**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM  10-K**

 
| **ý** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES** |
|------------|----------------------------------------------------------------------|
|       | **EXCHANGE  ACT OF 1934**                                            |

 

**For the fiscal year ended December 31, 2001**

 

**OR**

 
| **o**  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES** |
|--------|--------------------------------------------------------------------------|
|   | **EXCHANGE  ACT OF 1934**                                                |

** **

**For thetransition period from                        to                       .**

** **

**CommissionFile Number 1-8885**

 

**THE NEWHALLLAND AND FARMING COMPANY**

**(a California Limited Partnership )**

(Exact name of Registrant asspecified in its charter)

 
| **CALIFORNIA**                                                               |   | **95-3931727**                        |
|------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or  other jurisdiction of incorporation or organization)              |   | (I.R.S.  Employer Identification No.) |
|                                                                         |   |                                  |
| **23823 Valencia Boulevard, Valencia,  California 91355**                    |
| (Address of  principal executive offices)  (Zip  Code)                  |
|                                                                         |   |                                  |
| Registrant’s  telephone number, including area code **(661)  255-4000** |

 

**SECURITIES REGISTERED PURSUANT TO SECTION12(b) OF THE ACT:**

 
| **Title of  each class** |   | **Name of  each exchange on which registered**   |
|--------------------------|--------|--------------------------------------------------|
|                     |   |                                             |
| Depositary  Receipts     |   | New York  Stock Exchange  Pacific Stock Exchange |

 

**SECURITIES REGISTERED PURSUANT TO SECTION12(g) OF THE ACT:  None**

 

Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý  NO  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

 

The aggregate market value of depositaryreceipts held by non-affiliates based upon the closing price of such depositaryreceipts on the New York Stock Exchange on February 28, 2002 was $625,021,709.

 

 

 

**THE NEWHALL LAND AND FARMING COMPANY**

 

2001

FORM 10-K

 

TABLE OFCONTENTS

 
| PART I               |                                                                                        |   |   |
|----------------------|---------------------------------------------------------------------------------------------|--------|--------|
|                 |                                                                                        |   |   |
| Item    1  | Business                                                                                    |   | 1      |
|                 |                                                                                        |   |   |
| Item    2  | Properties                                                                                  |   | 6      |
|                 |                                                                                        |   |   |
| Item   3   | Legal Proceedings                                                                           |   | 7      |
|                 |                                                                                        |   |   |
| Item   4   | Submission of Matters to a Vote of Security  Holders                                        |   | 8      |
|                 |                                                                                        |   |   |
| PART II              |                                                                                        |   |   |
|                 |                                                                                        |   |   |
| Item    5  | Market for the Registrant’s Depositary  Units and Related Security Holder Matters      |   | 8      |
|                 |                                                                                        |   |   |
| Item   6   | Selected Financial Data                                                                     |   | 9      |
|                 |                                                                                        |   |   |
| Item    7  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   | 11     |
|                 |                                                                                        |   |   |
| Item    7A | Quantitative and Qualitative Disclosures  about Market Risk                                 |   | 21     |
|                 |                                                                                        |   |   |
| Item    8  | Financial Statements and Supplementary Data                                                 |   | 22     |
|                 |                                                                                        |   |   |
| Item    9  | Changes In and Disagreements with  Accountants on Accounting and Financial Disclosure       |   | 40     |
|                 |                                                                                        |   |   |
| PART III             |                                                                                        |   |   |
|                 |                                                                                        |   |   |
| Item    10 | Directors and Executive Officers of the  Registrant                                         |   | 41     |
|                 |                                                                                        |   |   |
| Item   11  | Executive Compensation                                                                      |   | 47     |
|                 |                                                                                        |   |   |
| Item    12 | Security Ownership of Certain Beneficial  Owners and Management                             |   | 58     |
|                 |                                                                                        |   |   |
| Item    13 | Certain Relationships and Related  Transactions                                             |   | 61     |
|                 |                                                                                        |   |   |
| Part IV              |                                                                                        |   |   |
|                 |                                                                                        |   |   |
| Item   14  | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                           |   | 63     |
|                 |                                                                                        |   |   |
| SIGNATURES           |                                                                                        | 67     |
|                 |                                                                                        |   |   |
| SCHEDULE III         | Real Estate and Accumulated Depreciation                                                    |   | 69     |
|                 |                                                                                        |   |   |
| INDEX TO EXHIBITS    |                                                                                        |   |
|                 |                                                                                        |   | 71     |
|                      |                                                                                             |        |        |  |

 

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**PART  I**

** **

** **

**FORWARD-LOOKING INFORMATION**

** **

Except forhistorical matters, the matters discussed in this Annual Report andforward-looking statements that involve inherent risks and uncertainties. Wehave tried, wherever practical, to identify these forward-looking statements byusing words like "anticipate," "believe," "estimate,""target," "project," "expect," "plan,"and similar expressions. Forward-looking statements include, but are notlimited to, statements about plans; opportunities; anticipated regulatoryapprovals; negotiations; market and economic conditions; development,construction, and sales activities; and availability of financing.

 

We caution younot to place undue reliance on these forward-looking statements, which reflectour current beliefs and are based on information currently available to us. Weexpressly undertake no obligation to publicly revise or update theseforward-looking statements to reflect future events or changes incircumstances. 

 

Theseforward-looking statements are subject to risks and uncertainties that couldcause our actual results, performance, or achievements to differ from thoseexpressed in or implied by these statements.

** **

** **

**Item  1. Business**

** **

**INTRODUCTION**

 

The NewhallLand and Farming Company, a California Limited Partnership, (the “Company” orthe “Partnership”) is engaged in the development of residential, industrial andcommercial real estate and in agriculture, on its approximately 49,000 acres inCalifornia. The interests in the Company (other than those held by the generalpartners) are represented by transferable Depositary Units listed on the New Yorkand Pacific Stock Exchanges under the ticker symbol NHL (also referred to inthis Annual Report as “partnership units”). The Company was reorganized from acorporation to a limited partnership on January 8, 1985. The predecessorcorporation was established in 1883 by the family of Henry Mayo Newhall; theshares of the corporation were listed on the New York Stock Exchange in 1970.

 

The Company’sprimary business is developing master-planned communities. Since 1965, theCompany has been developing the town of Valencia on a portion of the Company’slandholdings in Los Angeles County which now is home to approximately 45,000residents and over 1,400 companies that provide 45,000 jobs. With approximately6,500 acres remaining to be developed, and residential buildout expected by2006, Valencia is the regional center for north Los Angeles County and thenorthern gateway to the entire Los Angeles metropolitan area.

 

In 1994, theCompany started the entitlement process on Newhall Ranch, a new master-plannedcommunity located on 12,000 acres adjacent to Valencia and west of Interstate5. In March 1999, the Company received initial approval for the project fromthe Los Angeles County Board of Supervisors. The Newhall Ranch Specific Planpermits 21,600 homes in five distinct lifestyle villages and 325 net acres ofcommercial and business park uses. In June 2000, a Kern County Superior Courtjudge identified six issues in the project’s Environmental Impact Report asrequiring further environmental review. In October 2001, the Regional Planning Commission approved theadditional analyses performed by the Company concerning the six issues.  The Company anticipates the Los AngelesCounty Board of Supervisors’ approval of the additional analyses in 2002 anddevelopment is expected to commence in late 2004.  Planning and design work continues on the infrastructure for theproject and detailed planning is proceeding on the first two villages plannedfor the community.  For additionalinformation on this matter, please refer to the “Community Development” sectionunder Part II. Item 7. – Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

Valencia andNewhall Ranch are located on the Company’s prime landholding consisting of over18,000 contiguous acres in north Los Angeles County, a rapidly growing regionin California.  The developmentpotential of these properties is unmatched in the entire County and is directlyin the path of growth along the Interstate 5 corridor, just 30 miles north of downtownLos Angeles. Four major freeways intersect Interstate 5 within ten minutes ofValencia providing businesses and residents easy access to the Los Angelesmetropolitan area, major airports and the ports of Los Angeles and Long Beach.

 

In the late 1980s,the Company adopted the strategy of selling farm properties with little or nopotential for development and re-deploying the proceeds into real estateoperations. As of December 31, 2001, more than 70,000 acres of non-strategicfarmland have been sold. No farmland was sold in 2001.  The Company’s remaining agriculturalproperties are the New Columbia Ranch in the San Joaquin Valley and the NewhallOrchard in Ventura County.

 

In May 2001,the Company completed the unit repurchase program authorized by the Board ofDirectors in September 1999 of 6,384,446 units, equal to approximately 20% ofthe outstanding partnership units in September 1999.  Also, in May 2001, the Board of Directors authorized a new unitrepurchase program of up to 2,520,000, or 10% of the then outstandingunits.  As of December 2001, a total of970,150 units had been repurchased under the May 2001 program.  The Company’s goal is to complete theexisting repurchase program in 2002 and the Board will continue to evaluateadditional unit repurchase programs if it continues to be an attractiveinvestment alternative for the Company’s capital and its unitholders.

 

In 2000, tworetail properties, four apartment complexes and four office buildings were soldas part of the Company’s business strategy, announced in December 1999, to sellapproximately half of its income portfolio to finance the repurchase of theCompany’s partnership units.  Incomeproperty sales in 2001 included one mixed-use building, two office buildingsand the Chiquita Canyon Landfill.  TheCompany also sold its option to purchase approximately 1,800 acres inBroomfield, Colorado.  For additionalinformation about income properties sold and unit repurchases, please refer tothe “Results of Operations,” “Income Property Sales” and “Liquidity and Capital

 

1

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Resources” sections under Part II. Item 7. –Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

Financialinformation concerning the Company’s business segments appears in Note 10 of theNotes to Consolidated Financial Statements section in this AnnualReport. Information regarding competition and compliance with governmental andenvironmental regulations appears in the “Inflation, Risks and Related FactorsAffecting Forward-Looking Information” section under Part II. Item 7. – Management’sDiscussion and Analysis of Financial Condition and Results of Operations.  At December 31, 2001, the Company had 196employees.

 

**Competition**

 

The sale andleasing of residential, industrial and commercial real estate is highlycompetitive, with competition coming from numerous and varied sources. Thedegree of competition is affected by such factors as the supply of real estateavailable comparable to that sold and leased by the Company and the level ofdemand for such real estate. Currently, the residential market in the SantaClarita Valley, including Valencia, remains strong and has been capturing anincreasing portion of Los Angeles County’s new home sales.  However, there is no assurance that this trendwill continue.  The industrial market inValencia is experiencing declining demand and rising vacancy rates since thenational and regional economy has slowed and concerns linger over California’spower crisis.  In addition, localcompetition has intensified as local business parks have opened or are in theplanning stages.

 

**Appraisal of RealProperty Assets**

 

Theindependent appraisal firm of Buss-Shelger Associates appraised the marketvalue of the Company’s real property assets to be $925 million at December 31,2001. The appraised properties did not include oil and gas assets, water supplysystems, cash and cash equivalents and certain other assets. The net appraisedvalue of the Company’s total assets at December 31, 2001, including assets notindependently appraised, was $896 million, after reduction for debt and certainother liabilities as shown in the table below.

 

For thepurpose of the appraisals, market value was defined as the most probable pricein a competitive and open market under all conditions requisite to a fair sale,the buyer and seller each acting prudently, knowledgeably and assuming theprice is not affected by undue stimulus. A significant portion of the appraisedreal property assets is located on the Company’s 18,000 acres, 30 miles northof downtown Los Angeles and currently is undeveloped.

