<PAGE>
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, 1999
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 29, 2000 was $712,811,504.
<PAGE>
THE NEWHALL LAND AND FARMING COMPANY
1999
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I NUMBER
<S> <C>
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Registrant's Depositary Units and Related Security Holder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management 56
Item 13. Certain Relationships and Related Transactions 57
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 58
SIGNATURES 62
SCHEDULE III Real Estate and Accumulated Depreciation 64
INDEX TO EXHIBITS 67
</TABLE>
<PAGE>
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
50,000 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
40,000 residents and 1,400 companies that provide 40,000 jobs. With
approximately 6,800 acres remaining to be developed, and residential 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 March 1999, the Los Angeles County Board of Supervisors gave
final approval for the project. The Newhall Ranch Specific Plan permits 21,600
homes in five villages and 325 net acres of commercial and business park uses.
The project will also include schools, a lake, 335 acres of parks, golf, over 50
miles of trails and other recreational activities, and over 6,000 acres of open
space, including 900 acres, or 5 miles, along the Santa Clara River. Certain
legal challenges to the project have been received and a court hearing is
scheduled for March 2000. For additional information on these legal challenges,
please refer to PART I - ITEM 3. LEGAL PROCEEDINGS.
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, 1999, more than 70,000 acres of
non-strategic farmland have been sold, including the 36,000-acre Suey Ranch and
three remaining parcels at the Merced Ranch sold in 1999.
In September 1999, the Company initiated a strategy to repurchase up to 20%, or
6,384,446 units, of its outstanding partnership units over a projected 15-month
period. This represents a significant shift in business strategy and affords the
Company a major arbitrage opportunity to capitalize on the gap in its underlying
asset value relative to the market price of the Company's units. The timing for
this major buyback is considered excellent, as many of the Company's real estate
values are at all-time highs and demand for well-positioned developable land in
Los Angeles County, such as in Valencia, continues to be strong.
A repurchase program of this magnitude will require the generation of about $130
million in net cash after all expenditures, including distributions to
unitholders, debt repayments and ongoing land development activities in 2000.
This dollar amount is estimated using an estimated average of $28 per unit and
approximately 4.6 million units remaining to be purchased under the program at
January 1, 2000. At December 31, 1999, a total of 1,723,952 units had been
repurchased since mid-September when the major repurchase plan was announced, at
an average price of $24.50 per unit.
The Company's business plan for 2000 reflects several changes in corporate
strategy to accomplish the unit repurchases and hinges on three strategic
themes: debt capacity, income property sales and land sales. For additional
information on these strategies, please refer to the sections entitled "Results
of Operations," "Income-Producing Properties" and "Liquidity and Capital
Resources" under PART II. ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
1
<PAGE>
ITEM 1. BUSINESS (continued)
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, 1999, the Company
employed 217 persons, including 8 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. The Company recently has experienced a
slight decrease in its new home sale market share at both the local and the
county level, due to the temporary decline in Valencia new home inventory. New
competition is expected to deliver competing projects in the future that could
impact the Company's ability to reverse this trend.
APPRAISAL OF REAL PROPERTY ASSETS
The independent appraisal firm of Buss-Shelger Associates appraised the market
value of the Company's real property assets to be $1.1 billion at December 31,
1999. 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 $974 million, after reducing for debt and certain other
liabilities as shown in the table below.
For the purpose of the appraisals, market value was defined as the most probable
price 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 $893 million in 1999. The Company's net appraised
value has increased from $11.74 to $32.85 on a per unit basis over the same
16-year period.
In 1999, the Company initiated an aggressive unit repurchase program to
capitalize on the investment opportunity to create unitholder value based upon
the difference in the record high underlying asset values relative to the unit
price. Consequently, the 1999 results reflect the removal of $75.8 million in
asset value for unit repurchases and $19.7 million in distributions. This was
more than offset by a 9% reduction in units outstanding, resulting in an 11%
increase in net appraised value on a per unit basis for 1999 compared to 1998.
A summary of appraised values of properties owned for each of the last five
years as of December 31 follows (the appraisals were performed by independent
appraisers except as noted):
2
<PAGE>
ITEM 1. BUSINESS (continued)
APPRAISED VALUES
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- ----------------------- --------------------
$ IN MILLIONS, Percent Percent Percent
EXCEPT PER UNIT Acres Amount Change Amount Change Amount Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Valencia and nearby
properties 6,835 $428 ** (6) % $454 8 % $420 - %
Income-producing
real estate 810 465 7 435 2 425 14
-----------------------------------------------------------------------------------------
Total Valencia area
properties 7,645 893 0 889 5 845 7
Community development
properties:
Newhall Ranch,
City Ranch (50.1% 13,865 181 66 109 76 62 41
interest), McDowell
Mountain Ranch*
and other
Agricultural properties 30,110 59 (34) 90 5 86 (2)
Mortgage and other debt (223) 41 (158) 1 (157) (4)
at book carrying value
All other, net, not
independently appraised 64 56 41 14 36 (27)
-----------------------------------------------------------------------------------------
Net appraised value 51,620 $974 0 % $971 11 % $872 8 %
=========================================================================================
Number of partnership units
outstanding ( 000's ) 29,668 (9)% 32,676 (5)% 34,527 - %
==============================================================================
Net appraised value
per partnership unit $32.85 11 % $29.72 18 % $25.25 8 %
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
$ IN MILLIONS, Percent Percent
EXCEPT PER UNIT Amount Change Amount Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Valencia and nearby
properties $420 (7)% $450 (7)%
Income-producing
real estate 372 16 321 15
----------------------------------------------
Total Valencia area
properties 792 3 771 1
Community development
properties:
Newhall Ranch,
City Ranch (50.1% 44 (29) 76 14
interest), McDowell
Mountain Ranch*
and other
Agricultural properties 88 3 82 (10)
Mortgage and other debt (163) 7 (152) 4
at book carrying value
All other, net, not
independently appraised 49 (20) 61 97
---------------------------------------------
Net appraised value $810 (3)% $838 4 %
=============================================
Number of partnership units
outstanding ( 000's ) 34,701 (3)% 35,910 (2)%
==================================================
Net appraised value
per partnership unit $23.35 -% $23.32 7 %
==================================================
</TABLE>
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
1999, the Company has invested $163 million in unit repurchases and paid out $83
million in distributions.
* McDowell Mountain Ranch in Scottsdale, Arizona was sold in 1996.
** The 1999 appraised value of the remaining land in "Valencia and nearby
properties" increased $60.9 million, or 16.6%, due to higher investments in
infrastructure and land prices realized during the year. This increase was more
than offset by a high volume of land sales in 1999 consisting of 891 residential
lots and 121 commercial and industrial acres.
REAL ESTATE
The Company's primary business is developing new towns and master-planned
communities in north Los Angeles County. This includes the town of Valencia, 30
miles north of Los Angeles. Newhall Ranch, a new community that recently
received Los Angeles County Board of Supervisors' approval, is planned for over
21,000 homes on
3
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
12,000 acres adjacent to Valencia, just west of Interstate 5. The Company also
has a 50.1% interest in City Ranch, a new 1,900-acre master-planned community
approved in the City of Palmdale.
Valencia, the first master-planned community developed by the Company, has
experienced tremendous success and set the standard for the Company's other
planned communities. Today, Valencia is a balanced community, providing
residential, commercial and retail properties, along with industrial and
recreational facilities and is the regional center for north Los Angeles County.
Residents are attracted to the quality of life offered in Valencia's safe, clean
environment, combined with award-winning schools. Major business such as
Princess Cruises and Explorer Insurance, are relocating to Valencia for these
same reasons plus the added benefit of a strong local labor pool and proximity
to the Los Angeles metropolitan area. Approximately 7,000 acres including over
11,500 homes and apartments remain to be developed in Valencia. The Company's
goal is to complete the buildout of Valencia by 2005 for residential land sales.
Newhall Ranch, the next major master-planned community planned for the Company's
12,000 acres west of Interstate 5 and 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. Approval of this 21,600 home project was
received in 1999 from the Los Angeles County Board of Supervisors. Certain legal
challenges to the project have been received and a court hearing is scheduled
for March 2000. The first two villages, Riverwood and The Mesas, are in the
planning stages, along with design work on the major infrastructure to open the
project.
In 1999, the Company acquired a 50.1% interest in a joint venture with Kaufman
and Broad of Southern California, Inc. The joint venture plans to develop the
approved master-planned community of City Ranch on a 1,900-acre parcel in
Palmdale, 30 miles northeast of Valencia in the Antelope Valley. The entire
project is planned for approximately 4,500 homes, including 300 apartments,
commercial uses, schools, parks, trails and other amenities. The Company will
have responsibility for the planning and development of the community.
The Company has an option on 1,700 acres for a new community in Broomfield,
Colorado. Plans call for approximately 3,000 acres and 215 acres of office and
commercial development.
The Company also develops and operates a portfolio of commercial properties,
provides building-ready sites for sale to industrial and commercial
developers and users and owns a public water utility. 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
Constraints in the supply of Valencia's new home inventory slowed merchant
builder home sales in 1999 despite high demand. For 1999, new home sales in
Valencia by all sellers totaled 355, well below the 620 homes sold in 1998. A
total of nine housing projects sold out during the year. By late spring 2000,
nine merchant builders are expected to be offering 17 product lines.
In 1999, the Company closed escrow on 891 residential lots which included 597
lots in the Bridgeport lake community and 294 lots sold to Kaufman and Broad in
Hasley Hills, just north of Valencia. Approximately 4,400 residential lots are
expected to be entitled in early 2000, including 2,500 in Los Angeles County and
1,900 through annexation to the City of Santa Clarita. Of that total, over 700
lots are expected to be marketed for sale in 2000.
The Company's goal is to complete the sale of Valencia's remaining residential
land by 2005 by increasing annual average absorption, on average, to 1,500 homes
per year, including apartments. Plans to accelerate absorption include marketing
for sale entitled, unimproved "paper lots" to accelerate cash flow and
capitalize on the desire of homebuilders to control more lots in Valencia. The
Company is intensifying its marketing efforts to assist homebuilders in the sale
of approximately 800 new homes in 2000. This includes an aggressive advertising
campaign as well as tactical marketing, such as direct mailers to targeted buyer
profiles and a new website being introduced in the spring of 2000.
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. 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.
4
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
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 1,100 acres remaining for future
development. After two years of record industrial land sales which is expected
to add 5,000 new jobs, the Company's primary marketing efforts in 1999 were
concentrated on absorbing space being built. For the year, absorption was at a
record 1.9 million square feet with industrial building activity also reaching
record levels. Due to the large amount of available new space, the 5.8% vacancy
rate in Valencia's two business parks was slightly above the average of 5.2% for
Los Angeles County. With few large land parcels available in Los Angeles County,
the Company anticipates sales in the range of 50 to 75 industrial acres per year
to build-out.
In 1999, a total of 57.7 industrial acres were sold including two build-to-suit
facilities totaling 280,000 square feet on 13.7 acres. Commercial land closings
for 1999 totaled 62.8 acres which included two apartment sites totaling 49.9
acres.
COMMUNITY DEVELOPMENT
The Company continues to invest heavily in land use entitlements to support
accelerated growth and to maximize the value of its landholdings. 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 its plan of completing residential land sales in Valencia by
2005 and begin development of Newhall Ranch. 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 1999, the Company received approval from Los Angeles County Board of
Supervisors for Newhall Ranch consisting of 21,600 homes, 325 net acres of
commercial, business park and mixed use development, and over 6,000 acres of
open space. In the second quarter of 1999, the Los Angeles County Board of
Supervisors gave final approval to Valencia Westridge, a 1,711-home golf
course community. Certain legal challenges to these projects have been
received and court hearings are scheduled for March 2000. For additional
information please refer to the section entitled "Community Development"
under PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS".
The Company is in the process of entitling all of its remaining residential lots
in Valencia. Approximately 4,400 residential lots are expected to be entitled in
early 2000, including 2,500 in Los Angeles County and 1,900 through annexation
to the City of Santa Clarita. In January 2000, the City of Santa Clarita
certified the environmental impact reports concerning the 1,900 lots, an
important step in the entitlement process.
COMMERCIAL REAL ESTATE DEVELOPMENT
The Company continued its commercial portfolio expansion program in 1999 as new
income-producing properties, particularly along Town Center Drive in Valencia
Town Center, opened and occupancy rates increased. The Company invested $68
million in income-producing properties in 1999 and expects to invest
approximately $30 million in 2000 to complete construction of two office
buildings and Valencia Entertainment Center.
As previously announced in September 1999, the Company plans to sell several
existing income properties in 2000 due to the shift in business strategy to
accomplish the repurchase of up to 6.3 million partnership units. As part of
the plan, over $200 million is expected to be generated from asset sales
before necessary debt reductions and special distributions. For additional
information about the repurchase plan, see the section entitled "Income
Producing Properties" under PART II. ITEM 7.--"MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
For additional information about the Company's commercial properties at December
31, 1999, see PART I. ITEM 2--"PROPERTIES" and SCHEDULE III--REAL ESTATE AND
ACCUMULATED DEPRECIATION.
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
nearly 21,000 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 1999, 48% of Valencia Water Company's water was supplied
through ground sources.
5
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
AGRICULTURE
The Company's agricultural division consists of farming and energy operations.
Approximately 21,000 acres of land at the Newhall Ranch and Newhall Orchard not
suitable for cultivation or ready for development are leased out for cattle
grazing. In line with the Company's strategy of selling farm properties with
little or no potential for development, the 36,000-acre Suey Ranch and three
remaining parcels at the Merced Ranch were sold in 1999.
The principal remaining agricultural properties are New Columbia Ranch in the
San Joaquin Valley and the Newhall Orchard in Ventura County on which the
Company and its tenants raised over 20 different crops during the calendar year
1999. Of the Company's land devoted to farming, over 60% was leased to others in
1999.
The Company's agricultural operations 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.
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.
ITEM 2. PROPERTIES
LAND
Listed below are the location and acreage of properties owned by the Company at
December 31, 1999:
<TABLE>
<CAPTION>
PROPERTY STATE COUNTY ACREAGE
-------------- ---------- ----------- -------
<S> <C> <C> <C>
Valencia area California Los Angeles 7,645
Newhall Ranch California Los Angeles 11,965
Newhall Orchard California Ventura 16,110
New Columbia California Madera 14,000
City Ranch California Los Angeles 1,900*
-----
51,620
</TABLE>
* The acreage is owned by City Ranch, LLC, a joint venture with Kaufman and
Broad of Southern California, Inc., in which the Company owns a 50.1% interest.
PLANTS AND BUILDINGS
Agriculture - Various buildings located at two 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, 1999. The Company also has numerous land
leases including 541 acres for a landfill. The commercial properties are leased
to 276 tenants, not including apartment complexes.
