Annual Report (Form 10-K), fiscal year 1994

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 and is one of California's largest land resource companies. 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 and 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 new town of Valencia on a portion of the Company's landholdings in Los Angeles County. With nearly 10,000 acres remaining to be developed, Valencia now is the regional center and focal point for north Los Angeles County and is home to more than 32,000 residents and 1,000 companies that provide over 25,000 jobs. Regional centers generate long-term increases in land values with the more intensive development of industrial and commercial business parks and shopping centers, along with a broader range of single-family and multi-family homes.
During 1994, the Company started the entitlement process on a new planned community to be called Newhall Ranch. This new town will be located on 12,000 acres just west of Valencia along Highway 126 and will extend to the Ventura County line. Plans outline a balanced community designed for 70,000 residents, over 24,000 homes, a golf course and lake, schools and parks. Valencia and Newhall Ranch together form one of the nation's most valuable landholdings. They are located on the Company's 37,000 acres, approximately 30 miles north of downtown Los Angeles and within 10 miles 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.
In 1993, the Company exercised its first option on approximately 700 acres and purchased 160 acres in Scottsdale, Arizona, for development of McDowell Mountain Ranch, a new 3,200-acre master-planned community. Options remain on an additional 1,400 acres and approximately 900 acres of desert hillside have been dedicated to the City of Scottsdale for open space. The master plan and zoning for the new community were approved by the Scottsdale City Council in 1993, allowing development to begin. The master plan calls for more than 4,000 homes and 70 acres of retail and commercial development. When completed McDowell Mountain Ranch will be home to nearly 10,000 residents and include an elementary school, a middle school, a large community park and a wide range of neighborhood recreation centers and other amenities. During 1994, the Company began developing the first phase of the project and selling unfinished residential lots. At year end, six home builders were active in this new planned community.
ITEM 1. BUSINESS (continued)
Acquisition of the McDowell Mountain Ranch property is part of the Company's plan to diversify and expand during the 1990s with the development of planned communities in growing areas of California and other western states. Prospective parcels must meet certain criteria, including size, proximity to a major urban center and near-term development potential.
In the late 1980s, the Company adopted the strategy of selling farm properties with little or no potential for development and redeploying the proceeds into real estate operations. As of December 31, 1994, more than 22,000 acres of non-strategic farm land have been sold. The Company continues to market for sale its remaining 9,440 acres at the Merced Ranch. The Company intends to retain and continue agricultural operations on the 16,000-acre Newhall Orchard in Ventura County; the 38,800-acre Suey Ranch, where development will be considered in the future; and the 14,000-acre New Columbia Ranch which is being retained for its substantial surface and underground water supplies.
For information on damage to the Company's properties from the earthquake which struck the San Fernando Valley on January 17, 1994, see the "Earthquake Damage" section of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
Financial information concerning the Company's business segments appears in Note 11 of the Notes to Consolidated Financial Statements in this Annual Report. At December 31, 1994, the Company employed 225 persons including 11 classified as seasonal/temporary.
COMPETITION
The sale and leasing of industrial, residential and commercial real estate is highly competitive, with competition from numerous and varied sources. The degree of competition is affected by such factors as the supply of real estate available comparable to that sold and leased by the Company and the level of demand for such real estate. In turn, the level of demand is affected by interest rates and general economic conditions. The Company is not dependent upon any one customer for a significant portion of its revenues.
GOVERNMENTAL REGULATION AND ENVIRONMENT
The governmental review process through which landholdings must go before real estate projects are approved and can be built by the Company is referred to as the entitlement process. This process has become increasingly complex and projects often require several years to pass through the requirements of various governmental agencies.
In developing its projects, the Company must obtain the approval of numerous governmental authorities regulating such matters as permitted land uses, levels of population, density and traffic, and the provision of utility services such as electricity, water and waste disposal. In addition, the Company is also subject to a variety of federal, state and local laws and regulations concerning protection of health and the environment. This governmental regulation affects the types of projects which can be pursued by the Company
ITEM 1. BUSINESS (continued)
and increases the cost of development and ownership. The Company devotes substantial financial and managerial resources to complying with these requirements and dealing with this process. To varying degrees, certain permits and approvals will be required to complete the developments currently being undertaken, or planned, by the Company. 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 of the Company 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 properties. (See also Item 1 - Community Development)
APPRAISAL OF REAL PROPERTY ASSETS
The Company obtains annual appraisals of substantially all of its real property assets and engaged the independent firm of Buss-Shelger Associates, MAI real estate appraisers, to perform the appraisals as of December 31, 1994. The assets appraised by Buss-Shelger had an aggregate net book value of $244,796,000 at December 31, 1994 and did not include oil and gas assets, water supply systems, cash and cash equivalents and certain other assets.
For the purpose of the appraisals, market value was defined as the most probable price in terms of money which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. A significant portion of the appraised real property assets is located on the Company's 37,000 acres, 30 miles north of downtown Los Angeles and currently is undeveloped. The appraised value of undeveloped assets reflects the discount or developer's profit necessary to provide a third-party buyer with the incentive to purchase and undertake the risks inherent in the development process.
The Company believes that its strategy of selling entitled and primarily finished parcels on which the development process is substantially complete, or retaining land for development of building improvements, has enabled the Company to realize the fullest value from its various assets. The Company intends to continue the development of Valencia and the surrounding area, and plans to do so more aggressively as market conditions improve.
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 increases occur when necessary land use entitlements, including zoning and mapping approvals, are obtained from city and county governments. The appraised values of the Company's land and income-producing properties in the Valencia master-planned community have increased from $222 million in 1984, the first year independent property appraisals were obtained, to $766 million in 1994, despite declines in recent years.
On a per unit basis, the Company's net appraised value has increased from $11.74 to $21.86 over the same 11-year period. A summary of appraised values of properties owned for each of the last six years as of December 31 follows (the appraisals were performed by independent appraisers except as noted):
ITEM 1. BUSINESS (continued)
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. Certain reclassifications within categories have been made to prior periods' amounts to conform to the 1994 presentation; however, prior periods' amounts have not been restated to reflect land sale activity.
ITEM 1. BUSINESS (continued)
REAL ESTATE
The Company is developing the community of Valencia in Los Angeles County, California and McDowell Mountain Ranch in Scottsdale, Arizona. Valencia's development is based on a master plan with residential and industrial developments forming the basic community structure supported by shopping centers, schools, colleges, hospital and medical facilities, golf courses, professional offices and a range of recreational amenities. A system of landscaped and lighted pedestrian walkways, known as paseos, provide most residents with access to schools, retail, parks and recreation centers avoiding automobile traffic.
The Company now is applying its expertise to the development of McDowell Mountain Ranch, a planned community approved for 4,000 homes and 70 acres of retail and commercial development in the City of Scottsdale, Arizona. Unique environmental features, natural habitat and washes have been incorporated in the planning process. Neighborhood paseo walkways will connect with a community recreation center, and an extensive wilderness and equestrian trail system being developed by the city.
The Company also develops and operates a growing portfolio of commercial properties and provides building-ready sites for sale to industrial and commercial developers and users.
RESIDENTIAL DEVELOPMENT AND LAND SALES
VALENCIA
In 1993, the Company initiated a program to engage quality national and regional builders to construct and sell single and multi-family homes in Valencia through joint ventures with the Company. This development program is designed to augment the Company's merchant builder lot sale program and is expected to provide the Company with additional profit participation and accelerate residential development with emphasis being placed on more affordable housing markets.
The Company's strategy of increasing the pace of development through sales of residential lots to merchant builders and homes through joint ventures contributed to eleven new, more affordable home models in three projects being added to the product line of homes offered by merchant builders and joint-venture partners in Valencia in 1994. Valencia now offers homes that range from the low $100,000s to the mid $300,000s and, at the end of 1994, ten single and multi-family projects by eight home builders were active in Valencia. Additional new models catering to the demand for housing below $200,000 are planned by merchant builders and joint-venture partners in 1995. At the end of 1994, the Company's joint-venture partners had 34 homes in escrow.
In 1994, 271 lots were sold to merchant builders of which 176 were purchased by Beazer Homes for the first homes in Valencia NorthPark, the Company's newest residential neighborhood. Beazer opened models in August on 83 lots purchased from the Company in the second quarter and, as a result of the project's success, purchased an additional 93 lots in the fourth quarter and now is in escrow with 36 additional lots scheduled to close in 1995.
ITEM 1. BUSINESS (continued)
The Company's first joint venture with EPAC Communities, Inc. for 65 single-family homes in Valencia Northbridge was expanded to a total of 79 homes. During 1994, 41 homes closed escrow in this project. Closings are planned to start in 1995 at Montana Townhomes, a 138- unit project in Valencia Northbridge and the Company's second joint-venture with EPAC Communities, Inc.
The CourtHome Collection, a 128-home joint venture with RGC, an innovative Orange County-based builder, which features the most affordable detached homes offered in Valencia in many years, closed escrow on 5 homes in 1994. Another joint venture planned for 1995 is a 102-townhome project in Valencia Northbridge with prices starting in the low $100,000s.
MCDOWELL MOUNTAIN RANCH
The master plan and zoning for this 4,000-home planned community in Scottsdale, Arizona were approved by the Scottsdale City Council in 1993 and, in 1994, a total of 709 unfinished lots were sold to merchant builders. The builders include Coventry Homes, a division of Del Webb Corporation; Ryland Homes; Kaufman & Broad; The Presley Companies; Woodside Homes and Camelot Homes. Together, these merchant builders will offer homes ranging in price from $130,000 to $420,000. Initial model openings by merchant builders are scheduled for the spring of 1995.
The first lot sales are part of approximately 1,400 homes planned on the initial 680 acres of the project now under development. Construction is underway on the community recreation center, paseo system and information center for the new community. At December 31, 1994, 68 additional unimproved lots were in escrow with closings scheduled in 1995.
INDUSTRIAL DEVELOPMENT AND LAND SALES
The Company develops the infrastructure and provides building-ready sites to developers and users. Valencia's location just 30 minutes from downtown Los Angeles on Interstate 5, California's major north-south freeway, provides an attractive environment for industrial, commercial, service, distribution and entertainment businesses. The Company's first business park, Valencia Industrial Center, is home to over 500 companies and employs more than 14,000 people and, at the end of 1994, the vacancy rate in this center was 6.5 percent, an historic low. At December 31, 1994, the Company had over 850 acres of entitled industrial and commercial land, primarily in the Company's new business park, Valencia Commerce Center. With no competitive large land parcels available in Los Angeles County, these entitlements place the Company in a favorable position as the economy and real estate markets improve.
As a result of continued weakness in Southern California's industrial and office market, the Company has recorded no industrial or office land sales since 1992. However, six commercial parcels totaling 12 acres closed escrow in 1994 and included a 2.7-acre parcel for a Saturn dealership; 1.25 acres to a Cadillac, Oldsmobile and GMC truck dealer;
ITEM 1. BUSINESS (continued)
a 1.89-acre parcel for retail outlets including Blockbuster Music, Kinko's and The Men's Wearhouse; and a 4.2-acre parcel for a Barnes & Noble Bookstore with Starbucks Coffee, two restaurants and other retail outlets. At December 31, 1994, four parcels totaling 11.3 acres were in escrow with closings scheduled for 1995. Subsequent to year-end, a 1.2-acre industrial parcel closed escrow. The ability to close the remaining commercial escrows will be dependent upon market conditions.
