------- --------------------------- On Value Exercise Realized Un- Un- Name (#) ($000) Exercisable exercisable Exercisable Exercisable ------------------- -------- -------- ----------- ----------- ----------- ----------- Thomas L. Lee 3,563 $119,250 141,025 775,925 $1,660,381 $ 767,294 Gary M. Cusumano 2,704 88,750 107,250 610,500 1,271,000 613,500 Thomas E. Dierckman 776 24,063 78,750 392,750 872,688 416,500 Stuart R. Mork -- -- 51,750 391,750 656,875 474,188 James M. Harter -- -- 24,750 331,250 379,969 356,719 ----- -------- ------- --------- ---------- ---------- Total 7,043 $232,063 403,525 2,502,175 $4,840,913 $2,628,201 ===== ======== ======= ========= ========== ========== ----------------------------------------------------------------------------------------------------
(1) Based on the difference in the unit price of $30.00 at December 31, 1997, and the exercise price of the underlying options. 47 50 ITEM 11. EXECUTIVE COMPENSATION (continued) EMPLOYEE BENEFIT PLANS The following are descriptions of the principal employee benefit plans of the Company. RETIREMENT PLANS Under the Retirement Plan, participants' benefits are calculated as 40.5% of the average annual compensation, including salary and bonus, of the highest five calendar years of the preceding ten years up to Social Security covered compensation, plus 60% of the average annual compensation in excess of covered compensation, reduced pro rata for years of service less than 30. Benefits which accumulate after January 1, 1997 are calculated as 32.4% of the social security wage base and 48% of the excess over covered compensation. Under the Pension Restoration Plan, the Company will pay any difference between the ERISA and Internal Revenue Code maximum amount payable under the Retirement Plan and the amount otherwise payable, including amounts restricted by the compensation limit. The following table reflects the estimated annual benefits paid as a single life annuity upon retirement at age 65 under the Retirement Plan and Pension Restoration Plan at various assumed compensation ranges and credited years of service:
Years of Service ------------------------------------------------------------------------- Compensation 10 20 30 40 ------------ -------- -------- -------- -------- $125,000 $ 24,000 $ 48,000 $ 72,000 $ 72,000 200,000 39,000 78,000 117,000 117,000 275,000 54,000 108,000 162,000 162,000 350,000 69,000 138,000 207,000 207,000 425,000 84,000 168,000 252,000 252,000 450,000 89,000 178,000 267,000 267,000 500,000 99,000 198,000 297,000 297,000 550,000 109,000 218,000 327,000 327,000
Credited years of service as of December 31, 1997 (to the nearest whole year) and average annual compensation for the highest five years of the last ten years are as follows: 27 years and $500,000 for Mr. Lee; 28 years and $395,000 for Mr. Cusumano; 10 years and $200,000 for Mr. Mork; 15 years and $260,000 for Mr. Dierckman; and 5 years and $180,000 for Mr. Harter. An amendment to the Retirement Plan effective January 1, 1997 will reduce the amounts that each executive will receive at retirement from the full amounts shown in the above table. Based on years of service upon retirement at age 65 and the proportion of service rendered before January 1, 1997, the percentage of benefit from the above table for each executive will be as follows: Mr. Lee - 98.0%; Mr. Cusumano - - 98.7%; Mr. Mork - 85.2%; Mr. Dierckman - 90.0%; and Mr. Harter - 84.4%. CHANGE IN CONTROL SEVERANCE PROGRAM The Partnership entered into severance agreements in March, 1988 with two executive officers, Thomas L. Lee and Gary M. Cusumano, and in November, 1997 with three senior vice presidents and five vice presidents, under which each such officer is entitled to certain benefits in the event of a "change of control." Under the provisions of the severance agreements, a "change of control" is deemed to have occurred when (i) any "person" (other than a trustee or similar person holding securities under an employee benefit plan of the Partnership, or an entity owned by the Unitholders in substantially the same proportions as their ownership of units) becomes the beneficial owner of 25% or more of the total voting power represented by the Partnership's then outstanding voting securities, (ii) Newhall Management Corporation is removed as Managing General Partner of the Managing General Partner, or (iii) the holders of the voting securities of the Partnership approve a merger or consolidation of the Partnership with any other entity, other than a merger or consolidation which would result in the voting securities of the Partnership outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the total voting power represented by the voting securities of the Partnership or such surviving entity outstanding immediately after such merger or consolidation, or (iv) a plan of complete liquidation of the Partnership is adopted or the holders of the voting securities of the Partnership approve an agreement for the sale or disposition by the Partnership (in one transaction or a series of transactions) of all or substantially all the Partnership's assets. Entitlement to benefits arises if, within two years following a change in control, the officer's employment is terminated or if he or she elects to terminate his or her employment following action by the 48 51 ITEM 11. EXECUTIVE COMPENSATION (continued) Partnership which results in (i) a reduction in salary or other benefits, (ii) change in location of employment (iii) a change in position, duties, responsibilities or status inconsistent with the officer's prior position or a reduction in responsibilities, duties, or offices as in effect immediately before the change in control, or (iv) the failure of the Partnership to obtain express assumption by any successor of the Partnership's obligations under the severance agreement. Benefits payable under the agreements to Messrs. Lee and Cusumano consist of (i) payment in a single lump sum equal to base salary and general partners fees for three years, (ii) payment in a single lump sum of three times the average bonus payments for the two fiscal years preceding the change in control, (iii) continuation of participation in insurance and certain other fringe benefits for three years, (iv) immediate vesting of deferred compensation, nonqualified retirement benefits, options and other unit-based rights, (v) a retirement benefit equivalent to the additional benefits that would have accrued under retirement plans if employment had continued for two years, and (vi) reduction of required service for full retirement benefits from 30 years to 20 years through a non-qualified arrangement. The benefits payable to senior vice presidents are the same as for Messrs. Lee and Cusumano except that base salary, bonus and fringe benefits would be paid for two years and the retirement benefit for one year. Certain vice presidents would receive base salary, bonus and fringe benefits for one year. Benefits payable under the agreements are in lieu of any severance benefits under the Partnership's general severance policy. The agreements are not contingent upon the officers actively seeking other employment, but provide for offset of fringe benefits provided by a new employer. COMPENSATION OF THE DIRECTORS The Partnership Agreement provides that the compensation of the general partners and their partners, directors, officers and employees shall be determined by the Managing General Partner. Both the compensation committee and the nominating committee of the Board of Directors of Newhall Management Corporation, the Managing General Partner of Newhall Management Limited Partnership, have been granted authority by the Board of Directors to determine certain compensation issues. Non-employee members of the Board receive an annual retainer fee of $24,000 for serving on the Board, $2,000 for serving on the Audit Committee and $1,000 for serving on any other committee of the Board. In addition, independent directors receive a fee of $1,000 for attending each meeting of the Board or committee of which they are a member. Committee chairpersons receive a fee of $500 in addition to the regular meeting fee for each committee meeting they conduct. Employees serving on the Board of Directors do not receive directors' fees. Directors' compensation may be deferred until separation from the Board. Deferred amounts earn interest at the Wells Fargo Bank prime rate. Members of the Board of Directors will also receive reimbursement for travel and other expenses related to attendance at meetings of the Board of Directors and of the committees. In addition, the Partnership Agreement requires the Partnership to reimburse the Managing General Partner for any federal or California income taxes imposed upon the Managing General Partner or its Managing General Partner as a result of its activities as Managing General Partner. Under the terms of the 1995 Option/Award plan adopted by the Board of Directors on January 18, 1995, each non-employee Board member ("Independent Director") may elect to have all or any portion of the annual retainer fees paid in depositary units instead of cash. The 1995 Option/Award Plan also provides each Independent Director serving on the Board on January 18, 1995, and each newly elected or appointed Independent Director, with a non-statutory option ("Automatic Option") to purchase 1,500 depositary units. On the third Wednesday of July of each year that occurs after January 18, 1995, each continuing Independent Director will automatically receive an Automatic Option to purchase 500 depositary units. Each Automatic Option vests immediately and has a term of 10 years. Generally, the Independent Director may exercise his or her option for a period of 3 months after termination of service as an Independent Director for any reason other than death or "retirement," 12 months after the date of death and 36 months after the date of "retirement." "Retirement" means the first day the Independent Director ceases to serve as an Independent Director after serving as an Independent Director for at least five years. In addition, outside directors automatically receive 500 unit rights on the third Wednesday of July of each year pursuant to the terms of the Deferred Equity Compensation Plan for Outside Directors which was adopted effective November 1, 1996. Unit rights entitle a director to receive an equal number of partnership units upon separation from the Board of Directors for any reason. 49 52 ITEM 11. EXECUTIVE COMPENSATION (continued) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company has a $40 million line of credit for Valencia Town Center with Wells Fargo Bank, N.A. (the "Bank"), all of which was borrowed at December 31, 1997. Valencia Water Company, a subsidiary of the Company, maintains a $2 million credit line with the Bank. There were no borrowings outstanding against this line of credit at December 31, 1997. Additionally, the Company has a $200 million revolving credit facility managed jointly by the Bank and Morgan Guaranty Trust of New York, $7.1 million of which was borrowed at December 31, 1997. Certain of the Company's employee benefit plans have invested approximately $22 million in funds managed by the Bank and the Bank has issued approximately $13 million in letters of credit on behalf of the Company. Thomas L. Lee, Chairman and Chief Executive Officer of the Company, is a director of Wells Fargo & Company and the Bank. Carl E. Reichardt, former Chairman of the Board of the Bank and Wells Fargo & Company, is a director of the Managing General Partner of the Managing General Partner. In June 1994 Valencia Water Company, a wholly-owned subsidiary of the Company, borrowed $11 million from Pacific Life Insurance Company. In addition, the Company has acquired two life insurance policies for its two senior officers with face amounts of approximately $1.5 million each from Pacific Life. Thomas C. Sutton, a director of the Company, is Chairman of the Board and Chief Executive Officer of Pacific Life Insurance Company. All of the foregoing transactions are at rates and terms comparable to those of similar transactions with unrelated parties. REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF NEWHALL MANAGEMENT CORPORATION COMPENSATION COMMITTEE CHARTER The Compensation Committee, which is entirely comprised of independent directors, determines or approves compensation of all executive officers of the Company and reviews management development issues. It has regularly scheduled meetings two times a year, and meets at other times as appropriate. During 1997, the committee met four (4) times. SENIOR MANAGEMENT COMPENSATION PHILOSOPHY The Company believes its success is greatly influenced by the caliber of its employees. The Company's compensation program for senior management is designed to attract, motivate and retain a highly skilled, professional and dedicated work force. In this regard, Newhall Land's senior management compensation program consists of: - - Base salary compensation tied to prevailing real estate industry compensation practices. - - Annual merit and incentive pay compensation (bonuses) primarily related to the Company's and manager's performance for the previous fiscal year. - - Long-term incentive compensation in the form of unit options, restricted units and unit rights directly tied to increasing unitholder value. This component of compensation can be highly volatile because it is directly related to corporate performance. The Company's objective is for the base salary, annual incentive compensation and long-term incentive compensation of senior management to approximate the median levels for an industry comparison group consisting primarily of real estate companies with which the Company competes for executive talent. From year-to-year, however, relative compensation levels may vary due largely to variances in individual company performance. It should be pointed out that the companies with which the Company competes for executive talent are not the same as those in the Wilshire Real Estate Securities Index shown in the performance graph. In addition, for managers other than the Chief Executive Officer and the Chief Operating Officer, there is a subjective element to incentive compensation which relates to his or her success in meeting individual business and personal goals determined at the beginning of each year. The goals for the business segment he or she manages are based primarily on increasing unitholder values through profitability and, most importantly, the value of the Company's landholdings. 