6
<PAGE>
ITEM 2. PROPERTIES (continued)
<TABLE>
<CAPTION>
APPROXIMATE 1999 NET
YEAR GLA(1) IN OPERATING 12/31/99
OPENED SQUARE FEET INCOME OCCUPANCY(2) MAJOR TENANTS
------ ----------- ------ ------------ -------------
DOLLARS IN THOUSANDS (in 000's)
SHOPPING CENTERS
<S> <C> <C> <C> <C> <C>
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
Valencia Entertainment Center (3) 1999 130,000 IMAX / Edwards Theaters
River Oaks 1987 272,000 99% Mervyn's, Target
NorthPark Village Square 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 $15,052
--------- -------
OFFICE
City Center 1991 44,800 100% Bank of America
Town Center - 3 Story 1996 53,700 100% Morgan Stanley Dean Witter, Valencia
Bank & Trust
Town Center - 6 Story 1998 127,300 90% Princess Cruises
--------- -------
225,800 3,375
--------- -------
LAND LEASES/MIXED USE/OTHER
Plaza del Rancho 1997 47,200 100% Carl's Jr. Restaurant
Spectrum Health Club 1997 53,500 100%
Town Center Plaza 1999 26,000 73%
Other Income Properties various 95,600
--------- -------
222,300 5,958
--------- -------
APARTMENTS UNITS
Northglen 1988 234 90%
Portofino 1989 216 89%
SkyCrest 1996 264 95%
Montecito(4) 1999 210 61%
--------- -------
924 5,263
--------- -------
HOTELS ROOMS
Valencia Hilton Garden Inn
(75% joint venture interest) 1991 152
Hyatt Valencia Hotel and
Santa Clarita Conference
Center (5) 1998 244
--------- -------
--------- -------
396 1,204
--------- -------
TOTAL $30,852
=======
</TABLE>
(1) Gross Leaseable Area
(2) Including leases signed and not open
(3) Under expansion at December 31, 1999
(4) Opened July, 1999
(5) Santa Clarita Conference Center totals 26,000 square feet
Valencia Water Company - 20 distribution reservoirs, 19 booster pumping
stations, 18 wells, approximately 250 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. Three of the
apartment complexes secure loans having a $49.6 million principal balance at
December 31, 1999. Two of the shopping centers secure loans having a $24.9
million principal balance at December
7
<PAGE>
ITEM 2. PROPERTIES (continued)
31, 1999. At December 31, 1999, borrowings totaling $35 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 section.
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 64 and 65.
ITEM 3. LEGAL PROCEEDINGS
The Company, including its subsidiary, are named defendants in many lawsuits
arising from the ordinary course of its business. While the outcome of these
lawsuits cannot be predicted, management does not expect these matters to have a
material adverse effect on the Company's business, financial condition or
results of operations.
During 1999, the Company was named real-party-of-interest in several writs of
mandate actions concerning the Company's Newhall Ranch and Valencia Westridge
projects. Please refer to the section entitled "Community Development" under
PART II. ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS".
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
<TABLE>
<CAPTION>
MARKET PRICE
---------------------------------------
1999 1998 Distributions
- ---------------------------------------------------------------------------------------------------------------------------
PER UNIT High Low High Low 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First quarter $ 26 $ 22 3/4 $ 34 3/4 $ 27 3/4 First quarter $ .32 $ .22
Second quarter 28 22 1/2 31 15/16 26 7/8 Second quarter .10 .10
Third quarter 26 22 3/16 31 15/16 21 13/16 Third quarter .10 .10
Fourth quarter 27 23 3/8 29 1/8 20 1/4 Fourth quarter .10 .10
- ---------------------------------------------------------------------------------------------------------------------------
Year's high and low $ 28 $ 22 3/16 $ 34 3/4 $ 20 1/4 Total distributions $ .62 $ .52
============================================================================================================================
1999 1998
- ----------------------------------------------------------------------
December 31, closing price $27 $26
======================================================================
</TABLE>
The Company's partnership units are traded on the New York and Pacific Stock
Exchanges under the ticker symbol NHL and, at December 31, 1999, the Company had
1,241 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.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER UNIT, PERCENTAGES AND SALES
INFORMATION
OPERATING RESULTS
Revenues $ 322,506 $ 304,678 $ 207,701 $ 220,186
Operating income 115,213 83,894 63,898 60,584
General and administrative expense (1) (14,431) (12,634) (10,268) (9,133)
Interest and other, net (10,390) (7,180) (9,137) (9,562)
Net income 90,392 64,080 44,493 41,889
Depreciation and amortization (included in net
income) (15,296) (10,101) (10,148) (8,857)
-----------------------------------------------------------------------------------------------------------------------
PER UNIT INFORMATION
Net income $ 2.88 $ 1.89 $ 1.29 $ 1.19
Net income - assuming dilution 2.85 1.86 1.28 1.18
Distributions (including special) .62 .52 .48 .40
Partners' capital 4.71 4.40 4.21 3.48
Appraised value 32.85 29.72 25.25 23.35
Market price - high 28 34 3/4 32 18 3/4
low 22 3/16 20 1/4 16 1/2 15
year-end closing 27 26 30 16 7/8
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Land under development $ 39,401 $ 47,667 $ 53,875 $ 63,266
Income-producing properties, net 281,060(3) 248,712 227,203 182,641
Total assets 504,824 432,207 403,932 373,488
Mortgage and other debt (total debt) 222,825 157,609 156,946 163,256
Other long-term obligations 50,474 48,832 40,393 37,544
Total liabilities 365,099 288,394 258,655 252,835
Partners' capital (capital) 139,725 143,813 145,277 120,653
Market capitalization at year end 801,036 849,576 1,035,810 585,575
-----------------------------------------------------------------------------------------------------------------------
STATISTICS
Return on total debt and capital 25% 21% 15% 15%
Total debt as a percent of total debt and capital 61% 52% 52% 58%
Total debt as a percent of total market
capitalization 22% 16% 13% 22%
Units outstanding - weighted average 31,388 33,986 34,520 35,292
- weighted average - diluted 31,668 34,376 34,750 35,411
- year end 29,668 32,676 34,527 34,701
-----------------------------------------------------------------------------------------------------------------------
SALES INFORMATION
Residential lots and homes sold 1,060 1,232 888 1,284 (2)
Industrial and commercial acres sold 120.6 125.0 81.0 36.9
Farm acres sold 39,142 970 1,673 544
</TABLE>
(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.
(3) INCLUDES INCOME - PROPERTIES HELD FOR SALE, NET.
9
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 175,597 $ 134,268 $ 105,452 $ 128,182 $ 150,762 $ 192,886 $ 234,450
46,482 34,607 28,538 31,636 43,232 48,487 81,468
(8,547) (8,578) (7,710) (6,806) (8,749) (5,381) (10,880)
(10,618) (10,455) (8,031) (7,619) (4,398) (4,728) (1,865)
27,317 15,574 12,797 17,211 30,085 38,378 68,723
(7,698) (7,690) (7,329) (6,471) (7,701) (8,441) (6,725)
---------------------------------------------------------------------------------------------------------------
$ .75 $ .42 $ .35 $ .47 $ .82 $ 1.03 $ 1.75
.75 .42 .35 .47 .82 1.02 1.74
.40 .40 .40 .60 .80 .80 .85
3.14 3.06 3.03 3.08 3.20 3.18 4.12
23.32 21.86 21.04 22.01 23.70 25.33 28.52
17 17 1/4 17 1/2 20 3/8 22 1/2 32 1/2 35 3/4
12 1/8 12 13 1/2 12 13 1/2 14 7/8 25 1/8
17 12 1/8 16 14 1/4 19 1/4 16 30 1/8
---------------------------------------------------------------------------------------------------------------
$88,457 $ 87,423 $73,078 $ 50,127 $ 67,769 $ 73,527 $ 94,510
134,504 135,858 134,384 161,615 116,875 91,783 92,365
349,753 343,792 359,898 323,082 280,575 265,406 279,645
152,302 145,991 174,157 131,849 78,556 60,302 30,676
36,270 30,922 33,414 28,609 27,762 25,920 16,867
236,897 231,435 248,619 210,033 162,790 148,459 120,203
112,856 112,357 111,279 113,049 117,785 116,947 159,442
610,470 445,727 588,112 523,830 707,534 588,080 1,166,048
---------------------------------------------------------------------------------------------------------------
10% 6% 4% 7% 15% 22% 36%
57% 57% 61% 54% 40% 34% 16%
20% 25% 23% 20% 10% 9% 3%
36,241 36,757 36,757 36,759 36,755 37,393 39,286
36,272 36,789 36,790 36,796 36,831 37,543 39,488
35,910 36,761 36,757 36,760 36,755 36,755 38,707
---------------------------------------------------------------------------------------------------------------
1,233 (2) 1,026 (2) 113 487 233 540 812
38.5 12.0 28.9 4.5 73.5 24.3 23.8
5,501 5,370 3,900 6,750 2,989 3,950 -
---------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997
RESULTS OF OPERATIONS
For 1999, the Company achieved all-time record revenues of $322.5 million, net
income of $90.4 million and net income per unit of $2.85. These historical highs
were a result of accelerated residential, commercial and industrial land sales
in Valencia, some at record values. A total of 1,060 residential lots and
joint-venture homes, 63 acres of commercial land and 58 acres of industrial
land, including two build-to-suits, was sold. In addition, the Company closed
escrow on the sale of the 36,000-acre Suey Ranch as well as its remaining
property at the Merced and Cowell ranches.
In September, the Company embarked on a business strategy to repurchase up to
6,384,446 units, including 884,446 units under a previous authorization, over
the period ending December 31, 2000. The program will involve the sale of
approximately one-half of the Company's income portfolio and the suspension of
capital spending for new income portfolio additions. Escrow closings on most of
these sales are expected to occur during the last half of 2000 when the Company
is expected to record most of its earnings for the year. Income properties
identified for sale are classified as such on the December 31, 1999 balance
sheet and depreciation on these properties ceased as of January 2000. The
Company will continue to invest in ongoing planning and land development
activities.
In 1998, net income increased for the fifth consecutive year to $64.1 million
with revenues and net income per unit of $304.7 million and $1.86, respectively.
Residential lot and joint-venture home sales in the Valencia area totaled 1,232,
representing the most closings by the Company in a single year in the
community's history and industrial land sales totaled 111 acres. 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 revenues of $207.7 million and income of
$44.5 million in 1997 were two strategic sales, a 208-unit apartment complex and
portions of the Suey Ranch, along with the sale of 366 entitled, unimproved
residential lots.
With an expanding economy and strong Southern California real estate markets,
demand for industrial land, housing and commercial services continues to
increase. The Company's holdings are the only significant, close-in land
remaining in Los Angeles County. The Company expects 2000 to be another
outstanding year for the Company as it implements its income property and
accelerated land sales programs to achieve its unit repurchase plan.
A five-year summary of revenues and operating income for each of the Company's
business segments is listed below:
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
IN THOUSANDS 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Revenues
<S> <C> <C> <C> <C> <C>
Real estate
Residential home and land sales
Valencia $ 109,608 $ 70,867 $ 67,682 $ 79,533 $ 58,160
McDowell Mountain Ranch - - - 49,101 16,602
Industrial and commercial sales 109,200 172,320 61,996 29,844 41,396
Commercial operations
Income-producing properties 50,459 38,622 33,404 28,742 28,704
Valencia Water Company 12,202 10,209 11,170 9,762 8,631
Agriculture
Operations 12,080 11,270 15,487 16,459 14,676
Ranch sales 28,957 1,390 17,962 6,745 7,428
- ---------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 322,506 $ 304,678 $ 207,701 $ 220,186 $ 175,597
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income
Real estate
Residential home and land sales
Valencia $ 37,704 $ 23,609 $ 15,495 $ 14,116 $ 7,102
McDowell Mountain Ranch - - - 26,267 2,741
Industrial and commercial sales 41,264 48,663 19,216 3,775 17,702
Community development (12,257) (10,710) (11,034) (11,670) (6,766)
Commercial operations
Income-producing properties 17,127 17,637 15,580 14,080 15,158
Valencia Water Company 2,900 2,694 3,268 3,212 2,387
Agriculture
Operations 3,513 903 4,378 4,798 3,529
Ranch sales 24,962 1,098 16,995 6,006 4,629
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Income $ 115,213 $ 83,894 $ 63,898 $ 60,584 $ 46,482
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
RESIDENTIAL HOME AND LAND SALES
Constraints in the supply of Valencia's new home inventory slowed merchant
builder home sales in 1999 despite high demand. Four housing projects sold out
during the fourth quarter, bringing the total to nine projects that sold out
during 1999. For 1999, new home sales by all sellers in Valencia totaled 355,
well below the 620 homes sold in 1998. At December 31, 1999, there were 99 homes
in escrow by all builders, with another eight homes reserved, compared with 211
homes in escrow at the end of the previous year. 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.
In the fourth quarter of 1999, Shea Homes started selling homes in two projects
on lots previously purchased from the Company, with sales from a third project
expected in early 2000. Kaufman and Broad is opening two more projects in early
2000 on lots purchased from the Company in the Hasley Hills area just north of
the master-planned community of Valencia. Home sales in Woodlands at Valencia,
Taylor Woodrow's 316-home, gated community, started strong but slowed in the
second half of the year due to an aggressive pricing program. Escrows have
started closing in all four product lines in this project, which appeal to
move-up and executive homebuyers.
MERCHANT BUILDER PROGRAM
The Company sold a total of 891 residential lots in 1999, a 24% decrease from
1998 and 18% ahead of 1997. Sales in 1999 included 597 in the Company's
Bridgeport lake community, where finished lots were sold at the highest
residential per acre prices in Valencia's history. These combined lots added
$54.1 million to revenues and $26.6 million to income under percentage of
completion accounting. Revenues exceeded $1 million per acre on prime parcels
and profit per net acre will average $394,000 when all revenues and income have
been realized as remaining land development and amenities are completed. The
Company expects to sell the remaining 111 residential lots in Bridgeport during
the first half of 2000. All escrow closings are subject to market and other
conditions.
In 1999, the Company also completed the sale of 294 lots in Hasley Hills, just
north of Valencia, to Kaufman and Broad. This sale contributed $15.9 million to
revenues and $10.7 million to income.
In addition, results for 1999 include $1.5 million received from price and
profit participation agreements relating to Valencia lot sales in prior years.
This represents the first price and profit participation income received in
Valencia to date. The Company expects to continue to receive additional price
and profit participation income as the real estate market continues to be
strong.
In 1998, the Company sold a total of 1,108 residential lots which added $40.8
million to revenues and $24.2 million to income. Gross profit margins on these
lots averaged 58% and profit per net acre averaged $220,000. 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, the Company sold 754 lots in Valencia to merchant builders, adding
$38.1 million to revenues and $16.6 million to income. Gross profit margins on
these lot sales averaged 31% and the profit per net acre averaged $131,000,
excluding the high margin sale of 366 entitled, unimproved lots.
The Company expects approximately 4,400 residential lots to be entitled in 2000,
including 2,500 in Los Angeles County and 1,900 through annexation to the City
of Santa Clarita. Of that total, over 700 lots are expected to be marketed for
sale in 2000. The Company's ability to consummate these lot sales in 2000 is
dependent on receiving the entitlements. In addition, legal challenges could
negatively impact the Company's ability to complete these lot sales in 2000.
VALENCIA JOINT-VENTURE PROGRAM
As previously reported, the Company's strategy in a strong real estate market is
to increase absorption by concentrating its efforts on lot sales to merchant
builders. Accordingly, no new joint ventures currently are planned in Valencia.
Escrow closings from the Company's two remaining joint ventures totaled 169
homes in 1999, contributing $38.0 million to revenues and $3.9 million to income
with an average gross profit margin of 10.3%. These closings represent the
sell-out of these projects.
In 1998, escrow closings on 124 joint-venture homes in three projects
contributed $27.7 million to revenues and $2.9 million to income with an average
gross profit margin of 10.5%. In 1997, escrow closings from six joint-venture
projects totaled 134 homes, contributing $28.2 million to revenues and $2.9
million to income with average profit margins of 10%.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
CITY RANCH JOINT VENTURE
In the 1999 third quarter, the Company announced a joint venture with Kaufman
and Broad of Southern California, Inc. to develop the 1,900-acre City Ranch, an
approved master-planned community in the City of Palmdale. The Company owns a
50.1% interest in the joint venture and will act as the master developer with
shared major decision-making. The Company's investment will be accounted for
under the equity method. The master-planned community will be unique to the
Antelope Valley in north Los Angeles County with several hundred acres of open
space and homes for entry level and move-up buyers in an expanding housing
market. This property is entitled for approximately 4,200 homes, 300 apartments
and 260,000 square feet of commercial development. Land development is scheduled
to commence this summer, with initial lot sales planned for late 2000.
INDUSTRIAL AND COMMERCIAL SALES
After two years of record industrial land sales, the Company's primary marketing
efforts in 1999 were concentrated on absorbing space being built that is
expected to add 5,000 new jobs. The vacancy rate in Valencia's two industrial
parks is 5.8%, just above the 5.2% average for Los Angeles County. Absorption
was at a record of 1.9 million square feet for 1999.
