10-Q 1 a2045806z10-q.htm 10-Q Prepared by MERRILL CORPORATION

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10–Q


/x/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2001

or

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to               

Commission file number 1-8885

THE NEWHALL LAND AND FARMING COMPANY
(a California Limited Partnership)
(Exact name of Registrant as specified in its charter)

California
(State or other jurisdiction of
incorporation or organization)		   95-3931727
(I.R.S. Employer Identification No.)

23823 Valencia Boulevard, Valencia, CA
(Address of principal executive offices)
 
91355
(Zip Code)

(661) 255-4000
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

At March 31, 2001, 26,253,833 partnership units were outstanding.

PART 1.  FINANCIAL INFORMATION
Item 1.  Financial Statements

Consolidated Statements of Income

 
   Three Months Ended
March 31,
  
In thousands, except per unit
  
  2001
   2000
  
Revenues              
Real estate              
  Residential home and land sales   $ 106   $ 8,388  
  Industrial and commercial sales     8,375     2,585  
  Commercial operations              
    Income-producing properties     10,889     14,327  
    Valencia Water Company     2,456     2,411  
   
 
 
      21,826     27,711  
   
 
 

Agriculture operations
 
 
708
 
 
653
 
   
 
 
 
Total revenues
 
$
22,534
 
$
28,364
 
   
 
 
Contribution to income              
Real estate              
  Residential home and land sales   $ (731 ) $ 2,778  
  Industrial and commercial sales     2,123     199  
  Community development     (1,606 )   (2,020 )
  Commercial operations              
    Income-producing properties     4,251     6,897  
    Valencia Water Company     484     599  
   
 
 
      4,521     8,453  
   
 
 

Agriculture operations
 
 
394
 
 
407
 
   
 
 

Operating income
 
 
4,915
 
 
8,860
 

General and administrative expense
 
 
(2,185
)
 
(2,243
)
Interest and other, net     (1,691 )   (3,420 )
   
 
 
Net income   $ 1,039   $ 3,197  
   
 
 
Net income per unit   $ 0.04   $ 0.11  
   
 
 
Net income per unit — diluted   $ 0.04   $ 0.11  
   
 
 
Number of units used in computing per unit amounts:              
  Net income per unit     26,397     28,944  
  Net income per unit — diluted     26,664     29,313  

Cash distributions per unit:
 
 
 
 
 
 
 
  Regular   $ 0.10   $ 0.10  
  Special     0.10     0.35  

2

Consolidated Balance Sheets

In thousands
   March 31,
2001
   December 31, 2000
ASSETS            
Cash and cash equivalents   $ 4,211   $ 3,717
Accounts and notes receivable     8,889     17,154
Land under development     64,836     63,155
Land held for future development     22,419     22,419
Income-producing properties held for sale, net     15,042     12,720
Income-producing properties, net     144,373     147,785
Property and equipment, net     69,360     67,631
Investment in joint venture     547     591
Other assets and deferred charges     16,932     16,536
   
 
    $ 346,609   $ 351,708
   
 
LIABILITIES AND PARTNERS' CAPITAL            
Accounts payable   $ 24,669   $ 28,267
Accrued expenses     53,366     68,932
Deferred revenues     4,111     3,137
Mortgage and other debt     99,861     74,557
Advances and contributions from developers for utility construction     32,979     32,166
Other liabilities     25,439     25,445
   
 
  Total liabilities     240,425     232,504
Partners' capital            
26,254 units outstanding, excluding 10,518 units in treasury (cost-$250,868), at March 31, 2001 and 26,590 units outstanding, excluding 10,182 units in treasury (cost-$242,098), at December 31, 2000     106,184     119,204
   
 
    $ 346,609   $ 351,708
   
 

3

Consolidated Statements of Cash Flows

 
   Three Months Ended
March 31,
  
In thousands
  
  2001
   2000
  
CASH FLOWS FROM OPERATING ACTIVITIES:              
 
Net income
 
$
1,039
 
$
3,197
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
   
Depreciation and amortization
 
 
2,782
 
 
2,510
 
    Increase in land under development     (15,211 )   (16,121 )
    Cost of sales and other inventory changes     4,363     6,441  
    Decrease in accounts and notes receivable     8,265     10,574  
    Decrease in accounts payable, accrued expenses and deferred revenues     (9,023 )   (4,631 )
    Cost of property sold     169     55  
    Other adjustments, net     (26 )   5  
   
 
 
 
Net cash (used in) provided by operating activities
 
 
(7,642
)
 
2,030
 
   
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:              
 
Development of income-producing properties
 
 
(1,322
)
 
(6,159
)
  Purchase of property and equipment     (2,644 )   (2,043 )
  Distribution from (investment in) joint venture     44     (195 )
   
 
 
 
Net cash used in investing activities
 
 
(3,922
)
 
(8,397
)
   
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:              
 
Distributions paid
 
 
(5,289
)
 
