-----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, MO+nHQxQKXQU/F7wy2k/JX3tSWFQ/+JedelgkhCbqFNYljDGdPYO38K+SxbwMKvD GoW98U6q0UbQjL7LJjKVsw== 0001047469-99-011314.txt : 19990326 0001047469-99-011314.hdr.sgml : 19990326 ACCESSION NUMBER: 0001047469-99-011314 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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: 99572550 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 10-K 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, 1998 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 (661) 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 26, 1999 was $754,925,074. THE NEWHALL LAND AND FARMING COMPANY 1998 FORM 10-K TABLE OF CONTENTS
Page Number ------ PART I Item 1. Business 1 Item 2. Properties 5 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for the Registrant's Depositary Units and Related Security Holder Matters 7 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 20 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 55 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
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 90,000 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 37,000 residents and 1,200 companies that provide 35,000 jobs. With approximately 7,200 acres remaining to be developed, and buildout expected by 2005, Valencia is the regional center for north Los Angeles County and the northern gateway to the entire Los Angeles metropolitan area. In 1994, the Company started the entitlement process on Newhall Ranch, a new master-planned community located on 12,000 acres adjacent to Valencia and west of Interstate 5. In November, 1998, the Los Angeles County Board of Supervisors gave preliminary approval for the project. The Newhall Ranch Specific Plan permits 21,600 homes in five villages and 1,000 acres of commercial, business park and mixed-use development. Approximately 6,200 acres of mountain, river and other environmentally significant land will be dedicated as open space. The Board of Supervisors directed its staff to prepare the needed documents for final approval, which is expected to occur in the first quarter of 1999. Development is planned to begin in 2002. 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, 1998, more than 31,000 acres of non-strategic farmland have been sold, including a 970-acre parcel at the Merced Ranch sold in 1998. 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. At December 31, 1998, the Company employed 222 persons, including 14 classified as seasonal/temporary. 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. APPRAISAL OF REAL PROPERTY ASSETS The December 31, 1998 appraisal represents the last year the Company will be reporting the value of its assets. While valuation of income properties is relatively straightforward (generally capitalizing expected rental streams), appraising large, undeveloped land parcels like the Company owns is subjective and dependent upon several variables, including the timing of development, absorption rates, changes in sales prices and discount rates. Disclosure has been expanded regarding the performance, by segment, of the commercial portfolio. Information on landholdings, including entitled and unentitled lots, also has been expanded which will improve the Company's investors' ability to reach their own conclusions about value. 1 ITEM 1. BUSINESS (continued) The independent firm of Buss-Shelger Associates, MAI real estate appraisers, appraised the market value of the Company's real property assets to be $1.1 billion at December 31, 1998. 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 $971 million, after reducing for debt and certain other liabilities as shown in the table on page 2. 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 36,000 acres, 30 miles north of downtown Los Angeles and currently is undeveloped. 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 $889 million in 1998. The Company's net appraised value has increased from $11.74 to $29.72 on a per unit basis over the same 15-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): APPRAISED VALUES
1998 1997 1996 ------------------------ ----------------- ----------------- Percent Percent Percent $ IN MILLIONS, EXCEPT PER UNIT Acres Amount Change Amount Change Amount Change - ------------------------------------------------------------------------------------------------------------- Valencia and nearby properties 7,225 $454 8% $420 - % $420 (7)% Income-producing real estate 810 435 2 425 14 372 16 --------------------------------------------------------------- Total Valencia area properties 8,035 889 5 845 7 792 3 Other community development properties: Newhall Ranch, McDowell Mountain, (1) Cowell and Suey 48,660 133 58 84 20 70 (29) Agricultural properties 33,080 66 3 64 3 62 3 Mortgage and other debt at book carrying value (158) 1 (157) (4) (163) 7) All other, net, not independently appraised 41 14 36 (27) 49 (20) --------------------------------------------------------------- Net appraised value 89,775 $971 11% $872 8% $810 (3)% --------------------------------------------------------------- --------------------------------------------------------------- Number of partnership units outstanding ( 000's ) 32,676 (5)% 34,527 - 34,701 (3)% ------------------------------------------------------ ------------------------------------------------------ Net appraised value per partnership unit $29.72 18 % $25.25 8% $23.35 -% ------------------------------------------------------ ------------------------------------------------------ 1995 1994 ---------------------- -------------------- Percent Percent $ IN MILLIONS, EXCEPT PER UNIT Amount Change Amount Change - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Valencia and nearby properties $450 (7)% $486 3% Income-producing real estate 321 15 280 3 ----------------------------------------------- Total Valencia area properties 771 1 766 3 Other community development properties: Newhall Ranch, McDowell Mountain, (1) Cowell and Suey 98 14 86 30 Agricultural properties 60 (10) 67 (16) Mortgage and other debt at book carrying value (152) 4 (146) (16) All other, net, not independently appraised 61 97 31 (45) ---------------------------------------------- Net appraised value $838 4% $804 4% ---------------------------------------------- ---------------------------------------------- Number of partnership units outstanding ( 000's ) 35,910 (2)% 36,761 -- ---------------------------------------------- ---------------------------------------------- Net appraised value per partnership unit $23.32 7 % $21.86 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 1998, the Company has invested $88 million in unit repurchases and paid out $78 million in distributions. (1) McDowell Mountain Ranch in Scottsdale, Arizona was sold in 1996. 2 ITEM 1. BUSINESS (continued) REAL ESTATE The Company is developing the communities of Valencia and Newhall Ranch on its remaining over 19,000 contiguous acres of prime property in Los Angeles County, California. Plans for these communities include over 30,000 new homes and 1,700 acres of commercial, industrial, business and mixed-use 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 7,200 acres including over 8,000 homes remain to be developed in Valencia. The Company's goal is to complete the buildout of Valencia by 2005. Newhall Ranch, a new community on the Company's 12,000 acres adjacent to Valencia, is based on a master plan that incorporates the natural beauty of the Santa Clara River and preserves over 6,000 acres of open space. In 1998, the Company received tentative approval from the Los Angeles County Board of Supervisors for this well balanced, new community planned for 21,600 homes. Final zoning approval is expected in early 1999. 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 During 1998, new and resale home sales continued to increase in Los Angeles Country with median sales prices up more than 7% over the prior year and even higher in the move-up housing market. For the year, new home sales by merchant builders and the Company's joint ventures totaled 620. This is below the 657 homes sold in 1997 due to temporary supply constraints in Valencia's new-home inventory, as five residential housing projects sold out during 1998. Strong demand for homes in the Company's master-planned community of Valencia continued in 1998. Sales of 1,108 residential lots and 124 joint-venture homes were recorded by the Company in Valencia in 1998, a 39% increase over 1997. The 1,108 residential lots sold represent an all time record. Also included in the lot sales were 458 unimproved lots in Valencia to Shea Homes, the second largest residential transaction in Valencia's history. All lot sales in 1998 were significantly above 1997 year-end appraised values. The Company's growth goal is to complete the sale of Valencia's remaining residential land by 2005 by increasing annual average absorption to 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 458-home sale to Shea Homes in 1998, placing a greater emphasis on market niches at both ends of the housing spectrum to increase the variety of new homes available for sale and implementing a new and expanded marketing program to present a unified image of Valencia for all real estate segments. INDUSTRIAL/COMMERCIAL DEVELOPMENT AND LAND SALES The Company develops the infrastructure and provides sites for sale to industrial/commercial users. Select sites are sold complete with plans and permits, saving developers up to a year in completing a new building which gives the Company a competitive advantage over alternative sites. The Company also has active build-to-suit and speculative building programs. 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. The Company is marketing industrial and commercial land as Valencia Gateway, Los Angeles County's largest master-planned center for business, technology and industry encompassing 4,500 acres, with over 1,200 acres remaining for future development. Valencia Commerce Center and Valencia Industrial Center, part of Valencia Gateway, are home to over 750 companies which employ more than 21,000 people. Businesses choosing Valencia are attracted to Valencia's ample supply of competitively-priced land, located in or adjacent to the nation's fourth safest city. A highly-skilled workforce and five major universities within 40 miles provide employers 3 Item 1. BUSINESS (continued) with an attractive labor pool. The Company's goal is to sell an average of 70 to 80 acres of industrial land and bring, on average, 1,500 new jobs to Valencia each year. In 1998, a record 111 industrial acres were sold in Valencia, including four buildings constructed as part of the build-to-suit/lease program. In June 1998, the Company sold Valencia Marketplace, a 705,000-square-foot high-volume retail center. This transaction, along with the sale of Valley Business Center, a 56,800-square-foot mixed use development, 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. Other commercial escrow closings in 1998 included a 12.6-acre restricted-use site for a senior apartment complex, two small commercial parcels totaling 2.0 acres and the remaining building owned by the Company in Valencia Industrial Center. 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 buildout 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 1998, the Company received tentative approval from Los Angeles County Board of Supervisors for Newhall Ranch consisting of 21,600 homes and 1,000 acres of commercial, business park and mixed use development. The Board of Supervisors directed its staff to prepare the needed documents for final approval, which is expected to occur in the first quarter of 1999. Entitlements for Westridge, a 1,711-home golf course community were approved by the Los Angeles County Regional Planning Commission in December, 1998 and are expected to be heard by the Board of Supervisors early in 1999. Additional entitlements expected in 1999 include the 2,545-home Westcreek community in Valencia consisting of two primary villages that will contain product ranging from apartments and cluster homes to estate lots. The Company is working with the City of Santa Clarita on annexation of 1,900 homes in the Decoro South, Creekside and Eastcreek neighborhoods. The annexation is expected to be completed by the fall of 1999. COMMERCIAL REAL ESTATE DEVELOPMENT The Company continues its aggressive commercial portfolio expansion program and, in 1998, a record $102 million was invested in income property development. An additional $125 million is expected to be invested in new properties over the next two years. The income portfolio is a relatively stable source of earnings, providing working capital for continuing operations and additional debt capacity to finance Company growth. Valencia has emerged as the magnet for new commercial development in north Los Angeles County, attracting new businesses plus an expanding base of national and regional tenants. This is expected to lead to opportunities to bring new upscale shopping and dining to Valencia. Plans for the Valencia Town Center shopping center include up to three additional department stores complemented by numerous other commercial projects. The majority of current income property development activity is focused in Valencia Town Center along pedestrian-oriented Town Center Drive, a one-half mile, mixed-use "main street" extending west from the Company's regional shopping mall. Projects completed in 1998 include the 244-room Hyatt Valencia Hotel and Santa Clarita Conference Center; a six-story, 127,300-square-foot building for Princess Cruises; and 54,000 square feet of retail space on Town Center Drive. Projects under construction in Valencia Town Center include Montecito, a 210-unit apartment complex; a 130,000-square-foot entertainment complex with a 3-D IMAX theatre, 11 additional movie screens, a Borders bookstore plus several restaurants and retail space; and a 26,000-square foot office/retail building next to the Hyatt Valencia Hotel. For additional information about the Company's commercial properties at December 31, 1998, 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 19,000 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 1998, 56% of Valencia Water Company's water was supplied through ground sources. 4 Item 1. BUSINESS (continued) 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, 970 acres at the Merced Ranch were sold in 1998. The remaining 2,970 acres at the Merced Ranch are expected to close escrow in the first half of 1999. 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 70% was leased to others in 1998. 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 1998, the Company and its tenants raised over 20 different crops. The following table shows the approximate planted acreage of significant crops during 1998:
Crop Acreage Crop Acreage Crop Acreage - ---- ------- ---- ------- ---- ------- Alfalfa 2,905 Cotton 6,697 Oranges 787 Almonds 145 Forage 1,210 Safflower 73 Avocado 107 Grapefruit 28 Sudan Grass 100 Barley 500 Grapes 288 Sugarbeets 60 Beans 476 Lemons 481 Tomatoes 1,192 Christmas Trees 12 Melons 254 Vegetables 1,547 Corn 769 Oats 169 Wheat 1,964
ITEM 2. PROPERTIES (continued) LAND Listed below is the location and acreage of properties owned by the Company at December 31, 1998:
Ranch State County Acreage ------------ -------------- -------------- ------- Cowell California Contra Costa 110 Merced California Merced 2,970 New Columbia California Madera 14,000 Suey California Santa Barbara/San Luis Obispo 36,590 Newhall California Los Angeles/Ventura 36,105 ------ 89,775 ------ ------
PLANTS AND BUILDINGS Agriculture - Various buildings located at three farming operations in California. Commercial Real Estate - Listed below are square footage, occupancy, net operating income by group and anchor tenants of major commercial properties owned by the Company at December 31, 1998. The Company also has 5 ITEM 2. PROPERTIES (continued) numerous land leases including 541 acres for a landfill. The commercial properties are leased to 260 tenants, not including apartment complexes.