 

Entitlementsand the continuing development of Valencia enhance the appraised value of theCompany’s remaining 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 countygovernments.  The appraised values ofthe Company’s remaining land and income-producing properties in the Valenciamaster-planned community have increased from $222 million in 1984(approximately 9,600 acres), the first year independent property appraisalswere obtained, to $668 million in 2001 (approximately 6,600 acres).

 

In 1999,Newhall Land initiated an aggressive unit repurchase program to capitalize onthe investment opportunity to create unitholder value based upon the differencein the underlying asset values relative to Newhall Land’s unit price.  Consequently, the 2000 results reflect theremoval of $86.5 million in asset value for repurchases and $21.2 million indistributions.  To fund these unitrepurchases in 2000, the Company sold $78 million in Valencia land and $220million of income-producing properties. In 2001, in addition to completing the 2000 unit repurchase program, theCompany’s Board of Directors authorized an additional 2.5 million units forrepurchase.  Results for 2001 reflectthe removal of $66.2 million in asset value for repurchases and $12.7 millionin distributions.  A total of 92.3 acresof Valencia land, 232 residential lots and five assets, including theBroomfield option, were sold in 2001. This activity was offset by an 8% reduction in units outstanding,resulting in a 6% increase in net appraised value on a per unit basis.  Absent the above sales in 2001, remainingValencia land increased in value by 20% over 2000 values.

 

2

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A summary of year-end appraised valuesfollows (the appraisals were performed by the independent appraiser except asnoted):

 

**Appraised Values**

** **
|                                                 |   | **2001**  |   | **2000**   |        | **1999**    |   | **1998**   |   | **1997**    |   |
|------------------------------------------------------|--------|-----------|--------|------------|-------------|-------------|--------|------------|--------|-------------|--------|
|                                                 |   |      |   |       |        | **Percent** |   |       |   | **Percent** |   |   |   | **Percent** |   |   |   | **Percent** |   |   |   | **Percent** |   |
| **$****in millions, except per unit**                |   | **Acres** |   | **Amount** |        | **Change**  |   | **Amount** |   | **Change**  |   | **Amount** |   | **Change** |   | **Amount** |   | **Change** |   | **Amount** |   | **Change** |   |
|                                                 |   |      |   |
| Valencia and nearby properties                       |   | 6,489     |   | $          |  412   |        | (1     | )%         | $      |  418   |   | (2 | )% | $ |  428 |   | (6 | )% | $ |  454 |   | 8 | % | $ |  420 |   | 0 | % |
| Income-producing real estate                         |   | 139       |   | 256        |        | (20         | )      | 322        |   | (31         | )      | 465 |   | 7 |   | 435 |   | 2 |   | 425 |   | 14 |   |
|                                                 |   |      |   |       |        |        |   |       |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Valencia area properties                       |   | 6,628     |   | 668        |        | (10         | )      | 740        |   | (17         | )      | 893 |   | — |   | 889 |   | 5 |   | 845 |   | 7 |   |
|                                                 |   |      |   |       |        |        |   |       |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community development properties:                    |   |      |   |       |        |        |   |       |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Newhall  Ranch, Broomfield* and City Ranch *         |   | 11,965    |   | 194        |        | 4           |   | 187        |   | 3           |   | 181 |   | 66 |   | 109 |   | 76 |   | 62 |   | 41 |   |
|                                                 |   |      |   |       |        |        |   |       |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agricultural properties                              |   | 30,110    |   | 58         |        | (2          | )      | 59         |   | —      |   | 59 |   | (34 | ) | 90 |   | 5 |   | 86 |   | (2 | ) |
|                                                 |   |      |   |       |        |        |   |       |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage and other debt at book carrying value       |   |      |   | (86        | )           | 15          |   | (75        | )      | (66         | )      | (223 | ) | 41 |   | (158 | ) | 1 |   | (157 | ) | (4 | ) |
|                                                 |   |      |   |       |        |        |   |       |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| All other, net, not independently appraised          |   |      |   | 62         |        | 464         |   | 11         |   | (83         | )      | 64 |   | 56 |   | 41 |   | 14 |   | 36 |   | (27 | ) |
|                                                 |   |      |   |       |        |        |   |       |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net appraised value                                  |   | 48,703    |   | $          |  896   |        | (3     | )%         | $      |  922   |   | (5 | )% | $ |  974 |   | 0 | % | $ |  971 |   | 11 | % | $ |  872 |   | 8 | % |
|                                                 |   |      |   |       |        |        |   |       |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of partnership units outstanding (000’s) |   |      |   | 24,374     |        | (8          | )%     | 26,590     |   | (10         | )%     | 29,668 |   | (9 | )% | 32,676 |   | (5 | )% | 34,527 |   | 0 | % |
|                                                 |   |      |   |       |        |        |   |       |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net appraised value per partnership unit             |   |      |   | $          |  36.78 |        | 6      | %          | $      |  34.66 |   | 6 | % | $ |  32.85 |   | 11 | % | $ |  29.72 |   | 18 | % | $ |  25.25 |   | 8 | % |
|                                                      |        |           |        |            |             |             |        |            |        |             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Appraised values arejudgments.  Land and property appraisalsare an estimated value based on the sale of comparably located and zoned realestate or on the present value of income anticipated from commercial properties.  There is no assurance that the appraisedvalue of property would be received if any of the assets were sold.  No assumptions have been made with respectto the bulk sale of the Company’s total real estate assets.  Certain reclassifications within categorieshave been made to conform to the current year presentation; however, priorperiod amounts have not been restated to reflect land sale activity, unitrepurchases or distributions to unitholders. For the five-year period ended 2001, the Company has invested $283.3million in unit repurchases and paid out $88.1 million in distributions.

 

**The Company’s 50.1% interest in City Ranch was divested in 2000 and anoption on 1,800 acres in Broomfield, Colorado was sold in 2001.*

 

**REAL ESTATE**

 

The Company’s primary businessis developing new towns and master-planned communities in north Los AngelesCounty.  This includes the town ofValencia, 30 miles north of downtown Los Angeles and Newhall Ranch, a newcommunity planned for over 21,000 homes on 12,000 acres adjacent to Valenciaand west of Interstate 5.  The Companysells residential lots to merchant builders, operates a portfolio of commercialproperties, provides building-ready sites for sale to industrial and commercialdevelopers/users and owns a public water utility. For additional informationregarding the Company’s business refer to Part II. Item 7. – Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

Valencia, the firstmaster-planned community developed by the Company, has experienced tremendoussuccess and set the standard for the Company’s future planned communities.  Today, Valencia is a balanced community,providing 

 

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residential, commercial andretail properties, along with industrial and recreational facilities and is theregional center for north Los Angeles County. We believe residents are attracted to the quality of life offered inValencia’s relatively safe, clean environment, combined with award-winningschools.  Major business such asPrincess Cruises and Explorer Insurance, have relocated to Valencia for similarreasons plus the added benefit of a strong local labor pool and proximity tothe Los Angeles metropolitan area.  Plans for the build-out of Valencia include 5,220 homes plusapproximately 1,100 acres of commercial and industrial land, including land forapproximately 2,100 apartment units. The Company’s goal is to complete thesellout of the community’s residential land by 2006.

 

Newhall Ranch, the nextmaster-planned community planned for the Company on 12,000 acres adjacent toValencia and west of Interstate 5, is based on a master plan that incorporatesthe natural beauty of the Santa Clara River and preserves over 6,000 acres ofopen space. Approval of this 21,600 home project was received in 1999 from theLos Angeles County Board of Supervisors. In June2000, a Kern County Superior Court judge identified six issues in the project’sEnvironmental Impact Report as requiring further environmental review. InOctober 2001, the Regional Planning Commission approved the additional analysesperformed by the Company concerning the six issues. The Company anticipates the Los AngelesCounty Board of Supervisors’ approval of the Company’s additional analyses in2002 and development is expected to commence in late 2004.  The first two villages in thecommunity, Riverwood and The Mesas, are in the planning stages, along withdesign work on the major infrastructure to open the project.

 

**Residential Development and Land Sales**

 

Despite thenational economic slowdown, the local economy in the Santa Clarita Valley, hometo Valencia, remains vibrant and continues to outpace Los Angeles County.  In 2001, Valencia merchant builders sold 873new homes built on land previously sold by the Company, an all-time record forValencia, compared to 419 new homes sold the prior year by merchantbuilders.  At December 31, 2001,merchant builders had 245 new homes in escrow, exceeding the 186 homes inescrow at the end of 2000.  Includinglots purchased from the Company late in the 2001 fourth quarter, merchantbuilders had an inventory of 818 lots remaining on which to build new homes atthe end of 2001, compared to a remaining inventory of 931 lots at the end of2000.  While the Company does notparticipate directly in profits generated from escrow closings by merchantbuilders, the sale of homes situated on these previously sold lots is importantto the Company’s future success in selling additional lots.

 

A total of 232residential lots closed escrow in the 2001 fourth quarter. No residential lotsales were recorded in the first nine months of 2001.  Lot sales in 2001 continued to be impacted by the PublicUtilities Commission’s (PUC) decision in 2000 to combine its review of ValenciaWater Company’s request to expand its service area together with Valencia WaterCompany’s water management program.  In2001, the PUC approved Valencia Water Company’s water management program andgranted the service expansion request that includes 1,650 lots and apartmentsthat were annexed to the City of Santa Clarita in 2000 and 2,336 lots andapartments in the Company’s West Creek community.  The number of planned homes in West Creek was reduced from thepreviously reported 2,545 lots due to the relocation of a junior high schoolsite to this planning area.  Developmentopponents have asked the PUC for a re-hearing concerning the PUC’s decision.

 

The goal forthe Company’s residential division is to achieve record-setting Valencia lotsales in 2002 and complete the sellout of the community’s residential land by2006.  The Company plans to meet strongdemand for residential land in 2002 by marketing for sale approximately 1,100residential lots in several new lifestyle villages in Valencia.  Recent economic studies indicate a shortagein residential development in Los Angeles County.  The shortfall represents an opportunity for the Company toaccelerate development of Valencia in order to capture the demand.  The Company continues to invest heavily inland use entitlements, land planning and responding to legal challenges to moveforward with the new Valencia communities and to introduce Newhall Ranch.

 

**Industrial/Commercial Development and LandSales**

** **

The Companydevelops the infrastructure and provides sites for sale toindustrial/commercial developers and users. Valencia’s location just 30 milesnorth of downtown Los Angeles on Interstate 5, California’s major north-southfreeway, provides an attractive environment for industrial, commercial,service, distribution and entertainment businesses. Valencia has become theregional center for north Los Angeles County and as of the end of 2001, has

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3:1jobs-to-housing ratio with 45,000 jobs and 15,000 homes.  Businesses continue to be attracted toValencia’s relatively safer and cleaner environment, highly skilled workforce,variety of housing options and award-winning public schools.

 

The Companymarkets industrial and commercial land as Valencia Gateway which todayencompasses 4,500 acres and has 18.5 million square feet of building space,making it the largest master-planned center for business, technology andindustry in Los Angeles County. Valencia’s industrial market experienced somechallenges in 2001 due to the marketing for sale or lease of approximately 2million square feet of new space coming on line as a result of aggressive landsales in previous years, as well as the slowing of the southern Californiaeconomy.  Slower economic conditions andthe marketing of new industrial space coming on line likely will affectindustrial land sales in 2002.  In 2001,the Company sold 16.8 acres of industrial land and 75.5 acres of commercialland.   The Company expects to marketfor sale in 2002 approximately 20 acres of industrial land and 65 acres ofcommercial land.