(13,046
)
  Increase in mortgage and other debt     25,304     58,168  
  Increase in advances and contributions from developers for utility construction     813     2,921  
  Purchase of partnership units     (10,014 )   (39,305 )
  Issuance of partnership units     1,244     1,048  
   
 
 
 
Net cash provided by financing activities
 
 
12,058
 
 
9,786
 
   
 
 

Net increase in cash and cash equivalents
 
 
494
 
 
3,419
 

Cash and cash equivalents, beginning of period
 
 
3,717
 
 
1,624
 
   
 
 
Cash and cash equivalents, end of period   $ 4,211   $ 5,043  
   
 
 

4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Accounting Policies

The consolidated financial statements include the accounts of The Newhall Land and Farming Company and its subsidiaries, all of which are wholly-owned (collectively, "the Company"). All significant intercompany balances and transactions are eliminated.

The Company's unaudited interim financial statements have been prepared in conformity with generally accepted accounting principles used in the preparation of the Company's annual financial statements. In the opinion of the Company, all adjustments necessary for a fair presentation of the results of operations for the three months ended March 31, 2001 and 2000 have been made. The interim statements are condensed and do not include some of the information necessary for a more complete understanding of the financial data. Accordingly, your attention is directed to the footnote disclosures found on pages 26 through 38 of the December 31, 2000 Annual Report on Form 10-K and particularly to Note 2 therein which includes a summary of significant accounting policies. Certain reclassifications have been made to prior period's amounts to conform to the current period presentation.

Interim financial information for the Company has substantial limitations as an indicator for the calendar year because:

    •
    Land sales occur irregularly and are recognized at the close of escrow or on the percentage of completion basis if the Company has an obligation to complete certain future improvements and provided profit recognition criteria are met.

    •
    Sales of income properties and non-developable farmland occur irregularly and are recognized upon close of escrow provided profit recognition criteria are met.

    •
    Agricultural crops are on an annual cycle and income is recognized upon harvest. Most major crops are harvested during the fall and winter.

Note 2.  Details of Land Under Development

(In $000)
   March 31,
2001
   December 31,
2000
Residential development   $ 33,138   $ 25,154
Industrial and commercial land development     30,949     37,689
Agriculture     749     312
   
 
  Total land under development   $ 64,836   $ 63,155
   
 

5

Note 3.  Details for Earnings per Unit Calculation

(in 000's except per unit)
   Income
(numerator)
   Units
(denominator)
   Per Unit
For three months ended March 31, 2001                
Net income per unit                
  Net income available to unitholders   $ 1,039   26,397   $ 0.04
Effect of dilutive securities                
  Unit options     —   267     —
   
 
 
Net income per unit—diluted   $ 1,039   26,664   $ 0.04
   
 
 
For three months ended March 31, 2000                
Net income per unit                
  Net income available to unitholders   $ 3,197   28,944   $ 0.11
Effect of dilutive securities                
  Unit options     —   369     —
   
 
 
Net income per unit—diluted   $ 3,197   29,313   $ 0.11
   
 
 

Note 4.  Details of Income-Producing Properties, Income Producing Properties Held for Sale and Property and Equipment

(In $000)
   March 31,
2001
   December 31,
2000
  
Income-producing properties              
  Land   $ 36,593   $ 34,822  
  Buildings     131,963     106,916  
  Other     3,240     10,468  
  Properties under development     4,164     25,780  
   
 
 
      175,960     177,986  
Accumulated depreciation     (31,587 )   (30,201 )
   
 
 
    $ 144,373   $ 147,785  
   
 
 
Income-Producing Properties Held for Sale              
  Office   $ 11,223   $ 8,503  
  Other     7,311     7,311  
   
 
 
      18,534     15,814  
  Accumulated Depreciation     (3,492 )   (3,094 )
   
 
 
    $ 15,042   $ 12,720  
   
 
 
Property and equipment              
  Land   $ 3,759   $ 3,759  
  Buildings     5,974     5,974  
  Equipment     9,527     9,470  
  Water supply systems, orchards and other     83,778     81,620  
  Construction in progress     5,514     5,545  
   
 
 
      108,552     106,368  
  Accumulated depreciation     (39,192 )   (38,737 )
   
 
 
    $ 69,360   $ 67,631  
   
 
 

6

Note 5.  Business Segment Reporting

    The following table provides financial information regarding revenues from external customers, income and total assets for the Company's business segments and also provides a reconciliation to the Company's consolidated totals:

 
   Three months ended March 31, 2001
(In $000's)
   Revenues
   Contribution
to Income
   Assets
Real Estate                  
  Residential   $ 106   $ (726 ) $ 18,665
  Industrial and commercial     8,375     2,136     41,082
  Community development     —     (1,593 )   28,033
  Income-producing properties     10,889     4,253     171,703
  Valencia Water Company     2,456     487     68,166
Agriculture     708     396     8,131
Central administration     —     (2,148 )   10,829
   