50 53 ITEM 11. EXECUTIVE COMPENSATION (continued) BASE SALARY COMPENSATION The base salary for each executive officer is determined on the basis of an evaluation of the responsibilities of each position compared to other positions in the Company and to base salary levels in effect for comparable positions at the Company's principal competitors for executive talent. In addition, the qualifications of the executive officer including training and experience is considered in determining base salary. Salaries are reviewed and adjustments to each executive officer's base salary, if any, are made on an annual basis. External salary data provided to the Committee by an independent compensation consulting firm indicate that salaries for 1997 were generally at or below the median level. ANNUAL MERIT AND INCENTIVE COMPENSATION (BONUSES) Annual bonuses under the Company's Executive Incentive Plan adopted by the Board of Directors are earned by each executive officer on the basis of the Company's earnings, division performance and/or the attainment of individual goals in the previous fiscal year. Target earnings projections for the Company and each division and individual goals are developed at the beginning of the year. Target bonuses are determined as percentages of base salaries for each management group based upon ability to influence the success of the Company and are generally set to produce bonuses comparable to other real estate companies over a period of time. The bonuses earned are then calculated at the end of the year using the target percentages, increased or decreased by multiples which give effect to the earnings achieved and individual goals accomplished. The multiple results in the bonus percentage attributable to Company earnings being increased at twice the percentage by which actual earnings exceed targeted earnings and reduced at three times the percentage by which actual earnings are less than targeted earnings. There are no bonuses for this component of the formula if earnings are less than 75% of target. The aggregate amount of such incentive bonuses may not exceed 5% of the Company's net income after deducting the incentive awards. The 1997 bonuses continue to be at or below industry levels. The target bonuses (except for Mr. Lee's bonus) are recommended by the Company's Chief Executive Officer, Mr. Lee, and approved by the Compensation Committee and the Board of Directors. Beginning in 1996, senior executives are paid 50% of the excess of their current year's bonus over 1995 in partnership units until they reach their unit ownership guidelines described below. Additionally, any manager may elect to receive all or any part of his or her annual bonus in partnership units and to defer receipt of such partnership units for up to five (5) years. The total of the bonuses paid for 1997 was $1,907,000 (or 4.3% of 1997 income after deducting bonuses), versus $1,481,000 in 1996 (3.5% of income after deducting bonuses), a 29% increase from 1996 to 1997. The increase in bonuses for 1997 recognizes the improved earnings per unit in 1997 over 1996 of 8.5%, a 55% increase in lots and homes sold in Valencia, a 119% increase in sales of industrial/commercial acreage, a 10.6% increase in income from commercial operations, the approval of the 24,000-home Newhall Ranch project by the Los Angeles County Regional Planning Commission and the capturing of 12% of the new home market in Los Angeles County. LONG-TERM INCENTIVE COMPENSATION The Committee endorses the view that equity ownership of the Company aligns management's and unitholders' interests and thereby enhances unitholders' value. The equity component of compensation includes unit options, appreciation rights, restricted units, unit rights and bonuses paid in partnership units (described above) under the Company's 1995 Option/Award Plan. Option awards are generally made at mid-year to key management personnel who are in positions to make substantial contributions to the long-term success of the Company. These awards mature and are expected to grow in value over time and for that reason represent compensation which is attributable to service over a period of up to ten years. This focuses attention on managing the Company from the perspective of an owner with an equity stake in the business. The size of the unit options granted to each executive officer is based on the aggregate exercise price. Generally it is set at a multiple of salary which the Committee deems appropriate in order to create a meaningful opportunity for ownership based upon the individual's current position with the Company. The unit options granted also take into account comparable awards to individuals in similar positions in the industry, as reflected in external surveys and as reported to the Committee by an independent compensation consultant, and the individual's potential for future responsibility and promotion over the option term. There were no appreciation rights or restricted units granted during the year. In 1994 the Company adopted unit ownership guidelines for management. Managers are encouraged to own units having a market value ranging 51 54 ITEM 11. EXECUTIVE COMPENSATION (continued) from 50% to 600% of base salary. As an inducement to purchase partnership units the Company offers one unit right for every five units purchased. A unit right entitles the recipient to receive one partnership unit for each unit right. Unit rights vest at the rate of twenty percent a year over a five year period. In November 1997, a special grant of 2,450,000 premium price options was made to the top six executive officers of the Company to provide additional incentive for them to deliver near-term, substantial price growth in the outstanding partnership units and to enhance their incentive compensation to be more comparable with that of publicly-traded real estate companies. The options were granted in two tranches, both of which are exercisable in three years provided certain price performance objectives are met. The first tranche vests if within two years the market price of the Partnership's outstanding partnership units increases by 25% and the second tranche vests if within three years the market price increases 33 1/3 %. Alternatively, the options will vest if during the applicable period the total return on an outstanding partnership unit equals or exceeds the 75th percentile of a peer group of other publicly-traded real estate companies. A prorated portion of vested options will be exercisable upon death, disability or retirement within three years. The options are forfeited if neither of the price performance goals is met. The premium price options expire in five years. The premium price options were frontloaded so the six executives will not receive any other options for the next three years. CHIEF EXECUTIVE OFFICER COMPENSATION Mr. Lee's base salary is $362,000 per annum, the same as last year, and he was paid a bonus for 1997 of $205,073 for total cash compensation of $567,073. A study by a compensation consulting firm during 1997 indicates that Mr. Lee's cash and total direct compensation (short-term cash plus long-term incentive) are both below the medians of the chief executive officers of a peer group of companies with similar revenues, market capitalization and business focus. The Compensation Committee has elected to increase Mr. Lee's annual bonus and long-term incentive compensation to align more of his total direct compensation with the interests of the Company's owners. During 1997 Mr. Lee's efforts led to planning commission approval of Newhall Ranch, the largest single new development in the history of Los Angeles County, improved results in every major segment of the Company's business and a total shareholder return of 81%. Mr. Lee's bonus for 1997 of $205,073, versus $181,000 for 1996, equals his target bonus of 50% of his salary plus 13.3%, twice the percentage by which net income per unit exceeded target, pursuant to the Company's Executive Incentive Plan. The amount of the bonus earned was based entirely upon Company earnings. Long-term incentive compensation of 30,000 unit options was granted to Mr. Lee at market in July, 1997, an increase of 5,000 or 20% from the 1996 grant of 25,000 options. In addition Mr. Lee received 700,000 of the premium price options described above. The benefits of the unit options are expected to be realized over the next five to ten years during which Mr. Lee's emphasis on strategic planning, particularly land entitlements and investments in income producing properties are expected to yield benefits for the Company's investors. SECTION 162 LIMIT Section 162(m) of the Internal Revenue Code limits federal income tax deductions for compensation paid to the Chief Executive Officer and the four other most highly compensated officers of a public company to $1 million per year, but contains an exception for performance-based compensation that satisfies certain conditions. The Company believes that Section 162(m) does not apply to publicly-traded limited partnerships such as the Company. Even if Section 162(m) were applicable to the Company, however, the compensation paid the Chief Executive Officer and each of the four other most highly compensated officers, excluding performance-based compensation, is well below $1 million per year. 52 55 ITEM 11. EXECUTIVE COMPENSATION (continued) COMPENSATION COMMITTEE MEMBERS The Compensation Committee of the Board of Directors of Newhall Management Corporation is comprised of the following five independent directors: Peter T. Pope (Chairman) Thomas V. McKernan, Jr. Carl E. Reichardt Thomas C. Sutton Barry Lawson Williams 53 56 ITEM 11. EXECUTIVE COMPENSATION (continued) The Newhall Land and Farming Company Stock Performance Analysis
5 Year 1992 1993 1994 1995 1996 1997 Total Return ---- ---- ---- ---- ---- ---- ------------ NHL 100.00 115.32 89.89 129.62 131.81 239.74 81.88 % S&P 500 100.00 110.06 111.50 153.31 188.68 251.63 33.36 % WRESI* 100.00 119.46 112.77 138.37 189.25 226.98 19.94 %
10 Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total Return ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------------ NHL 100 193.37 211.74 116.50 146.21 112.35 129.55 100.99 145.62 148.09 269.34 81.88 S&P 500 100 116.55 153.45 148.55 193.91 208.74 229.74 232.75 320.03 393.87 525.26 33.36 WRESI* 100 134.72 137.10 70.57 79.92 72.09 86.11 81.29 99.74 136.42 163.62 19.94
Assumes $100 invested on December 31, 1992 for the 5-year graph and December 31, 1987 for the 10-year graph. Total return includes reinvestment of dividends. * Wilshire Real Estate Securities Index (consists of the following real estate operating companies: Bristol Hotel Co., Catellus Development Corporation, Homestead Valley Properties, Host Marriott Corporation, LaQuinta Inns, Inc., The Newhall Land and Farming Company, Prime Hospitality, Inc., Red Roof Inns, Rouse Company, Servico Inc., Trizec Hahn Corp.). 54 57 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT DIRECTORS AND OFFICERS The following table sets forth the number of units beneficially owned by each director of Newhall Management Corporation, each of the Company's five highest paid executives and all directors and officers as a group as of December 31, 1997.