Future industrial land sales will be concentrated in the 1,600-acre Valencia Commerce Center and expansion of the nearly completed Valencia Industrial Center. With Los Angeles County's northward expansion into the Santa Clarita Valley and beyond, the U.S. Postal Service chose Valencia Commerce Center for its new distribution center, which will bring 1,800 jobs to Valencia. For information on build-to-suit industrial buildings in Valencia Commerce Center, see the Commercial Real Estate Development section.
COMMUNITY DEVELOPMENT
The Company continues to focus financial and management resources on planning and entitlements in order to ensure an adequate supply of entitled land as the California economy and real estate markets improve. In 1994, the Company began the entitlement process for the largest residential project ever submitted in the history of Los Angeles County. This new town, to be called Newhall Ranch, encompasses 12,000 acres located west of Valencia along Highway 126 and extends to the Ventura County Line. The entitlement process for Newhall Ranch is continuing, and technical environmental studies are being prepared for the Environmental Impact Report.
At December 31, 1994, the Company had approximately 4,100 residential units approved in the Valencia area. Significant land development and infrastructure improvements remain to be completed before the Company can deliver the majority of these approved lots for sale. The Company is committed to continuing its entitlement efforts in the future. For additional discussion of community development and the entitlement process, see Item 1 - Governmental Regulation and Environment.
COMMERCIAL REAL ESTATE DEVELOPMENT
The Company develops and operates commercial properties in the Valencia area for the production of income. The Company's growing and diversified commercial portfolio is expected to continue to provide a relatively stable source of income and cash flow throughout economic cycles as well as appreciation in property values.
All income properties experienced high occupancy rates in 1994, including Valencia Town Center, the Company's regional shopping mall, where The Disney Store and Eddie Bauer, a national sportswear clothing chain, opened bringing the center to 95% occupancy. The center continues to attract shoppers from throughout north Los Angeles County, the San Fernando Valley, and east Ventura County. Occupancy rates at year-end ranged from 94% to 100% at the Company's three neighborhood shopping centers and averaged above 98% at the Company's three apartment complexes despite rental increases averaging 3%.
ITEM 1. BUSINESS (continued)
Two build-to-suit facilities were completed in 1994. ITT Corporation consolidated two divisions located in Los Angeles by moving more than 400 employees into a 199,000-square-foot facility, the first build-to-suit project in Valencia Commerce Center. An offer for sale of the building was under consideration at December 31,1994. A 7,000-square-foot facility for Trader Joe's, a popular specialty food retailer, opened in September. Negotiations for additional build-to-suit facilities are in progress with other companies.
During 1995, the Company plans to start seven new income properties in Valencia valued at over $160 million including land already owned. The largest of these projects is Valencia Marketplace, a 760,000-square-foot, high-volume retail complex. A lawsuit, filed by local environmental groups following approval by the Los Angeles County Board of Supervisors in July, 1994, was dismissed on March 9, 1995. Pending a 60-day appeal period, construction could start later this year with opening in late 1996 or early 1997.
Another of the 1995 projects is a 200,000-square-foot office/manufacturing building for Remo, Inc., an international manufacturer of percussion products. The $10.5 million, build-to-suit facility will be located on 10.5 acres in Valencia Commerce Center, the Company's newest business park. Remo, one of the world's largest drum manufacturers, will move its 38-year old company from North Hollywood to Valencia, bringing 300 jobs to the community. The state-of-the-art building is expected to be completed by March, 1996. Remo will join the U.S. Postal Service regional distribution facility and ITT Corporation in the new business park which is located immediately west of Interstate 5 and north of Highway 126.
Additional future plans include community shopping centers, apartment projects, restaurants, commercial recreational facilities, office buildings and hotels. The timing for development of future projects will be dictated by market conditions. On January 26, 1995, the Company disclosed that it is considering offers for sale of its Bouquet Shopping Center which was built in 1985 and consists of approximately 150,000 square feet on 12.3 acres. The sale is in line with the Company's strategy of selectively selling more mature income properties as additional projects are developed. If completed on the terms contained in the offers, the sale would contribute approximately $10 to $12 million to earnings. No assurances can be given that a sale will be completed on the terms contained in the offers or that a sale will be completed at all.
For a description of the commercial properties, see Item 2



ITEM 2. PROPERTIES
LAND
Listed below is the location and acreage of properties owned by the Company at December 31, 1994:
(1) An additional 1,430 acres are under long-term option.
PLANTS AND BUILDINGS
Agriculture - Various buildings located on four farming operations in California and office and maintenance buildings located in Dixon, California.
ITEM 2. PROPERTIES (continued)
Commercial Real Estate - Listed below is the location, square footage and anchor tenants of commercial properties owned by the Company at December 31, 1994. Other commercial properties not shown in the table include various commercial, industrial and restaurant buildings. The commercial properties are leased to 196 tenants, not including apartment complexes.
Valencia Water Company - 14 distribution reservoirs, 14 booster pumping stations, approximately 200 miles of pipeline and other utility facilities.
All of the commercial real estate properties and the properties of Valencia Water Company are located in and around Valencia, California and are owned by the Company. A $60 million mortgage is secured by the Portofino, Northglen and Stonecreek apartment complexes, River Oaks and Bouquet community shopping centers, and the Company's headquarters building. 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 8 of the Notes to Consolidated Financial Statements in this Annual Report.
For a discussion of the impact of the January 17, 1994 earthquake on the Company's properties, see the "Earthquake Damage" section of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S DEPOSITARY UNITS AND RELATED SECURITY HOLDER MATTERS
MARKET PRICE AND DISTRIBUTION DATA
The Company's partnership units are traded on the New York and Pacific Stock Exchanges under the ticker symbol NHL and, at December 31, 1994, the Company had approximately 1,760 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.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended December 31, 1994, 1993 and 1992
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $7.7 million at December 31, 1994, a decrease of $32.0 million for the year. The decrease was primarily due to retiring a $40 million loan obtained for construction of Valencia Town Center. There were no borrowings outstanding at December 31, 1994 against a new $40 million mortgage credit facility for Valencia Town Center or the Company's unsecured lines of credit which increased $12 million in 1994 to a total of $81 million. At December 31, 1994, over $125 million in cash and credit was available to fund future operations. At year-end there was no debt against raw land or land under development in Valencia.
Cash flow in 1994 was adequate to cover the year's quarterly distributions of 10 cents per partnership unit, fund the Company's on-going development projects and end 1994 with no short-term borrowings. The Company believes it has adequate sources of cash from operations and available credit to finance future operations as well as take advantage of new development opportunities.
There are no material commitments for capital expenditures other than in the ordinary course of business. The Company plans to start seven new commercial projects in 1995, valued at over $160 million including land already owned. Approximately $28 million is expected to be invested in these projects in 1995.
In 1995, the Board of Directors approved the repurchase of up to 600,000 of the Company's units depending on market conditions. Also, the Company is actively searching for additional large landholdings with development potential in California or other western states. At December 31, 1994, several properties were under review.
OPERATING ACTIVITIES: Cash provided from operating activities during 1994 totaled $20.9 million and included sales of 1,026 residential lots and homes in Valencia and at McDowell Mountain Ranch, the 5,370-acre Meridian Ranch and 12 commercial acres in Valencia. These sales provided the Company with $75.7 million in cash and notes totaling $9 million. In addition, $11 million was collected in 1994 from prior year land sales. The Company accepted $8.9 million and collected $22.2 million in notes receivable in 1993. For 1992, the Company accepted $29 million and collected $10.7 million in notes receivable.
The increase in inventories for 1994 was due to land development and infrastructure to support pending and future land sales and residential construction costs for the Company's joint venture projects. These expenditures totaled $66.6 million for 1994, including approximately $13.4 million related to McDowell Mountain Ranch, the majority of which has been funded by improvement district bonds sponsored by the City of Scottsdale. Total inventory expenditures were partially offset during 1994 by real estate sales in Valencia and McDowell Mountain Ranch. Deferred revenues of $650,000 were recognized in 1994 from land sales in prior years. At December 31, 1994, $5.2 million in deferred
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
revenues remained to be recognized in future periods as the Company completes required site development, landscaping and amenities. In 1993, $11.2 million in deferred revenues were recognized from land sales in prior years and, at the end of 1993, $1.8 million remained to be recognized. In 1992, the Company recognized $8.0 million in deferred revenues and $11.6 million remained to be recognized at the end of that year. Recognition of deferred revenues has no impact on the Company's cash position.
INVESTING ACTIVITIES: Capital expenditures totaled $11.9 million in 1994. This includes $5.1 million of construction costs for a 199,000-square-foot build-to-suit facility for ITT Corporation in Valencia Commerce Center and a 7,000-square-foot build-to-suit facility for Trader Joe's, a specialty food retailer. Also included are expenditures for various commercial tenant improvements and water utility construction costs.
In 1993, capital expenditures totaled $9.5 million and included $4.6 million of construction costs for Castaic Village, a 130,000-square-foot neighborhood shopping center north of Valencia. Other capital expenditures included water utility construction, land preparation for the ITT building and various improvements to commercial properties.
Capital expenditures during 1992 totaled $60 million, of which construction costs and infrastructure improvements for Valencia Town Center, the Company's regional shopping center, amounted to $50.4 million. Other capital expenditures in 1992 included $3.8 million for the first phase of Castaic Village and the purchase of the 433-acre Isola Ranch for $2.7 million.
FINANCING ACTIVITIES: In each of 1994 and 1993, the Company paid four quarterly cash distributions totaling $14.7 million, or 40 cents per partnership unit per year. In July 1992, the Board of Directors reduced the quarterly cash distribution to 10 cents from 20 cents per unit. The declaration of distributions is reviewed by the Board of Directors on a quarterly basis, and the amount is determined after consideration of the Company's earnings, cash requirements, financial condition and prospects.
In July 1994, following approval by the California Public Utilities Commission, Valencia Water Company finalized an $11 million long-term financing with a major insurance company. Also in 1994, Valencia Town Center's $40 million construction loan was prepaid without penalty and replaced with a $40 million revolving mortgage credit facility. There were no borrowings against this credit facility at December 31, 1994.
During 1994, the Company commenced infrastructure development activities at its McDowell Mountain Ranch, a portion of which is being funded through approximately $17 million of improvement district bonds. As of December 31, 1994, $11.4 million of the $17 million had been expended to construct these improvements of which $6.4 million remained as project debt after retirement of bonds for lots sold. In addition, $11.9 million in community facilities district bonds were placed by the City of Scottsdale to construct certain public improvements within McDowell Mountain Ranch. Although these bonds are not reflected as project debt, the Company is obligated to pay an ad valorem property tax for these improvements until parcels are sold.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
Revenues and earnings improved in 1994, ending four years of decline. The 22% increase in net income came despite a 1994 charge of $3.7 million, or 10 cents per partnership unit, for earthquake damage not covered by insurance.