In 1999, the Company sold 14 industrial parcels totaling 57.7 acres, including
two build-to-suit facilities totaling 280,000 square feet on 13.7 acres. These
closings contributed $40.1 million to revenues and $8.7 million to income.
Commercial escrow closings in 1999 totaled 62.8 acres which contributed $51.4
million to revenues and $30.1 million to income. Two apartment sites totaling
49.9 acres for approximately 1,100 units were the major commercial land sales
during the year. Also, in 1999, the Company recognized deferred revenues of $6.3
million and a loss of $400,000 on the 1998 sale of Valencia Marketplace, a
705,000-square-foot high-volume retail center. The Company does not expect to
recognize any additional income or loss from the sale of this property as
remaining revenues of approximately $2.4 million are recognized as the Company
completes its obligation for lease-up of the project. The difference between the
sales price of $111 million and total revenues, including revenues recognized in
1998 and 1999 as well as deferred revenues not yet recognized, is approximately
$4 million, which is the estimated obligation of the Company's rent subsidy
agreement.
At December 31, 1999, two industrial parcels totaling 4.1 acres were in escrow
for $2.7 million, and three commercial parcels totaling 13.2 acres were in
escrow for $7.9 million with closings scheduled during the first half of 2000.
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.
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. Included in the 1998 escrow closings was a 36.5-acre parcel for $20.4
million for a 700,000-square-foot office complex. This sale is significant
because these types of projects support higher land prices and bring more
employment on a per-acre basis.
In 1998, the Company sold Valencia Marketplace for $111 million cash and
recognized $98 million in revenues and $35 million in income under percentage of
completion accounting. 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 apartments
complex was the largest contributor to industrial and commercial sales. This
sale, along with the sale of 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.
As of December 31, 1999, Valencia has approximately 450 net acres of industrial
land remaining. With few large land parcels available in Los Angeles County, the
Company anticipates sales of approximately 50 to 75 acres per year to buildout.
Additionally, initial plans are underway for the development of 500 acres west
of Interstate 5 surrounding the Six Flags Magic Mountain amusement park.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
COMMUNITY DEVELOPMENT
The Company'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's residential land by 2005 and begin the
development of Newhall Ranch, a new town 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.
The Company has started extensive planning and design work on the infrastructure
for the 21,600-home Newhall Ranch project. Detailed planning is proceeding on
two of the five villages planned in the project. Riverwood, a village planned
along Highway 126 overlooking the Santa Clara River, is expected to contain
approximately 3,200 homes, 122 acres of commercial property, 256 acres for a
business park and 130 acres of mixed-use development. Development of The Mesas,
a second village south of the river, is also in the planning process. Current
plans are for approximately 8,000 homes and 1.5 million square feet of
commercial development. During 2000, the Company plans to submit tentative maps
on the initial phase of these two villages to the Los Angeles County Regional
Planning Commission with preliminary approval anticipated in 2001 and final
approval in 2002. This schedule may be affected by the pending lawsuit.
As a result of the Los Angeles County Board of Supervisors' approval of Newhall
Ranch in the 1999 first quarter, four separate lawsuits were filed against the
County of Los Angeles and the Los Angeles County Board of Supervisors, and name
the Company as a real party in interest. The four actions were petitions for
writs of mandate and were filed in the Ventura County (California) Superior
Court. The petitions were filed by: 1) Ventura County (California), Ventura
County Flood Control District, Ventura County Air Pollution Control District and
certain municipalities located within the County of Ventura (petition filed on
April 21, 1999); 2) United Water Conservation District (petition filed on April
21, 1999); 3) Sierra Club, Friends of the Santa Clara River and Santa Clarita
Organization for Planning the Environment (petition filed on April 22, 1999);
and 4) Maria Vega, et al. (petition filed on April 22, 1999). In general, the
petitions allege violation of the California Subdivision Map Act for illegally
subdividing parcels that cross the county border; violations of the California
Environmental Quality Act (CEQA); inconsistency between the Los Angeles County
General Plan and the project Specific Plan; and violation of the housing element
of the County General Plan as it relates to affordability and discrimination. A
Ventura County Superior Court judge ruled in favor of Los Angeles County's
request that the lawsuit be transferred out of Ventura County and designated the
neutral venue of Kern County. The principal issues alleged in the petitions have
been consolidated into one case. The California Attorney General has filed an
amicus brief indicating that the Environmental Impact Report did not fully
discuss environmental impacts of the project.
The Company also is continuing development plans for Valencia Westridge, a
1,711-home golf course community. The project will feature executive homes
surrounding a Tournament Players Club (TPC) championship golf course, designed
to serve as the site for an annual PGA TOUR-sanctioned golf tournament. The golf
course is a joint venture with PGA TOUR Golf Course Properties. Development
could commence later this year, with the first lot sales planned for 2001,
subject to the results of the pending lawsuit.
In the second quarter of 1999, the Los Angeles County Board of Supervisors gave
final approval to Valencia Westridge. A petition for writ of mandate was filed
in June in the Los Angeles County Superior Court. The petition was filed by the
Santa Clarita Organization for Planning the Environment and the Angeles Chapter
of the Sierra Club against the County of Los Angeles, the Los Angeles County
Board of Supervisors and names the Company as a real party in interest. In
general, the petition alleges violations of the Los Angeles County General Plan,
the California Water Code, the County Development Monitoring System and CEQA.
This petition has been consolidated with the petition filed in 1992 concerning
many of the same issues.
The lawsuits filed in connection with Newhall Ranch and Valencia Westridge are
scheduled for trial in March 2000. The Company is confident that the
Environmental Impact Reports on both projects have been well documented,
however, the results of these types of legal challenges are difficult to
predict. An adverse decision in the lawsuit(s) may delay the development of the
respective project and may affect project expenses, designs and plans.
The Company continues to work on plans for a new community with the City of
Broomfield, Colorado, where it has an option on 1,700 acres located between
Denver and Boulder. Plans call for approximately 3,000 homes and 215 acres of
office and commercial development.
The Company is in the process of entitling all of its remaining residential lots
in Valencia. Approximately 4,400 residential lots are expected to be entitled in
early 2000, including 2,500 in Los Angeles County and 1,900 through annexation
to the City of Santa Clarita. In January 2000, the City of Santa Clarita
certified the environmental impact reports concerning the 1,900 lots, an
important step in the annexation process.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Community development expenses in 1999 increased to $12.3 million, or 14%, from
1998 due to entitlement work for Newhall Ranch, certain initial costs relating
to commercial properties under development and the strategic marketing program.
Certain costs for developing Newhall Ranch subsequent to the approval of the
Specific Plan in 1999 are being capitalized to the project. Community
development expenses for 1998 and 1997 were approximately the same, $10.7
million and $11.0 million, respectively. With the continued focus on obtaining
entitlements and strategic marketing as well as litigation costs relating to
Newhall Ranch and Valencia Westridge, entitlement costs in 2000 are expected to
remain about the same as in 1999.
INCOME-PRODUCING PROPERTIES
In September 1999, the Company announced its intention to sell existing income
properties due to a shift in business strategy to accommodate the repurchase of
more than 6.3 million of the Company's partnership units over the 15-month
period ending December 31, 2000. As part of the approved plan announced in
December 1999, certain income properties were identified for sale which are
expected to generate over $200 million before necessary debt reductions or
special distributions. With many of these properties reaching record values, the
Company is targeting sales opportunities in three principal areas - retail,
office and other properties.
CB Richard Ellis has been retained to sell the Company's major retail
properties, including the Valencia Town Center regional shopping mall and retail
shops along Town Center Drive, plus the entertainment center completed earlier
this year, and its expansion currently under construction. Two other smaller
centers also will be marketed. Retail properties under consideration for sale,
including land for expansion, are expected to be marketed for sale for
approximately $160 million. Cushman Realty Corporation has been retained to
market and sell five office buildings, including three leased by Princess
Cruises - a six-story building currently occupied and a five- and a four-story
building under construction. The office portfolio is valued at about $70 million
at completion. Other income properties, such as the Spectrum Club, also are
sales candidates in 2000. The total income portfolio was valued at $465 million
at December 31, 1999.
The Company's commercial portfolio continued its expansion during 1999 as new
income-producing properties, particularly along Town Center Drive in Valencia
Town Center, opened and occupancy rates increased. For 1999, revenues from the
portfolio increased 31% and income declined 3%. While the income decline was
less than expected, it resulted primarily from depreciation associated with new
properties and operating expenses in connection with the Hyatt Valencia Hotel.
In 1998, revenues and income from the portfolio increased 16% and 13%,
respectively, over 1997 benefiting from the continued development of new
income-producing properties as well as excellent retail and apartment
occupancies and favorable rents throughout the portfolio.
The 117,000-square-foot Valencia Entertainment Center on Town Center Drive,
which includes an IMAX 3-D Theatre, 11 additional movie screens, a Borders
bookstore, three restaurants and a small food court, is 99% leased and a
19,000-square-foot expansion is under construction. Town Center Plaza,
consisting of retail shops and offices next to the Hyatt Valencia Hotel is 73%
leased, bringing the occupancy rate for retail and office tenants along Town
Center Drive to more than 90% including short-term tenants.
The Company's shopping centers continue to have high occupancy rates averaging
close to 100%, with Valencia Town Center 99% leased including short-term
tenants. NorthPark Village Square is 100% occupied following its expansion.
River Oaks and Castaic Village are both 100% leased including spaces with signed
leases but not yet occupied.
At December 31, 1999, occupancy rates at the three established apartment
complexes averaged 91%. Montecito, a 210-unit, high-end apartment complex,
opened this past summer in Valencia Town Center overlooking Valencia Country
Club and was 61% leased. With new jobs being created in Valencia, demand for
apartments is increasing. Including land sold in 1999 to other developers, an
additional 2,700 apartment units are planned for Valencia through buildout.
Demand for office space in the Town Center area continues to be strong resulting
in 100% occupancy in a three-story office building on Town Center Drive and the
Bank of America building adjacent to Valencia Town Center. The building occupied
by Princess Cruises on Town Center Drive is 90% leased with some space remaining
on the first floor for retail and service tenants. Construction is progressing
on two additional office buildings totaling 208,000 square feet for Princess
Cruises under 15-year leases. Princess Cruises will consolidate its operations,
including its executive offices, bringing their total employment in Valencia to
approximately 1,500 employees when they take occupancy in early 2001.
Income from the commercial portfolio is expected to increase temporarily in 2000
due to the cessation of depreciation of income-producing properties held for
sale.
VALENCIA WATER COMPANY
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Valencia Water Company is a regulated public utility and a wholly-owned
subsidiary of the Company, serving nearly 21,000 customers in the Valencia area.
Revenues increased 20% and income increased 8% in 1999 primarily due to an 11%
increase in the customer base. Revenues also benefited from drier weather during
the current year while income gains were impacted by increased maintenance and
operating costs. In 1998, while the customer base expanded, reduced demand from
heavy rainfall during the winter and spring resulted in revenues decreasing by
9% and income decreasing by 18%.
AGRICULTURAL OPERATIONS
Agriculture revenues and income, including the Company's energy operations,
increased in 1999 primarily due to excellent citrus yields and prices. The
income comparison to the prior year is impacted by a 1998 non-cash write-off of
$1.9 million relating to mineral rights associated with previously sold ranch
land. In 1998, revenues and income declined 27% and 37% from the prior year,
before the $1.9 million non-cash write-off, primarily as a result of the sale of
farmland and record earnings from agricultural operations in 1997.
With the sale of the 36,000-acre Suey Ranch and the remaining parcels at the
Merced Ranch in 1999, the Company expects revenues and income from agricultural
operations to decrease substantially in 2000.
RANCH SALES
In 1999, the Company completed the sale of the 36,000-acre Suey Ranch and the
three remaining parcels at the Merced Ranch as part of the Company's strategy of
selling farmland not suitable for development. These ranch sales combined
contributed $29.0 million to revenues and $25.0 million to income.
A 970-acre parcel of the Merced Ranch closed escrow in 1998 for $1.1 million,
contributing $775,000 to income. 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 $17.0 million to income and the sale of a small
remaining parcel in northern California for $62,000 contributed $45,000 to
income.
The Company's remaining agricultural properties include the 14,000-acre New
Columbia Ranch in Madera County and the 16,000-acre Newhall Orchard in Ventura
County.
GENERAL AND ADMINISTRATIVE EXPENSES
A 14% increase in general and administrative expenses in 1999 was primarily due
to land acquisition activities. With the announcement of the major unit
repurchase program in September 1999, expenses for land acquisition activities
are not expected to continue at 1999 levels. General and administrative expenses
are estimated to decrease about 15% in 2000.
In 1998, general and administrative expenses increased 39% from 1997 expenses
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.
UNIT OWNERSHIP PLANS
No expense was recorded in 1999 or 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.
INTEREST AND OTHER
An increase of 45% in net interest expense in 1999 is due to higher debt levels
against lines of credit, a new $25 million mortgage financing secured by two
shopping centers completed in the 1999 third quarter and a reduction in
capitalized interest due to the completion of several income portfolio projects.
The increase was partially offset by higher interest income from land sales
notes.
In 1998, reduction of debt due to the 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 in net interest expense of 39% from
1997 expense. 1998 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 the prior year when
outstanding project and bond debt was assumed by the buyer.
Interest expense is expected to increase in 2000 as the Company plans to utilize
available credit to finance the previously announced unit repurchase program in
the first half of the year. Escrow closings on income-properties held
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
for sale are expected to occur during the last half of 2000. A substantial
portion of the cash proceeds from these sales is expected to be used to reduce
debt.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of $1.6 million
and $81.6 million in available lines of credit, net of $21.0 million in letters
of credit. Borrowings outstanding total $64.4 million against unsecured lines of
credit and $35 million against a revolving mortgage loan. In addition, the
Company had fixed rate debt totaling $123.4 million. The Company believes it has
adequate sources of cash from operations and debt capacity, including lines of
credit, to finance future operations and, combined with anticipated land and
income property sales, to fund its unit repurchases. At December 31, 1999, there
was no debt against raw land or land under development inventories in Valencia.
In March 1999, the Company completed the refinancing of a portfolio mortgage
with a remaining principal balance of $44.7 million. The pre-existing portfolio
mortgage had a rate of 8.995% and was secured by five of the Company's
commercial properties. The new financings total $50 million at an average rate
of 6.51% and are secured by three of the Company's apartment complexes. In
September 1999, a $25 million seven-year financing was completed at a rate of
7.44% secured by River Oaks and NorthPark Village Square shopping centers. A $40
million revolving mortgage facility secured by Valencia Town Center which
matured in December 1999 has been extended until the end of February 2000. The
Company is reviewing its alternatives regarding the facility.
In September 1999, the Company's Board of Directors approved a plan to
repurchase up to an additional 5.5 million partnership units. Together, the new
authorization and 884,446 units remaining for repurchase from a previous
authorization, equaled over 6.3 million units, or approximately 20% of the
Company's outstanding units at the time of the authorization. Under the plan,
the Company may repurchase partnership units from time-to-time during a period
ending December 31, 2000 in open market and block transactions depending on
market conditions. During 1999, a total of 3,111,278 units were repurchased for
$75.8 million, or an average of $24.38 per unit. As of December 31, 1999, a
total of 4,660,494 units remain to be repurchased under the plan.
The Company plans to provide the cash to fund the unit repurchases and provide
the capital to continue ongoing planning and land development activities through
the use of existing debt capacity until the proposed land and income property
sales are completed during 2000. The Company has a gross cash generation plan of
over $200 million from income property sales, before necessary debt retirements
or special distributions. The income property sales consist of three principal
areas: retail, office and other. Retail properties represent the largest income
property classification under consideration for sale. The Company also has an
aggressive land sales program for next year, capitalizing on the strong regional
economy. It is the Company's goal in 2000 to generate approximately $160 million
cash from a combination of residential, industrial and commercial land sales, as
well as recurring commercial and agricultural income before depreciation, to
fund the Company's remaining operations. These include administrative,
operating, interest, development and entitlement costs and regular
distributions. The Company's ability to close escrows are subject to market,
economic, interest rate and other conditions, and marketplace acceptance of its
business strategies are factors that could affect results. Factors which may
affect the Company's ability to complete its unit repurchase program include,
but are not limited to, governmental approvals, changing market conditions,
rising interest rates and the ability to find suitable buyers for certain
properties.