Amount and Nature Percent Name of Beneficial Ownership of Class - ---------------- -------------------------- -------- George L. Argyros 57,289(1)(2)(3) 0.2% Gary M. Cusumano 237,849(1)(2)(4) 0.7 Thomas E. Dierckman 92,217(2)(4)(5) 0.3 James M. Harter 31,382(2)(4)(5) * Thomas L. Lee 243,633(1)(2)(4)(5) 0.7 Thomas V. McKernan, Jr. 8,174(1)(2)(3) * Stuart R. Mork 57,103(2)(4)(5) 0.2 Henry K. Newhall 880,758(1)(2)(3)(6) 2.6 Jane Newhall 1,085,256(1)(2)(3) 3.1 Peter T. Pope 10,821(1)(2)(3) * Carl E. Reichardt 95,173(1)(2)(3)(7) 0.3 Thomas C. Sutton 16,648(1)(2)(3)(8) * Barry Lawson Williams 4,504(1)(2)(3) * Ezra K. Zilkha 1,189,228(1)(2)(3)(9) 3.4 All directors and officers as a group 4,179,190 12.1%
* Represents less than 0.1% of the securities outstanding. (1) Includes 72,000 units each for Messrs. Henry K. Newhall and Zilkha, 71,650 units for Ms. Jane Newhall, 2,000 units each for Messrs. Argyros, McKernan, Pope, Reichardt, Sutton and Williams which are held by the Managing General Partner. Includes 36,000 units held by the Managing General Partner and 20 units contributed to Newhall General Partnership by Messrs. Cusumano and Lee. Of the total of 299,650 units held by the Managing General Partner beneficially for the directors, 20 units have been contributed to Newhall General Partnership, and of those 20 units, 10 units have been contributed back to the Managing General Partner by Newhall General Partnership. See Item 10 of this Annual Report on Form 10-K for information on a shareholders' agreement, voting trust agreement and limited partnership agreement relating to these units. (2) Includes 109,125 units for Mr. Cusumano, 78,750 for Mr. Dierckman, 24,750 for Mr. Harter, 143,325 for Mr. Lee, 51,750 for Mr. Mork, 2,000 for Mr. Williams, 2,500 for Mr. Argyros and 3,000 each for Ms. Newhall and Messrs. McKernan, Newhall, Pope, Reichardt, Sutton and Zilkha which they have the right to acquire pursuant to the Company's 1995 Option/Award Plan. (3) Includes 1,025 units for Mr. Argyros, 1,174 for Mr. McKernan, 5,030 for Mr. Newhall, 10,606 for Ms. Newhall, 3,568 for Mr. Pope, 8,873 for Mr. Reichardt, 2,258 for Mr. Sutton, 504 for Mr. Williams and 13,628 for Mr. Zilkha which they are entitled to receive upon separation from the Board of Directors of Newhall Management Corporation pursuant to the Company's Deferred Equity Compensation Plan for Outside Directors. (4) Includes unit rights to receive an equal number of partnership units under certain circumstances pursuant to the 1995 Option/Award Plan of 547 for Mr. Cusumano, 855 for Mr. Dierckman, 1,030 for Mr. Harter, 1,139 for Mr. Lee and 540 for Mr. Mork. (5) Includes units held by the Company's Employee Savings Plan of 2,253 for Mr. Dierckman, 1,078 for Mr. Harter, 1,661 for Mr. Lee and 2,002 for Mr. Mork. 55 58 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (continued) (6) The Partnership is advised that Henry K. Newhall has sole voting and investment power as to 97,121 units held by trusts for which he is the trustee and beneficiary. Voting and investment power is shared with others as to 711,637 units held by certain trusts. (7) Includes 4,000 units held by trusts for which Mr. Reichardt has sole voting and investment power as the trustee. (8) The Partnership is advised that Mr. Sutton has sole voting and investment power as to 9,390 units held by a trust for which he is a trustee. (9) Includes 230,600 units held by Zilkha & Sons, Inc. for which the Partnership is advised that Mr. Zilkha has sole voting and investment power and 30,000 units held by Mr. Zilkha's wife for which he disclaims beneficial ownership. Except as indicated otherwise in the above notes, the specified persons possess sole voting and investment power as to the indicated number of units to the best of the Company's knowledge. Certain provisions of the Partnership's Limited Partnership Agreement require the affirmative vote of holders of at least 75% of the Partnership's voting power to approve (i) the removal of any general partner or the election of any general partner as the Partnership's managing general partner; or (ii) certain business combinations and other specified transactions ("Business Combinations") with, or proposed by or on behalf of, persons beneficially owning 10% or more of the Partnership's voting power, unless such Business Combination is either approved by a majority of the present directors of Newhall Management Corporation (or by directors who are nominated by them) or certain price and procedural requirements are satisfied. CERTAIN UNITHOLDERS The following table sets forth the names, addresses and unitholdings of the only persons known to the Partnership to be beneficial owners of more than five percent of the outstanding units of the Partnership as of December 31, 1997. Such unitholders have sole voting and investment power to the best knowledge of the Partnership.