The earnings increase came primarily from the sale of 1,026 residential lots and homes, of which 709 lots were at McDowell Mountain Ranch, the Company's newest planned community in Scottsdale, Arizona and the sale of farm land with no development potential which contributed $9.2 million to operating income.
A five-year summary of revenues and operating income for each of the Company's major business segments is listed below.
FIVE YEAR SUMMARY
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESIDENTIAL HOME AND LAND SALES
VALENCIA: The Company continues to benefit from its strategy of selling residential lots to merchant builders and homes through joint ventures. At the end of 1994, ten single and multi-family products were being offered in Valencia by eight home builders. Results for 1994 include sales of 271 lots to merchant builders which contributed $21.1 million to revenues and $4.2 million to income under percentage of completion accounting and 46 escrow closings from joint ventures which contributed $14.9 million to revenues and $2.5 million to income.
In 1992, the Company lowered its lot prices to remain competitive. As a result, profit margins in the past three years have been reduced. The Company continues to focus on ways to improve margins and maximize per acre income through the introduction of higher-density residential products in Valencia NorthPark and the creation of strategic homebuilding joint ventures.
A total of 62 residential lots were sold to merchant builders in 1993 and 399 lots in 1992. Lot sales in 1993 and 1992 contributed $4.6 million and $32.7 million to revenues and $541,000 and $3.7 million to income, respectively, under percentage of completion accounting. Also included in 1993 results were 21 home closings from the Company's first joint venture which generated revenues of $6.7 million and income of $1.0 million plus the sale of 220 acres at the Cowell Ranch in northern California for $6.0 million which contributed $5.3 million to income.
Transition from the Company's own home construction operations was completed in 1993 when 30 homes closed escrow compared with 88 in 1992.
No deferred revenues or income were recognized in 1994 from prior residential lot sales under percentage of completion accounting. This compares with deferred revenues of $6.9 million and $6.1 million and income of $1.2 million and $5.5 million recognized in 1993 and 1992, respectively.
The Company does not expect any profit participation income related to recent lot sales because of the more competitive market and lower margins being realized by home building companies. Cash received from prior residential land sale profit participation agreements added $100,000 to revenues and income in 1993 and $733,000 in 1992.
MERCHANT BUILDER PROGRAM: At the end of 1994, six major home builders were active in Valencia with seven different residential products on finished lots purchased from the Company. Home sales continue to increase as the variety of homes offered appeal to a broad spectrum of buyers.
Merchant builders closed escrow on 193 homes in 1994. During 1993, merchant builders closed escrow on 137 homes. These builders had 56 homes in escrow at December 31, 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Although the Company does not participate directly in the 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. For example, Beazer Homes opened models in Valencia NorthPark in August on lots purchased from the Company in the second quarter of 1994. Within two months Beazer was selling its second phase of homes and, because of such success, purchased an additional 93 lots in the fourth quarter and is now in escrow with 36 additional lots scheduled to close in 1995.
JOINT VENTURE PROGRAM: In addition to the sale of entitled residential lots to merchant builders, the Company is continuing its strategy of increasing the pace and profitability of residential development in Valencia through joint ventures. Under the terms of these joint ventures, the Company recognizes its portion of revenues and income as homes close escrow to homebuyers. Generally, these sales provide the Company with increased income as it participates in the builder profit. The Company expects to generate an increasing proportion of its revenues and income from joint ventures in 1995.
The Company's first joint venture with EPAC Communities, Inc. expanded from 65 homes in 1993 to a total of 79 homes. During 1994, 41 homes closed escrow in this project and 5 homes closed escrow in RGC's CourtHome Collection, a 128-home project in Valencia NorthPark. The CourtHome Collection is the most affordable detached home project offered in Valencia in many years. These single-family homes are clustered around a common courtyard and range in price from $139,000 to $169,000. In 1993, the EPAC Traditions project recorded 21 home closings.
Two additional joint ventures are planned to start generating revenues and income for the Company in 1995. Four models, priced from $130,000 to $160,000, opened in September at Montana Townhomes, a 138-unit project in Valencia Northbridge, the Company's second joint venture with EPAC Communities, Inc. Another joint-venture project is planned for 102 townhomes in Valencia Northbridge. Models featuring three floorplans are expected to open in 1995 with prices starting in the low $100,000s.
MCDOWELL MOUNTAIN RANCH: This first community by the Company outside of California has attracted considerable interest by merchant builders. As land development and infrastructure development continues at this 4,000-home planned community in Scottsdale, Arizona, escrow closed on 604 unimproved residential lots during the fourth quarter of 1994. Sales of these lots to merchant builders contributed $18.4 million to revenues and $6.6 million to income under percentage of completion accounting. Results for 1994 also include the sale of a 79-acre bulk parcel for 105 unimproved lots outside the planned community which contributed $3.6 million to revenues and $1.7 million to income. At December 31, 1994, 68 additional unimproved lots were in escrow with closing scheduled in 1995.
Construction also started in 1994 on the community recreation center, paseo system and information center. Initial model openings by merchant builders are scheduled in the spring of 1995. Builders will offer homes ranging in price from $130,000 to $420,000, giving homebuyers a wide range of options.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Residential lot sales during 1994 are part of approximately 1,400 homes planned on the first 680 acres of the project now under development. When the 3,200-acre community is completed, it will be home to nearly 10,000 people and include 70 acres of commercial development, an elementary school, a middle school and a large community park.
In acquiring the land for development of McDowell Mountain Ranch, the seller provided financing at favorable terms to the Company. In addition, much of the infrastructure is being financed through improvement district and community facilities bonds sponsored by the City of Scottsdale at favorable interest rates, and is non-recourse to Newhall Land.
INDUSTRIAL AND OTHER SALES
As a result of continued weakness in Southern California's industrial and office market, the Company has recorded no industrial or office land sales since 1992. However, six commercial parcels totaling 12 acres closed escrow in 1994, including a 2.7-acre parcel for a Saturn dealership and a 1.25-acre parcel to Parkway Motors -- a major Cadillac, Oldsmobile and GMC truck dealer - -- for expansion of its truck operations. The sale to the Saturn dealership expands Valencia Auto Center across Valencia Boulevard and increases the Center to 16 dealerships selling 27 makes of vehicles.
A 1.89-acre parcel was sold across from Valencia Town Center for retail outlets including Blockbuster Music, Kinko's and The Men's Wearhouse. Additionally, a 4.2-acre commercial parcel sold on Valencia Boulevard for a Barnes & Noble book store with a Starbucks Coffee, two restaurants and other retail outlets. The six 1994 sales contributed $10.9 million to revenues and $6.8 million to income. Deferred revenues of $650,000 and income of $180,000 were recognized in 1994 from a prior land sale.
In 1993, seven parcels totaling 29.9 acres contributed $10.9 million to revenues and $5.2 million to income. In addition, $4.3 million in revenues and $2.3 million in income was recognized under percentage of completion accounting from prior land sales, including the final income recognition on the 62.4-acre U.S. Postal Service site. In 1992, two sales of commercial land totaling 4.5 acres closed escrow and contributed $1.3 million to revenues and $940,000 to income under percentage of completion accounting. Also, $2.0 million in revenues and $1.6 million in income was recognized in 1992 under percentage of completion accounting from the 1990 sale to the U.S. Postal Service and the 1991 sale of a 5-acre parcel to Kaiser Permanente.
At December 31, 1994, industrial and commercial land inventories totaled approximately 850 entitled acres. Final plans for these acres are subject to review by government agencies before development can proceed, but these entitlements, and the fact that few competitive large land parcels are available in Los Angeles County, place the Company in a favorable position as the economy and real estate markets improve. At December 31, 1994, four parcels totaling 11.3 acres were in escrow for $6.3 million with closings scheduled for 1995. The ability to close these escrows will be dependent upon market conditions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
COMMUNITY DEVELOPMENT
In June 1994, the Company submitted an application to Los Angeles County for a new 12,000-acre planned community. This new town, to be called Newhall Ranch, will be located west of Valencia along Highway 126 and will extend to the Ventura County line.
Plans outline a balanced community designed for 70,000 residents with more than 24,000 homes, a golf course and lake, schools, parks, an extensive trail system, and over 5,000 acres of natural open space. The new community also will include a 200-acre business park and several retail centers to create significant job opportunities. The Santa Clara River, which runs through the project, will be preserved in a natural state.
The entitlement process for Newhall Ranch is continuing, and technical environmental studies are being prepared for the Environmental Impact Report.
At December 31, 1994, the Company had approximately 4,100 residential units approved in the Valencia area. Significant land development work and infrastructure improvements remain to be completed before the Company can deliver the majority of approved lots for sale.
In 1992, the Company received final approval from the Los Angeles County Board of Supervisors for the 1,800-home Westridge Golf Course Community. However, following approval, two environmental groups filed a lawsuit challenging the County's approval and subsequently the court rescinded the entitlements previously granted. At December 31, 1994, the County was nearing completion of the Environmental Impact Report addressing the court-mandated inadequacies. This report is expected to be reviewed by the court and released to the public in 1995. If approved, the Company could reinstate the entitlements and begin to develop the community by early 1996 and generate sales in 1997.
Expenses associated with Community Development activities totaled $6.7 million in 1994, a 9% increase over 1993, principally relating to the newest planned community, Newhall Ranch. In 1993, Community Development expenses totaled $6.1 million, a 21% decrease from 1992, primarily as a result of the Company's success in obtaining entitlements during 1992 and prior years. Expenses in 1992 totaled $7.8 million. The Company is committed to continuing its entitlement efforts in the future.
COMMERCIAL OPERATIONS
Commercial operations include the Company's portfolio of income-producing properties and the Natural Resources division, consisting of Valencia Water Company, a wholly-owned public water utility, and the Company's energy operations. The Company's income portfolio contributed $13.8 million to income in 1994, an increase of 16% over 1993. A 19% decrease in 1994 results from the Natural Resources division reduced the overall increase in 1994 commercial operating income to 9%.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The income property portfolio benefited from a strong performance from Valencia Town Center, the Company's regional shopping mall. Opening of The Disney Store, Eddie Bauer and other mall shops resulted in mall tenant occupancy of 95% at the end of 1994. For 1994, contribution to income from Valencia Town Center was $3.6 million before debt service of $2.2 million, but after depreciation of $2.8 million. This result was a 25% improvement over 1993. Retail sales per square foot were up 20% for the year.
All income properties experienced high occupancy rates. Valencia Hilton Garden Inn, a 152-room joint venture hotel, recorded an exceptional occupancy rate of 92% compared with just under 80% in 1993. At Castaic Village, the Company's newest neighborhood shopping center, constructed space is 94% leased. Occupancy at Bouquet Center and River Oaks neighborhood shopping centers is 99% and 100%, respectively, the same as at the end of 1993. The Company's three apartment complexes had occupancy rates above 98%, even with rent increases averaging 3%. At the end of 1993 and 1992, vacancies in the apartment complexes averaged 4%. The Company's office buildings also enjoy high occupancy rates.
The commercial portfolio continues to expand as Trader Joe's, a popular specialty food retailer, opened in September 1994. The 7,000-square-foot facility is a build-to-suit under a long-term lease agreement with the Company. In October, ITT Corporation began the consolidation of two divisions by moving more than 400 employees into the Company's first build-to-suit facility in Valencia Commerce Center. An offer for sale of the building was under consideration at December 31, 1994. Negotiations for additional build-to-suit facilities are in progress with other companies.