Approximate 1998 Net Year GLA (1) in Operating 12/31/98 Opened Square Feet Income Occupancy Major Tenants -------- ------------ --------- --------- ------------- DOLLARS IN THOUSANDS SHOPPING CENTERS - ---------------- Valencia Town Center 1992 675,000 99% Robinsons-May, JC Penney, Sears Valencia Town Center Drive 1998 54,000 56% Ann Taylor, Nine West, Zany Brainy Entertainment Center (2) - 130,000 IMAX / Edwards Theaters River Oaks 1987 272,000 99% Mervyn's, Target NorthPark Village Square(2) 1996 81,800 100% Ralphs Supermarket, Rite Aid Castaic Village 1992 91,800 100% Ralphs Supermarket, PayLess Drugstores Other various 37,600 ----------- --------- 1,342,200 $11,287 ----------- --------- OFFICE - ------ City Center 1991 44,800 100% Bank of America Town Center - 3 Story 1996 53,700 80% Morgan Stanley Dean Witter, Valencia Bank & Trust Town Center - 6 Story 1998 127,300 85% Princess Cruises ----------- ---------- 255,800 1,302 ----------- ---------- LAND LEASES/MIXED USE/OTHER - --------------------------- Plaza del Rancho 1997 47,200 93% Carl's Jr. Restaurant Spectrum Health Club 1997 53,500 100% Office/Retail West of Hyatt(2) - 26,000 Other Income Properties various 95,600 ----------- ---------- 222,300 5,494 ----------- ---------- APARTMENTS Units - ---------- ----- Northglen 1988 234 97% Portofino 1989 216 93% SkyCrest 1996 264 89% Montecito(2) - 210 ----------- ---------- 924 5,135 ----------- ---------- HOTELS Rooms - ------ ----- Valencia Hilton Garden Inn (75% joint venture interest) 1991 152 Hyatt Valencia Hotel and Santa Clarita Conference Center (3) 1998 244 ----------- ---------- 396 838 ---------- Properties Sold During 1998 2,444 ---------- TOTAL $ 26,500 ---------- ----------
(1) Gross Leasable Area (2) Under development or expansion at December 31, 1998 (3) Santa Clarita Conference Center totals 26,000 square feet Valencia Water Company - 17 distribution reservoirs, 17 booster pumping stations, 18 wells, approximately 235 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 $44.7 million mortgage which matured on March 1, 1999 was secured by the Portofino, Northglen and SkyCrest apartment complexes, River Oaks shopping center, and the 6 ITEM 2. PROPERTIES (continued) Company's headquarters building. The Company replaced this financing upon maturity in March, 1999 with a $50 million financing secured by three apartment complexes. At December 31, 1998, 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 2 and SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION on pages 62 and 63. 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. 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 - ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 Distributions - ---------------------------------------------------------------------------------------------------------------------------- Per unit High Low High Low 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- First quarter $34 3/4 $27 3/4 $18 1/8 $16 1/2 First quarter $ .22 $ .18 Second quarter 31 15/16 26 7/8 22 1/4 17 1/4 Second quarter .10 .10 Third quarter 31 15/16 21 13/16 24 7/8 21 1/2 Third quarter .10 .10 Fourth quarter 29 1/8 20 1/4 32 22 7/8 Fourth quarter .10 .10 - ---------------------------------------------------------------------------------------------------------------------------- Year's high and low $34 3/4 $20 1/4 $32 $16 1/2 Total distributions $ .52 $ .48 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
1998 1997 - ---------------------------------------------------------------------- December 31, closing price $26 $30 - ---------------------------------------------------------------------- - ----------------------------------------------------------------------
The Company's partnership units are traded on the New York and Pacific Stock Exchanges under the ticker symbol NHL and, at December 31, 1998, the Company had 1,318 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. 7 ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- IN THOUSANDS, EXCEPT PER UNIT, PERCENTAGES AND SALES INFORMATION OPERATING RESULTS Revenues $304,678 $207,701 $220,186 $ 175,597 Operating income 83,894 63,898 60,584 46,482 General and administrative expense (1) (12,634) (10,268) (9,133) (8,547) Interest and other, net (7,180) (9,137) (9,562) (10,618) Net income 64,080 44,493 41,889 27,317 Depreciation and amortization (included in net income) (10,101) (10,148) (8,857) (7,698) - ---------------------------------------------------------------------------------------------------------------------- PER UNIT INFORMATION Net income $ 1.89 $ 1.29 $ 1.19 $ .75 Net income - assuming dilution 1.86 1.28 1.18 .75 Distributions (including special) .52 .48 .40 .40 Partners' capital 4.40 4.21 3.48 3.14 Appraised value 29.72 25.25 23.35 23.32 Market price - high 34 3/4 32 18 3/4 17 low 20 1/4 16 1/2 15 12 1/8 year-end closing 26 30 16 7/8 17 - ---------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Land under development $ 47,667 $ 53,875 $ 63,266 $ 88,457 Income-producing properties, net 248,712 227,203 182,641 134,504 Total assets 432,207 403,932 373,488 349,753 Mortgage and other debt (total debt) 157,609 156,946 163,256 152,302 Other long-term obligations 48,832 40,393 37,544 36,270 Total liabilities 288,394 258,655 252,835 236,897 Partners' capital (capital) 143,813 145,277 120,653 112,856 Market capitalization at year end 849,576 1,035,810 585,575 610,470 - ---------------------------------------------------------------------------------------------------------------------- STATISTICS Return on total debt and capital 21% 15% 15% 10% Total debt as a percent of total debt and capital 52% 52% 58% 57% Total debt as a percent of total market capitalization 16% 13% 22% 20% Units outstanding - weighted average 33,986 34,520 35,292 36,241 - weighted average - diluted 34,376 34,750 35,411 36,272 - year end 32,676 34,527 34,701 35,910 - ---------------------------------------------------------------------------------------------------------------------- SALES INFORMATION Residential lots and homes sold 1,232 888 1,284 (2) 1,233(2) Industrial and commercial acres sold 125.0 81.0 36.9 38.5 Farm acres sold 970 1,673 544 5,501 - ----------------------------------------------------------------------------------------------------------------------
(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. 8
1994 1993 1992 1991 1990 1989 1988 - ------------------------------------------------------------------------------------------------------------ $ 134,268 $ 105,452 $128,182 $150,762 $192,886 $234,450 $203,607 34,607 28,538 31,636 43,232 48,487 81,468 68,177 (8,578) (7,710) (6,806) (8,749) (5,381) (10,880) (16,281) (10,455) (8,031) (7,619) (4,398) (4,728) (1,865) 1,722 15,574 12,797 17,211 30,085 38,378 68,723 53,618 (7,690) (7,329) (6,471) (7,701) (8,441) (6,725) (5,149) - --------------------------------------------------------------------------------------------------------------- $ .42 $ .35 $ .47 $ .82 $ 1.03 $ 1.75 $ 1.36 .42 .35 .47 .82 1.02 1.74 1.35 .40 .40 .60 .80 .80 .85 .53 3.06 3.03 3.08 3.20 3.18 4.12 4.05 21.86 21.04 22.01 23.70 25.33 28.52 24.24 17 1/4 17 1/2 20 3/8 22 1/2 32 1/2 35 3/4 28 3/8 12 13 1/2 12 13 1/2 14 7/8 25 1/8 15 12 1/8 16 14 1/4 19 1/4 16 30 1/8 28 5/16 - --------------------------------------------------------------------------------------------------------------- $ 87,423 $ 73,078 $ 50,127 $ 67,769 $ 73,527 $ 94,510 $ 86,010 135,858 134,384 161,615 116,875 91,783 92,365 71,205 343,792 359,898 323,082 280,575 265,406 279,645 299,229 145,991 174,157 131,849 78,556 60,302 30,676 59,717 30,922 33,414 28,609 27,762 25,920 16,867 15,277 231,435 248,619 210,033 162,790 148,459 120,203 139,172 112,357 111,279 113,049 117,785 116,947 159,442 160,057 445,727 588,112 523,830 707,534 588,080 1,166,048 1,119,476 - --------------------------------------------------------------------------------------------------------------- 6% 4% 7% 15% 22% 36% 24% 57% 61% 54% 40% 34% 16% 27% 25% 23% 20% 10% 9% 3% 5% 36,757 36,757 36,759 36,755 37,393 39,286 39,561 36,789 36,790 36,796 36,831 37,543 39,488 39,666 36,761 36,757 36,760 36,755 36,755 38,707 39,540 - --------------------------------------------------------------------------------------------------------------- 1,026 (2) 113 487 233 540 812 733 12.0 28.9 4.5 73.5 24.3 23.8 104.2 5,370 3,900 6,750 2,989 3,950 - - - ---------------------------------------------------------------------------------------------------------------
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 RESULTS OF OPERATIONS Net income increased in 1998 for the fifth consecutive year, with revenues and net income per unit reaching historical highs. Net income increased to $64.1 million, on revenues of $304.7 million. This continued improvement was due in part to the further upswing in California's diversified economy and low interest rates which resulted in increased market demand and 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 the Valencia area totaled 1,232 and represent the most closings by the Company in a single year in the community's history. Industrial land sales totaled an unprecedented 111 acres with some parcels at the highest price per square foot ever obtained, generating record revenues and income from the industrial division. The strategic sale of Valencia Marketplace, a high-volume retail center, for $111 million in the second quarter of 1998, was the largest contributor to the year's revenues and income. The major contributors to 1997 earnings were two strategic sales, a 208-unit apartment complex and portions of the Suey Ranch not suited for development, along with the sale of 366 entitled, unimproved residential lots. The primary contributor to 1996 results was the sale of the McDowell Mountain Ranch project for $43.6 million, adding $24.4 million to operating income. The Company's goal is to continue earnings growth in core land sale activities in 1999. Approximately 1,400 residential lots will be marketed in 1999 to enable the Company to reach its goal of an annual absorption rate in Valencia of 1,500 homes and apartments by the end of the year. A five year summary of revenues and operating income for each of the Company's business segments is listed below:
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------- FIVE YEAR SUMMARY IN THOUSANDS 1998 1997 1996 1995 1994 --------- -------- --------- --------- --------- Revenues Real estate Residential home and land sales Valencia $ 70,867 $ 67,682 $ 79,533 $ 58,160 $ 36,022 McDowell Mountain Ranch - - 49,101 16,602 21,984 Industrial and commercial sales 172,320 61,996 29,844 41,396 11,667 Commercial operations Income-producing properties 38,622 33,404 28,742 28,704 28,835 Valencia Water Company 10,209 11,170 9,762 8,631 6,479 Agriculture Operations 11,270 15,487 16,459 14,676 17,481 Ranch sales 1,390 17,962 6,745 7,428 11,800 ------- -------- -------- -------- -------- Total Revenues $304,678 $207,701 $220,186 $175,597 $134,268 --------- -------- --------- --------- --------- --------- -------- --------- --------- --------- Operating Income Real estate Residential home and land sales Valencia $ 23,609 $ 15,495 $ 14,116 $ 7,102 $ 4,487 McDowell Mountain Ranch - - 26,267 2,741 6,719 Industrial and commercial sales 48,663 19,216 3,775 17,702 5,048 Community development (10,710) (11,034) (11,670) (6,766) (6,679) Commercial operations Income-producing properties 17,637 15,580 14,080 15,158 13,785 Valencia Water Company 2,694 3,268 3,212 2,387 1,370 Agriculture Operations 903 4,378 4,798 3,529 4,350 Ranch sales 1,098 16,995 6,006 4,629 9,227 Earthquake damage - - - - (3,700) --------- -------- --------- --------- --------- Total Operating Income $ 83,894 $ 63,898 $ 60,584 $ 46,482 $ 34,607 --------- -------- --------- --------- --------- --------- -------- --------- --------- ---------
10 RESIDENTIAL HOME AND LAND SALES VALENCIA 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, on a limited basis, in home construction on lots it owns by establishing joint ventures with builders who have created innovative 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 financing the construction costs. For 1998, new home sales by all sellers in Valencia totaled 620. This is below the 657 homes sold in 1997 due to temporary supply constraints in Valencia's new-home inventory. At December 31, 1998, 211 homes were in escrow by all builders, compared with 171 homes at the end of the previous year. In 1998, a total of 1,232 home and lot sale closings were recorded by the Company in the Valencia area, a 39% increase over 1997 and 15% higher than 1996. The Company's strategy in the current expanding 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 10% of the Company's Valencia area home and lot closings in 1998 compared with 15% in 1997 and 24% in 1996. 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 meeting the needs of prospective homebuyers. MERCHANT BUILDER PROGRAM The Company sold a total of 1,108 residential lots to merchant builders in 1998, 47% more than in 1997 and 37% ahead of 1996. Sales in 1998 added $40.8 million to revenues and $24.2 million to income. Gross profit margins from these 1998 lot sales averaged 58% and profit per net acre averaged $220,000. Because of high levels of unimproved residential lot sales, overall profit margins have been increasing dramatically and are less indicative of financial performance. Therefore, emphasis now and in the future will be on profit per acre. In 1997, 754 lots in Valencia were sold by the Company to merchant builders, adding $38.1 million to revenues and $16.6 million to income. Gross profit margins from these lot sales averaged 31% and the profit per net acre averaged $131,000, excluding the high margin sale of 366 entitled, unimproved lots. In 1996, 809 lots in the Valencia area were sold to merchant builders. This included 318 lots in Valencia, adding $21.9 million to revenues and $6.4 million to income. Gross profit margins from these lot sales averaged just over 29% and profit 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 just north of Valencia, for $4.5 million, added $4.3 million to operating income in 1996. Deferred revenues of $2.3 million and income of $766,000 were recognized in 1998 from prior residential lot sales under percentage of completion accounting. In 1997 and 1996, deferred revenues of $1.4 million and $1.9 million and income of $422,000 and $983,000 were recognized, respectively. Merchant builders in Valencia closed escrow on 450 homes in 1998, 404 homes in 1997 and 302 homes in 1996. 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 merchant builders to Valencia. While six builders were active in 11 projects at the end of 1998, the Company expects 17 merchant builders involved in over 20 projects by the end of 1999. At December 31, 1998, there were 188 lots in escrow to a merchant builder, which are the first lots to be sold in the new Bridgeport lake community. There were 37 residential lots in escrow at the end of 1997, and 123 lots in escrow at the end of 1996. A primary focus for 1999 is Bridgeport (formerly referred to as Lago de Valencia), a "lifestyle village" of 700 homes surrounding a lake. Grading of the 14-acre lake has started, with lot sales expected to begin in the second quarter of 1999. Merchant builder interest in Bridgeport is substantial and the Company expects to generate record high land prices per acre for a portion of the project. Other fully entitled projects include 800 multi-family lots in South River and 290 remaining residential lots in Hasley Hills, just north of Valencia. Over 6,000 additional lots are in various stages of the governmental approval process, including 1,900 lots expected to be entitled in 1999 through annexation to the City of Santa Clarita. 