Amount Percent Name and Address Beneficially Owned Of Class ------------------ ------------------ -------- State Farm Mutual Automobile 3,400,758 9.9% Insurance Company One State Farm Plaza Bloomington, Illinois 61710 Cohen & Steers Capital 1,964,300 5.7% Management, Inc. 757 Third Avenue New York, New York 10017
To the best knowledge of the management of the Company, no other person owned beneficially more than five percent of the outstanding units of the Company on that date. With respect to the above information, the Company has relied upon the Schedule 13G filing. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For additional related party information see Compensation Committee Interlocks and Insider Participation in Item 11 - Executive Compensation. 56 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed with this report: 1. See Index to Financial Statements on page 22 of this Annual Report on Form 10-K. 2. Financial Statement Schedules: Schedule III - Real Estate and Accumulated Depreciation with accountants' report thereon. Other schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements and notes thereto. 3. Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K): 3(a) The Newhall Land and Farming Company (a California Limited Partnership) Limited Partnership Agreement incorporated by reference to Exhibit 3(e) to Registrant's Registration Statement on Form S-14 filed August 24, 1984. (b) First Amendment to Limited Partnership Agreement of The Newhall Land and Farming Company (a California Limited Partnership) incorporated by reference to Exhibit 3(b) of the Company's Annual Report on Form 10-K for the year ended December 31, 1993, (Commission File Number 1-7585). 4 Depositary Receipt for Units of Interest, The Newhall Land and Farming Company (a California Limited Partnership) incorporated by reference to Exhibit 4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1990, (Commission File Number 1-7585). * 10(a) The Newhall Land and Farming Company 1995 Option/Award Plan incorporated by reference to the Company's Registration Statement on Form S-8 dated March 22, 1995. * (b) Newhall Executive Incentive Plan incorporated by reference to Exhibit 10(f) to Registrant's Registration Statement on Form S-14 filed August 24, 1984. * (c) The Newhall Land and Farming Company Employee Savings Plan incorporated by reference to the Company's Registration Statement on Form S-8 dated May 24, 1994. * (d) The Newhall Land and Farming Company Retirement Plan Restatement, Amendments No. 1 through 5, incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, (Commission File Number 1-7585). * (e) Form of Severance Agreements. * (f) The Newhall Land and Farming Company Supplemental Executive Retirement Plan (Restated effective January 15, 1992) incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, (Commission File Number 1-7585). * (g) The Newhall Land and Farming Company Senior Management Survivor Income Plan incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, (Commission File Number 1-7585). (h) Form of Indemnification Agreement between the Partnership and its General Partners and the general partners, partners, shareholders, officers and directors of its General Partners, or of the Managing General Partner of the Managing General Partner, as amended, incorporated by reference to Exhibit 28(g) to the Company's report on Form 8-K filed December 11, 1990, (Commission File Number 1-7585). 57 60 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) (i) Tax Payment and Tax Benefit Reimbursement Agreement incorporated by reference to Exhibit 28(f) to the Company's report on Form 8-K filed December 11, 1990, (Commission File Number 1-7585). * (j) The Newhall Land and Farming Company Deferred Cash Bonus Plan incorporated by reference to Exhibit 10(l) of the Company's Annual Report on Form 10-K for the year ended December 31, 1990, (Commission File Number 1-7585). * (k) Form of award issued under The Newhall Land and Farming Company Deferred Cash Bonus Plan incorporated by reference to Exhibit 10(m) of the Company's Annual Report on Form 10-K for the year ended December 31, 1990, (Commission File Number 1-7585). * (l) The Newhall Land and Farming Company Employee Savings Restoration Plan (As restated effective January 15, 1992) incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, (Commission File Number 1-7585). * (m) The Newhall Land and Farming Company Pension Restoration Plan (As restated effective January 15, 1992) incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, (Commission File Number 1-7585). (n) Trust Agreement dated January 15, 1992 between the Partnership and Newhall Management Corporation incorporated by reference to Exhibit 10(p)to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, (Commission File Number 1-7585). (o) The Newhall Land and Farming Company Employee Unit Purchase Plan incorporated by reference to the Company's Registration Statement on Form S-8 dated May 24, 1994. * (p) Amendment No. 1 to The Newhall Land and Farming Company Retirement Plan incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, (Commission File Number 1-7585). (q) The Newhall Land and Farming Company Deferred Equity and Compensation Plan for Outside Directors incorporated by reference to the Company's report on Form S-8 dated November 1, 1996. * (r) Amendment No. 2 to The Newhall Land and Farming Company Retirement Plan dated August 1, 1996 incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. * (s) Amendment No. 1 to The Newhall Land and Farming Company Pension Restoration Plan dated January 15, 1997 incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. * (t) Amendment No. 1 to The Newhall Land and Farming Supplemental Executive Retirement Plan dated January 15, 1997 incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. * (u) The Amended and Restated Newhall Management Corporation Retirement Plan for Directors dated September 18, 1996 incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. * (v) First Amendment to The Newhall Land and Farming Company 1995 Option/Award Plan dated November 19, 1997. * (w) Form of award for premium price options granted under The Newhall Land and Farming Company 1995 Option/Award Plan. 58 61 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) 11 Computation of earnings per unit. 21 Subsidiaries of the Registrant. 23 Independent Auditors' Consent. 27 Financial Data Schedule. 99(a) Articles of Incorporation of Newhall Management Corporation, as amended, incorporated by reference to Exhibit 28(b) to the Company's report on Form 8-K filed December 11, 1990, (Commission File Number 1-7585). (b) Bylaws of Newhall Management Corporation incorporated by reference to Exhibit 28(c) to the Company's report on Form 8-K filed December 11, 1990, (Commission File Number 1-7585), and Amendment Number 1 dated July 17, 1991 incorporated by reference to Exhibit 28(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, (Commission File Number 1-7585). (c) Shareholders' Agreement between Newhall Management Corporation, its shareholders and the Newhall Management Corporation Voting Trust incorporated by reference to Exhibit 28(d) to the Company's report on Form 8-K filed December 11, 1990, (Commission File Number 1-7585), and Amendment to Shareholders' Agreement dated as of November 20, 1991 incorporated by reference to Exhibit 28(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, (Commission File Number 1-7585). (d) Voting Trust Agreement between Newhall Management Corporation, the Trustee, and the individual shareholders of Newhall Management Corporation incorporated by reference to Exhibit 28(e) to the Company's report on Form 8-K filed December 11, 1990, (Commission File Number 1-7585). (e) Partnership Agreement of Newhall General Partnership incorporated by reference to Exhibit 28(e) to Registrant's Registration Statement on Form S-14 filed August 24, 1984, and the Certificate of Amendment of Partnership Agreement of Newhall General Partnership, dated November 14, 1990 incorporated by reference to Exhibit 28(e) of the Company's Annual Report on Form 10-K for the year ended December 31, 1990, (Commission File Number 1-7585). (f) Limited Partnership Agreement of Newhall Management Limited Partnership, incorporated by reference to Exhibit 28(a) to the Company's report on Form 8-K filed December 11, 1990, (Commission File Number 1-7585). * The items marked above constitute Executive Compensation Plans and Arrangements. (b) No report on Form 8-K was filed in the fourth quarter ended December 31, 1997. 59 62 Pursuant to the requirements of Section 13 or 15(d) 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: March 18, 1998 By /s/ THOMAS L. LEE ---------------------------------------- Thomas L. Lee Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 18, 1998 By /s/ THOMAS L. LEE ---------------------------------------- Thomas L. Lee, Chairman and Chief Executive Officer Newhall Management Corporation (Principal Executive Officer) Date: March 18, 1998 By /s/ STUART R. MORK ---------------------------------------- Stuart R. Mork Senior Vice President and Chief Financial Officer Newhall Management Corporation (Principal Financial Officer) Date: March 18, 1998 By /s/ DONALD L. KIMBALL ---------------------------------------- Donald L. Kimball, Vice President- Finance and Controller Newhall Management Corporation (Principal Accounting Officer) 60 63 Directors of Newhall Management Corporation: Date: March 18, 1998 By /s/ GEORGE L. ARGYROS ---------------------------------------- George L. Argyros Date: March 18, 1998 By /s/ GARY M. CUSUMANO ---------------------------------------- Gary M. Cusumano Date: March 18, 1998 By /s/ THOMAS L. LEE ---------------------------------------- Thomas L. Lee Date: March 18, 1998 By /s/ THOMAS V. MCKERNAN, JR. ---------------------------------------- Thomas V. McKernan, Jr. Date: March 18, 1998 By /s/ HENRY K. NEWHALL ---------------------------------------- Henry K. Newhall Date: March 18, 1998 By /s/ JANE NEWHALL ---------------------------------------- Jane Newhall Date: March 18, 1998 By /s/ PETER T. POPE ---------------------------------------- Peter T. Pope Date: March 18, 1998 By /s/ CARL E. REICHARDT ---------------------------------------- Carl E. Reichardt Date: March 18, 1998 By /s/ THOMAS C. SUTTON ---------------------------------------- Thomas C. Sutton Date: March 18, 1998 By /s / BARRY LAWSON WILLIAMS ---------------------------------------- Barry Lawson Williams Date: March 18, 1998 By /s/ EZRA K. ZILKHA ---------------------------------------- Ezra K. Zilkha 61 64 The Newhall Land and Farming Company SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (Dollars in thousands)