Valencia Marketplace, a high-volume retail complex, was approved by the Los Angeles County Board of Supervisors in July 1994. Subsequently, local environmental groups filed a lawsuit challenging the County's approval, and construction will be delayed on this 760,000-square-foot project.
A 12-month drought recovery surcharge, approved by the California Public Utilities Commission (CPUC) for Valencia Water Company, expired in May 1994, contributing to decreases in the Natural Resources division's revenues and income for the year compared with 1993 results. A 30% rate increase by the CPUC was approved effective January 1, 1995, and should contribute to an increase in revenues and income for the year. In the energy operation, natural gas prices were level but oil prices were down, also contributing to the decline.
AGRICULTURAL OPERATIONS
Revenues from agricultural operations increased 4% and income increased 49% primarily as a result of excellent yields and prices for avocados, grapes and certain row crops. Also, contributing to the increase in income are expense reductions from streamlined administrative functions and transition to leasing grazing land to livestock operators.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
In 1993, sales of farm land, partially offset by improved citrus prices and higher prices and yields for grapes, resulted in net decreases of 10% in revenues and 16% in income from the prior year. In 1992, agricultural earnings decreased by 32% from the prior year due to the sale of farm properties and a sharp decline in the price of oranges and lemons.
Agricultural operations will continue to provide returns from the 16,000-acre Newhall Orchard in Ventura County and the 39,000-acre Suey Ranch where development will be considered in the future. The New Columbia Ranch, which is being retained for its substantial surface and underground water supplies, will continue to be leased to tenants and contribute to income.
RANCH SALES
Sale of the 5,370-acre Meridian Ranch for $11.8 million contributed $9.2 million to 1994 income. In 1993, sale of a total of 3,900 acres of farm land at the Capay/Wheatland, Merced and Meridian ranches contributed $9.9 million to revenues and $5.2 million to income. The sale of 6,750 acres of farm land at the Wilson, Merced and Meridian ranches contributed $21.7 million to revenues and $14.5 million to income in 1992.
The Company continues to market for sale its remaining 9,440 acres at the Merced Ranch. At December 31, 1994, no agricultural parcels were in escrow.
EARTHQUAKE DAMAGE
Following the earthquake which struck the San Fernando Valley on January 17, 1994, a $3.7 million charge was taken for damages to the Company's properties not covered by insurance. This does not include estimated damages of $3.5 million incurred by Valencia Water Company to its tanks and distribution system. The majority of these costs are expected to be recovered over time through rates approved by the CPUC for 1995, and from insurance proceeds. In 1994, the CPUC approved a $785,000 disaster recovery surcharge for emergency repairs.
GENERAL AND ADMINISTRATIVE EXPENSE
The primary reason for an increase of 13% in total general and administrative expenses in 1994 is reduced expense recoveries for tax accounting fees billed to outside partnerships. Reductions in staff and overhead expenditures resulted in a 3% decrease in 1993 from the prior year and a 5% decrease in 1992 from 1991.
UNIT OWNERSHIP PLANS
In 1994, a $151,000 expense was recorded for amortization of lapsed return rights in connection with restricted units issued in 1988 and 1989. An expense of $250,000 in 1993 and an expense recovery of $900,000 in 1992 were recorded for fluctuations in the market price of partnership units in connection with appreciation rights of the Company's outstanding non-qualified options.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
INTEREST AND OTHER
Increases in interest expense from prior years are attributable to a $30-million unsecured loan obtained from a major insurance company in December 1993, and rate increases on variable rate project financing. Also contributing to the increase is a reduction in interest income due to collection of notes receivable partially offset by income from additional cash available for investment.
The increase in interest expense in 1993 was due to a construction loan and community facilities bonds for Valencia Town Center, and a ranch mortgage obtained in December 1992. Interest income recognized on notes receivable from land sales reduced the overall increase to 5%. The increase in interest expense in 1992 was due to construction financing for the regional mall after completion of the project in September 1992, short-term borrowings during the year and bank financing for the Company's wholly-owned water utility. Also, interest income was decreased by the repayment of land sale notes.
INFLATION AND RELATED FACTORS
The Company's business, like most others, is affected by general economic conditions and is impacted significantly by conditions in its real estate markets. Also, fluctuations in interest rates and the availability of financing to land purchasers have an important impact on Company performance.
The Company believes it is well positioned against any effects of inflation. Historically, during periods of inflation, the Company has been able to increase selling prices of properties to offset rising costs of land development and construction.
However, in the past few years, there has been a decline in land values in California from the recession and sales prices of Company properties have shown decreases while costs have remained relatively constant. The commercial income portfolio is protected substantially from inflation since percentage rent clauses in the Company's leases tend to adjust rental receipts for inflation, while the underlying value of commercial properties over the long-term has tended to rise.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
Independent Auditors' Report
Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
INDEPENDENT AUDITORS' REPORT
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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
Los Angeles, California /s/ KPMG Peat Marwick LLP January 18, 1995
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
See notes to consolidated financial statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994
NOTE 1. ORGANIZATION
The Newhall Land and Farming Company, a California Limited Partnership ("the Company" or "the Partnership"), was reorganized from a corporation to a limited partnership on January 8, 1985.
The general partners of the Company are Newhall Management Limited Partnership, the Managing General Partner, and Newhall General Partnership. Two executive officers and the Managing General Partner are the general partners of Newhall General Partnership.
NOTE 2. INDUSTRY SEGMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company operates in two reportable industry segments: Real Estate - -- community development including residential land sales and home building, commercial and industrial land sales, and development and operation of commercial property; Agriculture -- primarily farming. Information as to identifiable assets, capital expenditures and depreciation for these segments is summarized in Note 11. Significant accounting policies related to the Company's segments are:
REAL ESTATE/RESIDENTIAL HOME SALES: The Company's income from Residential Home Sales comes from sales of completed single and multi-family homes to homebuyers through joint ventures and limited partnerships. The Company increases its inventories of homes completed or under construction with venture partners as it funds its portion of the venture obligation and records its portion of revenues and income as the venture closes escrow on sales to homebuyers.
REAL ESTATE/LAND SALES: Sales are recorded at the time escrow is closed provided that: (1) there has been a minimum down payment, ranging from 20% to 25% depending upon the type of property sold, (2) the buyer has met adequate continuing investment criteria, and (3) the Company, as the seller, has no continuing involvement in the property. Where the Company has an obligation to complete certain future development, revenue is deferred in the ratio of the cost of development to be completed to the total cost of the property being sold under percentage of completion accounting.
REAL ESTATE/DEVELOPMENT AND OPERATION OF COMMERCIAL PROPERTIES: The Company owns and leases apartments, commercial and industrial buildings, shopping centers and land to tenants. Except for apartments and a hotel, 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 a six-month lease and continue on a month-to-month basis thereafter.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 accounted for under the provisions of SFAS No. 109 are included in operating expenses. In addition to income, funds advanced or contributed by developers to the utility are subject to federal and state income taxes. Accordingly, deferred income taxes are reflected in the consolidated financial statements.
REAL ESTATE/COMMUNITY DEVELOPMENT: Preliminary planning and entitlement costs are charged to expense when incurred. After tentative map approval, expenditures for map recordation are charged to the identified project.
AGRICULTURE/OPERATIONS: Revenue is recognized as crops are delivered to farm cooperatives and other purchasers. Crops delivered to farm cooperatives are marketed throughout the year after harvest. At the time of delivery, the Company estimates the proceeds to be received from the cooperatives and records these amounts as unbilled receivables. During the year following harvest, the Company records any adjustments of such estimated amounts arising from changing market conditions. Net income for the years ended December 31, 1994, 1993, and 1992 increased approximately $1,013,000, $1,075,000, and $1,177,000, respectively, as a result of such adjustments.
Costs incurred during the development stage of orchard and vineyard crops (ranging from three to ten years) are capitalized and amortized over the productive life of the trees or vines. Farming costs which cannot be readily identified with a specific harvested crop or other revenue producing activity are expensed as incurred.
Farming inventories include crops in process and harvested crops and are valued at the lower of cost or market, determined on the first-in, first-out method.
AGRICULTURE/RANCH SALES: Sales of non-developable farm land occur irregularly and are recognized upon close of escrow provided the criteria as described for real estate land sales are met.
OTHER GENERAL ACCOUNTING POLICIES ARE:
BASIS OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions are eliminated. Certain reclassifications have been made to prior periods' amounts to conform to the current year presentation.
JOINT VENTURE: The Company uses the equity method to account for an investment in a joint venture with Hilton Inns, Inc. which is less than 50% controlled.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
PROPERTY AND EQUIPMENT: Property is stated at cost, less proceeds from sales of easements and rights of way. Depreciation of property and equipment is provided on a 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.
ENVIRONMENTAL MATTERS: Environmental clean-up costs are charged to expense or established reserves and are not capitalized. Generally, reserves are recorded for environmental clean-up costs when remediation efforts are probable and can be reasonably estimated. To date, environmental clean-up costs have not been material.
INCOME TAXES: The Company, as a partnership, is not a taxable entity; accordingly, no provision for income taxes has been made in the consolidated financial statements. Partners are taxed on their allocable share of the Company's earnings. Partners' distributive share of the income, gain, loss, deduction and credit of the Company is reportable on their income tax returns.
The Revenue Act of 1987 contained provisions which, in some cases, taxes publicly traded partnerships as corporations. Since the Company was in existence on December 17, 1987, it will continue to be treated as a partnership for the 1987 through 1997 taxable years; and, subject to certain qualification requirements, will continue to be treated as a partnership indefinitely thereafter.
AMOUNTS PER PARTNERSHIP UNIT: Net income per unit is computed by dividing net income by the weighted average number of units and common unit equivalents (dilutive options) outstanding during the year. The number of units for the computation was 36,789,000, 36,790,000, and 36,796,000, for the years ended December 31, 1994, 1993, and 1992, respectively.
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, 1994, the net tax basis of the Company's assets and liabilities exceeded the Company's financial statement basis of its assets and liabilities by $204,695,000. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 the Company's financial instruments are as follows:
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 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 have maturities of less than one year from close of escrow and, if applicable, the carrying amount reflects imputed interest to reduce the note receivable to its present value.
MORTGAGE AND OTHER DEBT The carrying amount of the Company's debt reflects fair value based on current interest rates available to the Company for comparable debt. See Note 8 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 6. COMMERCIAL LEASING OPERATIONS
A summary of the historical cost of properties held for lease, which are included in property and equipment, follows:
Minimum lease payments to be received under non-cancellable operating leases as of December 31, 1994 are as follows:
* This amount does not include contingent rentals which may be received under certain leases based on lessee sales or apartment rentals. Contingent and apartment rentals received for the years ended December 31, 1994, 1993, and 1992 were (in thousands) $8,836, $8,119, and $10,927, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 7. LINES OF CREDIT
No borrowings were outstanding against lines of credit at December 31, 1994 or 1993. At December 31, 1994, the Company had available lines of credit totaling $81 million. Revolving lines of credit for general corporate purposes include a $30 million line with Wells Fargo Bank, a $20 million line with Societe Generale, a $4 million line with Bank of America and a $10 million line with Bank One, Arizona. In addition, the Company has a $15 million revolving credit facility with Morgan Guaranty Trust Company of New York which is restricted to financing development costs of various types of commercial projects in Valencia and a $2 million line of credit with Wells Fargo Bank which is restricted to use by Valencia Water Company for working capital needs. Commitment fees range from .125% to .5% per annum of the unused portion.