11 JOINT-VENTURE PROGRAM Escrow closings from the Company's joint ventures totaled 124 homes in three projects in 1998, contributing $27.7 million to revenues and $2.9 million to income with an average gross profit margin of 10.5%. A joint venture with Warmington Homes sold out during 1998 and the remaining two projects with EPAC Communities are expected to sell out in late 1999 or early 2000. Included in the 1998 closings were 28 homes in the upscale Avignon townhome project adjacent to Valencia Country Club. At December 31, 1998, 50 joint-venture homes were in escrow. All escrow closings are subject to market and other conditions. At December 31, 1997, 23 joint-venture homes were in escrow and 10 homes at the end of 1996. In 1997, escrow closings from six joint-venture projects totaled 134 homes, contributing $28.2 million to revenues and $2.9 million to income. Three joint-venture projects were sold out during 1997. Average gross profit margins were 10% in 1997, with 40% of the closings being townhomes and condominiums or higher- density, single-family homes. 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 were 10%, with almost 60% of the closings from townhomes and higher-density single-family homes. The decline in joint-venture escrow closings during the past two years is part of the Company's strategy to concentrate on residential lot sales to merchant builders in strong real estate markets. Accordingly, no new homebuilding joint ventures are planned for 1999. At December 31, 1998, 119 joint-venture homes remained to be sold, 22 at Avignon and 97 condominiums at Cheyenne. 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 1996. INDUSTRIAL AND COMMERCIAL SALES Revenues and income from industrial and commercial land sales established new highs in 1998, increasing for the third consecutive year following several slow years during a weak Southern California industrial and office market. In 1998, the Company closed escrow on 111 acres of industrial land, including four buildings constructed as part of its build-to-suit/lease program. These escrow closings contributed $62.6 million to revenues and $16.1 million to income. More than 1.5 million square feet of space was absorbed in Valencia's two business parks in 1998, exceeding the 1997 total. Included in the 1998 industrial escrow closings is a 36.5-acre parcel for $20.4 million. A 700,000-square-foot office complex is under development on this parcel at the intersection of Interstate 5 and Highway 126. It is the largest of several parcels being sold for office development and is significant because these types of projects support higher land prices and bring more employment on a per-acre basis. In June, 1998, the Company sold Valencia Marketplace, a 705,000-square-foot high-volume retail center for $111 million cash, the largest transaction in the Company's history. Through December 31, 1998, the Company recognized $98 million in revenues and $35 million in income under percentage of completion accounting. The sale is expected to generate additional revenues of approximately $8 million and income of approximately $1 million in 1999 as construction and lease-up of the center are completed. Also, in 1998, the Company completed the sale of Valley Business Center, a 56,800-square-foot mixed-use center on approximately 15 acres, for $7.3 million adding $1.5 million to income. Other commercial escrow closings in 1998 included a 12.6-acre, restricted-use site for a senior apartment project, two small commercial parcels totaling 2.0 acres and the remaining building owned by the Company in Valencia Industrial Center. These sales combined contributed $4.0 million to revenues and $1.5 million to income. In 1997, the strategic sale of the Company's 208-unit StoneCreek apartment complex was the largest contributor to industrial and commercial sales. This sale, along with the Orchard Plaza Office building, added $20.5 million to revenues and $13.5 million to income. In addition, sales of nine industrial parcels totaling 62.0 acres and three industrial buildings on 10.2 acres closed escrow, adding $38.1 million to revenues and $7.8 million to income in 1997. Results for 1997 also included the sale of three commercial parcels totaling 8.9 acres and contributing $3.2 million to revenues and $2.1 million to income. In 1996, industrial and commercial 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 12 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. Industrial land sales in 1999 are expected to decline as the record level of land sold in 1998 is developed and leased. With more than 500 acres available in Valencia's two business parks, adequate inventory should be available to meet future demand. Final plans for a portion of this land are subject to review by government agencies before development can proceed. Industrial acreage is also planned for the Newhall Ranch planned community adjacent to Valencia. At December 31, 1998, three industrial parcels totaling 10.6 acres and a build-to-suit on 5.2 acres were in escrow for $15.8 million, with closings scheduled for 1999. Commercial acres in escrow with closings expected in the first half of 1999 include three parcels totaling 7.5 acres for $6.2 million. Also in escrow are the Company's remaining 110 acres at the Cowell Ranch in northern California for $10.5 million with escrow expected to close in the first half of 1999. Subsequent to year-end, escrow opened on a 32.85-acre apartment site in South River adjacent to Valencia Town Center for $31.8 million with closing expected in the second quarter of 1999. The Company's ability to complete sales in escrow and generate future land sales is subject to market and other conditions beyond the control of the Company. At December 31, 1997, six parcels totaling 25.4 industrial acres, 16.8 commercial acres and one build-to-suit project in Valencia Commerce Center were in escrow, and at December 31, 1996, 2.1 commercial acres were in escrow. COMMUNITY DEVELOPMENT Newhall Land's community development activities are focused on securing the necessary entitlements as well as an intensified strategic marketing program to support the buildout of Valencia by 2005 and begin the development of Newhall Ranch, the next new town to be developed on the Company's 12,000 acres west of Valencia. The Company's ability to achieve its goals and increase the pace of development is contingent upon obtaining the necessary entitlements from the County of Los Angeles and the City of Santa Clarita. In November, 1998, the Los Angeles County Board of Supervisors gave preliminary approval to the Company's Newhall Ranch project. Newhall Ranch is located on 12,000 acres of Company property west of Interstate 5, between Valencia and the Los Angeles/Ventura County boundary, along the State Route-126 corridor. The Newhall Ranch Specific Plan permits 21,600 homes arranged in five villages, and 1,000 acres of commercial, business park, and mixed-use development, which will provide over 19,000 jobs. The mixed-use designation permits the design of innovative combinations of commercial, residential, recreation and institutional uses. Approximately 6,200 acres of mountain, river and other environmentally significant lands such as oak woodlands will be dedicated as open space, creating visual amenities and a strong environmental focus for the community. The approval of Newhall Ranch followed certain agreements entered into by the Company, including executed agreements with the four school districts that will provide educational facilities for Newhall Ranch and Valencia. The Board of Supervisors directed its staff to prepare the needed documents for final approval of Newhall Ranch, which is expected to occur in the first quarter of 1999. Market research has commenced on the first phase of the project, and, following final approval, the Company will begin processing subdivision maps. Also in process are plans for formation of a new sanitation district for the community and applications for required environmental permits. Development is expected to start in 2002. The Company entered into 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 daily-fee course and clubhouse will be designed, constructed and managed by PGA Tour Golf Course Properties, with PGA star Mark O'Meara as the design player-consultant. A not yet identified PGA-sanctioned tour event will be hosted each year at the TPC at Valencia course, bringing economic benefits and national recognition to Valencia and the Santa Clarita Valley. Westridge will contain 1,711 homes of widely varied types and prices, including executive and custom homes, along with an elementary school site and adjoining 9-acre park, paseos and nature trails, a recreation center, and a small commercial site. Over 150 acres of the site within a county significant ecological area will be dedicated as an oak tree habitat for public recreation and education uses. The Company will provide an endowment for the permanent management of the habitat. The Westridge entitlements were approved by the County Regional Planning Commission in December, 1998 and are expected to be heard by the Board of Supervisors early in 1999. 13 In 1998, final permits were received from the California Department of Fish and Game and the Army Corps of Engineers for construction of bridges and work involving the Santa Clara River. These signed environmental permits, one state and the other federal, allow the Company to complete the roads and infrastructure for the buildout of Valencia. Work has started for similar permits in connection with the development of Newhall Ranch. In addition to final approvals for commercial and industrial space and 2,458 new homes in Valencia received in 1997, additional entitlements are in the pipeline with final approvals expected starting in 1999. These include 2,545 homes in the Westcreek community in Valencia consisting of two primary villages that will contain product ranging from apartments and cluster homes to estate lots. The Company is working with the City of Santa Clarita on annexation of 1,900 homes which consist of the Decoro South, Creekside and Eastcreek neighborhoods. The annexation is expected to be completed by the fall of 1999. Community development expenses have been maintained at approximately the same levels in 1998, 1997 and 1996. The Company will continue to focus on the entitlement process for Newhall Ranch and on obtaining additional governmental approvals in Valencia to support the accelerated pace of development to meet forecasted demand. As a result, with the Company's increasing efforts on obtaining additional entitlements, community development expenses in 1999 are expected to increase over 1998. INCOME PRODUCING PROPERTIES The Company's portfolio of income-producing properties is a relatively stable source of earnings, providing working capital for continuing operations and additional debt capacity to finance Company growth. For 1998, revenues and income from the commercial portfolio increased 16% and 13%, respectively, over 1997. Contributing to the 1998 increases were the continued expansion of the commercial portfolio, excellent retail and apartment occupancies and favorable rents throughout the portfolio. This increased performance for 1998 more than offset sales of properties during the year. Along Town Center Drive, the Company's 244-room Hyatt Valencia Hotel and Santa Clarita Conference Center opened in August. The six-story, 127,300-square-foot building for Princess Cruises was occupied in December, 1998 with 700 employees, and 54,000 square feet of retail space on Town Center Drive was completed. At December 31, 1998, occupancy at Valencia Town Center shopping mall was 99% including short-term tenants. River Oaks and Castaic Village neighborhood shopping centers are 99 and 100% leased, respectively. At River Oaks, Mimi's Cafe opened on a building lease and the shopping center's remodel was completed prior to the holiday selling season. NorthPark Village Square, the Company's newest neighborhood shopping center, was fully leased and undergoing further expansion to accommodate Rite-Aid, the nation's largest drug store chain, which is scheduled to open a 16,700 square foot store in 1999. An additional 5,600 square feet of space is being added to NorthPark Village Square for other retailers. Plaza del Rancho, a 47,200-square-foot, mixed-use project in Valencia Industrial Center is 93% leased. The office buildings in the Company's portfolio also are averaging high occupancy rates of nearly 90%. The Company's three apartment complexes averaged 95% occupancy at the end of 1998, with rental increases for new tenants during the year averaging 15%. The temporary drop in apartment occupancy rates at the end of 1998 is a result of many renters buying homes in Valencia. To meet growing demand, additional apartment complexes are planned during the buildout of Valencia. Currently, Montecito, a 210-unit apartment complex in Valencia Town Center, is under construction adjacent to Valencia Country Club, with units expected to be available in spring, 1999. In addition, construction is expected to begin in 1999 on a 320-unit apartment complex in Valencia NorthPark. To capitalize on historically high land values, the Company may sell land for some or all of the 800 apartment units planned in South River to other developers. Development activity will continue to focus in Valencia Town Center and along Town Center Drive, a mixed-use "Main Street" extending from the Company's regional shopping mall west past the Hyatt Valencia Hotel. A 130,000-square-foot entertainment complex that will include an IMAX 3-D Theatre, 11 additional movie screens and a Borders bookstore, is under construction and is scheduled to be completed in mid-1999. The complex also will include several restaurants and retail space. Plans for Valencia Town Center mall provide for up to three more department stores plus additional retail. In 1999, net operating income from the portfolio is expected to be flat, and with the sale of Valencia Marketplace in June, 1998, and increased depreciation associated with new properties, net income is expected to be down approximately 15% compared to 1998. Projects started or completed during 1998 and 1999 in Valencia Town Center are expected to generate $13 to $14 million in incremental net operating income by 2000, more than offsetting the loss of income from strategic asset sales such as Valencia Marketplace. The Company's investment 14 in the continued expansion of the portfolio was $102 million in 1998 and is expected to be approximately $70 million in 1999. In 1997, revenues and income from the Company's commercial operations increased 16% and 11%, respectively, over 1996. Revenues and income in 1996 declined slightly due to the sale of Bouquet Shopping