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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