Letters of credit outstanding against available lines of credit totaled $5.5 million and $4.2 million, respectively, at December 31, 1994 and 1993.
NOTE 8. MORTGAGE AND OTHER DEBT
The $60 million financing from Prudential is secured by six of the Company's commercial properties. The terms of the note require monthly payments of interest only through February, 1995 and monthly principal and interest payments of $501,000 thereafter until maturity on March 1, 1999 when a principal balance of approximately $57 million is due.
In December 1992, the Company obtained a non-recourse mortgage financing from Prudential for $12 million 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.
In July 1994, Valencia Water Company finalized an $11 million financing with Pacific Mutual. The terms of the financing call for semi-annual interest payments with the principal payable in full at maturity on June 1, 2009. The loan is not guaranteed by the Company.
The commercial mortgage was obtained from Bank of America in January, 1991 in conjunction with the purchase of a 50,000-square-foot office building in the vicinity of Valencia Town Center. A $1.6 million principal repayment was made on September 1, 1993
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
in return for a 2.05% rate reduction. The revised terms call for monthly principal and interest payments of $26,000 and a balloon payment of approximately $3.1 million at maturity on February 1, 2001.
In December 1993, the Company completed a $30 million seven-year unsecured financing. The terms of the notes call for interest payments payable semi-annually and principal payments in equal annual installments commencing upon the third anniversary of the notes.
In November 1994, the Company prepaid without penalty the $40 million construction loan obtained from Bank of America for Valencia Town Center. In December 1994, a $40 million revolving mortgage credit facility secured by Valencia Town Center was obtained jointly from Wells Fargo Bank and Morgan Guaranty Trust Company. The terms of the credit facility call for a commitment fee of .125% per annum of the unused portion. Borrowings bear interest at LIBOR plus 1.5% or Wells Fargo's prime rate, at the election of the Company. There were no borrowings outstanding against the facility as of December 31, 1994.
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 which opened in September 1992. The bonds will be repaid over 20 years from special taxes levied on the mall property.
The McDowell Mountain Ranch land acquisition notes include an 8.75% mortgage payable in annual principal and interest installments of $201,000 until maturity on March 3, 2018 and an 8% note payable in semi-annual installments commencing November 30, 1994 until maturity on May 31, 1998. The 8% note calls for additional principal paydown as parcels are sold.
In March 1994, the City of Scottsdale placed over $17 million of improvement district bonds for construction of infrastructure improvements at McDowell Mountain Ranch. As of December 31, 1994, $11.4 million had been expended of the $17 million available to construct these improvements. A proportionate share of the bonds are repaid as parcels are sold to merchant builders and at December 31, 1994, $6.4 million is reflected as project debt. In addition, $11.9 million in community facilities district bonds were placed by the City of Scottsdale to construct certain public improvements within McDowell Mountain Ranch. Although these bonds are not reflected as project debt, the Company is obligated to pay an ad valorem property tax for these improvements until parcels are sold.
Annual maturities of long-term debt are approximately (in thousands) $1,177 in 1995, $9,826 in 1996, $11,625 in 1997, $11,755 in 1998, $65,502 in 1999, and $46,106 thereafter.
CAPITALIZED INTEREST AND INTEREST INCOME: During 1994, 1993, and 1992, total interest expense incurred amounted to (in thousands) $12,750, $10,348 and $7,555, net of $1,830, $535 and $1,100 which was capitalized, respectively. Interest income from investments and notes receivable totaled (in thousands) $2,822 in 1994, $2,988 in 1993 and $567 in 1992.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 9. EMPLOYEE BENEFIT PLANS
INCENTIVE COMPENSATION PLAN: Under the terms of the Company's Executive Incentive Plan, the Board of Directors may authorize incentive compensation awards to key management personnel of up to five percent of each year's income. The Board of Directors authorized awards of $662,000, $307,000 and $455,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
OPTION AND APPRECIATION RIGHTS PLAN: Under the terms of the Company's Option, Appreciation Rights and Restricted Units Plan, non-qualified options or restricted units may be granted at the market price at date of grant. The plan also allows for the granting of tandem appreciation rights or bonus appreciation rights in connection with non-qualified options, which entitle the holder to receive cash or partnership units, or a combination thereof, at a value equal to the excess of the fair market value on the date of exercise over the option price. The following non-qualified options, all without appreciation rights, were granted: 1994 -- 171,300; 1993 -- 226,200; 1992 -- 123,800. A total of 400 restricted unit rights were granted in 1994 under the Company's Management Unit Ownership Program. No restricted units were granted in 1993 or 1992.
No expense or recovery was recorded in 1994 for fluctuations in the market price of partnership units in connection with appreciation rights on outstanding non-qualified options. In 1993, an expense of $250,000 was recorded and, in 1992, and expense recovery of $900,000 was recorded.
A summary of changes under the plans follows:
At December 31, 1994, 580,975 options were exercisable and no options were available for future grants. On January 18, 1995, the Board of Directors adopted a new option program and approved repurchase of up to 600,000 depositary units for issuance under the program.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 are calculated as 40.5% of the highest average annual earnings up to Social Security covered compensation, plus 60% of average annual earnings in excess of covered compensation, reduced pro rata for years of service less than 30.
The Company's contribution to the Retirement Plan is determined by consulting actuaries on the basis of customary actuarial considerations, including total covered payroll of participants, benefits paid, earnings and appreciation in the Retirement Plan funds.
The Board of Directors has adopted a Pension Restoration Plan, pursuant to which the Company will pay any difference between the maximum amount payable under ERISA and the amount otherwise payable under the Plan.
The Company's funding policy is to contribute no more than the maximum tax-deductible amount. Plan assets are invested primarily in equity and fixed income funds.
The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations were 8.5 and 5 percent in 1994, 7 and 5 percent in 1993, and 8 and 6 percent in 1992, respectively. The expected long-term rate of return on assets was 9 percent for each of the three years.
The Company also has a Supplemental Executive Retirement Plan and a Retirement Plan for Directors. The additional pension cost for these plans was $298,000 in 1994, $184,000 in 1993, and $208,000 in 1992.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following table sets forth the plans' funded status and amounts recognized in the Company's financial statements for the Retirement and the Pension Restoration Plans:
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
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 $252,000 in 1994, $245,000 during 1993 and $298,000 during 1992.
DEFERRED CASH BONUS PLAN: In February 1991, the Compensation Committee of the Board of Directors awarded deferred bonuses payable January 15, 1999. The amount to be paid is based upon the relative percentage return on the market value of the Company's depositary units compared to the percentage return on the Standard and Poor's 500 Index over a nine-year period. No deferred cash bonuses were earned in 1994, 1993, or 1992 and accordingly, no expense was recorded.
OTHER BENEFITS: The Company does not provide postretirement or postemployment benefits other than those plans described above and, as such, there is no unrecorded obligation to be recognized under SFAS Nos. 106 and 112.
NOTE 10. 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 acquired adequate insurance to protect itself against any future material property and casualty losses.
In the ordinary course of business, and as part of the entitlement and development process, the Company is required to provide performance bonds to the County of Los Angeles and the City of Santa Clarita to assure completion of certain public facilities. At December 31, 1994, the Company had performance bonds outstanding totaling approximately $125 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 amount of such future latent cost cannot be determined. However, the Company believes such costs will not materially affect the Company's consolidated financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 11. INDUSTRY SEGMENT INFORMATION
In thousands
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for 1994 and 1993:
* Includes a charge of $3.7 million, or $.10 per unit, for earthquake damage not covered by insurance.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant was reorganized from a corporation to a California limited partnership on January 8, 1985. The general partners of the Partnership are Newhall Management Limited Partnership (the Managing General Partner) and Newhall General Partnership. Two executive officers and the Managing General Partner are the general partners of Newhall General Partnership. Newhall Management Corporation and Newhall General Partnership are the general partners of the Managing General Partner.
The Managing General Partner, Newhall Management Limited Partnership, has exclusive management and control of the affairs of the Partnership and shares in Partnership income and losses on the basis of the number of Partnership units owned by it. The Managing General Partner of Newhall Management Limited Partnership, Newhall Management Corporation, will make all decisions and take all action deemed by it necessary or appropriate to conduct the business and affairs of Newhall Management Limited Partnership and, therefore, of the Partnership.
The duties and responsibilities of directors are carried out by the Board of Directors of the Managing General Partner of the Managing General Partner, Newhall Management Corporation. Each voting shareholder of Newhall Management Corporation is also a director of Newhall Management Corporation and only voting shareholders may be directors of that corporation. Every voting shareholder and director has a number of votes in all matters equal to the number of votes of every other voting shareholder and director. Upon ceasing to be a director, a shareholder may be a nonvoting shareholder for a period of time prior to the repurchase of his or her shares by the Corporation. See further discussion of the shareholders' agreement and voting trust agreement below.
The shareholder-directors of Newhall Management Corporation ("Corporation") are as follows:
Thomas L. Lee, age 52, 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 served as President and Chief Executive Officer of the former Managing General Partner from 1987 to 1989, and as President and Chief Operating Officer from 1985 to 1987. Mr. Lee 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 First Interstate Bancorp, First Interstate Bank of California, CalMat, Inc. and the Los Angeles Area Chamber of Commerce.
James F. Dickason, age 72, was elected as a director of the Corporation upon its formation in November, 1990 and of the former Managing General Partner upon its formation in 1985. He currently serves as Chairman of the Executive Committee. Mr. Dickason served as a director of the predecessor corporation from 1963 to 1985, as Chairman of the Board of Directors and Chief Executive Officer of the former Managing General Partner from 1985 to 1987 and held the same position with the predecessor corporation from 1979 to 1985.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Mr. Dickason also served as President of the predecessor corporation from 1971 until 1985. He was the managing partner of Newhall Resources' managing general partner and the managing partner of Newhall Investment Properties' managing general partner from 1983 until their liquidation in 1989 and 1988, respectively. He is also a director of the Automobile Club of Southern California and the California Museum of Science and Industry. Mr. Dickason is a Trustee of the Southwest Museum.
George C. Dillon, age 72, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1973. He was Chairman of the Board of Directors of Manville Corporation from 1986 until 1990 and Chairman of the Executive Committee from 1990 to 1991. Previously he was Chairman and Chief Executive Officer of Butler Manufacturing Company, where he had served in various executive capacities since 1951. Mr. Dillon is a director of Phelps-Dodge Corporation and Astec Industries, Inc.
Thomas V. McKernan, Jr., age 50, was elected a director of the Corporation in September, 1994. Mr. McKernan has been President and Chief Executive Officer since 1991, Executive Vice President from 1990 to 1991 and Vice President and Chief Financial Officer from 1985 to 1990, of the Automobile Club of Southern California. He is a director of the American Automobile Association, California Chamber of Commerce, Los Angeles Area Chamber of Commerce, Orthopedic Hospital, The Employers Group, Payden & Rygel, Ramore Girls School, Urban League and American Red Cross.