 
 
      22,534     2,805     346,609
Interest and other, net     —     (1,691 )   —
Other     —     (75 )   —
   
 
 
    $ 22,534   $ 1,039   $ 346,609
   
 
 
Real Estate                  
  Residential   $ 8,388   $ 2,796   $ 32,241
  Industrial and commercial     2,585     231     123,784
  Community development     —     (1,994 )   21,413
  Income-producing properties     14,327     6,903     252,516
  Valencia Water Company     2,411     607     61,459
Agriculture     653     411     8,904
Central administration     —     (2,137 )   13,430
   
 
 
      28,364     6,817     513,747
Interest and other, net     —     (3,420 )   —
Other     —     (200 )   —
   
 
 
    $ 28,364   $ 3,197   $ 513,747
   
 
 

7

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Comparison of First Quarter of 2001 to First Quarter of 2000
Unaudited

The amounts of increase or decrease in revenues and income from the prior year first quarter are as follows (in 000s, except per unit):

 
   Three months
  
 
   Increase (Decrease)
  
 
   Amount
   %
  
Revenues            
  Real Estate            
    Residential home and land sales   $ (8,282 ) -99 %
    Industrial and commercial sales     5,790   224 %
    Commercial operations            
      Income-producing properties     (3,438 ) -24 %
      Valencia Water Company     45   2 %
   
 
 
      (5,885 ) -21 %
  Agriculture operations     55   8 %
   
 
 
Total revenues   $ (5,830 ) -21 %
   
 
 
Contribution to Income            
  Real Estate            
    Residential home and land sales   $ (3,509 ) -126 %
    Industrial and commercial sales     1,924   967 %
    Community development     414   20 %
    Commercial operations            
      Income-producing properties     (2,646 ) -38 %
      Valencia Water Company     (115 ) -19 %
   
 
 
      (3,932 ) -47 %
Agriculture operations     (13 ) -3 %
   
 
 

Operating income
 
 
(3,945
)
-45
%

General and administrative expense
 
 
58
 
3
%
Interest and other, net     1,729   51 %
   
 
 
Net income   $ (2,158 ) -68 %
   
 
 

Net income per unit
 
$
(0.07
)
-64
%
   
 
 
Net income per unit — diluted   $ (0.07 ) -64 %
   
 
 

Number of units used in computing per unit amounts:
 
 
 
 
 
 
Net income per unit     (2,547 ) -9 %
   
 
 
Net income per unit — diluted     (2,649 ) -9 %
   
 
 

8

For the three months ended March 31, 2001, revenues totaled $22.5 million and net income totaled $1.0 million compared with revenues of $28.4 million and net income of $3.2 million for the first quarter of 2000. The primary contributors to 2001 first quarter revenues and income were the Company's commercial operations, comprised of the Company's portfolio of income-producing properties and Valencia Water Company, along with the sale of 14 acres of industrial and commercial land. The decrease in first quarter results compared to the same period in 2000 is mainly attributed to the absence of residential lot sales, lower rental income due to the prior year sale of income-producing properties and suspension of depreciation during 2000 on assets being held for sale as part of the Company's business plan to sell approximately one-half of its income portfolio. In the 2000 first quarter, 130 residential lots in Bridgeport were sold, contributing $4.2 million to revenues and $1.9 million to income.

The Company's business plan for the year anticipates revenues being generated from residential, commercial and industrial land sales; the portfolio of income-producing properties; sale of the Company's option on the Broomfield, Colorado property, which closed escrow on May 1, 2001 for $13 million and will contribute about $12.7 million to 2001 second quarter net income; and the sale of three income properties, including the remaining two properties identified in last year's asset sale program that did not close escrow. About 950 residential lots are expected to be sold, along with approximately 80 acres of commercial and industrial land. In addition, the Company is negotiating the sale of additional apartment land. The ability to complete these sales in 2001 will be dependent upon a variety of factors including, but not limited to, identification of suitable buyers, agreement with the buyer on definitive terms, availability of financing to the buyer, and market conditions.

Residential Home and Land Sales

No residential lots were sold in the first quarter of 2001 and no residential lots were in escrow at the end of the quarter. Lot sales in Valencia are being impacted by the Public Utilities Commission's (PUC) decision to combine its review of Valencia Water Company's request to expand its service area together with the water company's water management plan. The PUC requested environmental studies be submitted on water availability for the projects included in the service area expansion. The water company has provided the necessary information to the PUC and expects a decision in the 2001 third quarter. A total of 4,195 residential lots and apartment units is affected. The total includes 1,650 lots and apartments that the City of Santa Clarita annexed in December 2000 and 2,545 lots and apartments in the Company's West Creek community.