Center in 1995 and reduced occupancy at Valencia Town Center in 1996. As the number of commercial income properties built each year increases, sales of mature income properties may be made on a selective basis, allowing the Company to benefit from strong capitalization rates and to maximize the return on its investment. VALENCIA WATER COMPANY Valencia Water Company is a regulated public water utility and a wholly-owned subsidiary of the Company, serving more than 19,000 metered customers in the Valencia area. While the customer base is growing, reduced demand from heavy rainfall during the winter and spring resulted in 1998 revenues decreasing by 9% and income by 18%. In 1997, revenues increased 14% while income increased 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% rate increase effective January 1, 1996. AGRICULTURE OPERATIONS Agriculture revenues and income, including the Company's energy operations, declined 27% and 37%, respectively, before a $1.9 million, non-cash, write-off of mineral rights associated with previously sold ranch land based on an independent valuation completed in 1998. The 1998 decline was primarily the result of the sale of farmland and that the Company's three ranches had record earnings in 1997. Additionally, in 1998, oil and gas prices were substantially lower. In 1997, revenues and income declined 6% and 9%, respectively, primarily due to the sale of vineyards at the Suey Ranch. The declines in 1997 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, primarily due to excellent prices and yields on avocados. RANCH SALES In 1998, a 970-acre parcel of the Merced Ranch closed escrow for $1.1 million, contributing $775,000 to income. The sale is part of the Company's strategy of selling farmland not suitable for development. Also included in 1998 results is $323,000 recognized from the 1996 sale of 539 acres of crop land at the Suey Ranch. The sale of 1,674 acres of vineyards and undeveloped land at the Suey Ranch in 1997 for $17.9 million, added $17 million to income. Sale of a small remaining parcel in northern California for $62,000 contributed another $45,000 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. The Company's three remaining parcels totaling 2,970 acres at the Merced Ranch are expected to close escrow in the first half of 1999. The acreage is being leased while awaiting sale. The Company plans to market the remaining 36,000 acres at the Suey Ranch beginning in 1999. GENERAL AND ADMINISTRATIVE EXPENSES A 39% increase in general and administrative expenses in 1998 was primarily due to consulting fees related to expanded marketing programs and improved business conditions and, to a lesser degree, to non-capitalized expenses in connection with upgrading of the computerized accounting system and Year 2000 repairs. General and administrative expenses are expected to be slightly lower in 1999 compared to 1998. 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 expense. UNIT OWNERSHIP PLANS No expense was recorded in 1998 and expense of $1.2 million was recorded in 1997 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, expense of $12,000 was recorded for amortization of return rights on restricted units. INTEREST AND OTHER In 1998, reduction of debt due to receipt of $111 million cash upon the sale of Valencia Marketplace in June, 1998 and an increase in interest capitalized to portfolio projects contributed to a decrease of 39% in net interest 15 expense. Interest income from increased cash available for investment was offset by a reduction in interest income due to collection of notes from prior land sales. The major contributor to a 4% decrease in net interest expense in 1997 was the sale of the McDowell Mountain Ranch in April, 1996 when outstanding project and bond debt was assumed by the buyer. The Company expects interest expense to increase in 1999 due to the accelerated pace of development and the continued expansion of the Company's income portfolio. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had cash and cash equivalents of $2.2 million and $138.8 million in available lines of credit to fund development activities. Letters of credit against lines of credit totaled $26.8 million at the end of 1998. 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, 1998, there was no debt against raw land or land under development inventories. 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 1998, a total of $101.8 million was invested in portfolio development and the Company expects to invest approximately $70 million in 1999. In addition, the Company expects to invest approximately $30 million into major roads and freeway improvements in 1999 to enable the Company to close additional land sales. In August, 1998, the Board of Directors authorized the repurchase of one million units and, in September, 1998, the Board of Directors authorized an additional one million units for repurchase. In addition, the Company had 181,385 units authorized for repurchase from a prior repurchase program. A total of 1,909,613 units, or 5.5% of the December 31, 1997 outstanding units, were repurchased in 1998. The unit repurchases are being made because the Board of Directors believe the units are underpriced and do not reflect the Company's current performance and especially its prospects. The Company intends to continue buying units in 1999. On January 20, 1999, the Board of Directors authorized an additional one million units for repurchase. The repurchases will be funded from cash flow generated from operations. THE FOLLOWING DISCUSSION RELATES TO PRINCIPAL ITEMS IN THE CONSOLIDATED STATEMENTS OF CASH FLOW. OPERATING ACTIVITIES Net cash provided by operating activities in 1998 totaled $167.6 million and included sales of 1,232 residential lots and homes in the Valencia area plus 125.0 acres of industrial and commercial land including four build-to-suit/lease buildings; sale of Valencia Marketplace, a high-volume retail center; and 970 acres of farmland. These sales combined provided $227.5 million in cash and $15.3 million in notes. In addition, $4.0 million was collected on notes from land sales in prior years. Expenditures for land under development inventories and home construction totaled $79.7 million in 1998 and were more than offset by $85.9 million in cost of sales relief. 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 net investment in homebuilding partnerships totaled $13.5 million at the end of 1998. In 1997, net cash provided by operating activities totaled $100.3 million and included sales of 888 residential lots and homes 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. Notes totaling $10.2 million were collected in 1997 from land sales in prior years. Expenditures in 1997 for land under development inventories and home construction totaled $66.8 million and was offset by $76.1 million in cost of sales relief. The Company's net homebuilding investment totaled $11.8 million at the end of 1997. In 1996, net cash provided by operating activities totaled $99.3 million and included sales of 1,284 residential lots and homes in Valencia 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 Scottsdale, 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 16 and were offset by $100.6 million cost of sales relief including the sale of the McDowell Mountain Ranch project. Net investment in homebuilding partnership decreased 51% in 1996 to $12.4 million. INVESTING ACTIVITIES Expenditures for development of income-producing properties in Valencia in 1998 totaled $101.8 million. Major expenditures include $27.5 million for the Hyatt Valencia Hotel and Santa Clarita Conference Center; $32.8 million for various retail/office/entertainment projects in Valencia Town Center including parking structures; $11.6 million for a six-story office building occupied by Princess Cruises; and $6.6 million for a 210-unit apartment complex under construction in Valencia Town Center. Also included is $14.1 million for Valencia Marketplace which was sold in June, 1998. The Company is obligated to complete the construction and leasing of the center and the sale is being recognized under percentage of completion accounting. The Company expects to invest approximately $70 million in income-producing projects in 1999 including completion of approximately 150,000 square feet of retail/office space under construction in Valencia Town Center. In addition to completing the 210-unit apartment complex adjacent to Valencia Country Club, construction is expected to begin in 1999 on a 320-unit apartment project located in Valencia NorthPark. In 1997, expenditures for income-producing properties under development totaled $69.4 million. Major expenditures included $22.8 million for Valencia Marketplace; $12.5 million for the Hyatt Valencia Hotel; $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. In 1996, expenditures for income-producing properties totaled $70.5 million. Major expenditures included $25.0 million for Valencia Marketplace; $14.4 million for three industrial buildings; $12.1 million for a 264-unit apartment complex; $4.6 million for a neighborhood shopping center; $5.3 million for a 53,700-square-foot office building; and $2.9 million for a 53,500-square-foot Spectrum Club sports and fitness center. Purchase of property and equipment in 1998, 1997 and 1996 were primarily for water utility construction. FINANCING ACTIVITIES Distributions totaling $17.8 million were paid in 1998 consisting of four quarterly distributions of $.10 per unit and a special distribution of $.12 per unit. In 1997, quarterly distributions totaling $16.6 million, or $.48 per unit, were paid which included a special distribution of $.08 per unit. In 1996, quarterly distributions of $.40 per unit totaled $14.1 million. The declaration of distributions, and the amount declared, are determined by the Board of Directors on quarterly basis taking into account the Company's earnings, financial condition and prospects. The Company has repurchased its partnership unit over the three-year period as follows: 1998 -- 1,909,613 for $49.0 million; 1997 -- 328,637 units for $5.7 million; 1996 -- 1,228,078 units for $20.3 million. Upon sale of Valencia Marketplace in June, 1998, for $111 million cash, the Company paid off all outstanding debt against lines of credit and a revolving mortgage facility. At December 31, 1998, $23.2 million was outstanding against lines of credit and $40 million against the revolving mortgage facility. In 1998, a $6 million scheduled principal payment was paid on an unsecured financing with Metropolitan and a $3.3 million commercial mortgage was paid in full. Also, a construction financing for a homebuilding joint venture was paid upon completion of the project in 1998. The Company expects to complete a $50 million financing secured by three apartment complexes with a 10-year term at an average interest rate of 6.51% on March 1, 1999. This financing will replace a portfolio mortgage secured by five of the Company's commercial properties with a principal balance of $44.7 million which matures on March 1, 1999. In 1997, a $6 million scheduled principal payment was paid on a 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 was related to draws against a construction loan for a homebuilding partnership. 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. YEAR 2000 ISSUE The Year 2000 issue concerns the possibility that computer programs with date-sensitive software may recognize a date using "00" as the year 1900, rather than as the year 2000, because the programs were written using two digits rather than four to define the applicable year. This could result in a system failure or miscalculations causing 17 disruptions of operations such as, among others, a temporary inability to process transactions or engage in normal business activities. READINESS: The Company's Year 2000 remediation efforts are progressing appropriately. At the end of 1997, a Year 2000 Task Force was formed to coordinate Company-wide efforts to be Year 2000 compliant. To date, the Company has inventoried its internal systems as well as identified systems and applications outside of the Company that may include imbedded computer technology that could be impacted by the Year 2000 Issue. As a result of the Company's comprehensive review of its internal systems in 1997, and for other strategic reasons, the Company is replacing its computerized accounting system. The Company successfully converted to the new accounting system on January 1, 1999, except for the payroll and human resources subsystem which the Company projects will be completed by April, 1999. The Company has made significant progress in modifying existing software to be retained to be Year 2000 compliant. Completion of these system changes is planned for the first half of 1999, which will allow adequate time for testing. Significant vendors, consultants, suppliers and governmental agencies (collectively, "business partners") were sent a questionnaire on their Year 2000 compliance efforts. Nearly all have responded to this request. The Company made selected site visits before the end of 1998 to assess the Year 2000 compliance efforts of these business partners. COSTS: The Company estimates the total cost of its compliance efforts in connection with the Year 2000 Issue will be approximately $400,000 and will be expensed as incurred. As of December 31, 1998, $114,000 had been expensed for this project. The majority of the expenditures in the future is expected to be for third party computer analysts to complete the modification and testing of existing software for Year 2000 compliance. In addition, the cost of the new accounting system is approximately $1 million and is being capitalized and amortized over its useful life. The cost of the Year 2000 Issue and the estimated completion dates are based on management's best estimates, which were derived utilizing assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. There can be no guarantee that these estimates will prove accurate and actual results could differ from those estimated. RISKS: The Company believes the worst-case scenario for the Year 2000 Issue would be for the Company or a significant number of its business partners to fail to successfully complete their respective Year 2000 remediation efforts by December 31, 1999. Under this scenario, the Company's operations would most likely be disrupted which would result in a material adverse effect on its business, operating results and financial condition. CONTINGENCY PLANS: The Company expects to develop by June 1999 contingency plans for business partners that do not indicate Year 2000 compliance. There can be no assurance that any contingency plans developed by the Company will prevent any service interruption on the part of one or more of the Company's business partners or that such service interruption would not have a material adverse effect upon the Company's business, operating results or financial condition. A failure of the accounting systems of a significant number of the Company's customers or business partners, or any of their financial institutions or lenders, would likely have a material adverse effect on the Company's business, operating results and financial condition. INFLATION, RISKS AND RELATED FACTORS AFFECTING FORWARD-LOOKING INFORMATION This report and other published reports by the Company contain forward-looking statements regarding the status of proposed or pending sales and rental activity, future planned development, plus the long-term growth goals of the Company. The forward-looking statements made in this report are based, in part, 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 18 Southern California. The regional economy is profoundly affected by the entertainment, technology, defense and certain other segments, which have been known to affect the region's demographics. Consequently, all sectors of real estate development for the Company tend to be cyclical. While the economy of Southern California has shown improvements recently, there can be no assurances that present trends will continue. INTEREST RATES AND FINANCING: Fluctuations in interest rates and the availability of financing have an important impact on the Company's performance. Sales of the Company's projects could be adversely impacted by the inability of buyers to obtain adequate financing. Further, the Company's real estate development activities are dependent on the availability of adequate sources of capital. Certain of the Company's credit facilities bear interest at variable rates and would be negatively impacted by increasing interest rates. COMPETITION: The sale and leasing of residential, industrial and commercial real estate is highly competitive, with competition coming from numerous and varied sources. The degree of competition is affected by such factors as the supply of real estate available which is comparable to that sold and leased by the Company and the level of demand for such real estate. 