** **

**Community Development**

 

The Companycontinues to actively invest in land use entitlements to support acceleratedgrowth and to maximize the value of its landholdings. The Company’s communitydevelopment activities are focused on securing the necessary governmental landuse approvals as well as planning and community marketing to complete theprojected sellout of Valencia residential land by 2006 and commence developmentof Newhall Ranch.  Planning and designwork continues on the infrastructure for the 21,600-home Newhall Ranch projectand detailed planning is proceeding on two of the five villages planned for thecommunity.

 

**Income-Producing Properties**

 

As previouslydiscussed, in 2001 and 2000, the Company sold several income-producingproperties to finance the repurchase of partnership units.  For additional information about theproperties sold and the repurchase plan, see the “Income Producing Properties”and “Liquidity and Capital Resources” sections under Part II. Item 7. –Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

For additionalinformation about the Company’s remaining income-producing properties atDecember 31, 2001, see Part I.  Item2. – Properties, the “Income-Producing Properties” section under PartII. Item 7. – Management’s Discussion and Analysis of Financial Condition andResults of Operations and Schedule III – Real Estate and AccumulatedDepreciation.  To conserve capitaland accelerate cash flow, the Company did not develop any new income propertiesin 2001 and instead marketed retail sites for sale to third-partydevelopers.  The Company expects toinvest approximately $20 million in the Valencia Town Center regional shoppingmall during 2002 and 2003 to remodel to space vacated by Edwards Theatres inSeptember 2001 for the relocation of the existing food court and creation ofnew retail space.  Additionally in 2002,the Company expects to invest approximately $16 million in the completion ofTPC Valencia, a Tournament Players Club® championship golf course, in theCompany’s Westridge community.

** **

**Valencia Water Company**

 

Valencia WaterCompany, a wholly-owned subsidiary that supplies water to Valencia and otheradjacent developments, is a regulated public utility serving over 23,000metered customers. The water supply for the service area is obtained from wellsowned by Valencia Water Company and by purchases from the California StateWater Project. In 2001, 47% of Valencia Water Company’s water was suppliedthrough ground sources.

 

**AGRICULTURE**

 

The Company’s agricultural division consists of farming and energyoperations. The principal remaining agricultural properties are New ColumbiaRanch in the San Joaquin Valley and the Newhall Orchard in Ventura County onwhich the Company and its tenants raised over 25 different crops during thecalendar year 2001.  Of the Company’sland devoted to farming, over 66% was leased to third parties in 2001.  Approximately 21,000 acres of land at theNewhall Ranch and Newhall Orchard not suitable for cultivation or ready fordevelopment are leased to third parties for cattle grazing.

5

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The Company’sagricultural operations supply most of their water through underground sourcesand are not dependent on state or federal water projects. The Company continuesto improve conservation practices to minimize the cost of irrigation and theamount of water used.

 

Energyoperations consist of royalty interests in oil and gas assets on the NewhallRanch.  In total, the Company hasroyalty interests in approximately 150 oil wells and 16 gas wells. Energy operationsdo not represent a material source of revenues or income for the Company.

 

**Central Administration**

** **

CentralAdministration includes the Company's corporate functions including executiveoffices, treasury, tax, employee relations, corporate accounting, finance,information systems, headquarters facilities, secretary/legal, investorrelations, market research, internal audit and, in prior years, landacquisition. Except for certain costs relating to headquarters facilities andspecific services billed to Valencia Water Company, expenses for thesefunctions are expensed as general and administrative expenses and are notallocated to the Company's operating business segments.

 

**Item 2. Properties**

** **

**Land**

 

Listed beloware the location and acreage of properties owned by the Company at December 31,2001:

 
| **Property**    |   | **State**  |   | **County**  |   | **Acreage** |
|-----------------|--------|------------|--------|-------------|--------|-------------|
| Valencia area   |   | California |   | Los Angeles |   | 6,628       |
| Newhall Ranch   |   | California |   | Los Angeles |   | 11,965      |
| Newhall Orchard |   | California |   | Ventura     |   | 16,110      |
| New Columbia    |   | California |   | Madera      |   | 14,000      |
|            |   |       |   |        |   |        |
|            |   |       |   |        |   | 48,703      |

** **

**Plants and buildings**

** **

Agriculture –Various buildings located at two farming operations in California.

 

CommercialReal Estate – Listed below are square footage, occupancy, net operating incomeby group and anchor tenants of major commercial properties owned by the Companyat December 31, 2001. The Company also has numerous land leases. The commercialproperties are leased to 183 tenants. 

 
|                           |   | **Year   Opened** |   | **Approximate****GLA (1)in   Square Feet** |      | **2001 Net Operating Income(2)** |   | **12/31/01 Occupancy (3)** |   | **Major Tenants**            |   |
|--------------------------------|--------|-------------------|--------|--------------------------------------------|-----------|----------------------------------|--------|----------------------------|--------|------------------------------|--------|
| **Dollars in thousands**       |   |              |   |                                       |      | **(in 000’s)**              |   |                       |   |                         |   |
|                           |   |              |   |
| **Shopping Centers**           |   |              |   |                                       |      |                             |   |                       |   |                         |   |
| Valencia Town Center           |   | 1992              |   | 729,000                                    | (5)  |                             |   | 84                         | %      | Robinsons-May, JC            |   |
| (expanded in 1998)             |   |              |   |                                       |      |                             |   |                       |   | Penney, Sears                |   |
|                           |   |              |   |                                       |      |                             |   |                       |   |                         |   |
| Valencia Entertainment Center  |   | 1999              |   | 126,000                                    |      |                             |   | 96                         | %      | Edwards Theatres             |   |
| River Oaks                     |   | 1987              |   | 272,000                                    |      |                             |   | 100                        | %      | Mervyn’s, Target        |   |
| NorthPark Village Square       |   | 1996              |   | 81,800                                     |      |                             |   | 100                        | %      | Ralphs Supermarket, Rite Aid |   |
|                           |   |              |   |                                       |      |                             |   |                       |   |                         |   |
| Other                          |   | various           |   | 37,600                                     |      |                             |   |                       |   |                         |   |
|                           |   |              |   | 1,246,400                                  | (5)  | $                                | 16,564 |                       |   |                         |   |   |
|                           |   |              |   |                                       |      |                             |   |                       |   |                         |   |
| **Other Income Properties**    |   | various           |   | 98,100                                     |      | $                                | 1,093  |                       |   |                         |   |   |
|                           |   |              |   |                                       |      |                             |   |                       |   |                         |   |
| **Hotels**                     |   |              |   | **Rooms**                                  |      |                             |   |                       |   |                         |   |
| Valencia  Hilton Garden Inn    |   | 1991              |   | 152                                        |      |                             |   | 85.2                       | %      | $82.81                       |   |
| (75% joint venture interest)   |   |              |   |                                       |      |                             |   |                       |   | average daily rate           |   |
| Hyatt Valencia Hotel and Santa |   | 1998              |   | 244                                        |      |                             |   | 70.5                       | %      | $108.36                      |   |
| Clarita Conference Center (4)  |   |              |   |                                       |      |                             |   |                       |   | average daily rate           |   |
|                           |   |              |   | 396                                        |      | $                                | 3,791  |                       |   |                         |   |   |
|                                |        |                   |        |                                            |           |                                  |        |                            |        |                              |        |  |  |  |  |  |  |  |  |  |  |

 

 

(1) Gross Leasable Area

(2) Income before administration and depreciation expense

(3) Including leases signed and not open

(4) Santa Clarita Conference Center totals 26,000 square feet

(5) Includes 393,000 square feet for anchor stores

 

6

----

 

 

All of thecommercial real estate properties and the properties of Valencia Water Companyare located in and around Valencia, California.  At December 31, 2001, two of the shopping centers secured loanswith a $24.2 million principal balance and no borrowings were outstandingagainst a $50 million revolving mortgage facility secured by Valencia TownCenter. An $11 million financing is secured by the water utility plant ofValencia Water Company. For additional information concerning encumbrancesagainst Company properties, refer to Note 7 of the Notes to ConsolidatedFinancial Statements section.

 

For additionalinformation on the Company’s properties, refer to the summary of appraisedvalues on page 3 and *Schedule III — Real Estate and AccumulatedDepreciation* on pages 69 and 70.

** **

**Item3.  Legal Proceedings**

 

The Company,including its subsidiary, are named defendants in many lawsuits arising fromthe ordinary course of its business. While the outcome of these lawsuits cannot be predicted, management doesnot expect these mattersto have a material adverse effect on the Company’s business, financialcondition or results of operations.

 

In early 2001, the Company filed a lawsuit in Los Angeles SuperiorCourt against Kerr-McGee Corporation, Kerr-McGee Oil & Gas Onshore LLC,Kerr-McGee Oil & Gas Onshore LP (collectively, “Kerr-McGee”) and MedallionCalifornia Properties Company (“Medallion”) for damages associated with oilfield contamination on property owned by the Company and leased to Kerr-McGeeor its predecessors, which successively transferred the lease interest to otherlessees, including Medallion.  Duringthe period beginning in 1935 to the present, the lessees conducted crude oiland gas extraction operations on the property. The Company is seeking damages resulting from the defendants’ failure toclean the property in accordance with the lease terms.  During the 2001 fourth quarter, Kerr-McGeefiled a cross-complaint against the Company seeking declaratory relief that ithas satisfied its clean-up obligations under the lease.  Also during the 2001 fourth quarter,Medallion filed a cross-complaint against the Company claiming the Company isresponsible for clean-up costs for the portions of the leased property whichMedallion claims to have the continued right to occupy and on which Mediallionclaims the Company failed to clean up the contamination caused by Kerr-McGee.

 

Environmental site assessment of the leased property is underway, thecompletion of which is necessary to determine potential damages.  The Company is vigorously pursuing itsclaims and believes that the defendants’ cross-claims will beunsuccessful.  No governmental agency isparticipating in the litigation, and no proceedings are known to becontemplated by any governmental authority.

 

In November 2000, Valencia Water Company, along with Castaic Lake WaterAgency (the water wholesaler for the Santa Clarita Valley), Newhall CountyWater District and Santa Clarita Water Company (collectively, the “waterpurveyors”) filed a lawsuit in U.S. District Court – Central District ofCalifornia against Whittaker Corporation, Santa Clarita LLC and RemediationFinancial, Inc. arising from the existence of the chemical perchlorate found infour local groundwater wells that are owned by the water purveyors.

 

Whittaker Corporation and apredecessor owner manufactured munitions on a site now located in the City ofSanta Clarita from 1934 to 1987 (called the “Whittaker-Bermite site”).  During that period, the chemical perchlorateand various other chemicals were used in the munitions manufacturing process.  In 1994, Whittaker Corporation and theCalifornia Department of Toxic Substances Control (“DTSC”) entered into aconsent order, under which Whittaker was required to commence preparation of aremediation work plan for the Whittaker-Bermite site.  Subsequently, remediation plans have been the subject of ongoingnegotiations among Whittaker, DTSC and the subsequent landowner and its parent,Santa Clarita LLC and Remediation Financial, Inc.