The Los Angeles County Board of Supervisors approved the West Creek community in January 2001. Opponents to the community have filed a California Environmental Quality Act (CEQA) lawsuit challenging the Board of Supervisors' approval. As with prior CEQA lawsuits, the results of these types of legal challenges are difficult to predict. An adverse decision will likely delay the development of the community beyond the delay created by the PUC process previously mentioned.

Land development work continues on Valencia Westridge, which will feature 1,700 homes surrounding a Tournament Players Club (TPC) golf course, a joint venture with PGA TOUR Golf Course Properties. During the 2001 first quarter, an appellate court dismissed the appeal of the Los Angeles County Superior Court dismissal of a CEQA lawsuit. The Company plans to sell approximately 650 improved lots in this community in the second half of 2001. In addition, 300 lots on 40 net acres in Altavista may be sold in 2001 depending on results and timing of the PUC decision.

During the first quarter of 2001, demand for new homes in Valencia set a first quarter sales record with merchant builders selling 217 new homes, compared to 86 homes sold in the same period last year. At March 31, 2001, merchant builders had 313 homes in escrow, compared to 112 homes at the end of the 2000 first quarter. While the Company does not participate directly in profits generated from escrow closings by merchant builders, these merchant builder sales are key to Company's future success in selling additional lots.

9


In the 2000 first quarter, 130 lots for attached homes closed escrow in Bridgeport. The sale added $4.2 million to revenues and $1.9 million to income. In addition, $4.1 million in revenues and $1.9 million in income were recognized from previous lot sales in Bridgeport under percentage of completion accounting. At March 31, 2000, the remaining 76 residential lots for detached homes in Bridgeport were in escrow for $7.8 million and subsequently closed escrow early in the 2000 second quarter.

Industrial and Commercial Sales

Industrial Land Sales

In the 2001 first quarter, one industrial parcel, totaling 9.5 acres, closed escrow for $4.7 million contributing $1.3 million to income. At March 31, 2001, a 15.0-acre industrial parcel was in escrow for approximately $8.4 million. All escrow closings are subject to market and other conditions beyond the control of the Company. During the first three months of 2000, no industrial land sales closed escrow and, at March 31, 2000, four industrial parcels totaling 8.4 acres were in escrow for $5.3 million.

The Company has approximately 380 net entitled acres of industrial land remaining in Valencia. With few large industrial land parcels available for development in Los Angeles County, the Company is targeting sales in the range of 50 to 75 industrial acres per year through completion of Valencia industrial land buildout.

Commercial Land Sales

Three commercial parcels, totaling 4.1 acres, closed escrow in the first quarter of 2001, contributing $2.9 million to revenues and $2.2 million to income. Two of the sales were recognized under percentage of completion accounting. At March 31, 2001, eight commercial parcels totaling 38 acres were in escrow for approximately $25 million. All escrow closings are subject to market and other conditions beyond the control of the Company.

No commercial land sales closed escrow in the 2000 first quarter and six commercial parcels, totaling 42.8 acres, were in escrow for approximately $26 million at March 31, 2000. Results for the 2000 first quarter included revenues of $2.6 million and income of $1.5 million recognized under percentage of completion accounting from the 1999 sale of land for an apartment site.

Income Property Sales

No income property sales were completed in the first quarter of 2001 or 2000. At March 31, 2001, the Company had two properties remaining to be sold from its asset sales program announced last year, the Bank of America and Spectrum Club buildings. In addition, a 35,310-square-foot building in Valencia Commerce Center has been added to the program. These three buildings are expected to be sold later this year for a total of approximately $17 million.

The ability to complete income property and other sales in 2001 will be dependent upon a variety of factors including, but not limited to, identification of a suitable buyer, availability of financing to the buyer, market conditions, agreement with the buyer on definitive terms and successful completion of the buyer's due diligence.

Community Development

Community development expenses for the first quarter of 2001 decreased 20% from the comparative prior year first quarter primarily due to expenses in 2000 relating to the Company's option on 1,800 acres in Broomfield, Colorado and marketing expenses including updating of Valencia's website. Community development expenses for 2001 are expected to increase about 20% from the 2000 level with the continued focus on entitlements, planning and community marketing to complete the projected

10

sellout of Valencia residential land by 2005 and begin the development of Newhall Ranch. The Company's option on the Broomfield, Colorado property was sold on May 1, 2001.

On April 19, 2001, the Company and Los Angeles County released the Company's research and summary of findings, along with proposed actions to be taken, for public review on the six issues in the Newhall Ranch project's Environmental Impact Report that were identified in June 2000 by a Kern County Superior Court as requiring further environmental studies. The areas studied, and the findings include:

    1.
    Water Supply Adequacy and Reliability

      The studies conclude that in dry and average/normal years alike, Newhall Land has identified a surplus of water sources to meet Newhall Ranch's demand at build-out, and that the water can be provided without significant environmental impacts. It will take 25 to 30 years to build out Newhall Ranch, and water demand will increase gradually over that time. Each new subdivision within the project will require approvals, which will involve confirming water availability.