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: The Company's real estate development activities are focused on its 19,000 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, economic changes and 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 comply 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 the 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, land values have been increasing at a faster rate than costs. However, there are no assurances that this trend will continue. A portion of the commercial income portfolio is protected from inflation since percentage rent clauses and Consumer Price Index increases 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. 19 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, 1998, 1997 and 1996 Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 20 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Los Angeles, California /S/ KPMG LLP January 20, 1999 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Consolidated Statements of Income YEARS ENDED DECEMBER 31, ----------------------------------------- IN THOUSANDS, EXCEPT PER UNIT 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Revenues Real estate Residential home and land sales Valencia $ 70,867 $ 67,682 $ 79,533 McDowell Mountain Ranch - - 49,101 Industrial and commercial sales 172,320 61,996 29,844 Commercial operations Income-producing properties 38,622 33,404 28,742 Valencia Water Company 10,209 11,170 9,762 Agriculture Operations 11,270 15,487 16,459 Ranch sales 1,390 17,962 6,745 - -------------------------------------------------------------------------------------------------------------------------- Total Revenues 304,678 207,701 220,186 - -------------------------------------------------------------------------------------------------------------------------- Operating Expenses Real estate Residential home and land sales Valencia 47,258 52,187 65,417 McDowell Mountain Ranch - - 22,834 Industrial and commercial sales 123,657 42,780 26,069 Community development 10,710 11,034 11,670 Commercial operations Income-producing properties 20,985 17,824 14,662 Valencia Water Company 7,515 7,902 6,550 Agriculture Operations 10,367 11,109 11,661 Ranch sales 292 967 739 - -------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 220,784 143,803 159,602 - -------------------------------------------------------------------------------------------------------------------------- Operating Income 83,894 63,898 60,584 General and administrative expense (12,634) (9,068) (9,121) Expense from unit ownership plans - (1,200) (12) Interest and other, net (7,180) (9,137) (9,562) - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 64,080 $ 44,493 $ 41,889 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Net Income Per Unit $ 1.89 $ 1.29 $ 1.19 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Net Income Per Unit - Assuming Dilution $ 1.86 $ 1.28 $ 1.18 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Consolidated Balance Sheets DECEMBER 31, --------------------------------- IN THOUSANDS 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 2,188 $ 2,770 Accounts and notes receivable 30,255 19,027 Land under development 47,667 53,875 Land held for future development 30,553 32,551 Income-producing properties, net 248,712 227,203 Property and equipment, net 58,836 54,876 Other assets and deferred charges 13,996 13,630 - -------------------------------------------------------------------------------------------------------------------------- $ 432,207 $ 403,932 - -------------------------------------------------------------------------------------------------------------------------- Liabilities and Partners' Capital Accounts payable $ 28,716 $ 18,529 Accrued expenses 43,196 39,635 Deferred revenues 10,041 3,152 Mortgage and other debt 157,609 156,946 Advances and contributions from developers for utility construction 26,466 18,845 Other liabilities 22,366 21,548 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 288,394 258,655 Commitments and contingencies (Note 9) Partners' capital 32,676 units outstanding, excluding 4,096 units in treasury (cost - $83,530), at December 31, 1998 and 34,527 units outstanding, excluding 2,245 units in treasury (cost - $35,769), at December 31, 1997 143,813 145,277 - -------------------------------------------------------------------------------------------------------------------------- $ 432,207 $ 403,932 - --------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Consolidated Statements of Cash Flows YEARS ENDED DECEMBER 31, --------------------------------------------- IN THOUSANDS 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 64,080 $ 44,493 $ 41,889 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,101 10,148 8,857 Decrease in land under development 6,208 9,391 25,191 (Increase) decrease in accounts and notes receivable (11,228) 6,530 (401) Increase in accounts payable, accrued expenses and deferred revenues 20,637 9,281 3,710 Cost of property sold 77,564 18,334 17,521 Other adjustments, net 216 2,134 2,561 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 167,578 100,311 99,328 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Development of income-producing properties (101,789) (69,403) (70,471) Purchase of property and equipment (9,133) (4,853) (8,813) Distribution from (investment in) joint venture 22 8 (43) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (110,900) (74,248) (79,327) - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Distributions paid (17,784) (16,588) (14,122) Borrowings on mortgage and other debt 15,100 2,389 34,871 Repayment of mortgage and other debt (14,437) (8,699) (23,917) Increase in advances and contributions from developers for utility construction 7,621 474 2,193 Purchase of partnership units (49,043) (5,746) (20,277) Other, net 1,283 2,465 (622) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (57,260) (25,705) (21,874) - -------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (582) 358 (1,873) Cash and Cash Equivalents, Beginning of Year 2,770 2,412 4,285 - -------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 2,188 $ 2,770 $ 2,412 - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Interest paid (net of amount capitalized) $ 7,562 $ 10,273 $ 10,938 - --------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 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, 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 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Net income - 64,080 Distributions - (17,784) Purchase of partnership units (1,910) (49,043) Other activity, net 59 1,283 - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 32,676 $ 143,813 - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 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 and Business Segments: The Company operates in two lines of business: real estate and agriculture. The business segments of the Company's real estate operations consist of residential land sales and homebuilding; industrial and commercial land sales; development and operation of income-producing properties; Valencia Water Company, a public water utility; and community development. Agriculture consists primarily of farming operations and sales of non-strategic farmland. Central Administration includes the Company's corporate general and administrative support services such as information systems, financial services, human resources and internal audit. 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 material 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 includes 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, 1998, 1997, and 1996 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE (continued) increased approximately $500,000, $288,000, and $336,000, 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. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that an impairment may have occurred. Also, under the provisions of this accounting pronouncement, the Company ceases to depreciate assets while they are held for sale. 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 1998 gross income currently qualifies under this provision and the Company expects to continue to be taxed as a partnership for the foreseeable future. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE (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, 1998 Net income per unit Net income available to unitholders $ 64,080 33,986 $ 1.89 Effect of dilutive securities Unit options - 390 (.03) - ------------------------------------------------------------------------------------------------------------------------- Net income per unit - diluted $ 64,080 34,376 $ 1.86 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Net income per unit for prior years has been restated to conform with the requirements of SFAS No. 128 - EARNINGS PER SHARE.
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, 1998, the net tax basis of the Company's assets and liabilities exceeded the Company's financial statement basis of its assets and liabilities by $195,188,000. 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. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE (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, ------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair IN THOUSANDS Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------------------- Notes receivable from land sales $ 21,744 $ 21,744 $ 10,339 $ 10,339 Mortgage and other debt 157,609 157,609 156,946 156,946 Advances from developers for utility construction 11,355 2,891 11,730 2,895 ------------------------------------------------------------------- -------------------------------------------------------------------
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 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Accounts and notes receivable Trade receivables, less allowance for doubtful accounts of $1,188 and $654, respectively $ 1,623 $ 1,513 Notes receivable from land sales 21,744 10,339 Unbilled accounts receivable Agricultural products 2,281 2,945 Other 544 565 Other 4,063 3,665 - ------------------------------------------------------------------------------------------------------------------------- $ 30,255 $ 19,027 ---------------------------------------- ---------------------------------------- Land under development Valencia Residential land development $ 1,166 $ 3,700 Homes completed or under construction with venture partners 13,525 11,799 Industrial and commercial land development 32,686 38,190 Agriculture 290 186 - ------------------------------------------------------------------------------------------------------------------------- $ 47,667 $ 53,875 ---------------------------------------- ----------------------------------------
NOTE 5 CONTINUED ON NEXT PAGE 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE (continued) NOTE 5 (CONTINUED)
DECEMBER 31, ---------------------------------------- IN THOUSANDS 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Income-producing properties Land $ 48,319 $ 45,873 Buildings 119,453 106,552 Other 14,611 14,063 - ------------------------------------------------------------------------------------------------------------------------- 182,383 166,488 Accumulated depreciation (39,443) (35,431) - ------------------------------------------------------------------------------------------------------------------------- 142,940 131,057 Properties under development 105,772 96,146 - ------------------------------------------------------------------------------------------------------------------------- $ 248,712 $ 227,203 ---------------------------------------- ---------------------------------------- Property and equipment Land $ 4,819 $ 5,004 Buildings 5,600 5,600 Equipment 8,993 9,232 Water supply systems, orchards and other 68,688 66,857 Construction in progress 7,172 2,595 - ------------------------------------------------------------------------------------------------------------------------- 95,272 89,288 Accumulated depreciation (36,436) (34,412) - ------------------------------------------------------------------------------------------------------------------------- $ 58,836 $ 54,876 ---------------------------------------- Other assets and deferred charges ---------------------------------------- Prepaid expenses $ 1,751 $ 1,091 Investment in joint venture 468 490 Unamortized loan fees 682 1,211 Deferred charges and assets of Valencia Water Company 4,985 5,243 Other 6,110 5,595 - ------------------------------------------------------------------------------------------------------------------------- $ 13,996 $ 13,630 ---------------------------------------- ---------------------------------------- Accrued expenses Deferred compensation $ 7,800 $ 6,161 Operating and other accruals 3,665 4,898 Project accruals 27,446 24,241 Other 4,285 4,335 - ------------------------------------------------------------------------------------------------------------------------- $ 43,196 $ 39,635 ---------------------------------------- ---------------------------------------- Other liabilities Warranty and other reserves $ 6,255 $ 6,743 Deferred taxes of Valencia Water Company 5,862 5,700 Other 10,249 9,105 - ------------------------------------------------------------------------------------------------------------------------- $ 22,366 $ 21,548 ---------------------------------------- ----------------------------------------