 

The water purveyors independently filed the lawsuit to enforce thedefendants’ obligations to remediate the perchlorate contamination.  In 2001, Santa Clarita LLC and RemediationFinancial, Inc. filed counterclaims against the water purveyors alleging thatthe water purveyors caused or contributed to the perchlorate contamination inan unspecified manner. The case is in the early phase of discovery.  The water purveyors are vigorously pursuingtheir claims.  Valencia Water Companybelieves the counterclaim against it will not be successful.

 

For information on lawsuits pertaining to Newhall Ranch, ValenciaWestridge and the West Creek community, please refer to the “CommunityDevelopment” section under Part II. Item 7. – Management’s Discussion andAnalysis of Financial Condition and Results of Operations.  For information on the Public UtilitiesCommission matter regarding Valencia Water Company, please refer to the“Residential Home and Land Sales” section under Part II. Item 7. –Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

7

----

**Item 4. Submission of Matters to a Vote of Security Holders**

None.

 

**Part II**

**Item5.****           Marketfor the Registrant’s Depositary Units and Related Security Holder Matters**

Market Priceand Distribution Data

*Years ended December 31*

 
|                             |   | **Market Price** |   |     |   |     |   |              |       |
|----------------------------------|--------|------------------|--------|----------|--------|----------|--------|-------------------|------------|
|                             |   | **2001**         |   | **2000** |   |     |   | **Distributions** |       |
| **Per unit**                     |   | **High**         |   | **Low**  |   | **High** |   | **Low**           | ** ** |   |   | **2001** | ** ** | **2000** |   |
| First quarter                    |   | $                | 26.87  |     | $      | 23.15    |   | $                 | 28.50      |   | $ | 26.75 |   | First quarter |   | $ | .20 |   | $ | .45 |   |
| Second quarter                   |   | 29.55            |   | 24.10    |   | 28.88    |   | 26.38             |       | Second quarter |   | .10 |   | .10 |   |
| Third quarter                    |   | 29.95            |   | 26.00    |   | 28.88    |   | 23.25             |       | Third quarter |   | .10 |   | .10 |   |
| Fourth quarter                   |   | 30.00            |   | 26.50    |   | 24.50    |   | 20.20             |       | Fourth quarter |   | .10 |   | .10 |   |
|                             |   |             |   |     |   |     |   |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Year’s high and low

  |   | $                | 30.00  |     | $      | 23.15    |   | $                 | 28.88      |   | $ | 20.20 |   | Total distributions |   | $ | .50 |   | $ | .75 |   |
|                                  |        |                  |        |          |        |          |        |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                       |   | **2001** | ** ** | **2000** |   |
|----------------------------|--------|----------|------------|----------|--------|
| December 31, closing price |   | $        | 29.60      |     | $      | 23.25 |   |
|                            |        |          |            |          |        |  |  |

 

The Company’sDepositary Units are traded on the New York and Pacific Stock Exchanges underthe ticker symbol NHL and, at December 31, 2001, the Company had 997unitholders of record. The Company has paid uninterrupted quarterly cashdistributions since 1936 and on occasion the Company has declared and paidspecial cash distributions. The declaration of any distribution and the amountdeclared is determined by the Board of Directors taking into account theCompany’s earnings, cash requirements, financial condition and prospects.

 

8

----

 

**Item 6. Selected Financial Data**

 

The followingselected financial data is derived from audited consolidated financialstatements. The data for the eight-year period ended December 31, 1998 wasderived from our audited financial statements and are not included in thisAnnual Report. You should read the selected financial information set forthbelow in conjunction with Management's Discussion and Analysis of FinancialCondition and Results of Operations and our consolidated financial statementsand related notes appearing elsewhere in this Annual Report.

 
| **In thousands, except per unit,  percentages and sales information** |   | **2001** |    | **2000** |   | **1999**      |   | **1998** |    | **1997**  |   |
|-----------------------------------------------------------------------|--------|----------|---------|----------|--------|---------------|--------|----------|---------|-----------|--------|
| **Operating Results**                                                 |   |     |    |     |   |          |   |     |    |      |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| Revenues                                                              |   | $        | 241,615 |     | $      |  400,968 |   | $        | 322,506 |      | $      | 304,678 |   | $ | 207,701 |   |
| Operating income                                                      |   | 109,307  |    | 117,973  |   | 115,213       |   | 83,894   |    | 63,898    |   |
| General and administrative expense                                    |   | (12,470  | )       | (14,642  | )      | (14,431       | )      | (12,634  | )       | (10,268   | )      |
| Interest and other, net                                               |   | (5,780   | )       | (17,935  | )      | (10,390       | )      | (7,180   | )       | (9,137    | )      |
| Net income                                                            |   | 91,057   |    | 85,396   |   | 90,392        |   | 64,080   |    | 44,493    |   |
| Depreciation and amortization (included in  net income)               |   | (11,597  | )       | (13,800  | )      | (15,296       | )      | (10,101  | )       | (10,148   | )      |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| **Per Unit Information**                                              |   |     |    |     |   |          |   |     |    |      |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| Net income                                                            |   | $        | 3.60    |     | $      |  3.09    |   | $        | 2.88    |      | $      | 1.89 |   | $ | 1.29 |   |
| Net income — assuming dilution                                   |   | 3.56     |    | 3.05     |   | 2.85          |   | 1.86     |    | 1.28      |   |
| Distributions (including special)                                     |   | .50      |    | .75      |   | .62           |   | .52      |    | .48       |   |
| Partners’ capital                                                |   | 5.55     |    | 4.48     |   | 4.71          |   | 4.40     |    | 4.21      |   |
| Appraised value                                                       |   | 36.78    |    | 34.66    |   | 32.85         |   | 29.72    |    | 25.25     |   |
| Market price — high                                              |   | 30.00    |    | 28.88    |   | 28.00         |   | 34.75    |    | 32.00     |   |
|    low                                                           |   | 23.15    |    | 20.20    |   | 22.19         |   | 20.25    |    | 16.50     |   |
|    year-end closing                                              |   | 29.60    |    | 23.25    |   | 27.00         |   | 26.00    |    | 30.00     |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| **Financial Position**                                                |   |     |    |     |   |          |   |     |    |      |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| Land under development                                                |   | $        | 85,317  |     | $      |  53,988  |   | $        | 39,401  |      | $      | 47,667 |   | $ | 53,875 |   |
| Income-producing properties, net                                      |   | 145,485  | (1)     | 160,505  | (1)    | 281,060       | (1)    | 248,712  |    | 227,203   |   |
| Total assets                                                          |   | 360,304  |    | 342,541  |   | 504,824       |   | 432,207  |    | 403,932   |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| Mortgage and other debt (total debt)                                  |   | 85,511   |    | 74,557   |   | 222,825       |   | 157,609  |    | 156,946   |   |
| Other long-term obligations                                           |   | 56,986   |    | 57,611   |   | 50,474        |   | 48,832   |    | 40,393    |   |
| Total liabilities                                                     |   | 225,093  |    | 223,337  |   | 365,099       |   | 288,394  |    | 258,655   |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| Partners’ capital (capital)                                      |   | 135,211  |    | 119,204  |   | 139,725       |   | 143,813  |    | 145,277   |   |
| Market capitalization at year end                                     |   | 721,470  |    | 618,218  |   | 801,036       |   | 849,576  |    | 1,035,810 |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| **Statistics**                                                        |   |     |    |     |   |          |   |     |    |      |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| Return on total debt and capital                                      |   | 41       | %       | 44       | %      | 25            | %      | 21       | %       | 15        | %      |
| Total debt as a percent of total debt and  capital                    |   | 39       | %       | 38       | %      | 61            | %      | 52       | %       | 52        | %      |
| Total debt as a percent of total market  capitalization               |   | 11       | %       | 11       | %      | 22            | %      | 16       | %       | 13        | %      |
| Units outstanding — weighted average                             |   | 25,284   |    | 27,658   |   | 31,388        |   | 33,986   |    | 34,520    |   |
| — weighted average  — diluted                          |   | 25,580   |    | 27,969   |   | 31,668        |   | 34,376   |    | 34,750    |   |
| — year end                                                       |   | 24,374   |    | 26,590   |   | 29,668        |   | 32,676   |    | 34,527    |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| **Sales Information**                                                 |   |     |    |     |   |          |   |     |    |      |   |
|                                                                  |   |     |    |     |   |          |   |     |    |      |   |
| Residential lots and homes sold                                       |   | 232      |    | 208      |   | 1,060         |   | 1,232    |    | 888       |   |
| Industrial and commercial acres sold                                  |   | 92.3     |    | 108.5    |   | 120.6         |   | 125.0    |    | 81.0      |   |
| Farm acres sold                                                       |   | —   |    | —   |   | 39,142        |   | 970      |    | 1,673     |   |

 

----

(1)          Includes income-producing properties heldfor sale, net

(2)          Includes lots sold at McDowell MountainRanch in Arizona prior to the sale of the project in 1996.