Paul A. Miller, age 70, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1979. Mr. Miller is Chairman of the Executive Committee and a director of Pacific Enterprises, a holding company for Southern California Gas Company. He is a director of Wells Fargo Bank N.A. and Wells Fargo & Company and a Trustee of Mutual Life Insurance Company of New York and the University of Southern California. Mr. Miller is also a director of the Los Angeles World Affairs Council, and is a member of the Executive Committee of the California Business Round Table.
Henry K. Newhall, age 56, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1982. Dr. Newhall is General Manager, Technology, Oronite Additives Division of Chevron Chemical Company. He has served in various managerial and consulting positions with Chevron since 1971.
Jane Newhall, age 81, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1960. Miss Newhall, a private investor, is a director of the Henry Mayo Newhall Foundation and a member of the Foundation Board of Donaldina Cameron House. She is a Trustee of Mills College, the San Francisco Theological Seminary, the University Mound Ladies' Home and the Graduate Theological Union.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Peter T. Pope, age 60, was elected a director of the Corporation in 1992. Mr. Pope has been Chairman, President and Chief Executive Officer since 1990 and Chairman and Chief Executive Officer since 1971 of Pope & Talbot, Inc. He is a director of Pope Resources, the American Paper Institute, Oregon Health Science Foundation and The Arlington Club.
Carl E. Reichardt, age 63, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1980. Mr. Reichardt was Chairman of the Board of Directors of Wells Fargo & Company and Wells Fargo Bank, N.A., from 1983 until December, 1994. He is a director of Wells Fargo & Company, Wells Fargo Bank, N.A., Ford Motor Company, Columbia/HCA Healthcare Corporation, Pacific Gas & Electric Company, The Irvine Company and ConAgra, Inc.
Thomas C. Sutton, age 52, was elected a director of the Corporation in November, 1991. He has been Chairman of the Board and Chief Executive Officer since 1990, President and a director from 1987 to 1990 and Executive Vice President from 1984 to 1987 of Pacific Mutual Life Insurance Company. Mr. Sutton is a director of the Association of California Life Insurance Companies and the Health Insurance Association of America. He is a trustee of the Committee for Economic Development.
Lawrence R. Tollenaere, age 72, has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1972. Mr. Tollenaere was Chairman of the Board of Directors until 1994, and Chief Executive Officer and President of Ameron, Inc. until 1993. He is Chairman of Gifford-Hill-American, Inc., and Tamco. He is a director of Pacific Mutual Life Insurance Company, The Parsons Corporation and The National Association of Manufacturers. He is past president and a director of The California Club and an honorary board member of The Employers Group. Mr. Tollenaere is a Trustee of the Huntington Library, Art Collections and Botanical Gardens, a fellow of the Society for the Advancement of Management, Emeritus Fellow of Claremount University, Governor of Iowa State University and Honorary Director of the Beavers.
Edwin Newhall Woods, age 77, is a rancher and has served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1950.
Ezra K. Zilkha, age 69, 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, and from 1993, President of 3555 Investment Holding Company, an investment holding company. From 1979 to 1988, he was president of Zilkha Corporation, a consulting company and from 1984 to 1990 and from 1991 to 1993 he was Chairman of Union Holdings, Inc., an industrial holding company. He is a director of CIGNA Corporation, Cambridge Associates, Chicago Milwaukee Corporation, and Milwaukee Land Company. Mr. Zilkha is Trustee Emeritus of Wesleyan University and a Trustee of the Brookings Institution, Lycee Francais de New York and the French Institute/Alliance Francaise. He is also Chairman of the Board of The International Center for the Disabled.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Peter McBean, age 84, was elected Director Emeritus upon his retirement from the Board of Directors in July of 1994. He is a rancher and had served as a director of the Corporation, the former Managing General Partner and the predecessor corporation, respectively, since 1940. He is being paid director's retirement benefits of $28,000 a year. As Director Emeritus he is entitled to attend meetings of the Board of Directors, at which he does not vote and receives no meeting fee.
Each of the shareholder-directors may be contacted at the principal executive offices of the Partnership and is a citizen of the United States.
Jane Newhall and Edwin Newhall Woods are first cousins.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Newhall Management Corporation and its officers and directors, the general partners, and persons who own more than ten percent of the Company's partnership units, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. The Company assists officers, directors and ten-percent unitholders to file their Section 16(a) reports and retains a copy of the forms filed. Written representations that all required reports have been filed are obtained at the end of each year. Based upon this information, the Company believes that, during the year ended December 31, 1994, all such filing requirements were complied with.
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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Messrs. Henry Newhall, Woods, and Zilkha each effectively has contributed to the Managing General Partner a total of 72,000 Partnership units. Mr. McBean and Ms. Newhall each effectively has contributed to the Managing General Partner a total of 71,650 Partnership units. Messrs. Dillon, Lee, Miller, Reichardt, Tollenaere, Pope, Sutton and McKernan each effectively has contributed to the Managing General Partner a total of 2,000 Partnership units. Mr. Dickason effectively has contributed 1,650 Partnership units. The Partnership units contributed to the Managing General Partner total 376,950 or 1.0% of the total number of partnership units outstanding.
It should be noted that a shareholder-director 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-director of the Corporation as distributions in proportion to the actual number of units or shares beneficially owned by such limited partner or shareholder-director, 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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
The shareholders' agreement expires if Newhall Management Corporation ceases to serve as the Managing General Partner of the Managing General Partner of the Partnership, or Newhall Management Limited Partnership ceases to be the Managing General Partner of the Partnership, if all parties to the shareholders' agreement consent to its termination, or with respect to any individual shareholder, upon the repurchase of all the shareholder's shares.
The term of the voting trust is limited by laws to 10 years, but a party to the voting trust will be deemed to have resigned as a director of the Corporation and will have to sell his shares, subject to repurchase by the Corporation, unless, at the times provided in the voting trust agreement, the party re-executes and renews the voting trust for the purpose of keeping it continually in effect. The voting trust agreement terminates if Newhall Management Corporation ceases to serve as a general partner of the Managing General Partner of the 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. At the present time, they are the only limited partners of Newhall Management Limited Partnership. The limited partnership agreement has restrictions on transfer similar to the shareholders' agreement and provides for repurchase of the limited partnership units of a limited partner upon the occurrence of repurchase events which are similar to those of the shareholders' agreement, including the cessation of being a director by a limited partner in the case of a limited partner who is a director.
Upon the occurrence of a repurchase event, Newhall Management Limited Partnership would have one full year to transfer Partnership units representing the limited partner's interest to the limited partner. A limited partner could not compel the return of Partnership units for at least one year from the date a limited partner chooses to obtain return of Partnership units. Even then, Newhall Management Limited Partnership cannot, and cannot be compelled to, distribute Partnership units to the limited partner if Newhall Management Limited Partnership would thereafter own less than 1% of the Partnership's Partnership units.
The limited partners, as limited partners, have no voting rights except as expressly set forth in the limited partnership agreement or granted pursuant to law. Such voting privileges include matters such as (i) electing general partners in specified instances, (ii) amending the limited partnership agreement, (iii) dissolving the limited partnership, (iv) electing a general partner to serve as the Managing General Partner, and (v) removing a general partner. Items (ii) and (iii) require the separate concurrence of the Managing General Partner.
Persons other than directors of Newhall Management Corporation may serve as limited partners of Newhall Management Limited Partnership and Newhall Management Corporation has the authority pursuant to the limited partnership agreement to cause additional units to be issued. The partnership agreement provides limited instances in which a general partner shall cease to be a general partner.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
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 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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
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.
EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER (Continued)
The officers serve at the pleasure of the Board of Directors.
ITEM 11.

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
(1) Represents bonus accrued during the current calendar year based on earnings for such period and paid in the subsequent calendar year.
(2) Includes general partner fees paid to Messrs. Lee and Cusumano as general partners of Newhall General Partnership of $29,000 each, director fees paid of $30,000 to Mr. Lee as a director of Newhall Management Corporation and $2,500 to Mr. Cusumano and Mr. Dierckman as directors of a wholly-owned subsidiary.
(3) The number and value of restricted unit holdings at December 31, 1994 were as follows: 4,000 units valued at $48,500 for Mr. Lee; 3,000 units valued at $36,375 for Mr. Cusumano; 2,400 units valued at $29,100 for Mr. Wilke; and 1,200 units valued at $14,550 for Mr. Dierckman.
Restricted units are granted subject to a return right which permits the Company to reacquire all or a portion of the restricted units for no consideration if the grantee terminates employment with the Company. The return right lapses as to twenty-five percent of the granted restricted units after expiration of each two-year period from the date of grant. The lapsing of the return right is accelerated as to an additional twenty-five percent if two-year Company performance goals as set by the Compensation Committee are met.
(4) Totals include the following: (1) Company matching contributions to the Employee Savings Plan and Savings Restoration Plan, (2) excess life insurance premiums, and (3) long-term disability insurance premiums for Messrs. Lee and Cusumano in 1994, 1993 and 1992, and Mr. Wilke in 1992.
(5) Retired on December 31, 1994.
(6) Hired August 17, 1992.
ITEM 11. EXECUTIVE COMPENSATION (continued)
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(1) Non-qualified options without appreciation rights granted at 100% of fair market value on the date of grant. Options are exercisable twenty-five percent at the end of each of the first four years following date of grant and expire ten years after date of grant. In the event of any change of control of the Company, as defined, then each option will immediately become fully exercisable as of the date of the change of control.
(2) 5% compound growth results in final unit price of $24.23 for options expiring 7/19/04 and $24.03 for options expiring 1/19/04 10% compound growth results in final unit price of $38.58 for options expiring 7/19/04 and $38.26 for options expiring 1/19/04
(3) The modified Black-Scholes Options Valuation Model modifies the Black-Scholes formula to include the impact of distributions and to allow option exercise prior to maturity. The 10-year distribution yield of 3.10% was used in the modified model.
(4) Retired on December 31, 1994 - Options will remain exercisable until December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION (continued)
AGGREGATED OPTIONS / SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION / SAR VALUES
(1) Based on the difference in the unit price of $12.125 at December 31, 1994 and the exercise price of the underlying options.
(2) Retired on December 31, 1994
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 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. 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.
Credited years of service as of December 31, 1994 (to the nearest whole year) and average annual compensation for the highest five years of the last ten years are as follows: 24 years and $450,000 for Mr. Lee, 25 years and $375,000 for Mr. Cusumano, 18 years and $280,000 for Mr. Wilke, 12 years and $240,000 for Mr. Dierckman, and 2 years and $130,000 for Mr. Harter.
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:
The Board of Directors has adopted a Supplemental Executive Retirement Plan pursuant to which the Company will pay benefits to specified employees so that such employees' maximum normal retirement benefit under the Retirement Plan and the Pension Restoration Plan will be earned during a period of 20 rather than 30 years of credited service. As of December 31, 1994, Robert D. Wilke and a former officer of the Company were the only participants in the plan.