      Potable water demand will be met through newly purchased water rights, existing agricultural water rights, tapping Castaic Creek flood flows and storing it for future use, and two innovative water banking programs. Under one water banking program, surplus wet season water will be purchased and stored in a groundwater bank located in central California for future use in dry years. Similarly, wet season surplus water will be stored in the local Saugus aquifer. The feasibility of using the Saugus aquifer for water banking and retrieval was thoroughly studied and tested. Millions of gallons of water were injected into the Saugus aquifer and subsequently retrieved without environmental impact.

      The non-potable water to be used for irrigation by Newhall Ranch will be reclaimed water, making the community a world leader in water conservation. A combination of highly treated reclaimed water from the planned Newhall Ranch Water Reclamation Plant and also reclaimed water through Castaic Lake Water Agency will be used to meet the demand for irrigation water.

    2.
    Water Reclamation Plant Alternative Site Analysis

      Further study of the proposed site of the Newhall Ranch Water Reclamation Plant was required because of its impacts to river vegetation. The benefits of an off-river location for the plant were compared to those of other alternative sites. As a result of these studies, an environmentally superior alternative has been proposed. The new proposal places the plant near the river but reduces its area in order to avoid permanent impacts to 5.5 acres of sensitive habitat.

    3.
    Ventura County Traffic Impacts

      The additional traffic studies conducted using Ventura County's new traffic model showed that all of the arterial roads that intersect State Routes 23 and 126 would receive less than a one percent impact from Newhall Ranch. The California Environmental Quality Act defines an impact of greater than one percent as "significant." Therefore, the studies showed Newhall Ranch will have an insignificant impact on these arterial roads.

    4.
    Salt Creek Wildlife Corridor Impacts

      The Salt Creek watershed drains portions of Newhall Ranch and crosses the Ventura County line just before it flows into the Santa Clara River. Supplemental studies were undertaken to determine if the Newhall Ranch development would impact wildlife movement through the part of the Salt Creek watershed in Ventura County. Studies show that 96% of the habitat in

11

      the Salt Creek watershed would not be impacted by development, and that animals would adjust because impacts would be gradual over the 25- to 30-year course of development.

      More than 20 separate field studies of bird, large and small mammal movement were carried out as part of the supplemental studies, and vegetation in the Ventura County portion of the watershed was mapped. The studies found that wildlife population and movement patterns would remain unchanged in both counties.

      Most significantly, as a result of the original Environmental Impact Report (EIR) process and specific action by the Los Angeles County Board of Supervisors, the boundaries of Newhall Ranch's development area were pulled back one-half mile from the Ventura County line resulting in a reduction of 210 acres of proposed development. This will create an effective buffer around the portion of Salt Creek in Ventura County.

    5.
    Santa Clara River Corridor Biological Impacts

      Possible environmental impacts due to development-caused changes in the river's depth or water velocity were studied. The study verified that there will be little impact, and that in some cases development will be beneficial. The study also showed that bridges will be designed so they will not narrow the channel, which could increase velocities and erosion, and that 75% of the bank stabilization required will be buried, protecting sensitive river habitats.

    6.
    General Plan Consistency in Significant Ecological Areas

      Additional studies on the impacts development would have on sensitive river habitats, which are designated as Significant Ecological Areas, also were performed. The studies determined through improved mapping and analysis that only 28 acres of sensitive habitat in the river corridor will be removed due to development, not 103 acres as originally stated in the EIR. For each of these 28 acres, at least one acre will be revegetated. There also will be an additional 14 acres added so that there will now be a total of 42 acres replacing the 28 acres, resulting in a net gain of sensitive habitat area in the river.

The Court ruled in the Company's favor on all other issues raised by opponents. The "affordable housing" opponent has appealed the Superior Court's decision.

Public hearings before the Los Angeles County Planning Commission are scheduled to begin on June 20, 2001. Once approved by the Commission, the six issues would go before the Board of Supervisors, which is expected to occur this fall. The Company's goal is to have these six issues back before the judge by year-end. However, the length of time that the public hearings and judicial process will take is difficult to predict, and circumstances beyond the Company's control could further delay resolution of the issues. An adverse decision by the County or Court and/or additional legal action will likely delay the start of the development of the community beyond 2003. If the judge rules in the Company's favor, the Company can begin processing the necessary documentation for tentative maps on the first two villages in Newhall Ranch—River Village and Mesas East.

Income-Producing Properties

For the first three months of 2001, revenues and income were down 24% and 38%, respectively, over the first three months of 2000 due to properties sold in 2000 as part of the Company's plan to sell approximately one-half of its income portfolio to finance its unit repurchase program. The sold properties included Castaic Shopping Center, Plaza del Rancho, a 3-story office building, three office buildings for Princess Cruises and four apartment complexes.