* *

9

----

 
|                                                     |   | **1996** |    | **1995** |   | **1994**     |    | **1993** |         | **1992** |   | **1991**     |   |
|----------------------------------------------------------|--------|----------|---------|----------|--------|--------------|---------|----------|--------------|----------|--------|--------------|--------|
| **In thousands, except per unit, percentages and sales** |   |     |    |     |   |         |    |     |         |     |   |         |   |
| **information**                                          |   |     |    |     |   |         |    |     |         |     |   |         |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| **Operating Results**                                    |   |     |    |     |   |         |    |     |         |     |   |         |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| Revenues                                                 |   | $        | 220,186 |     | $      | 175,597      |    | $        | 134,268      |     | $      | 105,452      |   | $ | 128,182 |   | $ | 150,762 |   |
| Operating income                                         |   | 60,584   |    | 46,482   |   | 34,607       |    | 28,538   |         | 31,636   |   | 43,232       |   |
| General and administrative expense                       |   | (9,133   | )       | (8,547   | )      | (8,578       | )       | (7,710   | )            | (6,806   | )      | (8,749       | )      |
| Interest and other, net                                  |   | (9,562   | )       | (10,618  | )      | (10,455      | )       | (8,031   | )            | (7,619   | )      | (4,398       | )      |
| Net income                                               |   | 41,889   |    | 27,317   |   | 15,574       |    | 12,797   |         | 17,211   |   | 30,085       |   |
| Depreciation and amortization (included in  net income)  |   | (8,857   | )       | (7,698   | )      | (7,690       | )       | (7,329   | )            | (6,471   | )      | (7,701       | )      |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| **Per Unit Information**                                 |   |     |    |     |   |         |    |     |         |     |   |         |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| Net income                                               |   | $        | 1.19    |     | $      | .75          |    | $        |  .42    |     | $      |  .35    |   | $ |  .47 |   | $ | .82 |   |
| Net income — assuming dilution                      |   | 1.18     |    | .75      |   | .42          |    | .35      |         | .47      |   | .82          |   |
| Distributions (including special)                        |   | .40      |    | .40      |   | .40          |    | .40      |         | .60      |   | .80          |   |
| Partners’ capital                                   |   | 3.48     |    | 3.14     |   | 3.06         |    | 3.03     |         | 3.08     |   | 3.20         |   |
| Appraised value                                          |   | 23.35    |    | 23.32    |   | 21.86        |    | 21.04    |         | 22.01    |   | 23.70        |   |
| Market price - high                                      |   | 18.75    |    | 17.00    |   | 17.25        |    | 17.50    |         | 20.38    |   | 22.50        |   |
| low                                                      |   | 15.00    |    | 12.13    |   | 12.00        |    | 13.50    |         | 12.00    |   | 13.50        |   |
| year-end closing                                         |   | 16.88    |    | 17.00    |   | 12.13        |    | 16.00    |         | 14.25    |   | 19.25        |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| **Financial Position**                                   |   |     |    |     |   |         |    |     |         |     |   |         |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| Land under development                                   |   | $        | 63,266  |     | $      |  88,457 |    | $        |  87,423 |     | $      |  73,078 |   | $ |  50,127 |   | $ |  67,769 |   |
| Income-producing properties, net                         |   | 182,641  |    | 134,504  |   | 135,858      |    | 134,384  |         | 161,615  |   | 116,875      |   |
| Total assets                                             |   | 373,488  |    | 349,753  |   | 343,792      |    | 359,898  |         | 323,082  |   | 280,575      |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| Mortgage and other debt (total debt)                     |   | 163,256  |    | 152,302  |   | 145,991      |    | 174,157  |         | 131,849  |   | 78,556       |   |
| Other long-term obligations                              |   | 37,544   |    | 36,270   |   | 30,922       |    | 33,414   |         | 28,609   |   | 27,762       |   |
| Total liabilities                                        |   | 252,835  |    | 236,897  |   | 231,435      |    | 248,619  |         | 210,033  |   | 162,790      |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| Partners’ capital (capital)                         |   | 120,653  |    | 112,856  |   | 112,357      |    | 111,279  |         | 113,049  |   | 117,785      |   |
| Market capitalization at year end                        |   | 585,575  |    | 610,470  |   | 445,727      |    | 588,112  |         | 523,830  |   | 707,534      |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| **Statistics**                                           |   |     |    |     |   |         |    |     |         |     |   |         |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| Return on total debt and capital                         |   | 15       | %       | 10       | %      | 6            |  % | 4        | %            | 7        | %      | 15           | %      |
| Total debt as a percent of total debt and  capital       |   | 58       | %       | 57       | %      | 57           | %       | 61       | %            | 54       | %      | 40           | %      |
| Total debt as a percent of total market  capitalization  |   | 22       | %       | 20       | %      | 25           | %       | 23       | %            | 20       | %      | 10           | %      |
| Units outstanding — weighted average                |   | 35,292   |    | 36,241   |   | 36,757       |    | 36,757   |         | 36,759   |   | 36,755       |   |
| — weighted average - diluted                        |   | 35,411   |    | 36,272   |   | 36,789       |    | 36,790   |         | 36,796   |   | 36,831       |   |
| — year end                                          |   | 34,701   |    | 35,910   |   | 36,761       |    | 36,757   |         | 36,760   |   | 36,755       |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| **Sales Information**                                    |   |     |    |     |   |         |    |     |         |     |   |         |   |
|                                                     |   |     |    |     |   |         |    |     |         |     |   |         |   |
| Residential lots and homes sold                          |   | 1,284    | (2)     | 1,233    | (2)    | 1,026        | (2)     | 113      |         | 487      |   | 233          |   |
| Industrial and commercial acres sold                     |   | 36.9     |    | 38.5     |   | 12.0         |    | 28.9     |         | 4.5      |   | 73.5         |   |
| Farm acres sold                                          |   | 544      |    | 5,501    |   | 5,370        |    | 3,900    |         | 6,750    |   | 2,989        |   |
|                                                          |        |          |         |          |        |              |         |          |              |          |        |              |        |  |  |  |  |  |  |  |

* *

----

(1)          Includes income-producing properties heldfor sale, net

(2)          Includes lots sold at McDowell MountainRanch in Arizona prior to the sale of the project in 1996.

 

 

10

----

 

**Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

Years ended December 31, 2001, 2000 and 1999

 

**SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES**

 

The Company’s consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  Inherent in the preparation ofthese financial statements are certain estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on aregular basis taking into account historical experience and other relevantcurrent factors.  Therefore, actualresults may differ from reported amounts under different assumptions orconditions.

 

The accounting policies used by the Company in the preparation of itsconsolidated financial statements as they relate to its business segments arepresented in Note 2 to the consolidated financial statements.  A summary of the accounting policiesmanagement considers significant in the preparation of the Company’sconsolidated financial statements follows.

 

*Revenue recognition* — The majority of revenues for the Companyresult from land sales.  The Companyfollows the provisions in Statement of Financial Accounting Standards No. 66, *Accounting for Sales of Real Estate* (“FAS66”), to record these sales.  FAS 66provides specific sales recognition criteria to determine when land salesrevenues can be recorded.  For example,FAS 66 requires a sale must be consummated with a sufficient down payment of atleast 20% to 25% of the sales price depending upon the type and timeframe fordevelopment of the property sold, and that any receivable from the sale cannotbe subject to future subordination.  Inaddition, the seller cannot retain any material continuing involvement in theproperty sold.

 

*Percentage ofcompletion* —When the Company has an obligation to complete development on sold property itutilizes the percentage of completion method of accounting to record revenuesand income.  Under percentage ofcompletion accounting, the Company recognizes revenues and income based uponthe ratio of development cost completed to the estimated total cost of theproperty sold, provided required sales recognition criteria have been met.  Unearned revenues resulting from applyingpercentage of completion accounting are reported as deferred revenues in theliabilities section of the balance sheet. The Company estimates total project costs associated with the parcelsold.  Revisions in profit estimates andchanges in percentages complete are recorded in the consolidated statement ofincome in subsequent periods, as they become known and the developmentprogresses toward completion.

 

*Project costs* — Costs incurred after the earlier ofspecific plan or tentative map approval are capitalized as a cost of thatproject and included as an asset in land under development on the balancesheet.  Preliminary planning andentitlement costs, including litigation costs, are charged to expense whenincurred.  Indirect costs that do notclearly relate to projects under development, including general andadministrative expenses, are charged to expense when incurred.

 

*Cost allocations* — The Company generally allocates onsitecosts to individual parcels within a project on a square foot basis if theparcels in the project are of similar value.  In mixed-use projects, where there may be both a residential and acommercial component with varying fair values, onsite costs are allocated tothe respective parcels using the relative sales value method.  Under the relative sales value method, eachparcel in the project under development is allocated onsite costs in proportionto the estimated overall sales prices of the project such that each parcel tobe sold reflects the same gross profit margin. Since this method requires the Company to estimate the expected salesprices for the entire project, the profit margin on subsequent parcels soldwill be impacted by both changes in the estimated total revenues as well as anychanges in the estimated total costs of the project.

 

Offsite improvements with regional benefit, such as freeway on-rampsand off-ramps and water storage tanks, are referred to as infrastructurecosts.  The Company estimates the totalcost to develop the infrastructure within a defined major development area andallocates this cost to the land within the area. Changes in the estimatedremaining infrastructure costs or changes in the remaining developable acreagewill impact the infrastructure cost allocation and corresponding profit marginfor unsold land within a major development area.

 

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**RESULTS OF OPERATIONS**

 

For 2001, the Company reportedrecord net income of $91.1 million, or $3.56 per unit, on revenues of $241.6million.  The major contributors to the2001 results were the sales of 232 residential lots, approximately 92 acres ofcommercial and industrial land, the sale of the Company’s option to purchase1,800 acres in Broomfield, Colorado and four income-producing properties.  The sale of income properties included onemixed-use building, two office buildings and the Chiquita Canyon Landfill.  Combined, these sales added $174.9 millionto revenues and $115.8 million to income in 2001.  The sale of the landfill for $65.0 million in the second quarterof 2001 was the single largest contributor to the year’s revenues and income.

 

In 2000, the Company recorded revenues of $401.0 million primarily as aresult of the sale of income properties in accordance with its businessstrategy to finance the repurchase of partnership units.  The properties sold included two shoppingcenters, four apartment complexes and four office buildings. In addition to theincome properties, 208 residential lots and over 108 acres of commercial andindustrial land were sold during the year. These sales, combined with the salesof income properties, added $298.0 million to revenues and $105.9 million toincome.  Net income for 2000 was $85.4million, or $3.05 per unit.

 

In 1999, the Company recordedrevenues of $322.5 million and net income of $90.4 million as a result of acceleratedresidential, commercial and industrial land sales in Valencia.  Altogether, 1,060 residential lots andjoint-venture homes, 63 acres of commercial land and 58 acres of industrialland, including two build-to-suits, were sold. In addition, the Company closedescrow on the sale of the 36,000-acre Suey Ranch as well as its remainingproperty at the Merced and Cowell ranches.

 

The Company’s business plan for 2002 anticipates the majority of itsrevenues will be generated from residential, commercial and industrial landsales and its portfolio of income-producing properties.  About 1,100 residential lots are expected tobe marketed for sale to merchant builders in three Valencia villages.  Subsequent to December 31, 2001, aresidential escrow closed on 265 lots, which is included in the 1,100 lotsplanned to close in 2002.  In additionto the 48 acres of commercial land in escrow at the beginning of 2002, thebusiness plan targets another 37 acres of commercial and industrial land forsale in 2002.  The Company’s portfolioof income-producing properties is expected to generate net operating income ofapproximately $21 million in 2002.  Theability to complete sales in 2002 will be dependent upon a variety of factorsincluding, but not limited to, identification of suitable buyers, agreementwith the buyers on definitive terms, successful completion of the due diligencework by buyers, availability of financing to suitable buyers, market and otherconditions.

 

Plans for 2002 also include completion of the current unit repurchaseprogram of approximately 1.5 million partnership units.  Numerous factors could affect the Company’sability to complete the current repurchase program including, but not limitedto, changing market and economic conditions, changing interest rates,challenges to governmental approvals, and finding suitable buyers for certainproperties.

 

Earningsbefore sales of income properties were $.52 per unit in 2001 compared to $.30per unit in 2000.  The 2001 per unitamount benefited from fewer outstanding partnership units as a result of theCompany’s unit repurchase program.  AtDecember 31, 2001, the number of outstanding units was approximately 8% lowerthan at December 31, 2000.  Based on thebusiness plan discussed above, the Company’s goal in 2002 is to nearly doubleearnings before sales of income properties to $1.00 per unit.  The Company anticipates only one smallincome property sale in 2002.

** **

**Residential Home andLand Sales**

 

The Company primarily sells lots to merchant builders who, in turn,build homes for sale.  Revenues andincome are recorded when title is transferred to the merchant builder.  Generally, residential lot sale agreementscontain a provision whereby the Company will receive from the merchant buildera portion of the home sales prices above an agreed upon base price (“priceparticipation”) and/or in the overall profitability of the home buildingproject after the merchant builder has received an agreed upon return (“profitparticipation”).  If home prices and/orproject profitability fall short of the participation thresholds, the Companyreceives no additional revenues or income and has no financial obligation tothe builder.  Prior to 2000, the Companyparticipated, on a limited basis, in home construction on lots it owned throughjoint ventures with certain builders. The Company’s 2002 plans do not include any residential jointventures.  Two hundred and thirty-tworesidential lots were sold in 2001, contributing $15.5 million to revenues and$4.7 million to income under percentage of completion accounting.  Under percentage of completion accounting,the Company recognizes revenues and income based upon the ratio of cost ofdevelopment completed to the total cost of the property sold.  Unearned revenues resulting from applyingpercentage of completion accounting are reported as deferred revenues withinthe liabilities section of the balance sheet. 