Gross Amount at Which Carried Initial Cost to the Company Costs at December 31, 1997 (D) ------------------------------------ Capitalized --------------------------------- Encum- Buildings and Subsequent Buildings and Description brances Land Improvements to Acquisition Land Improvements Total - ----------- ------- ---- ------------ -------------- ---- ------------ ----- OPERATING PROPERTIES APARTMENTS Northglen (A) $ 744 $ 12,797 $ (83) $ 744 $ 12,714 $ 13,458 Portofino (A) 2,031 13,656 7 2,031 13,663 15,694 SkyCrest (A) 3,661 18,620 -- 3,661 18,620 22,281 SHOPPING CENTERS Valencia Town Center $ 40,000 22,136 29,056 15,334 22,136 44,390 66,526 River Oaks (A) 2,354 5,302 (595) 2,354 4,707 7,061 NorthPark Village Square 2,642 5,506 -- 2,642 5,506 8,148 Castaic Village 3,082 1,801 6,779 3,082 8,580 11,662 HOTEL Valencia Hilton Garden Inn (B) -- -- -- -- -- -- OFFICE AND MIXED USE PROJECTS Town Center Office Building -- 7,204 -- -- 7,204 7,204 City Center Office Building 2,614 4,192 1,382 2,614 5,574 8,188 Valley Business Center 2,684 3,918 -- 2,684 3,918 6,602 Plaza del Rancho -- 4,225 -- -- 4,225 4,225 SINGLE TENANT FACILITIES Office/Records Storage 569 2,151 -- 569 2,151 2,720 Retail Store - Trader Joe's 269 546 -- 269 546 815 Spectrum Health Club -- 6,043 -- -- 6,043 6,043 Restaurant - El Torito 248 802 -- 248 802 1,050 Restaurant - Hamburger Hamlet 459 708 -- 459 708 1,167 Restaurant - Red Lobster 134 -- -- 134 -- 134 Restaurant - Wendy's 91 300 -- 91 300 391 OTHER PROPERTIES AND LAND UNDER LEASE 1,029 2,371 -- 1,029 2,371 3,400 ------ ------ ------- ------ ------ ------- ------- TOTAL OPERATING PROPERTIES 40,000 44,747 119,198 22,824 44,747 142,022 186,769 ------ ------ ------- ------ ------ ------- ------- PROPERTIES UNDER DEVELOPMENT Hyatt Hotel and Conference Center -- 14,110 -- -- 14,110 14,110 Valencia Marketplace (C) -- 50,122 -- -- 50,122 50,122 Entertainment Complex -- 798 -- -- 798 798 Six-story Office Building -- 2,435 -- -- 2,435 2,435 Industrial Build-to-Suits/Lease -- 5,352 -- -- 5,352 5,352 Preconstruction costs - various other projects -- 3,048 -- -- 3,048 3,048 ------ ------ ------- ------ ------ ------- ------- TOTAL PROPERTIES UNDER DEVELOPMENT -- -- 75,865 -- -- 75,865 75,865 ------ ------ ------- ------ ------ ------- ------- T O T A L $ 40,000 $ 44,747 $ 195,063 $ 22,824 $ 44,747 $ 217,887 $ 262,634 ========= ========= ========= ========= ========= ========= ========= Year Accumulated Completed/ Depreciable Description Depreciation Acquired Lives - ----------- ------------ -------- ----- OPERATING PROPERTIES APARTMENTS Northglen $ (5,771) 1988 (E) Portofino (5,481) 1989 (E) SkyCrest (1,050) 1997 (E) SHOPPING CENTERS Valencia Town Center (12,428) 1992 (E) River Oaks (2,244) 1987 (E) NorthPark Village Square (302) 1996 (E) Castaic Village (1,267) 1992 (E) HOTEL Valencia Hilton Garden Inn (B) -- 1991 (E) OFFICE AND MIXED USE PROJECTS Town Center Office Building (330) 1996 (E) City Center Office Building (1,866) 1991 (E) Valley Business Center (1,245) 1987 (E) Plaza del Rancho (18) 1997 (E) SINGLE TENANT FACILITIES Office/Records Storage (148) 1996 (E) Retail Store - Trader Joe's (63) 1994 (E) Spectrum Health Club (110) 1997 (E) Restaurant - El Torito (338) 1986 (E) Restaurant - Hamburger Hamlet (217) 1990 (E) Restaurant - Red Lobster -- 1986 (E) Restaurant - Wendy's (101) 1984 (E) OTHER PROPERTIES AND LAND UNDER LEASE (1,190) Various (E) ------- TOTAL OPERATING PROPERTIES (34,169) ------- PROPERTIES UNDER DEVELOPMENT Hyatt Hotel and Conference Center -- Valencia Marketplace (C) (1,209) (E) Entertainment Complex -- Six-story Office Building -- Industrial Build-to-Suits/Lease (53) Preconstruction costs - various other projects -- ------- TOTAL PROPERTIES UNDER DEVELOPMENT (1,262) ------- T O T A L $ (35,431) =========
62 65 The Newhall Land and Farming Company SCHEDULE III (CONTINUED) December 31, 1997 (A) Part of a portfolio mortgage secured by five properties, including the Company's headquarters building, with a remaining principal balance of $45.3 million at December 31, 1997. (B) Joint venture accounted for as an equity investment. (C) Phase I opened November, 1996. Construction completion in 1998. (D) The aggregate cost for federal income tax purposes is approximately $295,761,000 at December 31, 1997. (E) Reference is made to Note 2 of the Notes to Consolidated Financial Statements for information related to depreciation. (F) Reconciliation of total real estate carrying value for the three years ended December 31, 1997 are as follows: (In thousands)
1997 1996 1995 --------- --------- --------- Balance at beginning of period $ 215,193 $ 161,532 $ 160,518 Additions: Cash expenditures 69,403 70,471 8,503 Deletions: Cost of real estate sold (21,962) (16,810) (7,489) --------- --------- --------- Balance at end of period $ 262,634 $ 215,193 $ 161,532 ========= ========= =========
(G) Reconciliation of real estate accumulated depreciation for the three years ended December 31, 1997 are as follows: (In thousands)
1997 1996 1995 -------- -------- -------- Balance at beginning of period $ 32,552 $ 27,028 $ 24,660 Additions: Charged to expense 7,466 5,528 5,213 Other -- 262 -- Deletions: Cost of real estate sold (4,587) (266) (2,845) -------- -------- -------- Balance at end of period $ 35,431 $ 32,552 $ 27,028 ======== ======== ========
63 66 INDEPENDENT AUDITORS' REPORT The Board of Directors of Newhall Management Corporation and Partners of The Newhall Land and Farming Company: Under date of January 21, 1998, we reported on the consolidated balance sheets of The Newhall Land and Farming Company and subsidiaries as of December 31, 1997, and 1996, and the related consolidated statements of income, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related schedule of real estate and accumulated depreciation as of December 31, 1997 and for each of the years in the three year period then ended. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Los Angeles, California / S / KPMG Peat Marwick LLP January 21, 1998 64 67 THE NEWHALL LAND AND FARMING COMPANY INDEX TO EXHIBITS Item 14 (a) 3
Exhibit Number Description ------ ----------- 10(e) Form of Severance Agreements 10(v) First Amendment to The Newhall Land and Farming Company 1995 Option/Award Plan dated November 19, 1997 10(w) Form of award for premium price options granted under The Newhall Land and Farming Company 1995 Option/Award Plan 11 Computation of earnings per unit 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule
65 EX-10.(E) 2 FORM OF SEVERANCE AGREEMENT 1 Exhibit 10(e) November 19, 1997 Dear Thomas L. Lee: The Newhall Land and Farming Company (a California Limited Partnership) (the "Partnership") considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Partnership and holders of its depositary units. In this connection, the Partnership recognizes that the possibility of a change in control and the uncertainty and questions which it may raise among management may result in the departure or distraction of management personnel to the detriment of the Partnership. Accordingly, the Partnership has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Partnership's management, including yourself, to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from the possibility of a change in control of the Partnership. As a result, the Partnership implemented a Change of Control Severance Program as of March 16, 1988, which will provide you with financial support in the event the Partnership undergoes a significant change of ownership or other change in control. The Partnership has determined that it is appropriate to modify such program as of the date of this letter. The terms of the Change of Control Program, as modified (the "Program"), are outlined in this letter. If you accept the terms of the Program, you should acknowledge such by signing the acceptance at the end of the letter. Your participation in the Program will begin effective as of the date your acceptance is received by the Partnership. 1. Events Entitling You to Benefits. No benefits will be payable under the Program unless there is a Change of Control (as defined below). You will become entitled to benefits under the Program if, within the two-year period following a Change of Control, (i) Your employment with the Partnership or Newhall Management Corporation ("NMC") is terminated involuntarily for reasons other than death, disability or discharge for Good and Sufficient Cause (as defined below); or (ii) You voluntarily choose to terminate your employment for Good Reason (as defined below). As used herein, "Change of Control" means: (i) Any "person" (as defined below), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Partnership or an entity owned directly or 2 indirectly by the holders of depositary units of the Partnership in substantially the same proportions as their ownership of depositary units of the Partnership, becomes the "beneficial owner" (as defined below), directly or indirectly, of securities representing 25% or more of the total voting power represented by the Partnership's then outstanding voting securities; or (ii) NMC is removed as Managing General Partner; or (iii) the holders of depositary units of the Partnership approve a merger or consolidation of the Partnership with any other entity, other than a merger or consolidation which would result in the voting securities of the Partnership outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the total voting power represented by the voting securities of the Partnership or such surviving entity outstanding immediately after such merger or consolidation, or (iv) a plan of complete liquidation of the Partnership is adopted or the holders of depositary units of the Partnership approve an agreement for the sale or disposition by the Partnership (in one transaction or a series of transactions) of all or substantially all the Partnership's assets. For purposes of this subparagraph, "person" shall mean any individual firm, company or other entity and shall include any group comprised of any person and any other person with whom such person or an Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purposes of acquiring, holding, voting or disposing of Partnership interests. For purposes of this subparagraph, a person shall be a beneficial owner of any Partnership interest (i) which such person or any of its Affiliates or Associates (as defined in Rule 12b-2 under the Securities Act of 1933, reading the term "registrant" to mean the Partnership, and except that "Associate" as used herein shall not include any relative or spouse of such person, or any relative of such spouse, who is also a director or officer of NMC, merely because of such directorship or officership) beneficially owns, directly or indirectly; (ii) with regard to which such person or any of its Affiliates or Associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any partnership interest. As used herein, voluntary termination by you of your employment for "Good Reason" means termination subsequent to a Change of Control of the Partnership, resulting from the occurrence of one of the following events without your express written consent: (i) A material reduction in your responsibilities, titles or offices as in effect immediately prior to a Change of Control in connection with the Partnership or NMC or any removal of you from or any failure to re-elect you to any such positions, except in connection with the involuntary termination of your employment for Good and Sufficient Cause, or as a result of your death, disability or voluntary retirement, or