There are no material commitments for capital expenditures other than the
Company's plans in the ordinary course of business to complete the development
of income properties under construction. In 2000, the Company expects to expend
approximately $30 million to complete construction on the two office buildings
which have been leased to Princess Cruises and to complete the Valencia
Entertainment Center expansion. In addition, over $40 million is expected to be
invested in major roads and freeway improvements in 2000 to enable the Company
to close additional land sales.
THE FOLLOWING DISCUSSION RELATES TO PRINCIPAL ITEMS IN THE CONSOLIDATED
STATEMENTS OF CASH FLOWS.
OPERATING ACTIVITIES
Net cash provided by operating activities in 1999 totaled $122.4 million and
included sales of 1,060 residential lots and homes; 121 acres of industrial and
commercial land including two build-to-suit buildings; sale of the Suey Ranch
and the remaining property at the Merced and Cowell Ranches. These sales
combined provided $222.8 million in cash and $30.2 million in notes.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Expenditures for land under development inventories in 1999 totaled $103.9
million and were more than offset by $112.2 million in cost of sales relief. The
expenditures were primarily related to land preparation and infrastructure to
ready land for development or sale, home construction and agricultural crop
costs.
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
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's 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 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.
INVESTING ACTIVITIES
Expenditures for development of income-producing properties in 1999 totaled
$68.0 million and were primarily related to Montecito apartments and various
retail/office/entertainment projects in Valencia Town Center. The Company
expects to invest approximately $30 million in 2000 to complete construction of
two office buildings for Princess Cruises and the entertainment center.
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 the 210-unit Montecito apartment complex 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.
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 the
264-unit SkyCrest apartment complex; and $4.1 million for Plaza del Rancho, a
mixed-use project in Valencia Industrial Center.
Purchase of property and equipment in 1999, 1998 and 1997 were primarily for
water utility construction.
In the 1999 third quarter, the Company announced a joint venture with Kaufman
and Broad of Southern California, Inc. to develop the 1,900-acre City Ranch, an
approved master-planned community in north Los Angeles County in the City of
Palmdale. The Company owns a 50.1% interest in the joint venture and the
Company's initial investment consisted of $4.0 million cash and a $12.0 million
note.
FINANCING ACTIVITIES
Distributions totaling $19.7 million were paid in 1999 and consisted of four
quarterly distributions of $.10 per unit and a $.22 per unit special
distribution. In 1998, distributions totaling $17.8 million were paid 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. The
declaration of distributions, and the amount declared, are determined by the
Board of Directors on a quarterly basis taking into account the Company's
earnings, financial condition and prospects.
In March 1999, a $44.7 million portfolio mortgage financing was replaced with
three financings totaling $50 million secured by three apartment complexes and,
in September 1999, a new $25 million financing was completed secured by
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
two neighborhood shopping centers. Also, in August 1999, a $12.0 million note
was recorded in connection with the Company's acquisition of a 50.1% interest in
City Ranch, a joint-venture project with Kaufman and Broad of Southern
California, Inc. Borrowings outstanding against lines of credit increased by
$36.2 million to $99.4 million at December 31, 1999.
Upon the 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 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.
A total of 3,111,278 partnership units were repurchased in 1999 for $75.8
million. In 1998, the Company repurchased 1,909,613 units for $49.0 million and,
in 1997, 328,637 units were repurchased for $5.7 million.
YEAR 2000 ISSUE
The Company successfully entered 2000 with no significant Year 2000 problems. In
1997, the Company formed a task force to coordinate Company-wide efforts to
become Year 2000 compliant, which included inventorying its internal systems,
identifying systems and applications outside the Company that may include
embedded computer technology, testing of the Company's internally developed
systems for Year 2000 compliance, and limited compliance testing on software
provided by third parties.
As a result of the Company's comprehensive review of its internal systems in
1997, and for other strategic reasons, the Company replaced its computerized
accounting system. The Company successfully converted to the new accounting
system on January 1, 1999 and the payroll and human resources subsystem on July
1, 1999. The Company also tested the compatibility of its new accounting system
with its internally developed software.
The Company incurred and expensed a total of $413,000 to become Year 2000
compliant, $299,000 of which was expensed in 1999 and $114,000 in 1998. The
majority of the expenditures was related to the cost of testing existing third
party software and costs of replacing non-compliant hardware. In addition, the
cost of the new accounting system was approximately $1 million and has been
capitalized and is being amortized over its useful life.
The Company is confident that its systems will continue to function properly,
however, the Company will continue to monitor its systems and output and, as
necessary, correct any issues that arise. The Company is dependent upon its
business partners to conduct its operations and, as a result should any of its
significant vendors, consultants, suppliers and governmental agencies incur a
Year 2000 related failure, 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. While the Company has compiled a list
of alternate business partners in case any significant business partners fail
due to a Year 2000 problem, 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.
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. The forward-looking statements may also involve unknown
risks, uncertainties and other factors that may cause the Company's actual
results and performance in future periods to be materially different from any
future results or performance suggested by the forward-looking statements in
this report. Such forward-looking statements speak only as of the date of this
report. The Company expressly disclaims any obligation to update or revise any
forward-looking statements found herein to reflect any changes in Company
expectations or results or any change in events. 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 is 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
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
close. Therefore, the timing of sales may differ from that anticipated by the
Company. The inability to close sales as anticipated could adversely impact the
recognition of revenue in any specific period.
ECONOMIC CONDITIONS: Real estate development is significantly impacted by
general and local economic conditions which are beyond the control of the
Company. The Company's real estate operations are concentrated in Southern
California. The regional economy is profoundly affected by the entertainment,
technology, 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 is
currently robust, there can be no assurances that present trends will continue.
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.
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 properties 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. The Company recently has
experienced a slight decrease in its new home sale market share at both the
local and the county level, due to the temporary decline in Valencia new home
inventory. New competition is expected to deliver competing projects in the
future that could impact the Company's ability to reverse this trend.
GEOGRAPHIC CONCENTRATION: The Company's real estate development activities are
focused on 21,500 acres in Los Angeles County. 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. (See following "Litigation"
discussion.) 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.
LITIGATION: The land use approval processes the Company must follow to
ultimately develop its projects have become increasingly complex. Moreover, the
statutes, regulations and ordinances governing the approval processes provide
third parties the opportunity to challenge the proposed plans and approvals. As
a result, the prospect of, and actual, third-party challenges to planned real
estate developments have provided additional uncertainties in real estate
development planning and entitlements. Third-party challenges in the form of
litigation will, by its nature, adversely affect the length of time required to
obtain the necessary approvals. In addition, adverse decisions arising from any
litigation increase the costs and may adversely affect the design, scope, plans
and profitability of a project.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk primarily due to fluctuations in interest
rates. The Company utilizes both fixed rate and variable rate debt. At December
31, 1999, the Company had $99.4 million of variable debt with interest rates
ranging from 6.31% to 7.39% and $123.4 million of fixed rate debt with interest
rates ranging from 6.51% to 8.45%.
The table below presents principal cash flows and related weighted average
interest rates of the Company's long-term fixed rate and variable rate debt at
December 31, 1999 by expected maturity dates:
<TABLE>
<CAPTION>
--------------------------------------------------------------------- Fair
Dollars in thousands 2000 2001 2002 2003 2004 Thereafter Total Value
--------------------------------------------------------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage and Other Debt
Fixed Rate Debt $ 1,843 $4,992 $5,153 $14,688 $5,272 $ 91,477 $123,425 $123,425
Weighted Average
Interest Rate (%) 7.24 7.70 7.68 8.16 7.61 7.02 7.24
Variable Rate Debt (1) $ 99,400 $ 99,400 $ 99,400
Weighted Average
Interest Rate (%) 6.92 6.92
</TABLE>
(1) The Company has a $40 million revolving mortgage facility which bears
interest at LIBOR plus 1.0% or Wells Fargo Bank's prime rate, at the
election of the Company, against which $35 million was outstanding at
December 31,1999. The Company also has a $159 million unsecured revolving
line of credit on which the rate is LIBOR plus 1.2%. At December 31, 1999,
$64.4 million was outstanding against this line. The amounts set forth in
the table above assume that the outstanding amounts under the variable
rate credit facilities will be repaid at the facilities' respective
maturity dates. Management believes that these lines will be renewed at
maturity with similar terms.
There is inherent rollover risk for borrowings as they mature and are renewed at
current market rates. The extent of this risk is not quantifiable or predictable
because of the variability of future interest rates and the Company's future
financing requirements. The Company manages its interest rate risk by
maintaining a conservative ratio of fixed rate, long-term debt to total debt in
order to maintain variable rate exposure at an acceptable level and by taking
advantage of favorable market conditions for long term debt. In addition, the
Company's guideline for total debt is approximately 70% of the appraised value
of the income portfolio.
21
<PAGE>
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, 1999, 1998 and 1997
Consolidated Balance Sheets at
December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Partners'
Capital for the years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
22
<PAGE>
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, 1999 and 1998, 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,
1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Los Angeles, California /S/ KPMG LLP
January 19, 2000
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
IN THOUSANDS, EXCEPT PER UNIT 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Real estate
Residential home and land sales $ 109,608 $ 70,867 $ 67,682
Industrial and commercial sales 109,200 172,320 61,996
Commercial operations
Income-producing properties 50,459 38,622 33,404
Valencia Water Company 12,202 10,209 11,170
Agriculture
Operations 12,080 11,270 15,487
Ranch sales 28,957 1,390 17,962
- ----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 322,506 304,678 207,701
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Real estate
Residential home and land sales 71,904 47,258 52,187
Industrial and commercial sales 67,936 123,657 42,780
Community development 12,257 10,710 11,034
Commercial operations
Income-producing properties 33,332 20,985 17,824
Valencia Water Company 9,302 7,515 7,902
Agriculture
Operations 8,567 10,367 11,109
Ranch sales 3,995 292 967
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 207,293 220,784 143,803
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Income 115,213 83,894 63,898
General and administrative expense (14,431) (12,634) (9,068)
Expense from unit ownership plans - - (1,200)
Interest and other, net (10,390) (7,180) (9,137)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 90,392 $ 64,080 $ 44,493
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Unit $ 2.88 $ 1.89 $ 1.29
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Unit - Assuming Dilution $ 2.85 $ 1.86 $ 1.28
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
IN THOUSANDS 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 1,624 $ 2,188
Accounts and notes receivable 61,567 30,255
Land under development 39,401 47,667
Land held for future development 28,570 30,553
Income-producing properties held for sale, net 149,433 -
Income-producing properties, net 131,627 248,712
Property and equipment, net 61,318 58,836
Investment in joint ventures 16,682 468
Other assets and deferred charges 14,602 13,528
- ----------------------------------------------------------------------------------------------------------------------------------
$ 504,824 $ 432,207
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Partners' Capital
Accounts payable $ 24,244 $ 28,716
Accrued expenses 46,329 43,196
Deferred revenues 21,227 10,041
Mortgage and other debt 222,825 157,609
Advances and contributions from developers for utility construction 25,690 26,466
Other liabilities 24,784 22,366
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 365,099 288,394
Commitments and contingencies (Note 9)
Partners' capital
29,668 units outstanding, excluding 7,104 units in treasury (cost
- $157,394), at December 31, 1999 and 32,676 units
outstanding, excluding 4,096 units in treasury
(cost - $83,530), at December 31, 1998 139,725 143,813
- ----------------------------------------------------------------------------------------------------------------------------------
$ 504,824 $ 432,207
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
IN THOUSANDS 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 90,392 $ 64,080 $ 44,493
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,296 10,101 10,148
Decrease in land under development 8,266 6,208 9,391
(Increase) decrease in accounts and notes receivable (31,312) (11,228) 6,530
Increase in accounts payable,
accrued expenses and deferred revenues 9,847 20,637 9,281
Cost of property sold 26,617 77,564 18,334
Other adjustments, net 3,244 216 2,134
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 122,350 167,578 100,311
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Development of income-producing properties (67,988) (101,789) (69,403)
Purchase of property and equipment (8,672) (9,133) (4,853)
(Investment in) distribution from joint ventures (4,190) 22 8
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (80,850) (110,900) (74,248)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Distributions paid (19,746) (17,784) (16,588)
Borrowings on mortgage and other debt 115,698 15,100 2,389
Repayment of mortgage and other debt (62,506) (14,437) (8,699)
(Decrease) increase in advances and contributions from
developers for utility construction (776) 7,621 474
Purchase of partnership units (75,818) (49,043) (5,746)
Other, net 1,084 1,283 2,465
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (42,064) (57,260) (25,705)
- ----------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (564) (582) 358
Cash and Cash Equivalents, Beginning of Year 2,188 2,770 2,412
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 1,624 $ 2,188 $ 2,770
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Interest paid (net of amount capitalized) $ 13,396 $ 7,562 $ 10,273
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Note payable in connection with investment in joint venture $ 12,024 - -
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Consolidated Statements of Changes in Partners' Capital
<TABLE>
<CAPTION>
Number Partners'
IN THOUSANDS of Units Capital
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------------
Net income - 90,392
Distributions - (19,746)
Purchase of partnership units (3,111) (75,818)
Other activity, net 103 1,084
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 29,668 $ 139,725
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
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. BUSINESS 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; 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.
Information as to identifiable assets, capital expenditures and depreciation for
these segments is summarized and reconciled in Note 10. Significant accounting
policies related to the Company's segments are:
RESIDENTIAL
LAND SALES
Sales are recorded at the time escrow is closed provided that: (1) there has
been a minimum down payment of 20% or 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.
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. The Company
records revenues and its portion of income as the venture closes escrow on sales
to homebuyers.
INDUSTRIAL AND COMMERCIAL
Industrial and commercial land sales and respective land under development
inventories are accounted for under the same criteria as described in the
Residential Land Sales section.
The industrial and commercial division is also responsible for the development
of the Company's income-producing properties. Upon completion of construction,
the property is reported with Income-Producing Properties.
COMMUNITY DEVELOPMENT
Preliminary planning and entitlement costs are charged to expense when incurred.
After the earlier of specific plan or tentative map approval, certain
development costs are capitalized to the identified project.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
INCOME-PRODUCING PROPERTIES
The Company owns and leases apartments, commercial 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.
AGRICULTURE
Revenue is recognized as crops are delivered to farm cooperatives and other
purchasers. At the time of delivery, the Company estimates the proceeds to be
received from the cooperatives and records these amounts as unbilled
receivables. 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 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.
Agricultural ranch sales are accounted for under the same criteria as described
for land sales in the Residential Land Sales section.
CENTRAL ADMINISTRATION
Central Administration includes the Company's corporate functions including
executive offices, treasury, tax, employee relations, corporate accounting,
finance, information systems, headquarters facilities, corporate
secretary/legal, investor relations, internal audit and land acquisition. Except
for certain costs relating to the headquarters facilities and specific services
billed to Valencia Water Company, expenses for these functions are expensed as
general and administrative expenses and are not allocated to the Company's
operating business segments.
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 Ventures: The equity method is used to account for investments in ventures
not controlled by the Company. This includes a joint venture with Hilton Inns,
Inc. and a joint venture with Kaufman and Broad of Southern California, Inc. to
develop City Ranch, a master-planned community in north Los Angeles County in
the City of Palmdale.
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: Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that an impairment may have
occurred. Certain properties approved for sale in 2000 are classified as
"Income-producing properties held for sale, net" on the December 31, 1999
balance sheet and
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
depreciation for such assets will cease in 2000. The Company has reviewed each
asset classified for sale and no impairment losses were identified.