ITEM 11. EXECUTIVE COMPENSATION (continued)
RETIREMENT PLANS (Continued)
The following table reflects the estimated annual benefits under the Supplemental Executive Retirement Plan upon retirement at age 65 at various assumed compensation ranges and credited years of service:
CHANGE IN CONTROL SEVERANCE PROGRAM
The Partnership entered into severance agreements in March 1988 with two current executive officers, Thomas L. Lee and Gary M. Cusumano, under which each such officer is entitled to certain benefits in the event of a "change of control." Under the provisions of the severance agreements, a "change of control" is deemed to have occurred where (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 standing or by being converted into voting securities of the surviving entity) at least 75% of the total voting power represented by the voting securities of the Partnership or such surviving entity outstanding immediately after such merger or consolidation, or (iv) a plan of complete liquidation of the Partnership is adopted or the holders of the voting securities of the Partnership approve an agreement for the sale or disposition by the Partnership (in one transaction or a series of transactions) of all or substantially all the Partnership's assets. Entitlement to benefits arises if, within two years following a change in control, the officer's employment is terminated or if he elects to terminate his employment following action by the Partnership which results in (i) a reduction in salary or other benefits, (ii) change in location of employment (iii) a change in position, duties, responsibilities or status inconsistent with the officer's prior position or a reduction in responsibilities, duties, or offices as in effect immediately before the change in control, or (iv) the failure of the Partnership to obtain express assumption by any successor of the Partnership's obligations under the severance agreement.
Benefits payable under the agreements consist of (i) payment in a single lump sum equal to continuation of monthly payments of base salary for three years, (ii) payment in a single lump sum of three times the average bonus payments for the two fiscal years
ITEM 11. EXECUTIVE COMPENSATION (continued)
CHANGE IN CONTROL SEVERANCE PROGRAM (Continued)
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 or nonqualified retirement benefits and options and related appreciation rights, (v) immediate lapse of any Partnership rights to the return or repurchase of Units granted pursuant to Units Rights, (vi) a retirement benefit equivalent to the additional benefits that would have accrued under Partnership retirement plans if employment had continued for two years, and (vii) reduction of required service for full retirement benefits from 30 years to 20 years through a non-qualified arrangement. Benefits payable under the agreements are instead of any severance pay benefits under the Partnership's general severance pay policy. The agreements are not contingent upon the officers actively seeking other employment, but provide for some offset of benefits if other employment (other than self-employment) is obtained. For each month of employment (other than self-employment) during the three years following termination of employment with the Partnership, the officer must return to the Partnership the lesser of 1/36 of the salary continuation payment or the compensation received from the new employer for that month. In addition, to the extent the new employer provides the officer with comparable medical, dental, disability or life insurance coverage, such benefits under the severance agreements will terminate.
RETIREMENT PLAN FOR DIRECTORS
Directors who cease to be directors after at least five years of service on the Board of Directors, will be eligible for retirement benefits under a Retirement Plan for Directors. This Plan covers service only as an outside director. A director who retires as an employee of the Company but continues on the Board is eligible for benefits under this Plan if he or she serves on the Board for at least five years after retirement as an employee. Under the Plan, each eligible director is entitled to an annual retirement benefit equal to the greater of $28,000 or the annual retainer on the date of retirement. Quarterly benefit payments will commence after a director ceases to be a director (but not before age 65) and continue for a period equal to the length of the director's service as an outside director or until death, whichever occurs first. Retired directors are entitled to continue to participate in the Partnership matching gift program for amounts up to five thousand dollars per annum for five years after retirement.
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. Members of the Board receive an annual retainer fee of $24,000 for serving on the Board and a fee of $1,000 for attending each meeting of the Board or committee of which they are a member. Committee chair-
ITEM 11. EXECUTIVE COMPENSATION (continued)
COMPENSATION OF THE DIRECTORS (continued)
persons receive a fee of $500 in addition to the regular meeting fee for each meeting they conduct. Members of the Board of Directors will also receive reimbursement for travel and other expenses related to attendance at meetings of the Board of Directors and of the committees. In addition, the Partnership Agreement requires the Partnership to reimburse the Managing General Partner for any federal or California income taxes imposed upon the Managing General Partner or its Managing General Partner as a result of its activities as Managing General Partner. Under the terms of the 1995 Option/Award plan adopted by the Board of Directors on January 18, 1995, each non-employee Board member ("Independent Director") may elect to have all or any portion of the annual retainer fee paid in depositary units instead of cash.
The 1995 Option/Award Plan also provides each Independent Director serving on the Board on January 18, 1995, and each newly elected or appointed Independent Director, with a nonstatutory option (Automatic Option) to purchase 1,500 depositary units. On the third Wednesday of July of each year that occurs after January 18, 1995, each continuing Independent Director will automatically receive an Automatic Option to purchase 500 depositary units. Each Automatic Option vests immediately and has a term of 10 years. Generally, the Independent Director may exercise his or her option for a period of 3 months after termination of service as an Independent Director for any reason other than death or "retirement," 12 months after the date of death and 36 months after the date of "retirement." "Retirement" means the first day the Independent Director ceases to serve as an Independent Director after serving as an Independent Director for at least five years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company currently maintains a $30 million unsecured revolving credit facility, and a subsidiary of the Company has a $2 million revolving credit line with Wells Fargo Bank, N.A. (the "Bank"). In addition, in December, 1994, a $40 million revolving mortgage credit facility was finalized jointly with Wells Fargo Bank and Morgan Guaranty Trust of New York. There were no borrowings outstanding against these credit lines at December 31, 1994. Certain of the Company's employee benefit plans have invested approximately $13 million in funds managed by the Bank and the Bank has extended approximately $3 million in letters of credit to the Company. The Bank is the principal subsidiary of Wells Fargo & Company. Carl E. Reichardt, former Chairman of the Board of the Bank and Wells Fargo & Company, is a director of the Managing General Partner of the Managing General Partner. In addition, a director of the Managing General Partner of the Managing General Partner, Paul A. Miller, is also a director of the Bank and Wells Fargo & Company.
In June 1994 Valencia Water Company, a wholly-owned subsidiary of the Company, borrowed $11 million from Pacific Mutual Life Insurance Company. In addition, the Company has acquired two life insurance policies for its two senior officers with face amounts of approximately $1.5 million each from Pacific Mutual. Mr. Thomas C. Sutton, a director of the Company, is Chairman of the Board and Chief Executive Officer of Pacific Mutual Life Insurance Company. All of the foregoing transactions are at rates and terms comparable to those of similar transactions with unrelated parties. Mr. Lawrence R. Tollenaere, a director of the Company, is also a director of Pacific Mutual Life Insurance Company.
ITEM 11. EXECUTIVE COMPENSATION (continued)
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF NEWHALL MANAGEMENT CORPORATION
COMPENSATION COMMITTEE CHARTER
The Compensation Committee 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 1994 the committee met four (4) times.
SENIOR MANAGEMENT COMPENSATION PHILOSOPHY
The Company believes its success is greatly influenced by the caliber of its employees. The Company's compensation program for senior management is designed to attract, recruit and retain a highly skilled, professional and dedicated work force. In this regard, Newhall Land's senior management compensation program consists of:
. Base salary compensation tied to prevailing real estate industry compensation practices.
. Annual merit and incentive pay compensation (bonuses) primarily related to the Company's performance for the previous fiscal year.
. Long-term incentive compensation in the form of unit options and restricted units directly tied to increasing unitholder value. As it is directly related to corporate performance, this component of compensation can be highly volatile.
The Company's objective is for the base salary, annual incentive compensation and long-term incentive compensation of senior management over time to approximate the median levels for an industry comparison group consisting primarily of real estate companies with which the Company competes for executive talent. From year-to-year, however, relative compensation levels may vary due largely to variances in individual company performance. It should be pointed out that the companies with which the Company competes for executive talent are not the same as those in the Wilshire Real Estate Securities Index shown in the performance graph. In addition, for individual managers, there is also a subjective element relating to his or her success in meeting individual performance goals determined at the beginning of each year. These goals are for the business segment he or she manages including personal goals for 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 internal comparability considerations and base salary levels in effect for comparable positions at the Company's principal competitors for executive talent. External salary data provided to the Committee by an independent compensation consulting firm indicate that these salaries for 1994 were generally at or below the median level for such companies. Salaries are reviewed on an annual basis, and adjustments to each executive officer's base salary, if any, are made based upon individual performance and salaries paid by the Company's competitors after giving effect to varying job responsibilities.
ITEM 11. EXECUTIVE COMPENSATION (continued)
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF NEWHALL MANAGEMENT CORPORATION (continued)
ANNUAL MERIT AND INCENTIVE COMPENSATION (BONUSES)
Annual cash bonuses under the Company's Executive Incentive Plan are earned by each executive officer on the basis of the Company's earnings, division performance and/or the attainment of individual goals in the previous fiscal year. Target earnings projections for the Company and each division from the Company's business plan and individual goals are developed at the beginning of the year. Target bonuses are determined as percentages of base salaries for each management group 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 percentages attributable to company and division earnings being increased at twice the percentages by which actual earnings exceed targeted earnings and reduced at three times the percentages by which actual earnings are less than targeted earnings. There are no bonuses for these components of the formula if earnings are less than 75% of target. The aggregate amount of such incentive bonuses may not exceed 5% of the Company's net income before deducting the incentive awards. The 1994 bonuses continue to be at or below industry levels. The target bonuses (except for Mr. Lee's bonus) are recommended by the Company's Chief Executive Officer, Mr. Lee, and approved by the Compensation Committee and the Board of Directors.
The total of the cash bonuses paid for 1994 was $662,000 (or 4.1% of 1994 income before bonuses), versus $307,000 in 1993 (2.3% of income before bonuses), or a 115.6% increase from 1993 to 1994. This increase reflects the Company's increased earnings from 1993 to 1994 and the fact that Messrs. Lee and Cusumano did not receive cash bonuses in 1993. In lieu of cash bonuses, Mr. Lee was awarded options for 9,200 units and Mr. Cusumano was awarded options for 7,500 units for 1993. The increase in bonuses for 1994 recognizes the improved earnings in 1994 over 1993 of 21.7%, the expansion of the Company's merchant builder program in Valencia, the successful recovery from the Northridge earthquake, expansion of the portfolio of income producing properties, the continuing progress of the Company's expansion into the Arizona market, and the successful restructuring of the Company's operating groups into more autonomous, profit-oriented divisions.
LONG-TERM INCENTIVE COMPENSATION
The equity component of compensation is designed to encourage growth in unitholder value and includes unit options, appreciation rights and restricted units under the Company's 1995 Option/Award Plan. 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 unit awards mature and are expected to grow in value over time and for that reason represent compensation which is attributable to service over a period of up to ten years. This focuses attention on managing the Company from the perspective of an owner with an equity stake in the business.