 

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Despite a 12% increase in the number of residential lots sold in 2001compared to 2000, a loss of $201,000 was reported after divisional expenses in2001 compared to income of $3.8 million in 2000.  This decrease was primarily due to $14.1 million in revenues and$5.9 million in income recognized in 2000 under percentage of completionaccounting from lot sales in the prior year. No revenue or income from prior year lot sales was recorded in 2001.Results for 2001 also included $211,000 received from price and profitparticipation agreements relating to Valencia lot sales in prior years.  At December 31, 2001, no residential lotswere in escrow.  Subsequent to December31, 2001, a residential escrow closed for approximately $15 million on 265lots, which will be reflected in the results for 2002.

 

A total of 208 residential lots was sold in 2000 for $12.7 million contributing$5.7 million to income. These were the remaining lots in the Bridgeport lakecommunity. Results for 2000 also included the revenues and income from lotsales in the prior year discussed above and $309,000 received from price andprofit participation agreements relating to Valencia lot sales in prioryears.  Also in 2000, the Companyrecorded a $5.2 million loss associated with the dissolution of the Company’s50.1% interest in City Ranch, a joint venture project with Kaufman and Broad ofSouthern California, Inc.  At December31, 2000, no residential lots were in escrow.

 

The Company sold a total of 891 residential lots in 1999 contributing$70.0 million to revenues and $37.3 million to income.  In addition, results for 1999 included $1.5million received from price and profit participation agreements relating toValencia lot sales in prior years. This represented the first price and profitparticipation income received since 1993. Escrow closings from the Company’stwo remaining joint ventures totaled 169 homes in 1999, contributing $38.0million to revenues and $3.9 million to income. These closings represented thelast homes in the Company’s joint-venture program.  At December 31, 1999, no residential lots were in escrow.

 

Lot sales in 2001 and 2000 were impacted by the Public UtilitiesCommission’s (PUC) decision to combine its review of Valencia Water Company’srequest to expand its service area together with the Valencia Water Company’swater management program.  Late in 2001,the PUC approved Valencia Water Company’s water management program and grantedthe service expansion request that includes 1,650 lots and apartments that wereannexed to the City of Santa Clarita in 2000 and 2,336 lots and apartments inthe Company’s West Creek community.  Thenumber of planned homes in West Creek was reduced from the previously reported2,545 lots due to the relocation of a junior high school site to this planningarea.  Development opponents have askedthe PUC for a re-hearing concerning the PUC’s decision.  The length of time the public hearings andjudicial process will take is difficult to predict, and circumstances beyondthe Company’s control could further delay development.

 

Approximately 1,100 lots are expected to be marketed for sale in2002:  approximately 600 entitled,improved residential lots in the Westridge Golf Course Community together with500 lots in the communities of Hidden Creek and Creekside.  Subsequent to December 31, 2001, aresidential escrow closed on 265 lots, which is included in the 1,100 lotsplanned to close in 2002.  The abilityto complete sales in 2002 will depend upon a variety of factors including, butnot limited to, identification of suitable buyers, agreement with the buyers ondefinitive terms, successful completion of the due diligence work by buyers,availability of financing to suitable buyers, market and other conditions.

 

**Industrial andCommercial Sales**

 

**Industrial Land Sales**

 

Five industrial parcels totaling 16.8 acres closed escrow in 2001.  These sales contributed $8.4 million torevenues and $2.4 million to income. The decrease in acres sold in 2001 ascompared to prior years was due to the marketing for sale or lease ofapproximately 2 million square feet of new space coming on line as a result ofaggressive land sales in previous years, as well as the slowing of the southernCalifornia economy.  The Company expectsto market for sale approximately 20 acres of industrial land in 2002.  Slower economic conditions and the marketingof new industrial space coming on line as a result of prior year land saleslikely will affect industrial land sales in 2002.  A 15-acre escrow, which was open at the end of the 2001 thirdquarter, was canceled in the 2001 fourth quarter.  No industrial land sales were in escrow at December 31, 2001.

 

In 2000, escrows closed on 58.8 industrial acres contributing $28.4million to revenues and $8.5 million to income. No industrial land sales werein escrow at December 31, 2000.  InSeptember 2000, the Company agreed to accept a reduced note pay-off in returnfor accelerating the due date on a 1998 industrial land sale note withscheduled maturities through September 2002. This resulted in the Company recording a $2.1 million charge to incometo reduce the note receivable and accrued interest to the negotiated $14.4million pay-off amount.  The note wascollected in December 2000.

 

In 1999, the Company sold 57.7 industrial acres, including twobuild-to-suit facilities totaling 280,000 square feet on 13.7 acres.  These closings contributed $40.1 million torevenues and $8.7 million to income. At December 31, 1999, two industrialparcels totaling 4.1 acres were in escrow for $2.7 million.

 

As of December 31, 2001, there are 381 net acres of industrial landremaining in Valencia, all of which are entitled.  Higher vacancy rates in Valencia industrial properties are theresult of the general economic slowdown and the amount of new

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space on the market from prior year’s land sales.  The vacancy rate at December 31, 2001 wasover 13% compared to 4.3% at December 31, 2000.  Initial marketing concepts are being explored for the 500 acreswest of Interstate 5 surrounding the Six Flags Magic Mountain amusement park.

 

**Commercial Land Sales**

** **

Commercial land escrow closings for 2001 totaled 75.5 acres,contributing $59.0 million to revenues and $30.8 million to income.  Included in the sales were a 13.8-acreparcel in the Valencia Corporate Center, the entire 23-acre Rockwell CanyonBusiness Park and three apartment sites, which combined contributed $51.5million to revenues and $26.8 million to income.  In addition, 2001 results include $2.8 million in revenues and$400,000 in income recognized under percentage of completion accounting fromsales in prior years.  At December 31,2001, seven commercial parcels totaling approximately 48 acres were in escrowfor approximately $28.0 million with closings expected in 2002.  All escrow closings are subject to marketand other conditions beyond the control of the Company.

 

In 2000, a total of 49.7 commercial acres closed escrow contributing$36.9 million to revenues and $18.9 million to income.  The sales included a 16.5-acre parcel for aretail center for $12.9 million adding $6.3 million to income.  Results for 2000 also included revenues of$3.2 million and income of $1.9 million recognized under percentage ofcompletion accounting from the prior year sale of an apartment site.  At December 31, 2000, seven commercialparcels totaling 37.9 acres were in escrow for $24.9 million.

 

Commercial escrow closings in 1999 totaled 62.8 acres, whichcontributed $51.4 million to revenues and $30.1 million to income. Twoapartment sites totaling 49.9 acres for approximately 1,100 units were themajor commercial land sales during the year. At December 31, 1999, three commercial parcels totaling 13.2 acres werein escrow for $7.9 million.

 

**Income Property andOther Sales**

** **

Income property sales in 2001 included one mixed-use building, twooffice buildings and the Chiquita Canyon Landfill.  The Company also sold its option to purchase approximately 1,800acres in Broomfield, Colorado. Combined, these sales in 2001 contributed $92.0 million to revenues and$77.8 million to income.  The sale ofthe Chiquita Canyon Landfill was the largest contributor, generating $65.0million in revenues and $64.0 million in income.

 

Income-producing properties sold in 2000 included Castaic VillageShopping Center, Plaza del Rancho mixed-use retail, four office buildings andfour apartment complexes. These income property sales were part of the Company’sbusiness strategy, announced in December 1999, to sellapproximately half of its income portfolio to finance the repurchase of theCompany’s partnership units.  These sales combined added $220 million torevenues and $72.9 million to income. The primary contributor to the results was the sale of the apartmentcomplexes for $129.0 million, contributing $74.0 million to income.

 

The 2000 sale of the four office buildings for $72.3 million exceededthe construction costs by approximately $7.8 million.  A condition of the sale included a monthly rental payment by theCompany to the buyer for 161,000 square feet of building space (principallyoccupied by Princess Cruises) until Princess Cruises’ rent commencement date inthe first quarter of 2001.  In addition,under the terms of the agreement, the Company leased back approximately 51,000square feet of retail space for a term of 12-1/2 years.  With regard to the retail leaseback,accounting guidelines do not allow the consideration of any future new or renewalleasing activity to reduce the calculation of the net lease obligation.  As a result, the Company recorded anaccounting loss on the sale of the buildings of $4.9 million in 2000.Management believes that subleasing of the retail space will more than offsetthis accounting loss over the life of the leaseback and ultimately will resultin additional revenues and income.  Asof December 31, 2001 approximately 77% of the retail space was leased comparedto 34% at December 31, 2000.

 

No income-producing properties were sold in 1999; however, the Companyrecognized $6.3 million in deferred revenues and a loss of $400,000 on the 1998sale of Valencia Marketplace, a 705,000-square-foot high-volume retail center.

 

In 2001, an easement was sold contributing $600,000 to revenues andincome.  In 2000, a right-of-way parcelwas sold to Caltrans, which contributed $5.1 million to revenues and $4.0million to income.

 

The Company has only one income property that is being marketed forsale in 2002.  It is a 35,000 squarefoot building in Valencia Commerce Center. The Company does not anticipate any other income property sales in 2002.

 

**Community Development**

 

In 2001, community development expenses increased 9% from the prioryear primarily due to higher administrative and entitlement expenses in 2001.Community development expenses are expected to increase about 10% in 2002 withthe

 

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continued focus on entitlements, planning and community marketing tocomplete the projected sellout of Valencia residential land by 2006 andcommence development of Newhall Ranch.

 

Community development expenses in 2000 decreased 6% from 1999 primarilydue to expenses in 1999 related to entitlements work for Newhall Ranch, certaininitial costs relating to commercial properties under development and astrategic marketing program.

 

In 2001, the Company continued the planning and design work on its21,600-home Newhall Ranch project.  InJune 2000, a Kern County Superior Court judge identified six issues in theNewhall Ranch Environmental Impact Report (EIR) as requiring furtherenvironmental review.  The six issuesinclude the impact of the development on the Salt Creek wildlife corridor andon traffic in Ventura County; biological impacts on the Santa Clara Rivercorridor; consistency with the General Plan and impacts in SignificantEcological Areas; adequacy and reliability of the water supply; and a furtheralternative site analysis for the water reclamation plant location.  In April 2001, an additional analysisdocument addressing the court’s concerns was circulated for public review,comment and hearings.  In October 2001,the Regional Planning Commission approved the additional analyses performed bythe Company concerning the six issues. The Company anticipates the Los Angeles County Board of Supervisors’approval of the additional analyses in 2002 and development is expected tocommence in late 2004.  However, thelength of time the public hearings and judicial process will take is difficultto predict, and circumstances beyond the Company’s control could further delayresolution of the issues.  In addition,an adverse decision by the County or court and/or additional legal action couldfurther delay the start of Newhall Ranch development.  Moreover, the recent California Appellate Court decisionaffecting the acquisition of California State Water Project water by the localwater wholesale may further delay the start of development beyond 2004.  (See below in this section for a moredetailed description of the decision.)

 

In January 2001, housing affordability advocates filed an appeal of theSuperior Court’s decision to dismiss its challenges to the Newhall RanchEIR.  A hearing was held in November2001 on the affordable housing issues. The Company received a favorable court ruling in January 2002 affirmingthe Superior Court’s decision in full. The affordability advocates may appeal this decision.