Environmental Matters: Environmental clean-up costs are charged to expense when
incurred or established reserves and are not capitalized. 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 was treated as a partnership for the 1987 through 1997
taxable years. Beginning in 1998, 90% of the partnership's gross income, as
defined, 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 1999 and 1998 gross income qualifies under this provision and the
Company expects to continue to be taxed as a partnership for the foreseeable
future.
Amounts per Partnership Unit: The following is a reconciliation of the
numerators and denominators of the basic and diluted income net per unit
computations:
<TABLE>
<CAPTION>
INCOME UNITS PER UNIT
(IN 000'S EXCEPT PER UNIT) (NUMERATOR) (DENOMINATOR)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999
Net income per unit
Net income available to unitholders $ 90,392 31,388 $ 2.88
Effect of dilutive securities
Unit options - 280 (.03)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per unit - diluted $ 90,392 31,668 $ 2.85
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
- -------------------------------------------------------------------------------
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, 1999, the net tax basis of the Company's assets and liabilities
exceeded the Company's consolidated financial statement basis of its assets and
liabilities by $212,543,000. 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.
- -------------------------------------------------------------------------------
NOTE 4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of certain of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
IN THOUSANDS Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes receivable from
land sales $ 50,585 $ 50,585 $ 21,744 $ 21,744
Mortgage and other debt 222,825 222,825 157,609 157,609
Advances from developers
for utility construction 10,992 2,880 11,355 2,891
=============================================================================
</TABLE>
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 approximates
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.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
-------------------------------------------------------
IN THOUSANDS 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts and notes receivable
Trade receivables, less allowance for doubtful
accounts of $863 and $1,188, respectively $ 1,624 $ 1,623
Notes receivable from land sales 50,585 21,744
Unbilled accounts receivable
Agriculture 3,188 2,281
Other 1,293 544
Other 4,877 4,063
- ----------------------------------------------------------------------------------------------------------------------------------
$ 61,567 $ 30,255
=======================================================
Land under development
Valencia
Residential development $ 4,532 $ 14,691
Industrial and commercial land development 34,524 32,686
Agriculture 345 290
- ----------------------------------------------------------------------------------------------------------------------------------
$ 39,401 $ 47,667
=======================================================
Income-producing properties held for sale
Retail $ 115,462 $ -
Office 36,545 -
Other 19,857 -
- ----------------------------------------------------------------------------------------------------------------------------------
171,864 -
Accumulated depreciation (22,431) -
- ----------------------------------------------------------------------------------------------------------------------------------
$ 149,433 $ -
=======================================================
Income-producing properties
Land $ 21,399 $ 48,319
Buildings 112,304 119,453
Other 14,498 14,611
- ----------------------------------------------------------------------------------------------------------------------------------
148,201 182,383
Accumulated depreciation (25,478) (39,443)
- ----------------------------------------------------------------------------------------------------------------------------------
122,723 142,940
Properties under development 8,904 105,772
- ----------------------------------------------------------------------------------------------------------------------------------
$ 131,627 $ 248,712
=======================================================
Property and equipment
Land $ 3,759 $ 4,819
Buildings 5,343 5,600
Equipment 9,311 8,993
Water supply systems, orchards and other 73,635 68,688
Construction in progress 5,111 7,172
- ----------------------------------------------------------------------------------------------------------------------------------
97,159 95,272
Accumulated depreciation (35,841) (36,436)
- ----------------------------------------------------------------------------------------------------------------------------------
$ 61,318 $ 58,836
=======================================================
</TABLE>
(NOTE 5. CONTINUED ON NEXT PAGE)
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
<TABLE>
<CAPTION>
(NOTE 5. CONTINUED) DECEMBER 31,
-------------------------------------------------------
IN THOUSANDS 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other assets and deferred charges
Prepaid expenses $ 1,794 $ 1,751
Unamortized loan fees 841 682
Deferred charges and assets of
Valencia Water Company 4,767 4,985
Other 7,200 6,110
- ----------------------------------------------------------------------------------------------------------------------------------
$ 14,602 $ 13,528
=======================================================
Accrued expenses
Deferred compensation $ 10,515 $ 7,800
Operating and other accruals 3,611 3,665
Project accruals 27,681 27,446
Other 4,522 4,285
- ----------------------------------------------------------------------------------------------------------------------------------
$ 46,329 $ 43,196
=======================================================
Other liabilities
Warranty and other reserves $ 7,049 $ 6,255
Deferred taxes of Valencia Water Company 6,114 5,862
Other 11,621 10,249
- ----------------------------------------------------------------------------------------------------------------------------------
$ 24,784 $ 22,366
=======================================================
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 6. COMMERCIAL LEASES
Minimum lease payments to be received under non-cancelable operating leases as
of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
- --------------------------------------------------------------------------------------------------
<S> <C>
2000 $ 21,495
2001 20,525
2002 19,498
2003 16,347
2004 15,522
Thereafter 110,561
----------------------------------------------------------------------------------------
$ 203,948 *
==============
</TABLE>
* INCLUDES MINIMUM LEASE PAYMENTS FROM INCOME-PRODUCING PROPERTIES HELD FOR
SALE. THE 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, 1999, 1998,
AND 1997 WERE (IN THOUSANDS) $12,606, $11,429 AND $9,934, RESPECTIVELY.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 7. MORTGAGE AND OTHER DEBT
DECEMBER 31,
Interest ----------------------------------
IN THOUSANDS Rates 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unsecured lines of credit Variable $ 64,400 $ 23,200
FHLMC (apartment mortgages) 6.51%* 49,585 -
Prudential (shopping center loans) 7.44% 24,913 -
Kaufman and Broad (City Ranch) 8.0% 12,024 -
Prudential (portfolio mortgage) 8.995% - 44,686
Prudential (ranch mortgage) 8.45% 10,320 10,560
Pacific Life (Valencia Water Company) 8.0% 11,000 11,000
Metropolitan (unsecured notes) 6.9% - 12,000
Wells Fargo (Valencia Town Center) 6.31%* 35,000 40,000
Community facilities bonds (Valencia Town Center) 7.33%* 15,583 16,163
- ----------------------------------------------------------------------------------------------------------------------------------
$ 222,825 $ 157,609
==================================
</TABLE>
*WEIGHTED AVERAGE RATE
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 $21.0 million and $26.8 million, respectively, at
December 31, 1999 and 1998.
In March 1999, the Company replaced a $44.7 million portfolio mortgage secured
by five commercial properties with three financings totaling $50 million secured
by three apartment complexes. The loans were obtained from Federal Home Loan
Mortgage Corporation (Freddie Mac) at a 6.51% weighted-average interest rate and
mature in ten years. Principal and interest are payable monthly based on a
30-year amortization schedule until maturity when a $42.7 million principal
payment will be due.
In September 1999, the Company completed two financings totaling $25 million
with Prudential Insurance Company of America. Each loan is secured by a retail
shopping center and is due in seven years. Principal and interest are paid
monthly and based on a 7.44% interest rate and 25-year amortization.
In August 1999, a $12.0 million note was recorded in connection with the
Company's City Ranch venture with Kaufman and Broad of Southern California, Inc.
The note calls for simple interest at 8% per annum with interest payable
quarterly and principal payable in four equal annual installments commencing on
August 26, 2001.
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.
A $12 million principal balance of an unsecured financing with Metropolitan was
paid in full in March 1999.
The terms of a $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, 1999, the
weighted-average interest rate on the borrowings was 6.31%. The credit facility
expired in December 1999 and has been extended until the end of February 2000.
The Company is reviewing its alternatives regarding this facility.
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.
Annual maturities of existing long-term debt are approximately (in thousands)
$36,843 in 2000, $4,992 in 2001, $5,153 in 2002, $14,688 in 2003, $5,272 in 2004
and $91,477 thereafter. The unsecured lines of credit have no scheduled
repayment terms.
Planned income property sales in 2000 will accelerate the retirement of certain
mortgages and other debt.
Capitalized Interest and Interest Income: During 1999, 1998 and 1997, total
interest expense incurred amounted to (in thousands) $13,910, $8,067, and
$10,527, net of $1,563, $3,354 and $2,252, which was capitalized, respectively.
Interest income from investments and notes receivable totaled (in thousands)
$3,949 in 1999, $1,451 in 1998 and $1,641 in 1997.
- -------------------------------------------------------------------------------
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 7% of income for 1999 and
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
5% of income for 1998 and 1997. The Board of Directors authorized awards of
$5,164,000, $3,237,000 and $1,907,000 for the years ended December 31, 1999,
1998, and 1997, 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
IN THOUSANDS, EXCEPT PER UNIT 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income
As reported $ 90,392 $ 64,080 $ 44,493
Pro forma 86,168 60,227 43,489
Income Per Unit
As reported-assuming dilution $ 2.85 $ 1.86 $ 1.28
Pro forma 2.72 1.75 1.25
============================================
</TABLE>
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: 1999 - 270,784; 1998 - 215,419; 1997
- - 291,400. In 1997, expense of $1.2 million was recorded and no expense or
recovery was recorded in 1999 or 1998 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: 1999 - 4,342; 1998 - 2,936; 1997 - 4,580.
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 was larger than the Company's typical
market-price option program due to the increased risks associated with the
premium price and forfeiture provisions and was in lieu of market price options
for the executives over the next three years. Under the terms of the program,
participants were 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. At December 31, 1999, 1.95 million
of these options were outstanding.
The per unit weighted-average fair value of non-qualified, market price options
granted in 1999, 1998 and 1997 was $8.12, $10.02 and $7.40, respectively, on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: 1999 - distribution yield of 3.0%, expected
volatility of 29.7%, risk-free interest rate of 6.0% and expected life 10 years;
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.
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 6.4% and an expected life of five years.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
At December 31, 1999, 743,803 units were available for future grants. A summary
of the status of the Company's Option/Award Plan is presented below:
<TABLE>
<CAPTION>
Weighted Average
Units Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 275,126 24.14
Exercised (76,087) 15.67
Cancelled (608,448) 31.04
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 3,466,643 $27.34
==========================================================
</TABLE>
At December 31, 1999 and 1998, the number of options exercisable was 950,340 and
863,904, respectively, and the weighted-average exercise price of those options
was $18.70 and $18.31, respectively.
The following summarizes information about outstanding options at December 31,
1999:
<TABLE>
<CAPTION>
Range of Number Weighted-Average Weighted-Average
Exercise Prices Outstanding* Exercise Price Remaining Life
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$13.00-$16.75 616,550 $14.92 4.9
$19.75-$24.94 585,753 $22.61 7.4
$29.50-$33.39 2,254,925 $32.08 3.2
</TABLE>
*EXCLUDES 9,415 RESTRICTED UNITS GRANTED AS PART OF THE COMPANY'S MANAGEMENT
UNIT OWNERSHIP PROGRAM
The following summarizes information about exercisable options at December 31,
1999:
<TABLE>
<CAPTION>
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
$13.00-$16.75 574,031 $14.79
$19.75-$24.94 222,378 $21.19
$29.50-$33.39 153,931 $29.69
</TABLE>
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 9,996, 6,965 and 6,049 units to employees in
1999, 1998 and 1997, respectively. The weighted-average fair value of the
purchase discount was $2.33 for 1999, $3.64 for 1998 and $3.66 for 1997, using
the Black-Scholes model with the following assumptions: expected life of seven
months due to salary withholdings throughout the year; distribution yield of
2.2% and expected volatility of 29.4% for 1999 and distribution yield of 3.0%
and expected volatility of 20.6% for 1998 and 1997; risk-free interest rate of
4.54% for 1999 and 5.45% for 1998 and 5.45% for 1997; 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 60% of average annual earnings in
excess of covered compensation, reduced pro rata for years of service less
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 who were retired prior to the termination of the plan in
1997. The additional pension cost for these plans was $105,000 in 1999, $106,000
in 1998 and $124,000 in 1997.
The following table sets forth the plans' funded status and amounts recognized
in the Company's consolidated financial statements for the Retirement and the
Pension Restoration Plans:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
IN THOUSANDS 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation
Projected benefit obligation, beginning of year: $ 23,961 $ 20,281
Service cost 837 685
Interest cost 1,505 1,370
Benefits paid (2,738) (1,531)
Actuarial loss 244 3,156
----------------------------------------------------------------------------------------------------------------
Projected benefit obligation, end of year $ 23,809 $ 23,961
================================================================================================================
Change in Plan Assets
Plan assets, beginning of year: $ 19,134 $ 18,957
Actual return on plan assets 3,006 1,707
Employer contribution 100 1
Benefits paid (2,738) (1,531)
----------------------------------------------------------------------------------------------------------------
Plan assets, end of year $ 19,502 $ 19,134
================================================================================================================
Funded status $ (4,307) $ (4,827)
Unrecognized transition obligation (34) (68)
Unrecognized prior service cost 777 869
Unrecognized (gain) loss (537) 681
----------------------------------------------------------------------------------------------------------------
Net amount recognized - accrued benefit cost $ (4,101) $ (3,345)
================================================================================================================
</TABLE>
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
IN THOUSANDS 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service cost $ 838 $ 685 $ 555
Interest cost 1,505 1,370 1,295
Expected return on plan assets (1,650) (1,643) (1,467)
Amortization of unrecognized
transition obligation (34) (34) (34)
Amortization of unrecognized
prior service cost 92 92 61
Amortization of unrecognized (loss/gain) 105 (74) (4)
- ----------------------------------------------------------------------------------------------------------------------------------
Pension expense $ 856 $ 396 $ 406
- --------------------------------------------------------==========================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation (ABO) and
fair value of assets for the plan with assets less than ABO were $6,757,549,
$2,175,646 and $0 at December 31, 1999 and $4,028,025, $1,428,247, and $0,
respectively at December 31, 1998.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
The assumptions used in the accounting were:
Discount rate 7.50% 6.50%
Rate of increase in compensation levels 5.00% 5.00%
Expected long-term return of assets 9.00% 9.00%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
$438,000 in 1999, $371,000 in 1998 and $319,488 in 1997.
Deferred Cash Bonus Plan: In February 1991, the Compensation Committee of the
Board of Directors awarded deferred bonuses payable January 15, 1999. The amount
paid was 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 excess of established reserves.
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, 1999, the Company had performance
bonds outstanding totaling approximately $133 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.
38
<PAGE>
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 income 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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
Depreciation
Contribution and Capital
In Thousands Revenues to Income Amortization Assets Expenditures
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real Estate
Residential $109,608 $ 38,424 $ 116 $27,505 $ --
Industrial and commercial 109,200 42,104 10 116,666 10,546
Community development -- (11,597) 66 19,725 138
Income-producing
properties 50,459 17,307 12,127 253,214 57,442
Valencia Water Company 12,202 3,200 (a) 2,017 60,272 7,437
Agriculture 41,037 28,715 613 17,541 586
Central administration -- (11,371) 347 9,901 511
----------------- ---------------- ---------------- --------------- -----------------
322,506 106,782 15,296 504,824 76,660
Interest and other,
net -- (10,390) -- -- --
All other -- (6,000) -- -- --
----------------- ---------------- ---------------- --------------- -----------------
TOTAL $322,506 $ 90,392 $ 15,296 $504,824 $76,660
================= ================ ================ =============== =================
YEAR ENDED DECEMBER 31, 1998
Depreciation
Contribution and Capital
In Thousands Revenues to Income 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
Depreciation
Contribution and Capital
In Thousands Revenues to Income 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
================= ================ ================ =============== =================
</TABLE>
All of the Company's real estate operations are conducted on the Company's
properties in north Los Angeles County. Agricultural operations are
conducted on the Company's properties in Southern and Central California.
Accordingly, financial information based on geographic area is not presented.