voluntary termination by you for other than Good Reason; (ii) A reduction by the Partnership or NMC in your base salary as in effect immediately prior to the Change of Control; 3 (iii) The requirement by the Partnership or NMC that you be based anywhere other than within a 50-mile radius of your location immediately prior to a Change of Control, except for required travel on the Partnership's business to an extent substantially consistent with your present business travel obligations; (iv) The failure by the Partnership or NMC to continue in effect, or any action by the Partnership or NMC to change your participation or benefits under, any bonus plan or incentive compensation plan, any employee benefit plan qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), any severance plan, any non-qualified retirement or deferred compensation plan, any ownership, purchase, option or other equity incentive plan, any life, health, accident, disability or similar plan providing welfare benefits or any plan or program of fringe benefits in which you are participating immediately prior to a Change of Control, the effect of which would be to materially reduce your aggregate benefits under all such plans or programs as such existed immediately prior to the Change of Control, or the failure by the Partnership to provide you with the number of paid vacation days to which you are entitled in accordance with the Partnership's general vacation policy in effect immediately prior to the Change of Control; or (v) The failure of the Partnership or NMC to obtain the express assumption by any successor of the Partnership's obligations under the Program, as contemplated in Section 3. As used herein, "Good and Sufficient Cause" means any act of fraud or dishonesty, or conviction of a felony involving moral turpitude or your knowingly engaging in acts seriously detrimental to any of the operations of the Partnership. 2. Benefits. Benefits payable to you under the Program will consist of the following: (i) Payment of a single lump sum equal to three (3) times the aggregate of your annual base salary, general partners fees and directors fees (as in effect immediately prior to the Change of Control), which payment shall be made within thirty (30) days following the date of your termination; (ii) Payment in a single lump sum of three times the average of your annual bonus payments for the two fiscal years prior to the Change of Control, which payment shall be made within thirty (30) days following the date of your termination; (iii) Continuation of participation and coverage for a period of three years from the date of your termination under all the Partnership's life, medical, dental, and disability plans, the Senior Management Survivor Benefit Plan, and all fringe benefit plans and programs which you are participating in immediately prior to your termination of employment, under the same coverages and on the same terms as in effect immediately prior to the date of your termination (or in the case of your voluntary termination for Good Reason following a Change of Control as a result of a reduction in benefits, such coverages and terms as were in effect immediately prior to a Change of Control); provided that if your continued participation is not possible under the general terms and provisions of such plans and programs, the Partnership shall arrange to provide you with substantially similar benefits; 4 (iv) Immediate vesting of any non-qualified deferred compensation or retirement benefits and of any outstanding options to purchase depositary units and related appreciation rights; and immediate lapse of any rights of the Partnership to the return or repurchase of depositary units granted to you pursuant to restricted units; (v) A retirement benefit, payable at the same time and in the same form as benefits payable to you under The Newhall Land and Farming Partnership Retirement Plan and The Newhall Land and Farming Partnership Pension Restoration Plan, as amended (the "Retirement Plans"), in the amount of the additional benefits to which you would have been entitled under the terms of the Retirement Plans (as in effect on the date of the Change of Control) if you had remained employed for two years following your termination; and (vi) An additional retirement benefit, payable at the same time and in the same form as benefits payable to you under the Retirement Plans, in an amount calculated as follows: (a) The sum of 2.025% (1.62% for Plan Years beginning on and after January 1, 1997) of your Final Average Credited Compensation not in excess of your Covered Compensation multiplied by your years of Credited Benefit Service, up to twenty years of Credited Benefit Service, plus (b) 3% (2.4% for Plan Years beginning on and after January 1, 1997) of your Final Average Credited Compensation in excess of your Covered Compensation in (a) above multiplied by your years of Credited Benefit Service, up to twenty years of Credited Benefit Service, reduced by (c) Any benefits payable to you from the Retirement Plans and pursuant to subparagraph (v) above, without regard to the limitations of Section 415 of the Internal Revenue Code. Benefit accruals under the Partnership's employee benefit plans qualified under Section 401(a) of the Code which you are participating in immediately prior to your termination shall cease as the your date of termination. You will become entitled to payment of benefits under such plans in accordance with their terms. Benefits payable under the Program will be in lieu of any severance pay benefits provided under the Partnership's or NMC's general severance pay policy. In the event you have an outstanding employment agreement with the Partnership or NMC in effect as of your date of termination and such agreement provides you with compensation and benefits which will continue during the period of time coincident with that covered by this Program, your benefits under the Program will be provided only to the extent they exceed the benefits under such agreement. 3. Successors. As used herein, "Partnership" means the Partnership (as defined above) and any successor to its business and/or assets. 5 The Partnership will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Partnership, by agreement to expressly assume the Partnership's obligations under the Program in the same manner and to the same extent that the Partnership would be required to perform if no such succession had taken place. 4. Re-employment. Entitlement to benefits under the Program is not contingent upon your seeking or obtaining other employment. However, should you receive compensation for services performed as an employee for another employer (including services performed for another employer as an independent contractor if such services are performed full time for one entity and are of the type ordinarily performed by an employee in the line of business) during the period during which you would otherwise be entitled to receive benefits pursuant to Section 2(iii) of this Program, then to the extent that your new employer provides you with comparable medical, dental, disability or life insurance coverage or other benefits, such benefits provided under Section (iii) of the Program shall terminate. 5. Confidential Information. You shall hold in a fiduciary capacity for the benefit of the Partnership all secret or confidential information, knowledge or data relating to the Partnership or any of its affiliated companies, and their respective business, which shall have been obtained by you during your employment by the Partnership or any of its affiliated companies and which shall not be public knowledge (other than by your acts or acts of your representatives in violation of this Section 5). After termination of your employment with the Partnership, you shall not, without the prior written consent of the Partnership, communicate or divulge any such information, knowledge or data to anyone other than the Partnership and those designated by it. In no event shall an asserted violation of the provisions of this Section 5 constitute a basis for deferring or withholding any amounts otherwise payable to you under the Program. 6. General Provisions. No provision in this Program shall be construed to guarantee continued employment by the Partnership or NMC for any specified period of time, or to impair or interfere with the Partnership's and NMC's right to dismiss its employees. You will be entitled to reimbursement by the Partnership of all reasonable expenses, including attorneys' fees, incurred by you in enforcing the provisions of this Program. All payments are subject to applicable withholding taxes and income taxes. Please indicate your acceptance of the terms of the Program by signing one copy of this letter and returning it to the Partnership in the enclosed envelope. The second copy is for your own records. This Program supersedes the Change of Control Severance Program entered into as of March 16, 1988 between you and the Partnership. Sincerely, 6 ---------------------- I have read this letter and understand that the Program defines the entire obligation of The Newhall Land and Farming Company ("Partnership") with respect to the benefits identified above and is limited to those benefits. I further understand that the Program modifies the Partnership's or NMC's obligations under the Partnership's or NMC's general severance pay policy in the manner described above and that the opportunity to receive the special benefits provided under the Program represents valuable consideration for this modification. I accept the terms of the Program. Date: __________________ _____________________________ L:Board\CICTLL EX-10.(V) 3 1ST AMENDMENT TO THE CO. 1995 OPTION/AWARD PLAN 1 Exhibit 10(v) FIRST AMENDMENT TO THE NEWHALL LAND AND FARMING COMPANY 1995 OPTION/AWARD PLAN This First Amendment to The Newhall Land and Farming Company 1995 Option/Award Plan (the "Plan") is adopted as of November 19, 1997. The last sentence of paragraph 1.3.A of the Plan, which previously read as follows: "The aggregate number of depositary units that may be issued under the Plan will not exceed 600,000, subject to adjustment in accordance with the terms of the Plan." Is hereby amended to read as follows: "The aggregate number of depositary units that may be issued under the Plan will not exceed 3,650,000, subject to adjustment in accordance with the terms of the Plan." IN WITNESS WHEREOF, The Newhall Land and Farming Company (a California Limited Partnership) has adopted this First Amendment to The Newhall Land and Farming Company 1995 Options/Award Plan. THE NEWHALL LAND AND FARMING COMPANY (A CALIFORNIA LIMITED PARTNERSHIP) By: Newhall Management Limited Partnership, Managing General Partner By: Newhall Management Corporation, Managing General Partner By: /s/ THOMAS H. ALMAS ---------------------------------------------- Name: Thomas H. Almas Title: Vice President - Administration and Secretary EX-10.