30 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 - ---------------------------------------------------------------------------------------- 1999 $ 18,614 2000 18,709 2001 17,867 2002 16,883 2003 13,595 Thereafter 85,674 -------------------------------------------------------------------------------- $ 171,342* -------------- --------------
* 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, 1998, 1997, AND 1996 WERE (IN THOUSANDS) $11,429, $9,934, AND $8,991, RESPECTIVELY. - ------------------------------------------------------------------------------- NOTE 7. MORTGAGE AND OTHER DEBT
DECEMBER 31, INTEREST ------------------------- IN THOUSANDS RATES 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Unsecured lines of credit Variable $ 23,200 $ 8,100 Prudential (portfolio mortgage) 8.995% 44,686 45,306 Prudential (ranch mortgage) 8.45% 10,560 10,800 Pacific Life (Valencia Water Company) 8.0% 11,000 11,000 Bank of America (commercial mortgage) 7.95% -- 3,302 Metropolitan (unsecured notes) 6.9% 12,000 18,000 Wells Fargo (Valencia Town Center) Variable 40,000 40,000 Community facilities bonds (Valencia Town Center) 4.5-7.5% 16,163 16,678 Bank of America (homebuilding joint venture) 9.0% -- 3,760 - ------------------------------------------------------------------------------------------------------------------------- $157,609 $156,946 ----------------------- -----------------------
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. In 1998, the line was reduced to $159 million. 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 Bank & Trust. Letters of credit outstanding against available lines of credit totaled $26.8 million and $16.7 million, respectively, at December 31, 1998 and 1997. 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 $44.7 million is due. To replace this mortgage, the Company expects to complete a $50 million financing on March 1, 1999 secured by three apartment complexes for a 10-year term at an average rate of 6.51%. 31 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. Valencia Water Company also has a $2 million line of credit with Wells Fargo which is not guaranteed by the Company. The commercial mortgage with Bank of America was paid in full in July, 1998. The terms of a $30 million, seven-year unsecured financing with a remaining principal balance of $12 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 facility secured by the Valencia Town Center regional mall require 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, 1998, the interest rate on the borrowings was 6.71%. 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. Proceeds from 1998 home sales in the joint venture were used to fully repay the loan. Annual maturities of existing long-term debt are approximately (in thousands) $51,506 in 1999, $6,895 in 2000, $970 in 2001, $1,060 in 2002, $10,515 in 2003 and $23,463 thereafter. The unsecured lines of credit and the Wells Fargo revolving mortgage facility are lines of credit with no scheduled repayment terms. Capitalized Interest and Interest Income: During 1998, 1997 and 1996, total interest expense incurred amounted to (in thousands) $8,067, $10,527, $10,325, net of $3,354, $2,252 and $2,146, which was capitalized, respectively. Interest income from investments and notes receivable totaled (in thousands)$1,451 in 1998, $1,641 in 1997 and $1,504 in 1996. - ------------------------------------------------------------------------------- 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 $3,327,000, $1,907,000 and $1,481,000 for the years ended December 31, 1998, 1997 and 1996, 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 net income per unit would have been reduced to the pro forma amounts indicated below: 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
YEARS ENDED DECEMBER 31, ----------------------------------- IN THOUSANDS, EXCEPT PER UNIT 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Net Income As reported $64,080 $44,493 $41,889 Pro forma 60,227 43,489 41,503 Income Per Unit As reported-assuming dilution $ 1.86 $ 1.28 $ 1.18 Pro forma 1.75 1.25 1.17 ---------------------------------- ----------------------------------
Pro forma net income reflects only options granted in 1998, 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: 1998 - 215,419; 1997 - 291,400; 1996 - - 236,500. In 1997, expense of $1.2 million was recorded and no expense or recovery was recorded in 1998 or 1996 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: 1998 - 2,936; 1997 - 4,580; 1996 - 778. 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 1998, 1997 and 1996 was $10.02, $7.40 and $6.06, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 1998 - distribution yield 2.8%, expected volatility 29.4%, risk-free interest rate 5.5% and an expected life of 10 years; 1997 - 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. 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. 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) At December 31, 1998, 428,819 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, 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 Granted 218,355 30.03 Exercised (54,479) 17.50 Cancelled (27,507) 23.50 - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1998 3,876,052 $ 27.96 --------------------------------------------------- ---------------------------------------------------
At December 31, 1998 and 1997, the number of options exercisable was $863,904 and 702,488, respectively, and the weighted average exercise price of those options was $18.31 and $18.12, respectively. The following summarizes information about outstanding options at December 31, 1998:
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE REMAINING LIFE - --------------------------------------------------------------------------------------------------------- $13.00-$16.75 694,063 $14.93 5.9 $19.75-$23.00 368,369 $21.47 7.0 $29.50-$33.39 2,804,300 $32.13 4.1
The following summarizes information about exercisable options at December 31, 1997:
RANGE OF NUMBER WEIGHTED AVERAGE EXERCISE PRICES EXERCISABLE EXERCISE PRICE - ---------------------------------------------------------------------------------- $13.00-$16.75 559,622 $14.72 $19.75-$23.00 167,632 $20.75 $29.50-$33.39 136,650 $30.01
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 6,965, 6,049 and 6,428 units to employees in 1998, 1997 and 1996, respectively. The weighted average fair value of these units was $3.64 for 1998, $3.66 for 1997 and $2.80 for 1996 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 1998, 5.45% for 1997 and 6.4% for 1996; 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 31, 1996 are calculated as 40.5% of the highest average annual earnings up to Social Security covered compensation, plus 34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 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 are 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 Company also has a Supplemental Executive Retirement Plan and a Retirement Plan for Directors. The additional pension cost for these plans was $106,000 in 1998, $124,000 in 1997, and $690,000 in 1996. 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 1998 1997 - --------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Projected benefit obligation, beginning of year: $ 20,281 $ 18,124 Service cost 685 555 Interest cost 1,370 1,295 Amendments -- -- Benefits paid (1,531) (1,450) Actuarial loss 3,156 1,757 - --------------------------------------------------------------------------------------------------------------- Projected benefit obligation, end of year $ 23,961 $ 20,281 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Plan assets, beginning of year: $ 18,957 $ 16,555 Actual return on plan assets 1,707 3,851 Employer contribution 1 1 Benefits paid (1,531) (1,450) - --------------------------------------------------------------------------------------------------------------- Plan assets, end of year $ 19,134 $ 18,957 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Funded Status $ (4,827) $ (1,324) Unrecognized transition obligation (68) (102) Unrecognized prior service cost 869 961 Unrecognized (gain) loss 681 (2,485) - --------------------------------------------------------------------------------------------------------------- Net amount recognized - prepaid (accrued) benefit cost $ (3,345) $ (2,950) - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
DECEMBER 31, -------------------------------------------------------------- IN THOUSANDS 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost $ 685 $ 555 $ 692 Interest cost 1,370 1,295 1,244 Expected return on plan assets (1,643) (1,467) (1,458) Amortization of unrecognized transition obligation (34) (34) (34) Amortization of unrecognized prior service cost 92 61 61 Amortization of unrecognized gain (74) (4) 26 - --------------------------------------------------------------------------------------------------------------------------- Pension expense $ 396 $ 406 $ 531 - --------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation (ABO) and fair value of assets for the plan with assets less than ABO were $4,028,025, $1,428,247, and $0, respectively at December 31, 1998, and $3,074,365, $1,231,108, and $0 at December 31, 1997.
------------------------------------------------------- 1998 1997 ------------------------------------------------------- The assumptions used in the accounting were: Discount rate 6.50% 7.00% Rate of increase in compensation levels 5.00% 5.00% Expected long-term return of assets 9.00% 9.00% - -------------------------------------------------------------------------------------------------------------------
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 $371,000 in 1998, $319,488 in 1997 and $294,000 in 1996. 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. A total of $176,500 was earned and paid under this program. 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, 1998, the Company had performance bonds outstanding totaling approximately $126 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. BUSINESS SEGMENT REPORTING In accordance with the requirements of SFAS No. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, the Company's reportable business segments and respective accounting policies of the segments are the same as those described in Note 2. BUSINESS SEGMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Management evaluates segment performance based primarily on revenues before property sales and contribution to income before property sales and allocation of incentive compensation. Interest revenues and expenses are evaluated and reported on a consolidated net basis and are not allocated to the Company's business segments. The following table provides financial information regarding management's measures of the Company's business segments and other significant items and also provides a reconciliation to the Company's consolidated totals:
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------------------------------- CONTRIBUTION DEPRECIATION CAPITAL REVENUES TO INCOME AND AMORTIZATION ASSETS EXPENDITURES - ------------------------------------------------------------------------------------------------------------------------------ Real Estate Residential $ 70,867 $ 23,999 $ 37 $16,320 $ 494 Industrial and commercial 172,320 49,248 14 170,493 4,610 Community development -- (10,047) 43 17,278 67 Income-producing properties 38,622 17,754 7,277 147,216 97,419 Valencia Water Company 10,209 2,889 (a) 1,956 53,719 7,587 Agriculture 12,660 2,196 594 17,048 190 Central administration -- (10,879) 180 10,133 555 - ------------------------------------------------------------------------------------------------------------------------------ 304,678 75,160 10,101 432,207 110,922 Interest and other, net -- (7,180) -- -- -- All other -- (3,900) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 304,678 $ 64,080 $ 10,101 $432,207 $ 110,922 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------------------------------------------------- CONTRIBUTION DEPRECIATION CAPITAL REVENUES TO INCOME AND AMORTIZATION ASSETS EXPENDITURES - ------------------------------------------------------------------------------------------------------------------------------ Real Estate Residential $ 67,682 $ 15,759 $ 9 $16,226 $ 53 Industrial and commercial 61,996 19,524 16 106,870 13,189 Community development -- (10,638) 54 20,653 95 Income-producing properties 33,404 15,624 7,466 180,728 56,309 Valencia Water Company 11,170 3,378 (a) 1,810 51,058 3,317 Agriculture 33,449 21,505 580 20,812 735 Central administration -- (8,122) 213 7,585 558 - ------------------------------------------------------------------------------------------------------------------------------ 207,701 57,030 10,148 403,932 74,256 Interest and other, net -- (9,137) -- -- -- All other -- (3,400) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 207,701 $ 44,493 $ 10,148 $403,932 $ 74,256 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------------------------------------- CONTRIBUTION DEPRECIATION CAPITAL REVENUES TO INCOME AND AMORTIZATION ASSETS EXPENDITURES - ------------------------------------------------------------------------------------------------------------------------------ Real Estate Residential $ 128,634 $ 40,563 $ 21 $25,079 $ -- Industrial and commercial 29,844 4,009 21 82,882 14,138 Community development -- (11,328) 56 17,643 59 Income-producing properties 28,742 14,134 5,528 169,832 56,274 Valencia Water Company 9,762 3,302 (a) 2,398 48,109 8,277 Agriculture 23,204 10,948 608 21,193 438 Central administration -- (8,365) 225 8,750 98 - ------------------------------------------------------------------------------------------------------------------------------ 220,186 53,263 8,857 373,488 79,284 Interest and other, net -- (9,562) -- -- -- All other -- (1,812) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 220,186 $ 41,889 $ 8,857 $373,488 $ 79,284 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
ALL OF THE COMPANY'S REAL ESTATE OPERATIONS ARE CONDUCTED ON THE COMPANY'S PROPERTIES IN THE VALENCIA AREA OF SOUTHERN CALIFORNIA. AGRICULTURAL OPERATIONS ARE CONDUCTED ON THE COMPANY'S PROPERTIES IN SOUTHERN AND CENTRAL CALIFORNIA. ACCORDINGLY, FINANCIAL INFORMATION BASED ON GEOGRAPHIC AREA IS NOT PRESENTED. REVENUES FROM THE RESIDENTIAL SEGMENT INCLUDED $49.1 MILLION IN 1996 FROM THE MCDOWELL MOUNTAIN RANCH PROJECT IN SCOTTSDALE, ARIZONA WHICH WAS SOLD IN APRIL, 1996. SALES BY BUSINESS SEGMENT TO INDIVIDUAL CUSTOMERS REPRESENTING MORE THAN 10% OF THE COMPANY'S CONSOLIDATED REVENUES ARE AS FOLLOWS:
IN THOUSANDS 1998 1997 1996 - ---------------------------------------------------------------------------- Industrial and Commercial $111,000 Residential $43,542
(A) INCLUDES INCOME TAX EXPENSE OF (IN THOUSANDS) $1,071 IN 1998, $1,281 IN 1997 AND $1,057 IN 1996. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) - ------------------------------------------------------------------------------- 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 1998 and 1997:
IN THOUSANDS, QUARTER ----------------------------------------------------------------- EXCEPT PER UNIT FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------------------------------------------------- Revenues 1998 $ 23,762 $ 149,299 $ 78,061 $ 53,556 1997 36,001 48,729 67,303 55,668 - ------------------------------------------------------------------------------------------------------------------------- Operating income 1998 $ 5,603 $ 51,854 $ 20,594 $ 5,843 1997 15,004 21,936 17,239 9,719 - ------------------------------------------------------------------------------------------------------------------------- Net income 1998 $ 257 $ 45,741 $ 16,291 $ 1,791 1997 10,553 17,151 12,539 4,250 - ------------------------------------------------------------------------------------------------------------------------- Net income per unit 1998 $ .01 $ 1.32 $ .48 $ .05 1997 .30 .50 .36 .12 - ------------------------------------------------------------------------------------------------------------------------- Net income per unit - assuming dilution 1998 $ .01 $ 1.31 $ .47 $ .05 1997 .30 .49 .36 .12 - -------------------------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 38 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 56, 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 Blue Shield of California and CalMat, Inc. and a trustee of California Institute of the Arts. George L. Argyros, age 62, 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 DST Systems, Tecstar, First American Financial Corporation, Doskocil, Inc., 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 55, 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 Watkins-Johnson Company, Henry Mayo Newhall Memorial Hospital and Chairman of the Board of Directors of the California Chamber of Commerce. Thomas V. McKernan, Jr., age 54, 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, Payden & Rygel Mutual Funds, Ramona Girls School, and Forest Lawn Memorial Park. Henry K. Newhall, age 60, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1982. Dr. Newhall retired in August 1998 as General Manager, Technology, Oronite Additives Division of Chevron Chemical Company. He has served in various managerial and consulting positions with Chevron since 1971. 39 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) Jane Newhall, age 85, 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 Mayo Newhall Foundation. She is a life trustee of Mills College, the San Francisco Theological Seminary, the Graduate Theological Union and Donaldina Cameron House. Peter T. Pope, age 64, 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 67, 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 and a director until April, 1998. He is a director of Ford Motor Company, Columbia/HCA Healthcare Corporation, Pacific Gas and Electric Company, ConAgra, Inc., SunAmerica, Inc. and McKesson Corporation. Thomas C. Sutton, age 56, 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, Association of California Life Insurance Companies and Pimco Advisors. He is a trustee of the Committee for Economic Development. Barry Lawson Williams, age 54, was elected a director of the Corporation in July, 1996. Mr. Williams has been President of Williams Pacific Ventures, Inc., a venture capital consulting and business mediation 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, CH2M Hill, Ltd., Simpson Manufacturing Company, CompUSA, R.H. Donnelly and USA Group, Inc. He is a trustee of Northwestern Mutual Life Insurance Company. Ezra K. Zilkha, age 73, 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 Executive Committee 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, 1998, 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. 40 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) 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 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, 1998. 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, 41 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) 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 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. 42 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) 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, 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 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
Date of Age Office --- ------- THOMAS L. LEE 56 Chairman and Chief Executive Officer 07/89 GARY M. CUSUMANO 55 President and Chief Operating Officer 07/89 THOMAS E. DIERCKMAN 50 Senior Vice President - Valencia Division 09/94 Senior Vice President - Real Estate Operations 07/90 JAMES M. HARTER 52 Senior Vice President - Newhall Ranch Division 09/94 Senior Vice President - Community Development 08/92 STUART R. MORK 46 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 39 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 54 Vice President - Agriculture 09/85 DONALD L. KIMBALL 41 Vice President - Finance and Controller 01/97 Vice President - Controller 07/94 Controller 04/90 JAMES R. WHEELER 48 Senior Vice President, Residential - Valencia 07/98 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 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 LTIP Other Name and Bonus Comp. Awards Underlying Payouts Comp. Principal Position Year Salary (1) (2) (3) Options/SARs (4) (5) - ------------------------------ ----- ---------- ----------- ---------- ----------- ------------- ---------- ----------- Thomas L. Lee 1998 $ 362,000 $ 430,364 $ 64,343 - - $ 56,739 $ 38,824 Chairman and 1997 362,000 205,073 65,650 - 730,000 - 36,605 Chief Executive Officer 1996 322,000 181,000 61,450 - 25,000 - 33,640 Gary M. Cusumano 1998 274,000 320,078 68,365 - - 44,130 31,240 President and 1997 274,000 155,221 68,500 - 574,000 - 28,829 Chief Operating Officer 1996 264,000 132,000 66,000 - 20,000 - 26,706 Thomas E. Dierckman 1998 226,000 169,197 4,300 - - 37,826 19,541 Senior Vice President 1997 214,000 85,522 4,300 - 367,000 14,764 1996 214,000 73,321 4,500 - 14,000 - 14,827 Stuart R. Mork 1998 230,000 154,410 425 - - 12,609 15,580 Senior Vice President and 1997 200,000 85,320 350 - 367,000 - 10,139 Chief Financial Officer 1996 200,000 80,000 365 - 14,000 - 8,058 James M. Harter 1998 200,000 147,263 255 - - - 10,567 Senior Vice President 1997 175,000 84,655 - - 315,000 - 5,520 1996 170,000 64,600 - - 12,000 - 4,821 - -------------------------------------------------------------------------------------------------------------------------------
(1) 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 1998 bonus will be paid in partnership units in accordance with the Company's Management Unit Ownership Program as follows: Mr. Mork ($54,450), Mr. Dierckman ($58,299) and Mr. Harter ($103,084). Part of the 1997 and 1996 bonuses were paid in partnership units as follows: Mr. Lee (1996-$31,735), Mr. Mork (1997 - $19,905; 1996 - $17,245), Mr. Dierckman (1997 - $25,522; 1996 - $20,721), and Mr. Harter (1997 - $84,655; 1996 - $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 $3,500 to Mr. Dierckman as directors of a wholly-owned subsidiary. (3) Messrs. Dierckman, Mork and Harter have received 1,450, 730, and 1,691 unit rights, respectively, which entitles them to receive one partnership unit for each unit right under certain circumstances. (4) Represents deferred cash bonus granted in July, 1990 and earned as of December 31, 1998. (5) Totals include the following: (1) Company matching contributions to the Employee Savings Plan and Savings Restoration Plan, (2) excess life insurance premiums, and (3) long-term disability insurance premiums for Messrs. Lee and Cusumano. 45 ITEM 11. EXECUTIVE COMPENSATION (continued) OPTION/SAR GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------- Individual Grants ------------- ----------------------------------------------------------------- Value of Options as of -------------------------- Grant Date as Potential Realizable Value Computed by Number of % of Total at Assumed Annual Rates of the Modified Securities Options/SARs Exercise Stock Price Appreciation Black-Scholes Underlying Granted To Or Base for Option Term(3) Options Options/SARs Employees in Price Expiration -------------------------- Valuation Name Granted (1) Fiscal Year ($/Sh) Date 5 % 10 % Model (4) - --------------------- -------------- -------------- -------------- ------------- ------------- ------------ ------------- Thomas L. Lee 0 Gary M. Cusumano 0 Thomas E. Dierckman 0 Stuart R. Mork 0 James M. Harter 0
(1) Premium price options were granted in November, 1997 and were in lieu of market price options for the next three years. 46 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 Exercise Value Un- Un- Name ( # ) Realized Exercisable exercisable Exercisable Exercisable - ------------------------ ----------- ------------- --------------- -------------- ---------------- --------------- Thomas L. Lee -- -- 171,888 745,062 $1,409,406 $268,594 Gary M. Cusumano -- -- 131,813 585,937 1,090,500 214,875 Thomas E. Dierckman 1,757 $ 52,930 87,375 376,125 679,359 153,578 Stuart R. Mork 219 6,597 66,625 375,875 605,859 179,328 James M. Harter -- -- 36,250 319,750 380,703 131,984 ----------- ------------- --------------- -------------- ---------------- --------------- Total 1,976 $ 59,527 493,951 2,402,749 $4,165,827 $948,359 ----------- ------------- --------------- -------------- ---------------- --------------- ----------- ------------- --------------- -------------- ---------------- --------------- - -------------------------------------------------------------------------------------------------------------------------------
(1) Based on the difference in the unit price of $26.00 at December 31, 1998, and the exercise price of the underlying options. 47 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, 1998 (to the nearest whole year) and average annual compensation for the highest five years of the last ten years are as follows: 28 years and $530,000 for Mr. Lee; 29 years and $420,000 for Mr. Cusumano; 11 years and $235,000 for Mr. Mork; 16 years and $275,000 for Mr. Dierckman; and 6 years and $215,000 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 48 ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) 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 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 or, as amended on July 15, 1998, in options thereon 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 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, 1998. 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, 1998. Additionally, the Company has a $159 million revolving credit facility managed jointly by the Bank and Morgan Guaranty Trust of New York, $23.2 million of which was used at December 31, 1998. Certain of the Company's employee benefit plans have invested approximately $23 million in funds managed by the Bank. Thomas L. Lee, Chairman and Chief Executive Officer of the Company, and Carl E. Reichardt, Chairman and Chief Executive Officer of Wells Fargo & Company and the Bank, served as directors of Wells Fargo & Company and the Bank until November 1998 and April 1998, respectively. 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, evaluates the performance of the Chief Executive Officer, 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 1998, the committee met two (2) 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 Company 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 and 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 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 1998 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 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 1998 was $3,237,000 (or 5.0% of 1998 income after deducting bonuses), versus $1,907,000 in 1997 (4.3% of income after deducting bonuses), a 70% increase from 1997 to 1998. The increase in bonuses for 1998 recognizes the record revenues, earnings and per unit appraised value of the Company's assets achieved in 1998. Revenues increased 46% and earnings improved 44% compared to 1997. An unprecedented 110 acres of industrial property closed escrow and a record 1,232 residential lots and homes were sold in 1998. The Company's master-planned community of Valencia dominates the new home market in the Santa Clarita Valley with 37% of the market and continues to capture 12% of the market for all of Los Angeles County. The Company's new 21,600 home master-planned community, Newhall Ranch, received tentative approval of the Los Angeles County Board of Supervisors during 1998. 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 51 ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) 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 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. The market price increased 25% and the first tranche vested during 1998. 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 five years following their grant date. 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 was $362,000 in 1998, the same as last year, In addition he was paid general partners fees of $60,000 for managing Newhall General Partnership, a general partner of the Company, and a bonus for 1998 of $430,364 for total cash compensation of $852,364. A study by a compensation consulting firm during 1998 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 1998 Mr. Lee's efforts led to tentative approval of Newhall Ranch, the largest single new development in the history of Los Angeles County, by the County Board of Supervisors, record results in nearly every major segment of the Company's business and an increase in earnings of 44%. Mr. Lee's bonus for 1998 of $430,364, versus $205,073 for 1997, equals his target bonus of 70% of his salary plus 48%, twice the percentage by which net income per unit exceeded target, pursuant to the Company's Executive Incentive Plan (see description of Annual Merit and Incentive Compensation (Bonus) Plan on page 51). The amount of the bonus earned was based entirely upon Company earnings. In 1997 Mr. Lee received 700,000 premium price options in lieu of annual grants as described above. The benefits of these unit options, as well as previously granted market price 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 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 The Newhall Land and Farming Company Stock Performance Analysis
5 Year 1993 1994 1995 1996 1997 1998 Total Return ----- ----- ----- ----- ----- ----- ------------ NHL 100.00 77.95 112.40 114.31 207.90 183.62 83.62% S&P 500 100.00 101.31 139.30 171.44 228.63 294.48 194.48% WRESI* 100.00 94.40 115.83 158.42 190.01 148.62 48.62%
10 Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Total Return ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------------ NHL 100 109.50 60.25 75.61 58.10 67.00 52.22 75.31 76.58 139.29 123.02 23.02% S&P 500 100 131.66 127.46 166.37 179.10 197.12 199.70 274.59 337.94 450.67 580.47 480.47% WRESI* 100 101.77 52.38 59.32 53.51 63.91 60.34 74.04 101.26 121.45 95.00 -5.00%
Assumes $100 invested on December 31, 1993 for the 5-year graph and December 31, 1988 for the 10-year graph. Total return includes reinvestment of dividends. * As of 12/31/1998 the Wilshire Real Estate Securities Index consists of the following real estate operating companies: Catellus Development Corporation, Homestead Valley Properties, Lodgian Inc., The Newhall Land and Farming Company, Prime Hospitality, Inc., Red Roof Inns, and Trizec Hahn Corp. 54 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONTINUED) 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, 1998.