Sales by business segment to individual customers representing more than 10%
of the Company's consolidated revenues are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998 1997
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
<S> <C> <C> <C>
Industrial and Commercial -- $111,000 --
</TABLE>
(a) INCLUDES INCOME TAX EXPENSE OF (IN THOUSANDS) $1,463 IN 1999, $1,071 IN
1998 AND $1,281 IN 1997.
39
<PAGE>
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
1999 and 1998:
<TABLE>
<CAPTION>
IN THOUSANDS, QUARTER
---------------------------------------------------------------------------
EXCEPT PER UNIT First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
1999 $ 42,273 $ 63,038 $ 73,204 $ 143,991
1998 23,762 149,299 78,061 53,556
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income
1999 $ 13,355 $ 18,660 $ 18,233 $ 64,965
1998 5,603 51,854 20,594 5,843
- ----------------------------------------------------------------------------------------------------------------------------------
Net income
1999 $ 8,283 $ 12,723 $ 11,897 $ 57,489
1998 257 45,741 16,291 1,791
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per unit*
1999 $ .26 $ .40 $ .38 $ 1.91
1998 .01 1.32 .48 .05
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per unit - assuming dilution*
1999 $ .25 $ .40 $ .38 $ 1.89
1998 .01 1.31 .47 .05
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*DUE TO UNIT REPURCHASES DURING THE YEAR, QUARTERLY PER UNIT AMOUNTS MAY NOT ADD
UP TO THE TOTAL PER UNIT FOR THE YEAR.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Partnership 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 the 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 57, 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 a trustee of California
Institute of the Arts.
George L. Argyros, age 63, 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
Chairman of the Horatio Alger Association.
Gary M. Cusumano, age 56, 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 55, 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 Blue
Shield of California, the American Automobile Association, Payden & Rygel Mutual
Funds, Forest Lawn Memorial Park, California Chamber of Commerce, Los Angeles
Area Chamber of Commerce and Orthopaedic Hospital.
Henry K. Newhall, age 61, 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.
41
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (continued)
Jane Newhall, age 86, 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, and the Graduate Theological Union.
Peter T. Pope, age 65, was elected a director of the Corporation in 1992. Mr.
Pope has served as Chairman of Pope & Talbot, Inc. since 1990. Mr. Pope served
as Chief Executive Officer of Pope & Talbot, Inc. from 1990 until his retirement
in August 1999. He is a general partner of Pope Resources.
Carl E. Reichardt, age 68, 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, PG&E Corporation, ConAgra, Inc., McKesson HBOC, Inc. and
HSBC Holdings PLC.
Thomas C. Sutton, age 57, 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 55, 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 PG&E Corporation, CH2M Hill, Ltd., Simpson
Manufacturing Company, R.H. Donnelly & Co. and USA Group, Inc. He is a trustee
of Northwestern Mutual Life Insurance Company.
Ezra K. Zilkha, age 74, 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.
The Board of Directors manages and controls the overall business and affairs of
the Corporation, of the Managing General Partner, and of the Partnership. The
members of the Board of Directors are elected by the shareholder-directors of
the Corporation, unless there is a vacancy on the Board in which case the
remaining board members may fill the vacancy, without the approval of the
limited partners and with each shareholder-director of the Corporation having an
equal number of votes. Because the shareholders and directors are the same
persons, it is expected that the shareholders will re-elect themselves to serve
as directors.
It is the current policy of the Corporation that all directors of the
Corporation, except for the initial directors of the former Managing General
Partner and Mr. Lee, will retire at age 70. If a new director is elected, he or
she is required to become a shareholder by purchasing the number of shares
determined by the Board of Directors.
The Limited Partnership Agreement (the "Partnership Agreement") of the
Partnership requires the General Partners to own at least one percent (1%) of
the total number of Partnership units outstanding at all times. In order to meet
this 1% requirement, the shareholder-directors had originally contributed
Partnership units as 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.
42
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (continued)
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
66,020 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. The Partnership units contributed to the
Managing General Partner total 359,690 or 1.25% of the total number of
Partnership units outstanding at February 29, 2000.
A unitholder 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 law to 10 years, but a party to the
voting trust will be deemed to have resigned as a director of the Corporation
and will have to sell his shares, subject to repurchase by the Corporation,
unless, at the times provided in the voting trust agreement, the party
re-executes and renews the voting trust for the purpose of keeping it
continually in effect. The voting trust agreement terminates if Newhall
Management Corporation ceases to serve as a general partner of the Managing
General Partner of the 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.
43
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (continued)
Upon the occurrence of a repurchase event, Newhall Management Limited
Partnership would have one full year to transfer Partnership units representing
the limited partner's interest to the limited partner. A limited partner could
not compel the return of Partnership units for at least one year from the date a
limited partner chooses to obtain return of Partnership units. Even then,
Newhall Management Limited Partnership cannot, and cannot be compelled to,
distribute Partnership units to the limited partner if Newhall Management
Limited Partnership would thereafter own less than 1% of the Partnership's
Partnership units.
The limited partners, as limited partners, have no voting rights except as
expressly set forth in the limited partnership agreement or granted pursuant to
law. Such voting privileges include matters such as (i) electing general
partners in specified instances, (ii) amending the limited partnership
agreement, (iii) dissolving the limited partnership, (iv) electing a general
partner to serve as the Managing General Partner, and (v) removing a general
partner. Items (ii) and (iii) require the separate concurrence of the Managing
General Partner.
Persons other than directors of Newhall Management Corporation may serve as
limited partners of Newhall Management Limited Partnership and Newhall
Management Corporation has the authority pursuant to the limited partnership
agreement to cause additional units to be issued. The partnership agreement
provides limited instances in which a general partner shall cease to be a
general partner.
Newhall Management Limited Partnership will dissolve (i) when a general partner
ceases to be a general partner (other than by removal) unless there is at least
one other general partner or all partners agree in writing to continue the
business of the partnership and to admit one or more general partners, (ii) if
Newhall Management Limited Partnership becomes insolvent, (iii) upon the
disposition of substantially all assets of Newhall Management Limited
Partnership, (iv) 90 days after an affirmative vote of the limited partners to
dissolve pursuant to the partnership agreement, or (v) upon the occurrence of
any event which makes it unlawful for the business of Newhall Management Limited
Partnership to be continued.
Newhall General Partnership, a California general partnership, is a general
partner for the purposes of continuing the business of the Partnership and
serving as an interim Managing General Partner if Newhall Management Limited
Partnership or its successor ceases to serve as Managing General Partner. So
long as Newhall Management Limited Partnership or its successor remains as
Managing General Partner, Newhall General Partnership will have no right to take
part in the management and control of the affairs of the Partnership.
The general partners of Newhall General Partnership are Newhall Management
Limited Partnership, the chief executive officer of Newhall Management
Corporation and another officer or director of Newhall Management Corporation
selected from time to time by the board of directors of Newhall Management
Corporation. Thomas L. Lee is the Chief Executive Officer of Newhall Management
Corporation and, therefore, is a general partner of Newhall General Partnership.
Gary M. Cusumano, President and Chief Operating Officer of Newhall Management
Corporation, has been selected by the board of directors of Newhall Management
Corporation to be a general partner of Newhall General Partnership. For as long
as Newhall Management Limited Partnership serves as a general partner of the
Partnership, Newhall Management Limited Partnership shall serve as a general
partner of Newhall General Partnership and the individual general partners of
Newhall General Partnership shall be the chief executive officer of Newhall
Management Corporation and another officer or director selected by the board of
directors of Newhall Management Corporation.
The managing partner of Newhall General Partnership is the chief executive
officer of Newhall Management Corporation and shall have management and control
of the ordinary course of day to day business of Newhall General Partnership.
Matters outside the ordinary course of the day to day business of Newhall
General Partnership shall be decided by a majority vote of the partners except
that a unanimous vote will be required to, 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
44
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (continued)
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.
45
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (continued)
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE CORPORATION
DATE OF
AGE OFFICE
<S> <C> <C>
THOMAS L. LEE 57
Chairman and Chief Executive Officer 07/89
GARY M. CUSUMANO 56
President and Chief Operating Officer 07/89
THOMAS E. DIERCKMAN 51
Senior Vice President - Commercial and Industrial, Valencia Division 09/94
STUART R. MORK 47
Senior Vice President and Chief Financial Officer 01/96
Vice President and Chief Financial Officer 01/95
Vice President - Finance 01/94
STEPHEN C. SCHMIDT 51
Senior Vice President - Residential Community Development 07/99
Self-Employed Investor 1992-07/99
DANIEL N. BRYANT 40
Vice President - Asset Management 01/98
Director - Asset Management 07/96
Director - Property Management and Leasing 12/94
JOHN R. FRYE 55
Vice President - Agriculture (1) 09/85
DONALD L. KIMBALL 42
Vice President - Finance and Controller 01/97
Vice President - Controller 07/94
STEVEN D. ZIMMER 55
Vice President - Newhall Ranch Division 07/99
Partner - Rupp, Holmberg & Zimmer 1992-07/99
</TABLE>
The officers serve at the pleasure of the Board of Directors.
(1) Effective January 1, 2000, became a non-executive officer due to a reduction
in the significance of the Company's agricultural operations.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Corporation's executive 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. The Company assists its executive officers, directors and
general partners to file their Section 16(a) reports and retains a copy of the
forms filed. Based upon our review of copies of the reports and on written
statements from our executive officers, directors and general partners, the
Company believes that all such forms were filed on a timely basis by the
executive officers, directors and general partners during 1999, except that a
Form 4 for Mr. Pope reporting an open market purchase of Partnership units was
filed late.
46
<PAGE>
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
<TABLE>
<CAPTION>
---------------------------------------- -------------------------------------
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 )
- --------------------------- -------- ----------- ------------- ----------- ------------ ------------- ---------- ----------
- --------------------------- -------- ----------- ------------- ----------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THOMAS L. LEE 1999 $ 440,000 $ 930,600 $ 61,425 - - $ - $ 52,795
Chairman and 1998 362,000 430,364 64,343 - - 56,739 38,824
Chief Executive Officer 1997 362,000 205,073 65,650 - 730,000 - 36,605
GARY M. CUSUMANO 1999 336,000 704,880 66,980 - - - 43,506
President and 1998 274,000 320,078 68,365 - - 44,130 31,240
Chief Operating Officer 1997 274,000 155,221 68,500 - 574,000 - 28,829
THOMAS E. DIERCKMAN 1999 226,000 256,396 5,250 - - - 20,278
Senior Vice President 1998 226,000 169,197 4,300 - - 37,826 19,541
1997 214,000 85,522 4,300 - 367,000 - 14,764
STUART R. MORK 1999 230,000 239,890 560 - - - 18,614
Senior Vice President and 1998 230,000 154,410 425 - - 12,609 15,580
Chief Financial Officer 1997 200,000 85,320 350 - 367,000 - 10,139
JOHN R. FRYE 1999 144,000 138,723 - - 7,500 - 10,906
Vice President (6) 1998 144,000 58,068 - - 9,000 12,609 11,254
1997 141,000 70,000 - - 11,000 - 10,057
</TABLE>
- -------------------------------------------------------------------------------
(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
1999 bonus will be paid in partnership units in accordance with the
Company's Management Unit Ownership Program as follows: Mr. Dierckman
($51,279), Mr. Mork ($97,190) and Mr. Frye ($88,723). Part of the 1998 and
1997 bonuses were paid in partnership units as follows: Mr. Dierckman (1998
- $58,299; 1997 - $25,522) and Mr. Mork (1998 - $54,450; 1997 - $19,905.
(2) Includes general partner fees paid to Messrs. Lee and Cusumano as general
partners of Newhall General Partnership of $60,000 each, director fees of
$4,000 each to Messrs. Cusumano and Dierckman as directors of a
wholly-owned subsidiary and the balance are tax preparation/estate planning
fees.
(3) Messrs. Lee, Cusumano, Dierckman, Mork and Frye have received 1,300, 577,
2,118, 1,332, and 400 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: (a) Company matching contributions to the
Employee Savings Plan and Savings Restoration Plan, (b) excess life
insurance premiums, and (c) long-term disability insurance premiums for
Messrs. Lee and Cusumano.
(6) Effective January 1, 2000, became a non-executive officer due to a
reduction in the significance of the Company's agricultural operations.
47
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (continued)
<TABLE>
<CAPTION>
OPTION / SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------
Individual Grants
-------------------------------------------------------------------- ------------------------------------
Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options/SARs Exercise of Stock Price Appreciation
Underlying Granted To Or Base for Option Term (3)
Options/SARs Employees in Price Expiration ------------------------------------
Name Granted Fiscal Year ( $ / Sh ) Date 5 % 10 %
- ---------------------- --------------- ------------- ------------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
THOMAS L. LEE 0 (1) --- --- --- --- ---
GARY M. CUSUMANO 0 (1) --- --- --- --- ---
THOMAS E. DIERCKMAN 0 (1) --- --- --- --- ---
STUART R. MORK 0 (1) --- --- --- --- ---
JOHN R. FRYE 7,500 (2) 2.9% $24.125 07-20-09 $113,791 $288,368
</TABLE>
(1) Premium price options were granted in November 1997 and were in lieu of
market price options for the next three years.
(2) Non-qualified options without appreciation rights granted at 100% of fair
market value on the date of grant. Options are exercisable 25% at the
end of each of the first four years following date of grant and expire
ten years after date of grant.
(3) The final unit price at 5% compound growth is $39.30 and the final unit
price at 10% compound growth is $62.57.
48
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (Continued)
AGGREGATED OPTION / SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION / SAR VALUES
<TABLE>
<CAPTION>
---------------------------------
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
------------------ ------------- -------------- --------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
THOMAS L. LEE --- --- 195,700 721,250 $1,723,075 $138,125
GARY M. CUSUMANO --- --- 150,750 567,000 1,336,375 110,500
THOMAS E. DIERCKMAN --- --- 101,500 362,000 846,094 77,844
STUART R. MORK --- --- 78,500 362,000 790,344 77,844
JOHN R. FYE --- --- 65,750 22,250 605,156 74,344
---------- -------------- --------------- -------------- ---------------- ----------------
Total --- --- 592,200 2,034,500 $5,301,044 $478,657
=========== ============== =============== ============== ================ ================
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the difference in the unit price of $27.00 at December 31, 1999,
and the exercise price of the underlying options.
49
<PAGE>
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 at 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:
<TABLE>
<CAPTION>
YEARS OF SERVICE
COMPENSATION 10 20 30 40
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
$125,000 $ 23,000 $ 46,000 $ 69,000 $ 69,000
200,000 38,000 76,000 114,000 114,000
275,000 53,000 106,000 159,000 159,000
350,000 68,000 136,000 204,000 204,000
425,000 83,000 166,000 249,000 249,000
450,000 88,000 176,000 264,000 264,000
500,000 98,000 196,000 294,000 294,000
550,000 108,000 216,000 324,000 324,000
600,000 118,000 236,000 354,000 354,000
</TABLE>
Credited years of service as of December 31, 1999 (to the nearest whole year)
and average annual compensation for the highest five years of the last ten years
are as follows: 29 years and $625,000 for Mr. Lee; 30 years and $485,000 for Mr.
Cusumano; 12 years and $285,000 for Mr. Mork; 17 years and $305,000 for Mr.
Dierckman; and 29 years and $180,000 for Mr.
Frye.
CHANGE IN CONTROL SEVERANCE PROGRAM
The Partnership has entered into severance agreements with each of the Executive
Officers named in the Summary Compensation Table, which agreements provide
benefits in the event of a "change of control." Under the provisions of the
severance agreements, a "change of control" is deemed to have occurred when (i)
any "person" (other than a trustee or similar person holding securities under an
employee benefit plan of the Partnership, or an entity owned by the unitholders
in substantially the same proportions as their ownership of units) becomes the
beneficial owner of 25% or more of the total voting power represented by the
Partnership's then outstanding voting securities, (ii) Newhall Management
Corporation is removed as Managing General Partner of the Managing General
Partner, or (iii) the holders of the voting securities of the Partnership
approve a merger or consolidation of the Partnership with any other entity,
other than a merger or consolidation which would result in the voting securities
of the Partnership outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least 75% of the total voting power represented by the
voting securities of the Partnership or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) a plan of complete
liquidation of the Partnership is adopted or the holders of the voting
securities of the Partnership approve an agreement for the sale or disposition
by the Partnership (in one transaction or a series of transactions) of all or
substantially all the Partnership's assets. Entitlement to benefits arises if,
within two years following a change in control, the executive 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
executive officer's prior position or a reduction in
50
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (continued)
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 Messrs. Dierckman
and Mork 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 who entered into a severance agreement
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 executive 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,
non-employee 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 may elect to have
all or any portion of the annual retainer fees paid in Partnership units or, as
amended on July 15, 1998, in options thereon instead of cash.