(W) 4 THE COMPANY'S PREMIUM PRICE OPTION AGREEMENT 1 Exhibit 10(w) THE NEWHALL LAND AND FARMING COMPANY PREMIUM PRICE OPTION AGREEMENT A. The Newhall Land and Farming Company ("Partnership") has implemented The Newhall Land and Farming Company 1995 Option/Award Plan (the "Plan") for the purpose of attracting and retaining the services of key employees (including officers) of the Partnership and any affiliated entities thereof, and non-employee Board members of the managing general partner of the Partnership, and its managing general partner. B. Optionee is an individual who is to render valuable services to the Partnership or one or more affiliated entities thereof, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Partnership's grant of an option to Optionee. C. All capitalized terms shall have the meaning as those terms are defined in the Plan unless otherwise indicated. 1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement, the Partnership hereby grants to ______________ (the "Optionee"), as of November 19, 1997 (the "Grant Date"), an option (the "Option") to purchase from the Partnership from time to time during the option term, (i) ___________ Partnership units ("Units") at an exercise price of $31.30 per Unit (the "Tranche I Options"), and (ii) _____________ Units at an exercise price of $33.39 per Unit (the "Tranche II Options"). 2. NO TANDEM OPTION/APPRECIATION RIGHTS. This Option is not granted in tandem with any appreciation right. 3. OPTION TERM. This Option shall expire at the close of business on the fifth anniversary of the Grant Date (the "Expiration Date"), unless sooner terminated in accordance with Paragraph 5, 6, 9 or 10. 4. LIMITED TRANSFERABILITY. This Option shall be exercisable only by Optionee during Optionee's lifetime and shall not be transferable or assignable by Optionee other than by will or by the laws of descent and distribution following Optionee's death. However, Optionee may designate a beneficiary who may exercise the Option or receive compensation under the Option after Optionee's death. 5. EXERCISE OF OPTION. a. VESTING OF TRANCHE I OPTIONS: The Tranche I Options shall become exercisable on November 20, 2000 if Optionee's Service has not terminated prior to November 20, 2000 and either: (i) The Fair Market Value (as defined below) of a Unit equals or exceeds $31.30 per Unit for any ten of any twenty consecutive trading days during the period beginning on and including November 19, 1997 and ending on and including November 19, 1999; or (ii) The Total Percentage Return with respect to a Unit for the period beginning November 19, 1997 through November 20, 1999 equals or exceeds the 75th Percentile of the Shareholder Return of the Peer Group (as defined below) for the same period. 2 If neither of the tests set forth in (i) or (ii) above is satisfied, then, except as set forth in Paragraph 9, the Tranche I Options shall be unexercisable and shall be cancelled. b. VESTING OF TRANCHE II OPTIONS. The Tranche II Options shall become exercisable in full on November 20, 2000, if Optionee's Service has not terminated prior to November 20, 2000 and either: (i) The Fair Market Value of a Unit equals or exceeds $33.39 per Unit for any ten of any twenty consecutive trading days during the period beginning on and including November 19, 1997 and ending on and including November 19, 2000; or (ii) The Total Percentage Return with respect to a Unit for the period beginning November 19, 1997 through November 20, 2000 equals or exceeds the 75th Percentile of the Shareholder Return of the Peer Group (as defined below) for the same period. If neither of the tests set forth in (i) or (ii) above is satisfied, then, except as set forth in Paragraph 9, the Tranche II Options shall be unexercisable and shall be cancelled. c. PRO-RATED VESTING IF UNIT PRICE TESTS ARE MET AND SERVICE CEASES PRIOR TO NOVEMBER 20, 2000. If Optionee's Service is terminated prior to November 20, 2000, such Service was not terminated as a result of an event described in Paragraph 6(a), and the test for the exercise of Tranche I or Tranche II or both set forth in Paragraph 5(a)(i) or 5(b)(i), as applicable, are met prior to the date that Service terminates, then this Option shall become exercisable, on the date of termination of Service, with respect to the number of Units, calculated separately for each Tranche, equal to (x) the number of Units in such Tranche that Optionee could have purchased under this Option if his Service had not terminated prior to November 20, 2000, multiplied by (y) the number of days in the period beginning with and including November 20, 1997 and ending with and including the date Service ceases, divided by (z) 1,096. This Option shall not become exercisable for any additional Units following Optionee's cessation of Service. 6. EFFECT OF CESSATION OF SERVICE. a. CESSATION OF SERVICE AS A RESULT OF MISCONDUCT. Should (i) Optionee's Service be terminated for misconduct (including, but not limited to, any act of dishonesty, willful misconduct, fraud or embezzlement) or (ii) Optionee make any unauthorized use or disclosure of confidential information or trade secrets of the Partnership or any parent or subsidiary, then in any such event this Option shall terminate immediately and cease to be outstanding. b. CESSATION OF SERVICE IN OTHER CIRCUMSTANCES. If Optionee ceases Service and Paragraph 6(a) does not apply to such termination, the Option shall terminate in accordance with the following provisions: (i) This Option shall immediately terminate and cease to be outstanding for any Units for which it is not exercisable at the time of Optionee's cessation of Service. 3 (ii) Should Optionee cease Service for any reason other than death or Retirement while this Option is outstanding, then this Option shall be exercisable for all of the Units for which this Option is exercisable at the time of such cessation of Service. Such right shall lapse, and this Option shall terminate and cease to remain outstanding, upon the earlier of (i) the expiration of the three (3)-month period measured from the date of Optionee's cessation of Service, or (ii) the Expiration Date. (iii) Should Optionee die while this Option is outstanding, or within three (3) months after Optionee ceases Service, then Optionee's designated beneficiary, or, if no beneficiary has been designated, Optionee's estate or heirs shall have the right to exercise the Option for any or all of the Units for which this Option is exercisable at the time of Optionee's death. Such right shall lapse, and this Option shall terminate and cease to remain outstanding, upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee's death, or (ii) the Expiration Date. (iv) Should Optionee Retire while this Option is outstanding, then this Option shall be exercisable for all of the Units for which this Option is exercisable at the time of such Retirement. Such right shall lapse, and this Option shall terminate and cease to remain outstanding upon the earlier of (i) the expiration of the thirty-six (36)-month period measured from the date of Optionee's Retirement, or (ii) the Expiration Date. 7. DEFINITIONS. For purposes of this Agreement, the following definitions shall apply: (a) "Fair Market Value" shall mean, with respect any security, the closing selling price of such security as quoted on the New York Stock Exchange Composite Tape on the date in question. If the security is not listed or admitted for trading on the NYSE, but is listed or traded on another established stock exchange or national market system (including without limitation the NASDAQ National Market System), the Fair Market Value of the security shall be the closing sales price for such security on such exchange or national market system. (b) "Total Percentage Return" shall mean, with respect to a security, (x) the increase, if any, during the relevant period in the Fair Market Value of a hypothetical fund consisting of one such security plus the number of such securities that could be acquired by the end of the period through the immediate reinvestment of distributions made during the period on the security (and, for the remainder of the period after their acquisition, on the additional securities so acquired), divided by (y) the Fair Market Value of one such security at the beginning of the period. The Fair Market Value of one outstanding unit of the Partnership at the beginning of the period has been determined to be $25.04. The beginning Fair Market Value of the common equity securities of the companies in the Peer Group are shown on Exhibit A. (c) The "75th Percentile of the Shareholder Return of the Peer Group" for a measured period is calculated as follows. The Total Percentage Return is calculated for the common equity security of each company in the Peer Group for the applicable period. The 75th Percentile is the Total Percentage Return which is greater than seventy-five percent of the Total Percentage Returns of all the companies in the Peer Group. (d) "Peer Group" means the companies identified on Exhibit A hereto; provided, however, if the common equity securities of a company are not publicly traded during any portion of a measurement period, such company will be excluded from the Peer Group for such measurement period. 4 (e) Optionee shall be deemed to remain in "Service" for so long as such individual renders services on a periodic basis to the Partnership (or any subsidiary or other affiliated entity) in the capacity of an employee. (f) An entity shall be considered to be a "subsidiary" of the Partnership if it is a member of an unbroken chain of entities beginning with the Partnership, provided each such entity in the chain (other than the last entity) owns, at the time of determination, securities possessing fifty percent (50%) or more of the total combined voting power of all classes of securities in one of the other entities in such chain. (g) An entity shall be considered to be a "parent" of the Partnership if it is a member of an unbroken chain ending with the Partnership, provided each such entity in the chain (other than the Partnership) owns, at the time of determination, securities possessing fifty percent (50%) or more of the total combined voting power of all classes of securities in one of the other entities in such chain. (h) "Retirement" shall mean the Optionee's cessation of Service on or after either of the following: (x) the first day of the month coinciding with or next following Optionee's sixty-fifth (65) birthday; or (y) the first day of a calendar month after meeting the age and service requirements for early retirement, which are: Optionee's years of service for the Partnership or an affiliated entity meet or exceed ten (10) years of service, and Optionee has attained age 55. 