 

In 2001, land development work progressed on Valencia Westridge, whichwill feature approximately 1,600 homes surrounding a Tournament Players Club®golf course, a joint venture with PGA Tour Golf Course Properties.  During the 2001 first quarter, a CaliforniaAppellate Court dismissed the appeal of the Los Angeles County Superior Courtruling in favor of the Company in 2000 of a California Environmental QualityAct (CEQA) lawsuit. During 2001, the Company sold the first 232 lots in theWestridge community to merchant builders.

 

In January 2001, the West Creek community in the Valencia North Riverplanning area received final approval from the Los Angeles County Board ofSupervisors.  Opponents to the communityfiled a CEQA lawsuit early in 2001 challenging the Board of Supervisors’approval.  In November 2001, theSuperior Court determined that the opponents’ claims had no merit.  In January 2002, development opponents filedan appeal of the court’s decision. Development opponents also have asked the PUC for a re-hearingconcerning the PUC’s decision on the Valencia Water Company’s water managementprogram as discussed in the “Residential Home and Land Sales” sectionabove.  The length of time the publichearings and judicial process will take is difficult to predict, andcircumstances beyond the Company’s control could further delay development.

 

In January 2002, a California Appellate Court decertified an EIRconcerning the acquisition and importing of 41,000 acre-feet of CaliforniaState Water Project water by Castaic Lake Water Agency (CLWA), a waterwholesaler serving the Santa Clarita Valley. The Appellate Court decertified the EIR on the ground that it was basedon another EIR decertified by a northern California court last year.  The Appellate Court returned the case to aLos Angeles Superior Court, which now has the discretion to determine thestatus of CLWA’s water acquisition transaction.  The Superior Court may take several months before it renders adecision concerning the status of the acquisition.  Although the EIR and CLWA’s water acquisition transaction arematters outside the Company’s control, this pending case could cause additionaldelays to the development of the Company’s projects since CLWA is a primarysource of water for Valencia Water Company.

** **

**Income-ProducingProperties**

 

For 2001,revenues and income from the Company’s income-producing properties decreased27% and 33%, respectively, from the prior year.  The decrease is primarily due to the sale of income properties in2001 and 2000.  In 2001, income property sales included one mixed-usebuilding, two office buildings and the Chiquita Canyon Landfill.  In addition, 2001 income decreased due tointerest expense recorded on the net lease obligation recorded in 2000 inconjunction with the sale of four office buildings.

 

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Revenues in 2000 increased 15% from 1999 while income increased 32%primarily due to suspension of depreciation on income properties during theperiod the properties were held for sale, which accounted for approximately 56%of the increase in income compared to 1999. In 2000, four apartment complexes, four office buildings, a neighborhoodshopping center and a mixed-use retail property were sold in accordance withthe Company’s business strategy to finance the repurchase of partnership unitsas discussed in the “Income Property and Other Sales” section above.  In addition, improved results from hoteloperations, continued high retail occupancy and favorable rents alsocontributed to increases in revenues and income for 2000.

 

In December 2000, the Company announced it was no longer marketing forsale the Valencia Town Center regional shopping mall and entertainment center.In August 2000, a potential buyer terminated its due diligence work due to theChapter 11 bankruptcy filing by Edwards Theatres Circuit, Inc., a major tenantin the mall.  In December 2000, a chargeof $4 million was recorded for depreciation that had been suspended during theperiod the assets were held for sale. In 2001, Edwards Theatres reaffirmed its current lease for the 12-screentheater in the Valencia Entertainment Center. Edwards Theatres rejected thelease for the original 10-screen theater located in Valencia Town Centerregional shopping mall and vacated the location in September 2001.  The Company has filed a claim in the EdwardsTheatres’ bankruptcy proceeding for lost rent on the canceled lease space andother expenses.  The Company is in theprocess of remodeling the former Edwards Theatres space for relocation of thecurrent mall food court.

 

At December 31, 2001, the occupancy at Valencia Town Center regionalshopping mall was 84%, including short-term tenants compared to 99% at December31, 2000.  The primary contributor tothe decrease was the closure in September 2001 of Edwards Theatres’ 10-screenlocation, which represented approximately 12% of the gross leasable area of themall.  The Company’s other retail centerscontinue to have high occupancy rates, with NorthPark Village Square and RiverOaks Shopping Center both 100% leased. Hotel occupancy and average daily rates continue to be strong.  At December 31, 2001, the year-to-dateoccupancy levels for the Valencia Hilton Garden Inn and Hyatt Valencia Hotelwere 85% and 71%, respectively.  Theserates are 9% and 4% higher, respectively, than prior year levels.  In addition, the average daily rate at HyattValencia Hotel was 9% higher than prior year while the average daily rate forthe Valencia Hilton Garden Inn remained flat.

 

For 2002, The Company expects the remaining portfolio ofincome-producing properties to generate revenues and income approximately 6%and 27%, respectively, below 2001’s results primarily due to income propertysales in 2001.

 

**Valencia WaterCompany**

 

Valencia Water Company is a regulated utility and a wholly-ownedsubsidiary of the Company, serving over 23,000 metered connections. For 2001,revenues increased 4% and income decreased 2% compared to 2000.  Increased revenues were primarily due to a7.5% growth in metered customers.  Thedecrease in income was primarily due to higher administrative and legal expenses.  In 2000, revenues increased 8% and incomeincreased 18% compared to 1999 due to the continuing expansion of the utility’scustomer base.

 

In January 2002, Valencia Water Company was notified by the CaliforniaPublic Utilities Commission of the Commission’s desire to perform a review ofthe utility’s authorized rate of return based upon its approved ratestructure.  The review is expected to becompleted in 2002 and will likely result in a reduction to Valencia WaterCompany’s authorized water billing rates.

 

**AgriculturalOperations**

 

For 2001, the Company reported revenues of $7.2 million and a loss of$437,000 from agriculture operations, including the Company’s energyoperations.  The decrease in revenuescompared to the prior year was primarily due to lower prices for citrus andother crops, partially offset by higher gas prices during most of 2001.  The 2001 loss is consistent with thedecrease in revenue combined with higher operating expenses.  In 2000, revenues and income decreased ascompared to 1999 primarily due to the sale of over 39,000 acres of farm land in1999 and lower prices for oranges partially offset by higher revenues andincome from energy operations due to higher oil and gas prices.

 

**Ranch Sales**

 

No farm land was sold in 2001 or 2000. In 1999, the Company completed the sale of the 36,000-acre Suey Ranchand the three remaining parcels at the Merced Ranch as part of the Company’sstrategy of selling farm land not suitable for development. These salescombined contributed $29.0 million to revenues and $25.0 million to income in1999.

 

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The Company’s remaining agricultural properties include the 14,000-acreNew Columbia Ranch in Madera County and the 1,250-acre Newhall Orchard inVentura County. Most of the remaining 14,750 acres in Ventura County owned bythe Company are leased for cattle grazing.

 

**General andAdministrative Expenses**

 

General and administrative expenses decreased 15% in 2001 primarily dueto lower compensation expense.  In 2000,a net increase of 1% compared to 1999 was primarily due to an increase of $3.1million in compensation expense partially offset by a reduction of $2.2 millionin land acquisition activities.  Generaland administrative expenses are expected to decrease approximately 10% in 2002compared to 2001.

 

**Interest and OtherExpense, net**

 

Due to reduced borrowings throughout the year and lower interest rates,2001 net interest expense was 68% lower compared to 2000.  In 2000, net interest expense increased 73%over 1999 levels due to increased borrowings under credit facilities to temporarilyfund partnership unit repurchases prior to the sale of income properties, mostof which occurred in December 2000.

 

**FINANCIALCONDITION**

** **

**Liquidity and CapitalResources**

 

At December 31, 2001, the Company had cash and cash equivalents of $3.1million and $146.7 million in available lines of credit, net of $13.7 inletters of credit. Borrowings outstanding totaled $23.7 million againstunsecured lines of credit.  Noborrowings were outstanding against a revolving mortgage loan. In addition, theCompany had fixed rate debt totaling $61.8 million.  The Company believes it has adequate sources of cash fromoperations and debt capacity, including lines of credit, to finance futureoperations on both a short- and long-term basis and, combined with anticipated landsales, to fund its approved partnership unit repurchases.  Debt levels are targeted to remain at orbelow 60% of the appraised value of remaining income-producing properties. TheCompany ended 2001 with a debt to income portfolio value ratio of 33%, providingadequate debt capacity in 2002 to fund ongoing operations and, along withplanned land sales, continue unit repurchases. Furthermore, at December 31, 2001, there was no debt against raw land orland under development inventories in Valencia.

 

In May 2001, the Company completed the repurchase program authorized bythe Board of Directors in September 1999 of 6,384,446 units (including 884,446units under a previous authorization), equal to approximately 20% of theoutstanding units in September 1999. The total cost of the unit repurchases was $167.3 million of which1,484,944 units were repurchased in 2001 for $38.6 million.  Also, in May 2001, the Board of Directorsauthorized a new unit repurchase program of up to 2,520,000, or 10% of the thenoutstanding units.   As of December 31,2001, a total of 970,150 units had been repurchased under this program for$27.6 million, or an average price of $28.49 per unit, and 1,549,850 remainedto be repurchased.  Completion of thisrepurchase program is expected to occur in 2002 and will require approximately$45 million. Repurchases are funded from cash flow generated from normalbusiness operations.

 

The Company repurchases units from time to time at prevailing pricesand, depending on market conditions, either through open market, or unsolicitednegotiated transactions.  Factors thatcould affect the Company’s ability to complete its unit repurchase programinclude, but are not limited to, governmental approvals, changing market andeconomic conditions, changing interest rates, challenges to governmentalapprovals and finding suitable buyers for certain properties.

As of December 31, 2001, there were nomaterial commitments for capital expenditures. In 2002, the Company expects to invest over $40 million in major roadsand freeway improvements to enable the Company to continue its land salesprogram in Valencia.  Approximately $20million is expected to be invested in Valencia Town Center regional shoppingmall in 2002 and 2003 to remodel the former Edwards Theatres space forrelocation of the existing food court and creation of new retail space.  Additionally in 2002, theCompany expects to invest approximately $16 million in the completion of TPCValencia, a Tournament Players Club® championship golf course, in the Company’sWestridge community.

 

*The followingdiscussion relates to principal items in the Consolidated Statements of CashFlows.*

 

**Operating Activities**

** **

Net cash provided by operating activities totaled $78.6 million in2001.  Cash generated from operatingactivities included the sale of 232 residential lots, 92.3 acres ofindustrial/commercial land, the sale of an option on 1,800 acres in Broomfield,Colorado and the sales of four income producing properties, including ChiquitaCanyon Landfill.  These combined salesgenerated $176.9 million cash and $19.7 million in notes.  During the year, an $8.3 million portion ofone note was subsequently sold to a bank at par. Notes totaling $10.5 millionwere collected in 2001 from land sales in prior years. 

 

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Expenditures for land under development inventories totaled $82.9million in 2001 and were primarily related to land preparation andinfrastructure to ready land for development or sale.