The 1995 Option/Award Plan also provides each non-employee director serving on
the Board on January 18, 1995, and each newly elected or appointed non-employee
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 non-employee director will automatically
receive an Automatic Option to purchase 500 Partnership units. Each Automatic
Option vests immediately and has a term of 10 years. Generally, the non-employee
director may exercise his or her option for a period of 3 months after
termination of service as a non-employee 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 non-employee director
ceases to serve as a non-employee director after serving as a non-employee
director for at least five years.
In addition, non-employee 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.
51
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (continued)
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In June 1994, Valencia Water Company, a wholly-owned subsidiary of the Company,
borrowed $11 million from Pacific Life Insurance Company at a rate of 8% per
annum. The terms of the loan require semi-annual interest payments with
principal due at maturity. 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 Corporation, 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 comprised entirely 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 1999, the Committee met
three (3) 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, the Company'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 the 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. 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.
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 every two or three years.
External salary data provided to the Committee by an independent compensation
survey firm indicate that salaries for 1999 were generally at or below the
median level.
52
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (continued)
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 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 7% 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 the 1995 bonus 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 1999 was $5.164 million (or 5.7% of 1999
income after deducting bonuses), versus $3.237 million in 1998 (or 5.0% of
income after deducting bonuses), a 59.5% increase from 1998 to 1999. The
increase in bonuses for 1999 recognizes the record revenues, earnings and per
unit appraised value of the Company's assets achieved in 1999. Revenues
increased 6% and earnings improved 41% compared to 1998. Appraised value per
unit increased 10.5% from 1998 per unit appraised value.
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
vest and are expected to grow in value over time and for that reason represent
compensation which is attributable to service over a period of up to ten years.
This focuses attention on managing the Company from the perspective of an owner
with an equity stake in the business.
The size of the unit options granted to each executive officer is based on the
aggregate exercise price. Generally it is set at a multiple of salary which the
Committee deems appropriate in order to create a meaningful opportunity for
ownership based upon the individual's current position with the Company. The
unit options granted also take into account comparable awards to individuals in
similar positions in the industry, as reflected in external surveys, and 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. The
guidelines encourage managers to own units having a market value of at least 50%
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 premium price options was made to the top
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
53
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (continued)
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 executive
officers will not receive any other options for the subsequent three years.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Lee's base salary was $440,000 in 1999. 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 1999 of $930,600 for total cash
compensation of $1,430,600. A study by a compensation consulting firm during
1998 indicated that Mr. Lee's cash and total direct compensation (short-term
cash plus long-term incentive) were both below the medians of the chief
executive officers of a peer group of companies with similar revenues, market
capitalization and business focus. Consequently, in January 1999, the
Compensation Committee elected to increase Mr. Lee's compensation to align more
of his total direct compensation with the interests of the Company's owners. In
addition to the compensation consulting firm data, the Committee considered Mr.
Lee's performance. During 1998 Mr. Lee's efforts led to tentative Los Angeles
County Board of Supervisors' approval of Newhall Ranch, the largest single new
development in the history of Los Angeles County, for which the Board of
Supervisors gave final approval in 1999. In addition, the Board of Supervisors
provided final approval of the Company's Westridge golf course community.
Moreover, Mr. Lee's efforts let to record high revenues and net income for both
1998 and 1999. Income for 1999 increased 41% to $90.4 million from $64.1 million
in 1998, which increased 44% from 1997 earnings of $44.5 million.
Mr. Lee's bonus for 1999 of $930,600, versus $430,364 for 1998, equals his
target bonus of 94% of his salary plus 98%, 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 three to
seven years during which Mr. Lee's emphasis on strategic planning is expected to
yield benefits to 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 other 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 has been advised that Section 162(m) does not apply to limited
partnerships such as the Company.
Compensation Committee of the Board of Directors of Newhall Management
Corporation:
Peter T. Pope (Chairman)
Thomas V. McKernan, Jr.
Carl E. Reichardt
Thomas C. Sutton
Barry Lawson Williams
The preceding Compensation Committee Report and the following Stock Price
Performance graphs shall not be deemed incorporated by reference into any filing
under the Securities Act of 1933 or under the Securities Exchange Act of 1934,
except to the extent that the Company specifically incorporates this information
by reference, and shall not otherwise be deemed filed under such Acts.
54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (continued)
THE NEWHALL LAND AND FARMING COMPANY
STOCK PERFORMANCE ANALYSIS
FIVE-YEAR TOTAL RETURN
<TABLE>
<CAPTION>
5 YEAR
TOTAL
1994 1995 1996 1997 1998 1999 RETURN
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NHL 100.00 144.20 146.64 266.74 235.56 244.62 144.62%
S&P 500 100.00 137.50 169.40 225.91 290.30 351.26 251.26%
WRESI* 100.00 122.70 167.82 201.28 157.44 145.90 45.90%
</TABLE>
TEN-YEAR TOTAL RETURN
<TABLE>
<CAPTION>
10 Year
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Total Return
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NHL 100 55.02 69.05 53.06 61.19 47.69 68.77 69.94 127.21 112.35 116.67 16.67%
S&P 500 100 96.81 126.37 136.22 149.93 152.03 209.04 257.53 343.44 441.33 534.00 434.00%
WRESI* 100 51.47 58.29 52.58 62.81 59.29 72.75 99.50 119.34 93.35 86.51 -13.49%
</TABLE>
Assumes $100 invested on December 31, 1994 for the 5-year graph and December
31, 1989 for the 10-year graph. Total return includes reinvestment of
dividends.
* As of 9/30/1999 the Wilshire Real Estate Securities Index consists of the
following real estate operating companies: Catellus Development Corporation,
Extended Stay America, Homestead Valley Properties, Lodgian Inc., The Newhall
Land and Farming Company, Prime Hospitality Co., Starwood Hotels & Resorts,
Trizec Hahn Corp. and Wyndham International Inc.
55
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth the number of units beneficially owned by each
director of Newhall Management Corporation, each of the Company's five highest
paid executive officers, and all directors and officers as a group as of
February 29, 2000.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNERSHIP OF CLASS(%)
- ---------------- -------------------------------- -----------
<S> <C> <C> <C>
George L. Argyros 114,266 (1) (2) (3) *
Gary M. Cusumano 279,504 (1) (2) (4) *
Thomas E. Dierckman 123,716 (2) (4) (5) *
John R. Frye 102,672 (2) (4) *
Thomas L. Lee 296,252 (1) (2) (4) (5) 1.02
Thomas V. McKernan, Jr. 17,881 (1) (2) (3) *
Stuart R. Mork 92,193 (2) (4) (5) *
Henry K. Newhall 320,872 (1) (2) (3) (6) 1.12
Jane Newhall 615,460 (1) (2) (3) 2.14
Peter T. Pope 22,943 (1) (2) (3) *
Carl E. Reichardt 95,598 (1) (2) (3) (7) *
Thomas C. Sutton 18,772 (1) (2) (3) (8) *
Barry Lawson Williams 9,085 (1) (2) (3) *
Ezra K. Zilkha 1,231,870 (1) (2) (3) (9) 4.28
All directors and officers
as a group (23 persons) 3,449,040 (10) 11.67%
- ----------
</TABLE>
* Represents less than 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 66,000 units held by the
Managing General Partner and 20 units contributed to Newhall General
Partnership by each of Messrs. Cusumano and Lee. Of the total of
359,690 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 the following number of units subject to options that are
exercisable within 60 days of February 29, 2000: 3,500 for Mr. Argyros;
150,750 units for Mr. Cusumano; 101,500 for Mr. Dierckman; 65,750 for
Mr. Frye; 195,700 for Mr. Lee; 6,632 units for Mr. McKernan; 78,500 for
Mr. Mork; 7,966 for Mr. Pope; 3,365 for Mr. Williams; and 4,000 each
for Ms. Newhall and Messrs. Newhall, Reichardt, Sutton and Zilkha.
(3) Includes the following number of units subject to unit rights pursuant
to the Deferred Equity Compensation Plan for Outside Directors, which
units are distributable upon separation from the Board of Directors:
2,093 units for Mr. Argyros; 2,249 for Mr. McKernan; 6,281 for Mr.
Newhall; 12,110 for Ms. Newhall; 4,751 for Mr. Pope; 10,298 for Mr.
Reichardt; 3,382 for Mr. Sutton; 1,548 for Mr. Williams and 15,270 for
Mr. Zilkha.
(4) Includes the following number of units subject to unit rights under
certain circumstances pursuant to the 1995 Option/Award Plan: 577 for
Mr. Cusumano; 8,712 for Mr. Dierckman; 5,692 for Mr. Frye; 3,101 for
Mr. Lee; and 9,342 for Mr. Mork.
(5) Includes the following number of units held by the Company's Employee
Savings Plan on behalf of the respective officer: 2,564 for Mr.
Dierckman; 1,744 for Mr. Lee; and 2,499 for Mr. Mork.
56
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (continued)
(6) The Partnership is advised that Henry K. Newhall has sole voting and
investment power as to 80,871 units, of which 70,616 units are held by
a trust for which he is the trustee and beneficiary. Voting and
investment power is shared with others as to 167,975 units held by
certain trusts of which he disclaims beneficial ownership.
(7) Includes 2,000 units held by trusts for which Mr. Reichardt has sole
voting and investment power as the trustee and for which he disclaims
beneficial ownership.
(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 70,000 units held by Mr. Zilkha's wife for which he
disclaims beneficial ownership.
(10) Includes 714,563 units subject to options that are exercisable within
60 days from February 29, 2000 pursuant to the Partnership's 1995
Option/Award Plan; and 100,329 units subject to unit rights pursuant to
the Partnership's Deferred Equity Compensation Plan for Outside
Directors and the 1995 Option/Award Plan.
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 information about an unitholder that beneficially
owns more than 5% of outstanding Partnership units as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF UNITS PERCENT
NAME AND ADDRESS BENEFICIALLY OWNED OF CLASS
- ----------------------------- ------------------ ---------
<S> <C> <C>
State Farm Mutual Automobile 3,400,758 11.83%
Insurance Company*
One State Farm Plaza
Bloomington, Illinois 61710-0001
</TABLE>
- ---------
*Information is based upon a Schedule 13G (Amendment 14) dated February 3, 2000.
State Farm Mutual Automobile Insurance Company has disclosed it has sole voting
and investment power over all of the units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1999, the Company entered into consulting agreements with James M.
Harter, who resigned as Senior Vice President of the Corporation effective April
30, 1999, to pursue personal interests. During his employment, Mr. Harter was
the executive responsible for the Company's Newhall Ranch and Valencia Westridge
developments. The consulting agreements provide for Mr. Harter's assistance with
briefing and trial preparation for the pending lawsuits involving the Newhall
Ranch and Valencia Westridge developments. (Please refer to the "Community
Development" section of ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a description of the
developments and lawsuits.) Effective September 1999, Mr. Harter also entered
into an agreement to provide management consulting services to a Company
affiliate. During 1999, the Company paid $83,662 to Mr. Harter pursuant to the
terms of the agreements. For additional related party information see the
section entitled "Compensation Committee Interlocks and Insider Participation"
under ITEM 11 - "EXECUTIVE COMPENSATION."
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed with this report:
1. See Index to Financial Statements on page 22 of this Annual Report on
Form 10-K.
2. Financial Statement Schedules: Schedule III - Real Estate and
Accumulated Depreciation with accountants' report thereon. Other
schedules have been omitted because they are not applicable or the
required information is shown in the consolidated financial statements
and notes thereto.
3. Exhibits (listed by numbers corresponding to the Exhibit Table of Item
601 in Regulation S-K):
3(a) The Newhall Land and Farming Company (a California Limited
Partnership) Limited Partnership Agreement incorporated by
reference to Exhibit 3(e) to Registrant's Registration
Statement on Form S-14 filed August 24, 1984.
(b) First Amendment to Limited Partnership Agreement of The
Newhall Land and Farming Company (a California Limited
Partnership) incorporated by reference to Exhibit 3(b) of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, (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,
(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 (File Number 33-58171) dated March 22,
1995.
* (b) Newhall Executive Incentive Plan (as amended July 11, 1990).
* (c) The Newhall Land and Farming Company Employee Savings Plan
incorporated by reference to the Company's Registration
Statement on Form S-8 (File Number 33-53769) 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, (File Number
1-7585).
* (e) Form of Severance Agreements incorporated by reference to
Exhibit 10(e) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 (File Number 1-7585).
* (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, (File Number 1-7585).
* (g) The Newhall Land and Farming Company Senior Management
Survivor Income Plan incorporated by reference to Exhibit
10(h) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, (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, (File Number 1-7585).
58
<PAGE>
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, (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, (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, (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 Exhibit 10(d) of the Company's
Report on Form 10-Q for the quarter ended September 30, 1998,
(File Number 1-7585).
* (m) The Newhall Land and Farming Company Pension Restoration
Plan (As amended through July 15, 1998) incorporated by
reference to Exhibit 10(c) of the Company's Report on Form
10-Q for the quarter ended September 30, 1998, (File Number
1-7585).
(n) Trust Agreement dated January 15, 1992 between the Partnership
and Newhall Management Corporation incorporated by reference
to Exhibit 10(p) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1991, (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, (File Number
33-53767).
* (p) Amendment No. 1 to The Newhall Land and Farming Company
Retirement Plan incorporated by reference to Exhibit 10(r) of
the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, (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 Registration Statement on Form S-8
dated November 1, 1996, (File Number 333-15303).
* (r) Amendment No. 2 to The Newhall Land and Farming Company
Retirement Plan dated August 1, 1996 incorporated by reference
to Exhibit 10(r) the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, (File Number 1-7585).
* (s) Amendment No. 3 to The Newhall Land and Farming Company
Retirement Plan dated July 15, 1998, incorporated by reference
to Exhibit 10(a) of the Company's Report on Form 10-Q for the
quarter ended September 30, 1998, (File Number 1-7585).
* (t) Amendment No. 1 to The Newhall Land and Farming
Supplemental Executive Retirement Plan dated January 15, 1997
incorporated by reference to Exhibit 10(t) of the Company's
Annual Report on Form 10-K for the year ended December 31,
1996, (File Number 1-7585).
* (u) First Amendment to The Newhall Land and Farming Company
1995 Option/Award Plan dated November 19, 1997 incorporated by
reference to Exhibit 10(v) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, (File Number
1-7585).
* (v) Form of award for premium price options granted under The
Newhall Land and Farming Company 1995 Option/Award Plan
incorporated by reference to Exhibit 10(w) of the Company's
Annual Report on Form 10-K for the year ended December 31,
1997, (File Number 1-7585).
* (w) Amendment No. 2 to The Newhall Land and Farming Company
Savings Plan dated July 15, 1998, incorporated by reference to
Exhibit 10(b) the Company's Report on Form 10-Q for the
quarter ended September 30, 1998, (File Number 1-7585).
59
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(x) Valencia Marketplace Purchase and Sale Agreement dated January
7, 1998 and subsequent First, Second, Third and Fourth
Amendments incorporated by reference to Exhibit 10 the
Company's Report on Form 10-Q for the quarter ended March 31,
1998, (File Number 1-7585).
(y) 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, (File Number
1-7585).
* (z) Amendment Number One Effective January 1, 1999 to Newhall
Executive Incentive Plan (as amended July 11, 1990)
incorporated by reference to Exhibit 10 of the Company's
Report on Form 10-Q for the quarter ended March 31, 1999,
(File Number 1-7585).