12

Results for the current and prior year first quarters include the effects of the cessation of depreciation on Properties Held for Sale and Sold Properties of $155,000 and $1,654,000, respectively. The 2000 amount includes depreciation expense suspended on Valencia Town Center regional mall and entertainment center as they were held for sale at March 31, 2000. Subsequently, in the fourth quarter of 2000, the regional mall and entertainment center were re-classified as held for investment and depreciation expense was recorded covering the entire period they were held for sale.

Edwards Theaters Circuit, Inc., which filed for Chapter 11 bankruptcy last year, is expected to affirm its current lease during the 2001 second quarter for the IMAX 3D theater and 11 screens in Valencia Entertainment Center that opened in the summer of 1999. The terms of the lease for the original 10-screen Edwards Theater, located in the Valencia Town Center regional mall that was recently remodeled to include stadium seating and other up-to-date improvements, are under discussion. Edwards has paid rent when due for the two complexes.

A few other, smaller retail tenants in the Company's income properties are also operating while in bankruptcy proceedings. However, overall retail operations are performing well. At March 31, 2001, NorthPark Village Square neighborhood shopping center, River Oaks Shopping Center and Town Center Plaza, a 25,193-square-foot mixed-use building located adjacent to the Hyatt Valencia Hotel, were 100% leased. Valencia Town Center regional mall was 99% leased at the end of the 2001 first quarter.

The Company's 244-room Hyatt Valencia Hotel and 152-room Hilton Garden Inn continued to post improved performance both in occupancy rates and average daily rates in the first quarter of 2001 compared to the same period last year.

Valencia Water Company

Valencia Water Company is a regulated public water utility and a wholly-owned subsidiary of the Company serving over 22,000 metered connections. Revenues for the three months ended March 31, 2001 were about the same as the 2000 first quarter while income declined 19% primarily due to an increase in administrative expense for various legal proceedings in which Valencia Water Company is involved.

Agricultural Operations

For the first quarter of 2001, revenues and income, including the Company's energy operations, were about the same as the year earlier quarter. The major contributor to revenues and income was energy operations, where oil prices continued strong.

General and Administrative Expense

General and administrative expenses for the first quarter of 2001 were approximately the same as the comparable prior year period. For all of 2001, general and administrative expenses are expected to decrease about 30% from 2000 levels primarily due to lower compensation expense.

Interest and Other, net

A 51% net decrease from the comparable 2000 quarter is primarily due to the Company's strategy in 2000 of utilizing existing debt capacity to fund unit repurchases until the sale of income properties were completed later that year. Interest expense in 2001 for the total year is expected to be substantially lower than in the previous year due to lower anticipated borrowings outstanding compared to 2000.

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Financial Condition

Liquidity and Capital Resources

At March 31, 2001, the Company had cash and cash equivalents of $4.2 million and $135.7 million available under bank lines, net of $18.9 million in letters of credit. Borrowings outstanding totaled $7.4 million against unsecured lines of credit and $32 million against a revolving mortgage facility. In addition, the Company had fixed rate debt totaling $60.5 million. The Company believes it has adequate sources of cash from operations and debt capacity to finance future operations on both a short- and long-term basis and, combined with anticipated land and property sales, to fund its unit repurchases. The Company ended the 2001 first quarter with a conservative debt to income portfolio ratio of 31% which provides adequate debt capacity to fund operations and complete the current repurchase program. At March 31, 2001, there was no debt secured by raw land or land under development inventories in Valencia.

In September 1999, the Company announced its intention to repurchase up to 6,384,446 units (including 884,446 units under a previous authorization), equal to approximately 20% of the then outstanding units. From the time the repurchase plan was announced through March 31, 2001, 5,294,062 units, or 83% of the 6,384,446 units, were repurchased including 394,560 units purchased in the first quarter of 2001. At March 31, 2001, a total of 1,090,384 units remain to be repurchased under the current authorization. The Company repurchases partnership units from time to time in the open market and through block transactions. Numerous factors could affect the Company's ability to complete the repurchase program including, but not limited to, changing market conditions, rising interest rates, challenges to governmental approvals, and finding suitable buyers for certain properties. If the Company is on track to accomplish its current business plan and market conditions remain strong, another repurchase program may be announced for an additional 5 to 7% of the total outstanding units. The Company's ability to accelerate the pace at which it can deliver entitled product to market, close sales, and the price at which its units are trading are some of the factors that will determine the number of units it is able to repurchase.

At March 31, 2001, there were no material commitments for capital expenditures other than approximately $21 million for the completion of two office buildings that were sold in December 2000 and the expected landfill lease termination. In addition, over $40 million is expected to be invested in major roads and freeway improvements in 2001 to enable the Company to continue its land sales program for Valencia.