8. ADJUSTMENT IN UNITS. a. If any change is made to the Units issuable under the Plan (whether by reason of merger, consolidation, reorganization, recapitalization, Unit distribution, Unit split, combination of Units, exchange of Units, or other change in partnership or capital structure of the Partnership), or if the Partnership makes a distribution to holders of Units which results from the sale or disposition of a major asset or separate operating division of the Partnership, which would materially dilute the rights of option holders', then the Committee shall make appropriate adjustments to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities and price per Unit in effect under each outstanding option under the Plan and (iii) the maximum number of Units issuable to one individual pursuant to Paragraph 1.3.D of the Plan. The purpose of these adjustments will be to preclude the enlargement or dilution of rights and benefits under the options: 5 b. If any change is made to the Units issuable under the Plan by reason of a Structural Transaction or a Change in Control that does not result in the termination of all outstanding options, the Committee may adjust the maximum number of Units issuable under the Plan, the number of Units subject to options, and the option price, as provided in Paragraph 1.3.C. of the Plan. 9. ACCELERATION OF OPTIONS. Irrespective of whether or not the tests set forth in Paragraph 5(a) or 5(b) have been met, in the event of a Structural Transaction or Change in Control as defined in the Plan, this Option will be automatically accelerated and shall become fully exercisable; provided, however, no acceleration of Options will occur with respect to Optionee if Optionee's Service has terminated prior to the date of the Structural Transaction or Change of Control. 10. CANCELLATION OF OPTION. In the event of any Structural Transaction, the Committee shall have the discretion to cancel outstanding options in whole or in part, subject to such conditions as the Committee may determine, upon payment to the Optionee with respect to each cancelled option, an amount in cash not less than the difference between (i) the Fair Market Value (at the effective date of such Structural Transaction) of the consideration the Optionee would have received if the Option had been exercised immediately prior to the effective date of such Structural Transaction and (ii) the exercise price of such Option. 11. PARTNERSHIP STRUCTURE. The grant of this Option shall in no way affect the Partnership's right to adjust, reclassify, reorganize, or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate, or sell or transfer any part of its business or assets. 12. PRIVILEGE OF UNITHOLDER RIGHTS. The holder of this Option shall not have any of the rights of a unitholder with respect to the Units until such individual shall have exercised the Option and paid the exercise price for the purchased Units. 13. WITHHOLDING. Grantee may elect to have the Partnership withhold, from the Units otherwise issuable pursuant to this Option, one or more of such Units with an aggregate Fair Market Value equal to the Federal, state and local employment and income taxes ("Taxes") incurred in connection with the acquisition of such Units. Grantee may also deliver previously acquired Units held for the requisite period to avoid a charge to earnings in satisfaction of such Taxes. The withheld or delivered Units will be valued at Fair Market Value on the applicable determination date for such Taxes. 14. MANNER OF EXERCISING OPTION. In order to exercise this Option with respect to all or any part of the Units for which this Option is at the time exercisable, Optionee (or in the case of exercise after Optionee's death, Optionee's designated beneficiary, executor, administrator, heir or legatee, as the case may be) must take the following actions: a. Deliver to the Secretary of the Partnership an executed notice of exercise in the form provided by the Partnership (the "Exercise Notice") in which there is specified the number of Units which are to be purchased under the exercised Option. b. Pay the aggregate exercise price for the purchased Units through one or more of the following alternatives: (i) in cash or cash equivalents made payable to the Partnership; 6 (ii) in Units valued at their Fair Market Value as of the Exercise Date (defined below) and held for the requisite period in order to avoid a charge to earnings (currently six (6) months, but subject to change); (iii) through a sale and remittance procedure under which the Optionee delivers a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Partnership the amount of sale proceeds to pay the Option price; or (iv) such other lawful consideration as the Committee shall determine. For purposes of clause (ii) immediately above, the "Exercise Date" is the date on which written notice of the exercise of the Option is delivered to the Partnership. In all other cases, the Exercise Date is the date on which written notice and actual payment is received by the Partnership. Except to the extent the sale and remittance procedure specified above is utilized in connection with the Option exercise, payment of the exercise price for the purchased Units must accompany the Exercise Notice. Furnish to the Partnership appropriate documentation that the person or persons exercising the Option (if other than Optionee) have the right to exercise this Option. As soon as practical after receipt of the Exercise Notice, the Partnership shall mail or deliver to or on behalf of Optionee (or any other person or persons exercising this Option in accordance herewith) a depositary receipt representing the purchased Units. In no event may this Option be exercised for any fractional Units. 15. GOVERNING LAW. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 16. COUNTERPARTS. The Option may be executed in counterparts each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 17. COMPLIANCE WITH LAW AND REGULATIONS. The exercise of this Option and the issuance of Units upon such exercise shall be subject to compliance by the Partnership and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which the Partnership's Units may be listed at the time of such exercise and issuance. 18. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 4, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the designated beneficiaries, successors, administrators, heirs and legal representatives of Optionee and the successors and assigns of the Partnership. 19. LIABILITY OF PARTNERSHIP. The inability of the Partnership to obtain approval from any regulatory body having authority deemed by the Partnership to be necessary to the lawful issuance and sale of any Units pursuant to this Option shall relieve the Partnership of any liability with respect to the non-issuance or sale of the Units as to which such approval shall not have been obtained. The Partnership shall, however, use its best efforts to obtain all such approvals. 7 20. NO EMPLOYMENT/SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon Optionee any right to continue in the Service of the Partnership (or any subsidiary or other affiliated entity employing or retaining Optionee) for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Partnership (or any affiliated entity) or Optionee, which rights are hereby expressly reserved by each party, to terminate Optionee's Service at any time for any reason whatsoever, with or without cause. 21. NOTICES. Any notice required to be given or delivered to the Partnership under the terms of this Agreement shall be in writing and addressed to the Partnership in care of the Corporate Secretary at Newhall Management Corporation, 23823 Valencia Boulevard, Valencia, CA 91355. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated on the signature page hereto. All notices shall be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, by registered or certified mail, postage prepaid and properly addressed to the party to be notified. 22. CONSTRUCTION. This Agreement and the Option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan; provided, however, in the event of a conflict between the terms of this agreement and the terms of the Plan, the terms of this agreement will prevail. All decisions of the Committee with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this Option. 23. WITHHOLDING. Optionee shall make appropriate arrangements with the Partnership or any parent, subsidiary or affiliated entity employing Optionee for the satisfaction of all Federal, state or local income and employment tax withholding requirements applicable to the exercise of this option. * * * 8 [SIGNATURE PAGE TO PREMIUM PRICE OPTION AGREEMENT] IN WITNESS WHEREOF, Optionee and the Partnership have caused this Agreement to be executed as of March 5, 1998. THE PARTNERSHIP The Newhall Land and Farming Company (a California Limited Partnership) By: Newhall Management Limited Partnership, Managing General Partner By: Newhall Management Corporation, Managing General Partner By: -------------------------------------------- Thomas H. Almas Vice President - Admin. and Secretary OPTIONEE ----------------------------------------------- Signature Name: ------------------------------------------ Address: --------------------------------------- --------------------------------------- I designate the following beneficiary(ies): Relationship: - ----------------------------------- -------------------------------- Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- EX-11 5 COMPUTATION OF EARNINGS PER UNIT 1 Exhibit 11 THE NEWHALL LAND AND FARMING COMPANY COMPUTATION OF EARNINGS PER UNIT (in thousands, except per unit)
Years Ended December 31, --------------------------------------- Partnership Units 1997 1996 1995 ------- ------- ------- Average number of units outstanding during the period 34,520 35,292 36,241 Net units issuable in connection with dilutive options based upon use of the treasury stock method 230 119 31 ------- ------- ------- Average number of primary units 34,750 35,411 36,272 ======= ======= ======= Net income $44,493 $41,889 $27,317 ======= ======= ======= Net income per unit $ 1.29 $ 1.19 $ .75 ======= ======= ======= Net income per unit - assuming dilution $ 1.28 $ 1.18 $ .75 ======= ======= =======
EX-21 6 THE COMPANY'S SUBSIDIARIES 1 EXHIBIT 21 THE NEWHALL LAND AND FARMING COMPANY SUBSIDIARIES The following subsidiaries are included in the Registrant's December 31, 1997 consolidated financial statements: Newhall Depositary Company (a California corporation) Valencia Water Company (a California corporation) Valencia Town Center Associates Limited Partnership (a California limited partnership) EX-23 7 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors of Newhall Management Corporation and Partners of The Newhall Land and Farming Company: We consent to incorporation by reference in the Registration Statements on Form S-8 (Numbers 033-53767, 033-53769, 033-58171 and 333-15303) of The Newhall Land and Farming Company of our report dated January 21, 1998, relating to the consolidated balance sheets of The Newhall Land and Farming Company and subsidiaries as of December 31, 1997, and 1996, and the related consolidated statements of income, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997, annual report on Form 10-K of The Newhall Land and Farming Company. /s/ KPMG PEAT MARWICK LLP Los Angeles, California March 18, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1997 DEC-31-1997 2,770 0 19,027 654 53,875 0 384,473 69,843 403,932 0 156,946 0 0 0 145,277 403,932 163,127 207,701 107,043 143,803 0 0 9,137 44,493 0 44,493 0 0 0 44,493 1.29 1.28
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