* (aa) Amendment No. 4 to the Newhall Land and Farming Company
Retirement Plan dated July 21, 1999 incorporated by reference
to Exhibit 10 of the Company's Report on Form 10-Q for the
quarter ended June 30, 1999, (File Number 1-7585).
* (ab) Second Amendment to The Newhall Land and Farming Company
1995 Option/Award Plan adopted as of July 15, 1998
incorporated by reference to Exhibit 10(a) of the Company's
Report on Form 10-Q for the quarter ended June 30, 1999, (File
Number 1-7585).
11 Computation of earnings per unit
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule (Filed only with the Securities and
Exchange Commission)
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).
60
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(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) The following report on Form 8-K was filed in the fourth quarter ended
December 31, 1999.
<TABLE>
<CAPTION>
Item Reported Date of Report
------------- --------------
<S> <C>
A news release issued by the Company on December 16, 1999 December 16, 1999
concerning unexpected earnings in 1999, the close of escrow on the
sale of the Suey Ranch, an update on its unit repurchase program and
its continuing to publish year-end property appraisals.
</TABLE>
61
<PAGE>
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 15, 2000 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 15, 2000 /s/ THOMAS L. LEE
-----------------------
Thomas L. Lee
Chairman and Chief Executive Officer
Newhall Management Corporation
(Principal Executive Officer)
Date: March 15, 2000 /s/ STUART R. MORK
-----------------------
Stuart R. Mork
Senior Vice President and Chief Financial Officer
Newhall Management Corporation
(Principal Financial Officer)
Date: March 15, 2000 /s/ DONALD L. KIMBALL
-----------------------
Donald L. Kimball
Vice President - Finance and Controller
Newhall Management Corporation
(Principal Accounting Officer)
62
<PAGE>
Directors of Newhall Management Corporation:
Date: March 15, 2000 /s/ GEORGE L. ARGYROS
-----------------------
George L. Argyros
Date: March 15, 2000 /s/ GARY M. CUSUMANO
-----------------------
Gary M. Cusumano
Date: March 15, 2000 /s/ THOMAS L. LEE
-----------------------
Thomas L. Lee
Date: March 15, 2000 /s/ THOMAS V. MCKERNAN, JR.
----------------------------
Thomas V. McKernan, Jr.
Date: March 15, 2000 /s/ HENRY K. NEWHALL
-----------------------
Henry K. Newhall
Date: March 15, 2000 /s/ JANE NEWHALL
-----------------------
Jane Newhall
Date: March 15, 2000 /s/ PETER T. POPE
-----------------------
Peter T. Pope
Date: March 15, 2000 /s/ CARL E. REICHARDT
-----------------------
Carl E. Reichardt
Date: March 15, 2000 /s/ THOMAS C. SUTTON
-----------------------
Thomas C. Sutton
Date: March 15, 2000 /s/ BARRY LAWSON WILLIAMS
--------------------------
Barry Lawson Williams
Date: March 15, 2000 /s/ EZRA K. ZILKHA
-----------------------
Ezra K. Zilkha
63
<PAGE>
THE NEWHALL LAND AND FARMING COMPANY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Initial Cost of Development
------------------------------ Costs
Capitalized
Encum- Buildings and Subsequent
DESCRIPTION brances Land Improvements to Completion
- ----------- ----------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING PROPERTIES
APARTMENTS
Northglen (A) $ 744 $ 12,797 $ (85)
Portofino (A) 2,031 13,656 4
SkyCrest (A) 3,661 18,620 -
Montecito 3,082 19,206 -
SHOPPING CENTERS
Valencia Town Center 50,583 (C) 22,136 41,425 (682)
Valencia Town Center - Ring Road (C) 804 14,443 -
River Oaks (B) 2,354 5,302 619
NorthPark Village Square (B) 2,701 7,398 -
Castaic Village (C) 5,384 6,319 5
HOTELS
Valencia Hilton Garden Inn (D) - - -
Hyatt Valencia Hotel and
Conference Center 2,131 37,497 -
OFFICE AND MIXED USE PROJECTS
Town Center Office Building (C) 1,547 7,474 1,438
City Center Office Building (C) 2,614 4,192 1,426
Six Story Office Building (C) 4,028 13,826 -
Plaza del Rancho (C) 1,457 4,621 (50)
Town Center Plaza 636 5,399 -
Valencia Entertainment Center (C) - 19,600 -
SINGLE TENANT FACILITIES
Office/Records Storage 569 2,151 -
Retail Store - Trader Joe's 269 546 -
Spectrum Health Club (C) 1,000 6,156 78
Restaurant - El Torito 248 802 -
Restaurant - Hamburger Hamlet 459 661 -
Restaurant - Red Lobster 134 - -
Restaurant - Wendy's 91 300 -
OTHER PROPERTIES AND LAND
UNDER LEASE (G) 2,466 14,400 (25)
- -----------
------------ ---------------- ----------------
TOTAL OPERATING PROPERTIES 60,546 256,791 2,728
------------ ---------------- ----------------
PROPERTIES UNDER DEVELOPMENT
Princess Expansion Building - 2,178 -
Town Center Office Building 2 - 2,567 -
Preconstruction costs - various
other projects - 4,159 -
------------ ---------------- ----------------
TOTAL PROPERTIES UNDER
DEVELOPMENT - 8,904 -
------------ ---------------- ----------------
T O T A L $60,546 $ 265,695 $ 2,728
============ ================ ================
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at Which Carried
at December 31, 1999 (E)
-------------------------------------------- Year
Buildings and Accumulated Completed / Depreciable
DESCRIPTION Land Improvements Total Depreciation Acquired Lives
- ----------- ------------ --------------- ------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING PROPERTIES
APARTMENTS
Northglen $ 744 $ 12,712 $ 13,456 $ (6,566) 1988 (F)
Portofino 2,031 13,660 15,691 (6,668) 1989 (F)
SkyCrest 3,661 18,620 22,281 (3,494) 1997 (F)
Montecito 3,082 19,206 22,288 (506) 1999 (F)
SHOPPING CENTERS
Valencia Town Center 22,136 40,743 62,879 (13,312) 1992 (F)
Valencia Town Center - Ring Road 804 14,443 15,247 (713) 1998 (F)
River Oaks 2,354 5,921 8,275 (2,437) 1987 (F)
NorthPark Village Square 2,701 7,398 10,099 (809) 1996 (F)
Castaic Village 5,384 6,324 11,708 (1,875) 1992 (F)
HOTELS
Valencia Hilton Garden Inn (D) - - - - 1991 (F)
Hyatt Valencia Hotel and
Conference Center 2,131 37,497 39,628 (2,832) 1998 (F)
OFFICE AND MIXED USE PROJECTS
Town Center Office Building 1,547 8,912 10,459 (932) 1996 (F)
City Center Office Building 2,614 5,618 8,232 (2,539) 1991 (F)
Six Story Office Building 4,028 13,826 17,854 (968) 1998 (F)
Plaza del Rancho 1,457 4,571 6,028 (577) 1997 (F)
Town Center Plaza 636 5,399 6,035 (221) 1999 (F)
Valencia Entertainment Center - 19,600 19,600 (624) 1999 (F)
SINGLE TENANT FACILITIES
Office/Records Storage 569 2,151 2,720 (302) 1996 (F)
Retail Store - Trader Joe's 269 546 815 (98) 1994 (F)
Spectrum Health Club 1,000 6,234 7,234 (555) 1997 (F)
Restaurant - El Torito 248 802 1,050 (389) 1986 (F)
Restaurant - Hamburger Hamlet 459 661 1,120 (242) 1990 (F)
Restaurant - Red Lobster 134 - 134 - 1986 (F)
Restaurant - Wendy's 91 300 391 (116) 1984 (F)
OTHER PROPERTIES AND LAND
UNDER LEASE 2,466 14,375 16,841 (1,134) Various (F)
------------ --------------- ------------- -------------
TOTAL OPERATING PROPERTIES 60,546 259,519 320,065 (47,909)
------------ --------------- ------------- -------------
PROPERTIES UNDER DEVELOPMENT
Princess Expansion Building - 2,178 2,178 -
Town Center Office Building 2 - 2,567 2,567 -
Preconstruction costs - various
other projects - 4,159 4,159 -
------------ --------------- ------------- -------------
TOTAL PROPERTIES UNDER
DEVELOPMENT - 8,904 8,904 -
------------ --------------- ------------- -------------
T O T A L $60,546 $ 268,423 $328,969 $(47,909)
============ =============== ============= =============
</TABLE>
64
<PAGE>
THE NEWHALL LAND AND FARMING COMPANY
SCHEDULE III (CONTINUED)
DECEMBER 31, 1999
(A) Secures three financings with a total principal balance of $49.6 million at
December 31, 1999.
(B) Secures two financings with a total principal balance of $24.9 million at
December 31, 1999.
(C) Classifed as "Income-Producing Properties Held for Sale" on the December
31, 1999 balance sheet
(D) Joint venture accounted for as an equity investment.
(E) The aggregate cost for federal income tax purposes is approximately
$409,034 at December 31, 1999
(F) Reference is made to Note 2 of the Notes to Consolidated Financial
Statements for information related to depreciation.
(G) Includes certain properties classifed as "Income-Producing Properties Held
for Sale" on the December 31, 1999 balance sheet.
(H) Reconciliation of total real estate carrying value for the three years
ended December 31, 1999 are as follows:
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of period $ 288,155 $ 262,634 $ 215,193
Additions:
Cash expenditures 67,988 101,789 69,403
Deletions:
Cost of real estate sold (23,034) (76,268) (21,962)
Other (4,140) - -
---------------- --------------- ---------------
Balance at end of period $ 328,969 $ 288,155 $ 262,634
================ =============== ===============
</TABLE>
(I) Reconciliation of real estate accumulated depreciation for the three
years ended December 31, 1998 are as follows: (In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of period $ 39,443 $ 35,431 $ 32,552
Additions:
Charged to expense 11,718 7,277 7,466
Other - - -
Deletions:
Cost of real estate sold - (3,265) (4,587)
Other (3,252) - -
---------------- --------------- ---------------
Balance at end of period $ 47,909 $ 39,443 $ 35,431
================ =============== ===============
</TABLE>
65
<PAGE>
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
66
<PAGE>
THE NEWHALL LAND AND FARMING COMPANY
INDEX TO EXHIBITS
Item 14(a) 3
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(b) Newhall Executive Incentive Plan (as amended July 11, 1990)
11 Computation of earnings per unit
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
67
<PAGE>
Exhibit 10 (b)
THE NEWHALL LAND AND FARMING COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
NEWHALL EXECUTIVE INCENTIVE PLAN
(As Amended July 11, 1990)
1. PURPOSE
The Newhall Executive Incentive Plan ("Plan") is intended to benefit
The Newhall Land and Farming Company ("Partnership") by motivating and rewarding
certain key executives of the Partnership and Newhall Management Corporation
("NMC"), the Partnership's managing general partner.
2. ADMINISTRATION
(a) The Plan shall be administered by the Compensation Committee
("Committee") of the Board of Directors ("Board") of NMC, which shall consist of
no fewer than three (3) members of the Board. No member of the Committee shall
be eligible to participate in the Plan while he or she is a member of the
Committee. The Committee shall have full power and authority to interpret and
administer the Plan in accordance with such rules and regulations as the Board
may establish.
(b) The Board may, from time to time, remove members from the Committee
or add members thereto, and vacancies in the Committee, however caused, shall be
filled by action of the Board. The Committee shall select one of its members as
chairman, and shall hold its meetings at such times and places as it may
determine. All determinations of the Committee shall be made by a majority of
its members. Any decision or determination reduced to writing and signed by a
majority of the members of the Committee shall be as fully effective as if it
had been made by a majority vote at a meeting of the Committee duly called and
held. The members of the Committee shall receive such compensation for their
services as the Board may determine.
3. ELIGIBILITY
The persons eligible to participate in the Plan shall be such key
executives employed by the Partnership or NMC as the Committee shall from time
to time select. All such selections shall be made in accordance with eligibility
rules established by the Board.
4. INCENTIVE POOL
The Committee shall direct the Partnership's independent public
accountants (that firm that the Partnership employs to certify the Partnership's
financial statements) to annually ascertain, at the close of the
<PAGE>
Partnership's fiscal year, the amount equal to five percent (5%) of net earnings
of the Partnership, which amount shall constitute the Incentive Pool from which
Incentive Awards shall be made with respect to such fiscal year.
5. INCENTIVE AWARDS
(a) Upon determination of the amount of the Incentive Pool for a
particular fiscal year, an amount not exceeding the Incentive Pool so determined
may be allotted by the Committee as Incentive Awards for such fiscal year to
such key executives as it may select, and in such amounts and in such manner as
it may determine.
(b) The Committee's determination of how much, if any, of the Incentive
Pool shall be allotted as Incentive Awards, its selection of the key executives
to whom Incentive Awards shall be made, and its determination of the amount and
method of payment of each such Incentive Award (which method may include
deferral thereof pursuant to a deferred compensation agreement between the
Partnership and the key executive) shall be final.
6. AMENDMENT AND TERMINATION
The Board shall have full discretion to amend, suspend, or terminate
the Plan at any time.
THE NEWHALL LAND AND FARMING COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
BY: NEWHALL MANAGEMENT CORPORATION
MANAGING GENERAL PARTNER
/s/ ROBERT D. WILKE
---------------------------------------
Robert D. Wilke
Secretary
<PAGE>
Exhibit 11
THE NEWHALL LAND AND FARMING COMPANY
COMPUTATION OF EARNINGS PER UNIT
(in thousands, except per unit)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
Partnership Units 1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Average number of units outstanding during the period 31,388 33,986 34,520
Net units issuable in connection with dilutive options based upon
use of the treasury stock method 280 390 230
-------- ------- -------
Average number of primary units 31,668 34,376 34,750
-------- ------- -------
Net income $ 90,392 $64,080 $44,493
-------- ------- -------
Net income per unit $ 2.88 $ 1.89 $ 1.29
-------- ------- -------
Net income per unit - assuming dilution $ 2.85 $ 1.86 $ 1.28
-------- ------- -------
</TABLE>
<PAGE>
EXHIBIT 21
THE NEWHALL LAND AND FARMING COMPANY
SUBSIDIARIES
The following subsidiaries are included in the Registrant's December 31,
1999 consolidated financial statements:
Newhall Depositary Company
(a California corporation)
Valencia Water Company
(a California corporation)
Valencia Town Center Associates
Limited Partnership
(a California limited partnership)
VTC Hotel Company
(a California corporation)
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Newhall Management Corporation and Partners of The
Newhall Land and Farming Company:
We consent to incorporation by reference in the Registration Statements on Form
S-8 (Numbers 033-53767, 033-53769, 033-58171, 333-15303 and 333-57591) of The
Newhall Land and Farming Company of our report dated January 19, 2000, relating
to the consolidated balance sheets of The Newhall Land and Farming Company and
subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report appears
in the December 31, 1999, annual report on Form 10-K of The Newhall Land and
Farming Company.
/s/ KPMG LLP
Los Angeles, California
March 23, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,624
<SECURITIES> 01,567
<RECEIVABLES> 61,567
<ALLOWANCES> 863
<INVENTORY> 39,401
<CURRENT-ASSETS> 0
<PP&E> 454,698
<DEPRECIATION> 83,750
<TOTAL-ASSETS> 504,824
<CURRENT-LIABILITIES> 0
<BONDS> 222,825
0
0
<COMMON> 0
<OTHER-SE> 139,725
<TOTAL-LIABILITY-AND-EQUITY> 504,824
<SALES> 259,845
<TOTAL-REVENUES> 322,506
<CGS> 152,402
<TOTAL-COSTS> 207,293
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,390
<INCOME-PRETAX> 90,392
<INCOME-TAX> 0
<INCOME-CONTINUING> 90,392
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,392
<EPS-BASIC> 2.88
<EPS-DILUTED> 2.85
</TABLE>