The following discussion relates to principal items in the Consolidated Statements of Cash Flow:

Operating Activities

Net cash used by operating activities totaled $7.6 million for the 2001 first quarter. Cash generated from operating activities included the sale of 14 industrial/commercial acres, the income property portfolio and the collection of a $9.4 million land sale note, which generated a total of $24.5 million. Cash used by operating activities included primarily $15.2 million of expenditures for land under development inventories mostly related to land preparation and infrastructure improvements to ready land for development or sale. Additional uses of cash included the Company's general & administrative expenses and interest expense.

Investing Activities

Expenditures for development of income-producing properties totaled $1.3 million and were primarily for two office buildings that were sold in December 2000. Purchase of property and equipment was primarily for water utility construction.

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Financing Activities

A quarterly distribution totaling $5.3 million was paid in the 2001 first quarter which consisted of a $.10 per unit quarterly distribution and a $.10 per unit special distribution. Borrowings against lines of credit increased by $25.4 million during the quarter. Units repurchased during the quarter totaled 394,560 for $10.0 million or an average price of $25.38 per unit. The Company's policy is to provide sufficient distributions, including special distributions, to pay the taxes associated with Company earnings. The declaration of distributions, and the amount declared, are determined by the Board of Directors on a quarterly basis taking into account the Company's earnings, financial condition and prospects.

Inflation, Risks And Related Factors Affecting Forward-Looking Information

Except for historical matters, the matters discussed in this report are forward-looking statements that involve risks and uncertainties. We have tried, wherever practical, to identify these forward-looking statements by using words like "anticipate," believe," "estimate," "project," "expect," and similar expressions. Forward-looking statements include, but are not limited to, statements about plans; opportunities; negotiations; market and economic conditions; development, construction, and sales activities; and availability of financing.

We caution you not to place undue reliance on these forward-looking statements, which reflect our current beliefs and are based on information currently available to us. We do not undertake any obligation to publicly revise these forward-looking statements to reflect future events or changes in circumstances.

These forward-looking statements are subject to risks and uncertainties that could cause our actual results, performance, or achievements to differ from those expressed in or implied by these statements. In particular, among the factors that could cause actual results to differ materially are:

Sales of Real Estate:  The majority of the Company's revenues is generated by its real estate operations. The ability of the Company to consummate sales of real estate is dependent on various factors including, but not limited to, availability of financing to the buyer, agreement with buyers on definitive terms regulatory and legal issues and successful completion of the buyer's due diligence. The fact that a real estate transaction has entered escrow does not necessarily mean that the transaction ultimately will close. Therefore, the timing of sales may differ from that anticipated by the Company. The inability to close sales as anticipated could adversely impact the recognition of revenue in any specific period.

Economic Conditions:  Real estate development is significantly impacted by general and local economic conditions, which are beyond the control of the Company. The Company's real estate operations are concentrated in Southern California. The regional economy is profoundly affected by the entertainment, technology, defense and certain other segments. Consequently, all sectors of real estate development for the Company tend to be cyclical. While the economy of Southern California continues to be strong, there can be no assurances that present trends will continue.

Inflation:  The Company believes it is well positioned against the effects of inflation. Historically, during periods of inflation, the Company has been able to increase selling prices of properties to offset rising costs of land development and construction. Recently, land values have been increasing at a faster rate than costs. However, there are no assurances that this trend will continue. A portion of the commercial income portfolio is protected from inflation since percentage rent clauses and Consumer Price Index increases in the Company's leases tend to adjust rental receipts for inflation, while the underlying value of commercial properties has tended to rise over the long term.

Interest Rates and Financing:  Fluctuations in interest rates and the availability of financing have an important impact on the Company's performance. Sales of the Company's properties could be adversely

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impacted by the inability of buyers to obtain adequate financing. Further, the Company's real estate development activities are dependent on the availability of adequate sources of capital. Certain of the Company's credit facilities bear interest at variable rates and would be negatively impacted by increasing interest rates.

Competition:  The sale and leasing of residential, industrial and commercial real estate is highly competitive, with competition coming from numerous and varied sources. The degree of competition is affected by such factors as the supply of real estate available which is comparable to that sold and leased by the Company and the level of demand for such real estate. Valencia experienced a slight decrease in its new home sale market share at both the local and the county level in 2000, due to the temporary decline in new home inventory. There is no assurance that this new home sales decline will reverse in the future even with an increasing supply of new homes in Valencia given competing projects in the region. This could impact the Company's ability to sell residential land.

Geographic Concentration:  The Company's real estate development activities are focused on the 19,400 acres that it owns in Los Angeles County. The Company's entire commercial income portfolio is located in the Valencia area. Therefore, any factors affecting that concentrated area, such as changes in the housing market, economic conditions and environmental factors, which cannot be predicted with certainty, could affect future results.

Exposure to Natural Occurrences:  The Company's real estate development and sales activities may be affected by natural occurrences such as earthquakes and weather conditions that may impact progress of infrastructure construction and land development, and the pace of sales.