ITEM 11. EXECUTIVE COMPENSATION (continued)
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF NEWHALL MANAGEMENT CORPORATION (continued)
There were no appreciation rights or restricted units granted during the year. The size of the unit options granted to each executive officer is based on the aggregate exercise price. Generally it is set at a multiple of salary which the Committee deems appropriate in order to create a meaningful opportunity for ownership based upon the individual's current position with the Company. The unit options granted also take into account comparable awards to individuals in similar positions in the industry, as reflected in external surveys and as reported to the Committee by an independent compensation consultant, and the individual's potential for future responsibility and promotion over the option term. The value of the unit options granted during 1994 were at or below those of the Company's competitors in the independent consultant's survey.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Lee's salary was last increased in January 1994 by $17,000 to $322,000 per annum, the first increase since February 1990, and he was paid a cash bonus for 1994 of $77,280. His annual salary and bonus have declined from a high of $540,000 for 1990 to $399,280 in 1994 due to reduced incentive compensation. The increase in Mr. Lee's base salary during 1994 was in recognition of his performance and to maintain appropriate relationships with other salaries and compensation packages within the Company and the industry.
Mr. Lee's bonus for 1994 of $77,280 was calculated by applying a multiple of 120% to his target bonus of 20% of his salary. The target bonus percentage was established at the beginning of the year as described earlier and was based entirely upon Company earnings. The multiple gives effect to the amount by which the Company's earnings exceeded target earnings. Mr. Lee received 9,200 unit options at the then market price of $14.75 in lieu of a cash bonus for 1993.
Long-term incentive compensation of 19,000 Unit options was granted to Mr. Lee in July, 1994, a reduction of 11,000, or 36.6%, from the 1993 grant of 30,000 options. While presenting an opportunity for him to add to his equity stake in the Company, the value of the 19,000 unit options granted to Mr. Lee was less than the median of the long-term incentive compensation of his peers in the industry group. As noted above, Mr. Lee was also granted 9,200 options in January 1994 in lieu of a 1993 cash bonus for a total of 28,200 options during 1994. The long-term benefits of the unit options are expected to be realized over the next ten years during which Mr. Lee's emphasis on earnings, land entitlements, investments in income producing properties, geographic diversification and strategic planning are expected to yield benefits for the Company's investors.
SECTION 162 LIMIT
Section 162(m) of the Internal Revenue Code ("Section 162") limits federal income tax deductions for compensation paid to the Chief Executive Officer and the four other most
ITEM 11. EXECUTIVE COMPENSATION (continued)
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF NEWHALL MANAGEMENT CORPORATION
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 Internal Revenue Service has indicated that it is studying whether Section 162 applies to publicly traded limited partnerships such as the Company.
The Company believes that unit options granted to its executives will qualify for the performance based-compensation exception to the deduction limit. Because it is unlikely that other compensation to any Company executive would exceed the deduction limit in the near future and final regulations have not been issued under Section 162(m), the Committee has not yet considered whether it will seek to qualify compensation other than options for the performance-based exception or will prohibit the payment of compensation that would exceed the deduction limit.
COMPENSATION COMMITTEE MEMBERS
The Compensation Committee of the Board of Directors of Newhall Management Corporation is comprised of the following five directors:
George C. Dillon (Chairman) James F. Dickason Peter T. Pope Carl E. Reichardt Lawrence R. Tollenaere
ITEM 11. EXECUTIVE COMPENSATION (continued)
The Newhall Land and Farming Company Stock Performance Analysis (5-year Total Return*)
The 10-year graph assumes $100 invested on December 31, 1984 in The Newhall Land and Farming Company, S&P 500 Index and the Wilshire Real Estate Securities Index (Real Estate Operating Companies only).
The 5-Year Total Return assumes $100 invested on December 31, 1989.
* Total Return includes reinvestment of dividends.
** Wilshire Real Estate Securities Index (consists of the following real estate operating companies: American Real Estate Partnership, Arbor Property Trust, Catellus Development Corporation, Forest City Enterprises, Inc. , John Q. Hammons Hotels, Host Marriott Corporation, La Quinta Motor Inns, National Realty L.P., The Newhall Land and Farming Company, Rouse Company).
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth the number of units beneficially owned by each director of Newhall Management Corporation, each of the Company's five highest paid executives and all directors and officers as a group as of December 31, 1994.
* Represents less than 0.1% of the securities outstanding.
(1) Includes 72,000 units each for Messrs. Henry K. Newhall, Woods and Zilkha, 71,650 units for Miss Jane Newhall, 2,000 units each for Messrs. Dillon, McKernan, Miller, Pope, Reichardt, Sutton and Tollenaere and 1650 units for Mr. Dickason which are held by the Managing General Partner. Includes 2,000 units held by the Managing General Partner and 20 units contributed to Newhall General Partnership in the case of Mr. Lee. Of the total of 376,950 units held by the Managing General Partner beneficially for the directors, including 71,650 held for Mr. McBean, Director Emeritus, 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 112,938 units which Mr. Cusumano has the right to acquire and 3,000 restricted units which may be returned to the Partnership under certain circumstances pursuant to the Company's Option, Appreciation Rights and Restricted Units Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Continued)
DIRECTORS AND OFFICERS (Continued)
(3) The Partnership is advised that Mr. Dickason has sole voting and investment power as to 39,520 units held by a trust for which he is a trustee.
(4) Includes 56,625 units which Mr. Dierckman has the right to acquire and 1,200 restricted units which may be returned to the Partnership under certain circumstances pursuant to the Company's Option, Appreciation Rights and Restricted Units Plan and 1,862 held by the Company's Employee Savings Plan.
(5) Includes 3,600 units owned by Mr. Dillon's wife.
(6) Includes 2,500 units which Mr. Harter has the right to acquire pursuant to the Company's Option, Appreciation Rights and Restricted Units Plan and 374 units held by the Company's Employee Savings Plan.
(7) Includes 146,738 units which Mr. Lee has the right to acquire and 4,000 restricted units which may be returned to the Partnership under certain circumstances pursuant to the Company's Option, Appreciation Rights and Restricted Units Plan.
(8) The Partnership is advised that Henry K. Newhall has sole voting and investment power as to 80,928 held by trusts for which he is the trustee and beneficiary. Voting and investment power is shared with Peter McBean and others as to 889,940 units held by certain trusts.
(9) Mr. Reichardt has sole voting and investment power as to 3,000 units held by trusts for which he is the trustee.
(10) Includes 103,125 units which Mr. Wilke has the right to acquire and 2,400 restricted units which may be returned to the Partnership under certain circumstances pursuant to the Company's Option, Appreciation Rights and Restricted Units Plan.
(11) The Partnership is advised that Mr. Woods has sole voting and investment power as to 335,846 of these units owned by him and sole voting and investment power as to 312,208 of these units held of record by a trust under which he is the trustee. Also included are 54,300 units owned by Mr. Woods' wife as to which he disclaims any beneficial ownership.
(12) Includes 230,600 units held by Zilkha & Sons, Inc. for which the Partnership is advised that Mr. Zilkha has sole voting and investment power and 30,000 units held by Mr. Zilkha's wife for which he disclaims beneficial ownership.
Except as indicated otherwise in the above notes, the specified persons possess sole voting and investment power as to the indicated number of units to the best knowledge of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (continued)
DIRECTORS AND OFFICERS (Continued)
Certain provisions of the Partnership's Limited Partnership Agreement require the affirmative vote of holders of at least 75% of the Partnership's voting power to approve (i) the removal of any general partner or the election of any general partner as the Partnership's managing general partner; or (ii) certain business combinations and other specified transactions ("Business Combinations") with, or proposed by or on behalf of, persons beneficially owning 10% or more of the Partnership's voting power, unless such Business Combination is either approved by a majority of the present directors of Newhall Management Corporation (or by directors who are nominated by them) or certain price and procedural requirements are satisfied.
CERTAIN UNITHOLDERS
The following table sets forth the names and addresses and unitholdings of the only persons known to the Partnership to be beneficial owners of more than five percent of the outstanding units of the Partnership as of December 31, 1994. Except as otherwise indicated, such unitholders have sole voting and investment power to the best knowledge of the Partnership.
(1) See footnote (1) under Directors and Officers.
To the best knowledge of the management of the Company, no other person owned beneficially more than five percent of the outstanding units of the Company on that date. With respect to the above information, the Company has relied upon Schedule 13G filings and information received from such persons.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company expects to complete two transactions in 1995 with a partnership, one of whose partners is the son of Robert D. Wilke, who retired as Vice Chairman and Chief Financial Officer on December 31, 1994. The first transaction is to sell approximately one acre of land for use as a car wash for $1.1 million and the second is to lease 2,074 square feet of retail space at approximately $7,000 per month for 20 years with a 5-year option for use as an auto service center. The terms of the transactions are at or above prevailing terms for similar transactions.
For additional related party information see Compensation Committee Interlocks and Insider Participation in Item 11 - Executive Compensation.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed with this report:
1. Financial Statements - The Consolidated Financial Statements of the Company: Consolidated Statements of Income for the years ended December 31, 1994, December 31, 1993 and December 31, 1992, Consolidated Balance Sheets as of December 31, 1994 and December 31, 1993, Consolidated Statements of Cash Flows for the years ended December 31, 1994, December 31, 1993 and December 31, 1992, Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1994, December 31, 1993 and December 31, 1992, and Notes to Consolidated Financial Statements.
2. Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K):
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued)
* The items marked above constitute Executive Compensation Plans and Arrangements.
(b) There was no current report on Form 8-K filed with respect to the quarter ended December 31, 1994.
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, 1995 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, 1995 By / S / THOMAS L. LEE --------------------------------------- Thomas L. Lee, Chairman and Chief Executive Officer of Newhall Management Corporation (Principal Executive Officer)
Date: March 15, 1995 By / S / STUART R. MORK --------------------------------------- Stuart R. Mork Vice President and Chief Financial Officer Newhall Management Corporation (Principal Financial Officer)
Date: March 15, 1995 By / S / DONALD L. KIMBALL --------------------------------------- Donald L. Kimball, Vice President - Controller Newhall Management Corporation (Principal Accounting Officer)
Directors of Newhall Management Corporation:
Date: March 15, 1995 By / S / James F. Dickason --------------------------------------- James F. Dickason
Date: March 15, 1995 By / S / George C. Dillon --------------------------------------- George C. Dillon
Date: March 15, 1995 By / S / Thomas L. Lee --------------------------------------- Thomas L. Lee
Date: March 15, 1995 By / S / Thomas V. McKernan, Jr. --------------------------------------- Thomas V. McKernan, Jr.
Date: March 15, 1995 By / S / Paul A. Miller --------------------------------------- Paul A. Miller
Date: March 15, 1995 By / S / Henry K. Newhall --------------------------------------- Henry K. Newhall
Date: March 15, 1995 By / S / Jane Newhall --------------------------------------- Jane Newhall
Date: March 15, 1995 By / S / Peter T. Pope --------------------------------------- Peter T. Pope
Date: March 15, 1995 By / S / Carl E. Reichardt --------------------------------------- Carl E. Reichardt
Date: March 15, 1995 By / S / Thomas C. Sutton --------------------------------------- Thomas C. Sutton
Date: March 15, 1995 By / S / Lawrence R. Tollenaere --------------------------------------- Lawrence R. Tollenaere
Date: March 15, 1995 By / S / Edwin Newhall Woods --------------------------------------- Edwin Newhall Woods
Date: March 15, 1995 By / S / Ezra K. Zilkha --------------------------------------- Ezra K. Zilkha
THE NEWHALL LAND AND FARMING COMPANY
INDEX TO EXHIBITS
Item 14 (a) 3