Amount and Nature Percent Name of Beneficial Ownership of Class - ---------------- -------------------------------- -------- George L. Argyros 61,822 (1) (2) (3) 0.2% Gary M. Cusumano 260,550 (1) (2) (4) 0.8 Thomas E. Dierckman 104,152 (2) (4) (5) 0.3 James M. Harter 46,198 (2) (4) (5) * Thomas L. Lee 272,299 (1) (2) (4) (5) 0.8 Thomas V. McKernan, Jr. 12,120 (1) (2) (3) * Stuart R. Mork 73,010 (2) (4) (5) 0.2 Henry K. Newhall 881,859 (1) (2) (3) (6) 2.7 Jane Newhall 1,086,462 (1) (2) (3) 3.3 Peter T. Pope 12,866 (1) (2) (3) * Carl E. Reichardt 96,347 (1) (2) (3) (7) 0.3 Thomas C. Sutton 17,695 (1) (2) (3) (8) * Barry Lawson Williams 6,491 (1) (2) (3) * Ezra K. Zilkha 1,190,493 (1) (2) (3) (9) 3.6 All directors and officers as a group 4,347,915 13.3 %
* 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 131,813 units for Mr. Cusumano, 87,375 for Mr. Dierckman, 36,250 for Mr. Harter, 171,888 for Mr. Lee, 4,419 units for Mr. McKernan, 66,625 for Mr. Mork, 2,500 for Mr. Williams, 3,000 for Mr. Argyros and 3,500 each for Ms. Newhall and Messrs. Newhall, Pope, Reichardt, Sutton and Zilkha which they have the right to acquire pursuant to the Company's 1995 Option/Award Plan. (3) Includes 1,549 units for Mr. Argyros, 1,701 for Mr. McKernan, 5,631 for Mr. Newhall, 11,312 for Ms. Newhall, 4,140 for Mr. Pope, 9,547 for Mr. Reichardt, 2,805 for Mr. Sutton, 1,018 for Mr. Williams and 14,393 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 560 for Mr. Cusumano, 1,450 for Mr. Dierckman, 1,691 for Mr. Harter, 1,207 for Mr. Lee and 730 for Mr. Mork. 55 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONTINUED) (5) Includes units held by the Company's Employee Savings Plan of 2,360 for Mr. Dierckman, 1,253 for Mr. Harter, 1,696 for Mr. Lee and 2,162 for Mr. Mork. (6) The Partnership is advised that Henry K. Newhall has sole voting and investment power as to 98,222 units, 89,091 of which are 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 3,000 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 UNITHOLDER The following table sets forth the name, address and unitholdings of the only person known to the Partnership to be a beneficial owner of more than five percent of the outstanding units of the Partnership as of December 31, 1998. Such unitholder has 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 10.4% Insurance Company One State Farm Plaza Bloomington, Illinois 61710
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 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 20 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 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 Amended Effective January 1, 1999, incorporated by reference to the Company's Report on Form 10-Q for the quarter ended September 30, 1998. * (m) The Newhall Land and Farming Company Pension Restoration Plan (As amended through July 15, 1998) incorporated by reference to the Company's Report on Form 10-Q for the quarter ended September 30, 1998. (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 quarter ended December 31, 1996. * (s) Amendment No. 3 to The Newhall Land and Farming Company Retirement Plan dated July 15, 1998, incorporated by reference to the Company's Report on Form 10-Q for the quarter ended September 30, 1998. * (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 incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. * (w) Form of award for premium price options granted under The Newhall Land and Farming Company 1995 Option/Award Plan incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 58 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) * (x) Amendment No. 2 to The Newhall Land and Farming Company Savings Plan dated July 15, 1998, incorporated by reference to the Company's Report on Form 10-Q for the quarter ended September 30, 1998. (y) Valencia Marketplace Purchase and Sale Agreement dated January 7, 1998 and subsequent First, Second, Third and Fourth Amendments incorporated by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1998. (z) Fifth Amendment dated May 29, 1998 to the Valencia Marketplace Purchase and Sale Agreement incorporated by reference to the Company's Report on Form 8-K filed June 19, 1998. 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, 1998. 59 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 17, 1999 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 17, 1999 By /s/ THOMAS L. LEE ------------------------------------ Thomas L. Lee, Chairman and Chief Executive Officer Newhall Management Corporation (Principal Executive Officer) Date: March 17, 1999 By /s/ STUART R. MORK ------------------------------------ Stuart R. Mork Senior Vice President and Chief Financial Officer Newhall Management Corporation (Principal Financial Officer) Date: March 17, 1999 By /s/ DONALD L. KIMBALL ------------------------------------ Donald L. Kimball, Vice President - Finance and Controller Newhall Management Corporation (Principal Accounting Officer) 60 Directors of Newhall Management Corporation: Date: March 17, 1999 By /s/ George L. Argyros ----------------------------------- George L. Argyros Date: March 17, 1999 By /s/ Gary M. Cusumano ----------------------------------- Gary M. Cusumano Date: March 17, 1999 By /s/ Thomas L. Lee ----------------------------------- Thomas L. Lee Date: March 17, 1999 By /s/ Thomas V. McKernan, Jr. ----------------------------------- Thomas V. McKernan, Jr. Date: March 17, 1999 By /s/ Henry K. Newhall ----------------------------------- Henry K. Newhall Date: March 17, 1999 By /s/ Jane Newhall ----------------------------------- Jane Newhall Date: March 17, 1999 By /s/ Peter T. Pope ----------------------------------- Peter T. Pope Date: March 17, 1999 By /s/ Carl E. Reichardt ----------------------------------- Carl E. Reichardt Date: March 17, 1999 By /s/ Thomas C. Sutton ----------------------------------- Thomas C. Sutton Date: March 17, 1999 By /s/ Barry Lawson Williams ----------------------------------- Barry Lawson Williams Date: March 17, 1999 By /s/ Ezra K. Zilkha ----------------------------------- Ezra K. Zilkha 61 The Newhall Land and Farming Company SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands)
Gross Amount at Which Carried Initial Cost of Development Costs at December 31, 1998 (C) --------------------------- Capitalized ----------------------------------- Encum- Buildings and Subsequent Buildings and Description brances Land Improvements to Completion 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 $56,163 22,136 41,425 3,213 22,136 44,638 66,774 Valencia Town Center - Ring Road - 12,009 - - 12,009 12,009 River Oaks (A) 2,354 5,302 820 2,354 6,122 8,476 NorthPark Village Square 2,642 5,506 - 2,642 5,506 8,148 Castaic Village 5,384 6,319 - 5,384 6,319 11,703 HOTEL - ----- Valencia Hilton Garden Inn (B) - - - - - - Hyatt Valencia Hotel and Conference Center - 41,594 - - 41,594 41,594 OFFICE AND MIXED USE PROJECTS - ----------------------------- Town Center Office Building 1,547 7,474 - 1,547 7,474 9,021 City Center Office Building 2,614 4,192 1,426 2,614 5,618 8,232 Six Story Office Building - 13,854 - - 13,854 13,854 Plaza del Rancho 1,457 4,621 - 1,457 4,621 6,078 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 1,000 6,156 - 1,000 6,156 7,156 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 979 1,368 20 979 1,388 2,367 - ------------------------- ------- ------- -------- ------ ------- -------- -------- TOTAL OPERATING PROPERTIES 56,163 48,319 199,400 5,403 48,319 204,803 253,122 ------- ------- -------- ------ ------- -------- -------- PROPERTIES UNDER DEVELOPMENT - ---------------------------- Entertainment Complex - 9,238 - - 9,238 9,238 VTC Office Retail 3,253 3,253 3,253 Valencia Town Center Apartments - 6,720 - - 6,720 6,720 Parking Structures 9,787 9,787 9,787 Preconstruction costs - various other projects - 6,035 - - 6,035 6,035 ------- ------- -------- ------ ------- -------- -------- TOTAL PROPERTIES UNDER DEVELOPMENT - - 35,033 - - 35,033 35,033 ------- ------- -------- ------ ------- -------- -------- TOTAL $56,163 $48,319 $234,433 $5,403 $48,319 $239,836 $288,155 ------- ------- -------- ------ ------- -------- -------- ------- ------- -------- ------ ------- -------- -------- Year Accumulated Completed/ Depreciable Description Depreciation Acquired Lives - ----------- ------------- ---------- ----------- OPERATING PROPERTIES - -------------------- Apartments Northglen $ (6,217) 1988 (D) Portofino (6,075) 1989 (D) SkyCrest (2,252) 1997 (D) Shopping Centers Valencia Town Center (14,479) 1992 (D) Valencia Town Center - Ring Road (28) 1998 (D) River Oaks (2,393) 1987 (D) NorthPark Village Square (528) 1996 (D) Castaic Village (1,576) 1992 (D) HOTEL - ----- Valencia Hilton Garden Inn (B) - 1991 (D) Hyatt Valencia Hotel and Conference Center (569) 1998 (D) OFFICE AND MIXED USE PROJECTS - ----------------------------- Town Center Office Building (593) 1996 (D) City Center Office Building (2,197) 1991 (D) Six Story Office Building (90) 1998 (D) Plaza del Rancho (313) 1997 (D) SINGLE TENANT FACILITIES - ------------------------ Office/Records Storage (148) 1996 (D) Retail Store - Trader Joe's (80) 1994 (D) Spectrum Health Club (332) 1997 (D) Restaurant - El Torito (364) 1986 (D) Restaurant - Hamburger Hamlet (245) 1990 (D) Restaurant - Red Lobster - 1986 (D) Restaurant - Wendy's (108) 1984 (D) OTHER PROPERTIES AND LAND UNDER LEASE (856) Various (D) - ------------------------- -------- TOTAL OPERATING PROPERTIES (39,443) -------- PROPERTIES UNDER DEVELOPMENT - ---------------------------- Entertainment Complex - VTC Office Retail Valencia Town Center Apartments - Parking Structures Preconstruction costs - various other projects - -------- TOTAL PROPERTIES UNDER DEVELOPMENT - -------- TOTAL $(39,443) -------- --------
62 The Newhall Land and Farming Company SCHEDULE III (CONTINUED) December 31, 1998 (A) Part of a portfolio mortgage secured by five properties, including the Company's headquarters building, with a remaining principal balance of $44.7 million at December 31, 1998. (B) Joint venture accounted for as an equity investment. (C) The aggregate cost for federal income tax purposes is approximately $307,999 at December 31, 1998. (D) Reference is made to Note 2 of the Notes to Consolidated Financial Statements for information related to depreciation. (E) Reconciliation of total real estate carrying value for the three years ended December 31, 1998 are as follows: (In thousands)
1998 1997 1996 --------- --------- --------- Balance at beginning of period $ 262,634 $ 215,193 $ 161,532 Additions: Cash expenditures 101,789 69,403 70,471 Deletions: Cost of real estate sold (76,268) (21,962) (16,810) --------- --------- --------- Balance at end of period $ 288,155 $ 262,634 $ 215,193 --------- --------- --------- --------- --------- ---------
(F) Reconciliation of real estate accumulated depreciation for the three years ended December 31, 1998 are as follows: (In thousands)
1998 1997 1996 -------- -------- -------- Balance at beginning of period $ 35,431 $ 32,552 $ 27,028 Additions: Charged to expense 7,277 7,466 5,528 Other - - 262 Deletions: Cost of real estate sold (3,265) (4,587) (266) -------- -------- -------- Balance at end of period $ 39,443 $ 35,431 $ 32,552 -------- -------- -------- -------- -------- --------
INDEPENDENT AUDITORS' REPORT The Board of Directors of Newhall Management Corporation and Partners of The Newhall Land and Farming Company: Under date of January 20, 1999, we reported on the consolidated balance sheets of The Newhall Land and Farming Company and subsidiaries as of December 31, 1998, and 1997, 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, 1998, as contained in the annual report on Form 10-K for the year 1998. 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, 1998 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 LLP January 20, 1999 64 THE NEWHALL LAND AND FARMING COMPANY INDEX TO EXHIBITS Item 14(a)3
Exhibit Number Description ------- ----------- 11 Computation of earnings per unit 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule
EX-11 2 EXHIBIT 11 Exhibit 11 THE NEWHALL LAND AND FARMING COMPANY COMPUTATION OF EARNINGS PER UNIT (in thousands, except per unit)
Years Ended December 31, -------------------------------------------------- 1998 1997 1996 ---------------- ---------------- -------------- Partnership Units Average number of units outstanding during the period 33,986 34,520 35,292 Net units issuable in connection with dilutive options based upon use of the treasury stock method 390 230 119 ------ ------ ------ Average number of primary units 34,376 34,750 35,411 ------ ------ ------ ------ ------ ------ Net income $64,080 $44,493 $41,889 ------ ------ ------ ------ ------ ------ Net income per unit $ 1.89 $ 1.29 $ 1.19 ------ ------ ------ ------ ------ ------ Net income per unit - assuming dilution $ 1.86 $ 1.28 $ 1.18 ------ ------ ------ ------ ------ ------
EX-21 3 EXHIBIT 21 EXHIBIT 21 THE NEWHALL LAND AND FARMING COMPANY SUBSIDIARIES The following subsidiaries are included in the Registrant's December 31, 1998 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) VTC Hotel Company (a California corporation) EX-23 4 EXHIBIT 23 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 20, 1999, relating to the consolidated balance sheets of The Newhall Land and Farming Company and subsidiaries as of December 31, 1998 and 1997, 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, 1998, which report appears in the December 31, 1998, annual report on Form 10-K of The Newhall Land and Farming Company. /S/ KPMG LLP Los Angeles, California March 23, 1999 EX-27 5 EXHIBIT 27
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 2,188 0 30,255 1,188 47,667 0 413,980 75,879 432,207 0 157,609 0 0 0 143,813 432,207 255,847 304,678 181,574 220,784 0 0 7,180 64,080 0 64,080 0 0 0 64,080 1.89 1.86
-----END PRIVACY-ENHANCED MESSAGE-----