Government Regulation and Entitlement Risks:  In developing its projects, the Company must obtain the approval of numerous governmental authorities regulating such matters as permitted land uses, density and traffic, and the provision of utility services such as electricity, water and waste disposal. In addition, the Company is subject to a variety of federal, state and local laws and regulations concerning protection of health and the environment. This government regulation affects the types of projects which can be pursued by the Company and increases the cost of development and ownership. The Company devotes substantial financial and managerial resources to comply with these requirements. To varying degrees, certain permits and approvals will be required to complete the developments currently being undertaken or planned by the Company. Furthermore, the timing, cost and scope of planned projects may be subject to legal challenges, particularly large projects with regional impacts. (See following "Litigation" discussion.) In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations and their interpretation and application. The ability to obtain necessary approvals and permits for its projects can be beyond the Company's control and could restrict or prevent development of otherwise desirable new properties. The Company's results of operations in any period will be affected by the amount of entitled properties the Company has in inventory.

Litigation:  The land use approval processes the Company must follow to ultimately develop its projects have become increasingly complex. Moreover, the statutes, regulations and ordinances governing the approval processes provide third parties the opportunity to challenge the proposed plans and approvals. As a result, the prospect of, and actual, third-party challenges to planned real estate developments have provided additional uncertainties in real estate development planning and entitlements. Third-party challenges in the form of litigation will, by its nature, adversely affect the length of time required to obtain the necessary approvals. In addition, adverse decisions arising from any litigation increase the costs and may adversely affect the design, scope, plans and profitability of a project.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

    The Company is exposed to market risk primarily due to fluctuations in interest rates. The Company utilizes both fixed rate and variable rate debt. At March 31, 2001, the Company had $39.4 million of variable debt outstanding with interest rates ranging from 6.32% to 6.90% and $60.5 million of fixed rate debt with interest rates ranging from 7.33% to 8.45%.

The table below presents principal cash flows and related weighted average interest rates of the Company's long-term fixed rate and variable rate debt at March 31, 2001 by expected maturity dates:

Dollars in thousands
   2001
   2002
   2003
   2004
   2005
   Thereafter
   Total
   Fair
Value
Mortgage and Other Debt                                                
  Fixed Rate Debt   $ 1,264   $ 1,479   $ 10,968   $ 1,512   $ 1,655   $ 43,583   $ 60,461   $ 60,461
  Weighted Average Interest Rate     7.58     7.55     8.32     7.35     7.37     7.55     7.68      
  Variable Rate Debt (1)   $ 32,000   $ 7,400                           $ 39,400   $ 39,400
  Weighted Average Interest Rate     6.32     6.90                             6.43      
(1)
The Company has a $50 million revolving mortgage facility which bears interest at LIBOR plus 1.25% against which $32 million was outstanding at March 31, 2001. The Company also has unsecured lines of credit consisting of a $130 million line and a $10 million line on which the interest rate is LIBOR plus 1.25%—1.45% and a $2 million line on which the rate is LIBOR plus 1.35%, against which borrowings of $5.4 million, 0 and $2 million were outstanding, respectively, at March 31, 2001. The amounts set forth in the table above assume that the outstanding amounts under the variable rate credit facilities will be repaid at the facilities' respective maturity dates. Management believes that these lines will be renewed at maturity.

There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements. The Company manages its interest rate risk by maintaining a conservative ratio of fixed rate, long-term debt to total debt in order to maintain variable rate exposure at an acceptable level and by taking advantage of favorable market conditions for long-term debt. In addition, the Company's guideline for total debt is not to exceed 60% of the appraised value of the income portfolio.

PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings.

Please refer to "Community Development" and "Litigation" under Part I, Item 2. — "Management's Discussion and Analysis of Financial Condition and Results of Operations".

Item 6.  Exhibits and Reports on Form 8-K

(a)
Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K):

10
Severance and Consulting Agreement

99
Amended and Restated Partnership Agreement of Newhall General Partnership

(b)
The following report on Form 8-K was filed in the first quarter ended March 31, 2001:

Items Reported
   Date of Report
     
Change in the Company's certifying accountant from KPMG LLP to Deloitte & Touche LLP and the retirement of Thomas L. Lee as Chief Executive Officer effective March 21, 2001 and Chairman of the Board effective March 31, 2001.   March 21, 2001

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SIGNATURES

    Pursuant to the requirements 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: May 4, 2001
 
By:
/s/ GARY M. CUSUMANO   
Gary M. Cusumano
 President and Chief Executive Officer of Newhall Management Corporation
(Principal Executive Officer)

Date: May 4, 2001
 
By:
/s/ STUART R. MORK   
Stuart R. Mork
 Senior Vice President and Chief Financial Officer of Newhall Management Corporation
(Principal Financial Officer)

Date: May 4, 2001
 
By:
/s/ DONALD L. KIMBALL   
Donald L. Kimball
 Vice President—Finance and Controller of Newhall Management Corporation
(Principal Accounting Officer)

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