 

Net cash provided by operating activities in 2000 totaled $221.7million and included sales of 208 residential lots, over 108 acres ofindustrial and commercial land and sales of income properties which includedfour apartment complexes, four office buildings, a neighborhood shopping centerand a mixed-use center. These sales combined provided $239.8 million in cashand $10.5 million in notes.  Inaddition, notes totaling $49.7 million from land sales in prior years werecollected and $5.1 million was received from a right-of-way purchase byCaltrans. The notes collected included $14.4 million from a 1998 land sale noteon which the Company recorded a $2.1 million charge to income in 2000 to reducethe note principal and accrued interest to a negotiated $14.4 million payoffamount in return for accelerating the due date to December 2000.

 

Expenditures for land under development inventories in 2000 totaled$76.1 million and were partially offset by $52.4 million in cost of sales. Theexpenditures included $69.7 million for land preparation and infrastructure toready land for development or sale with the remainder primarily foragricultural crop costs.

 

Net cash provided by operating activities in 1999 totaled $122.4million and included sales of 1,060 residential lots and homes; 121 acres ofindustrial and commercial land including two build-to-suit buildings; sale ofthe Suey Ranch and the remaining property at the Merced and Cowellranches.  These sales combined provided$222.8 million in cash and $30.2 million in notes.  Expenditures for land under development inventories in 1999totaled $103.9 million and were more than offset by $112.2 million in cost ofsales.  The expenditures primarily werefor land preparation and infrastructure to ready land for development or sale,home construction and agricultural crop costs.

 

**Investing Activities**

 

In 2001, expenditures for development of income-producing propertiestotaled $8.2 million.  The majority ofwhich was attributed to the completion of construction of two office buildingsto be occupied by Princess Cruises. The office buildings were sold in December2000, prior to completion of construction, and the Company was obligated tofinish construction of the buildings in 2001.

 

Expenditures for development of income-producing properties totaled$27.4 million in 2000 and primarily were for the two office buildings that werecompleted in 2001 and the Valencia Entertainment Center expansion.

 

Development of income-producing properties in 1999 primarily wererelated to Montecito apartments and various retail/office/entertainmentprojects in Valencia Town Center and expenditures totaled $68.0 million.

 

Purchase of property and equipment expenditures in 2001, 2000 and 1999primarily were for water utility construction.

** **

**Financing Activities**

 

Distributions totaling $12.7 million were paid in 2001 consisting offour quarterly distributions of $.10 per unit each and a $.10 per unit specialdistribution. On January 15, 2002, a $.10 per unit quarterly distribution and a$.13 per unit special distribution were declared, payable March 11, 2002 tounitholders of record on February 1, 2002. In 2000, distributions totaling $21.2 million were paid which consistedof four quarterly distributions of $.10 per unit and a $.35 per unit specialdistribution.  Distributions totaling$19.7 million were paid in 1999 and consisted of four quarterly distributionsof $.10 per unit and a $.22 per unit special distribution. The Company’s policyis to provide sufficient distributions, including special distributions, to paythe taxes associated with Company earnings. The declaration of distributions,and the amount declared, are determined by the Board of Directors on aquarterly basis taking into account the Company’s earnings, financial conditionand prospects.

 

In 2001, increases in mortgage and other debt were primarily due toutilization of unsecured lines of credit with lower interest rates instead of asecured revolving mortgage facility and scheduled debt service.

 

A decrease in mortgage and other debt of $87.2 million in 2000 includedan $85 million reduction in lines of credit and the remainder resulted fromscheduled debt service on fixed-rate, secured debt. As planned, the Companyutilized available debt capacity during the year to temporarily fund the unitrepurchase program until major asset and land sales were completed.  Mortgages totaling $49.0 million wereassumed by the buyer of the apartment complexes in December 2000 and a $12.0million note payable was canceled upon divestiture of the Company’s interest inthe City Ranch joint-venture with Kaufman and Broad of Southern California, Inc.in September 2000.

 

In 1999, increases in mortgage and other debt included a $44.7 millionportfolio mortgage financing which was replaced with three financings totaling$50 million secured by three apartment complexes and a new $25 millionfinancing secured by two neighborhood shopping centers. Also, in August 1999, a$12.0 million note was recorded in connection with the Company’s

 

18

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acquisition of a 50.1% interest in City Ranch, a joint-venture projectwith Kaufman and Broad of Southern California, Inc. Borrowings outstandingagainst lines of credit increased by $36.2 million to $99.4 million at December31, 1999.  In addition to scheduled debtservice on fixed rate debt, decreases in mortgage and other debt in 1999included the refinanced portfolio mortgage and repayment of a $12 millionunsecured financing.

** **

**Partnership UnitRepurchases**

 

In 2001, 2000 and 1999, the Company repurchased 2,455,094 units for$66.2 million, 3,175,550 partnership units for $86.5 million and 3,111,278partnership units for $75.8 million, respectively. For the three-year periodended 2001, the Company has repurchased approximately 27% of its totalpartnership units outstanding at the end of 1998.

** **

**New Accounting Pronouncements**

 

In June 2001, The Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*, effective for fiscalyears beginning after December 15, 2001. This pronouncement is not expected to have a material impact on theCompany’s financial position or results of operations.

 

In October 2001, the FASB issued Statement of Accounting Standards No.144, *Accounting for the Impairment orDisposal of Long-Lived Assets* (SFAS 144), effective for fiscal yearsbeginning after December 15, 2001.  Thispronouncement supercedes SFAS 121,*Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets toBe Disposed Of*, and applies to all long-lived assets, includingdiscontinued operations.  SFAS 144establishes a single accounting model for the impairment and/or disposal oflong-lived assets, including discontinued operations.  Additionally, SFAS 144 expands the scope of discontinuedoperations to include all components of an entity with operations that (1) canbe distinguished from the rest of the entity and (2) will be eliminated fromthe ongoing operations of the entity in a disposal transaction.  The Company has not yet completed itsevaluation of the impact of the adoption of SFAS 144 but does not expect thepronouncement to have a material impact on the Company’s financial position orresults of operations.

 

**FORWARD-LOOKINGINFORMATION**

 

Except for historical matters, the matters discussed in this report areforward-looking statements that involve inherent risks and uncertainties.  We have tried, wherever practical, toidentify these forward-looking statements by using words like “anticipate,”“believe,” “estimate,” “target”, “project,” “expect,” "plan," andsimilar expressions.  Forward-lookingstatements include, but are not limited to, statements about plans;opportunities; anticipated regulatory approvals; negotiations; market andeconomic conditions; development, construction, and sales activities; andavailability of financing. 

 

We caution you not to place undue reliance on these forward-lookingstatements, which reflect our current beliefs and are based on informationcurrently available to us.  We expresslyundertake no obligation to publicly revise or update these forward-looking statementsto reflect future events or changes in circumstances.

 

These forward-looking statements are subject to risks and uncertaintiesthat could cause our actual results, performance, or achievements to differfrom those expressed in or implied by these statements. See our risk factorsbelow.

* *

*Sales of RealEstate:*The majority of the Company’s revenues isgenerated by its real estate operations. The ability of the Company toconsummate sales of real estate is dependent on various factors including, butnot limited to, availability of financing to the buyer, agreement with buyerson definitive terms, regulatory and legal issues, and successful completion ofthe buyer’s due diligence. The fact that a real estate transaction has enteredescrow 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 therecognition of revenue in any specific period.

* *

*Economic Conditions:*Real estate development and commercial income property can be significantlyimpacted by general and local economic conditions, which are beyond the controlof the Company. The Company’s real estate operations are concentrated in northLos Angeles County. The Southern California economy is profoundly affected bythe entertainment, technology, defense and certain other segments.Consequently, all sectors of the Company’s real estate operations tend to becyclical. The regional economy, like that of the state and nationally, has slowedinto a recession.  There can be noassurances that the recession will not worsen or the economy will recover inthe near future.

 

*Inflation*: TheCompany believes it is well positioned against the effects of inflation.Historically, during periods of inflation, the Company has been able toincrease selling prices of properties to offset rising costs of landdevelopment and construction.  A portionof the commercial income portfolio is protected from inflation since percentagerent clauses and Consumer Price Index increases in the Company’s leases tend toadjust rental receipts for inflation, while the underlying value of commercialproperties has tended to rise over the long term.

 

19

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*Interest Rates andFinancing*: Fluctuations in interest rates and theavailability of financing have an important impact on the Company’sperformance. Sales of the Company’s properties could be adversely impacted bythe inability of buyers to obtain adequate financing. Further, the Company’sreal estate development activities are dependent on the availability ofadequate sources of capital. Certain of the Company’s credit facilities bearinterest at variable rates and would be negatively impacted by increasinginterest rates.

* *

*Competition*:The sale and leasing of residential, industrial and commercial real estate ishighly competitive, with competition coming from numerous and varied sources.The degree of competition is affected by such factors as the supply of realestate available comparable to that sold and leased by the Company and thelevel of demand for such real estate. Currently, the residential market in theSanta Clarita Valley, including Valencia, remains strong and has been capturingan increasing portion of Los Angeles County’s new home sales.  However, there is no assurance that thistrend will continue.  The industrialmarket in Valencia is experiencing declining demand and rising vacancy ratessince the national and regional economy has slowed and concerns linger overCalifornia’s power crisis.  In addition,local competition has intensified as local business parks have opened or are inthe planning stages.

* *

*GeographicConcentration*: The Company’s real estate developmentactivities are focused on the 18,600 acres that it owns in north Los AngelesCounty. The Company’s entire commercial income portfolio is located in theValencia area. Therefore, any factors affecting that concentrated area, such aschanges in the housing market, economic conditions and environmental factors,which cannot be predicted with certainty, could affect future results.

* *

*Exposure to Natural Occurrences and Acts ofTerror:*The Company’s assets and real estateoperations may be adversely affected by natural occurrences such as earthquakesand weather conditions, and acts of terrorism or armed conflict that may causedamage to assets, delay progress and increase the costs of infrastructureconstruction and land development, and affect the pace of sales.

* *

*GovernmentRegulation and Entitlement Risks*: In developing itsprojects, the Company must obtain the approval of numerous governmentalauthorities regulating such matters as permitted land uses, density andtraffic, and the provision of utility services such as electricity, water andwaste disposal. In addition, the Company is subject to a variety of federal,state and local laws and regulations concerning protection of health and theenvironment. This government regulation affects the types of projects which canbe pursued by the Company and increases the cost of development and ownership. TheCompany devotes substantial financial and managerial resources to comply withthese requirements. To varying degrees, certain permits and approvals will berequired to complete the developments currently being undertaken or planned bythe Company. Furthermore, the timing, cost and scope of planned projects may besubject to legal challenges. (See following “Litigation” discussion.) Inaddition, the continued effectiveness of permits already granted is subject tofactors such as changes in policies, rules and regulations and theirinterpretation and application. The ability to obtain necessary approvals andpermits for its projects may be beyond the Company’s control and could restrictor prevent development of otherwise desirable new projects. The Company’sresults of operations in any period will be affected by the amount of entitledproperties the Company has in inventory.

* *

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

* *

*EnvironmentalRemediation*:  The Company owns or formerly ownedproperties on which the Company may be required to remediate environmentaleffects of prior releases of contamination by third parties.  Future environmental costs are difficult toestimate because of factors such as, but are not limited to, the unknownmagnitude of possible contamination, the unknown timing and extent ofremediative actions that may be required, the determination of the Company’spotential liability, and the extent to which such costs are recoverable fromthird parties or insurance.  Inaddition, the length of time to perform any required remediation or thesuccessful pursuit of responsible third parties is difficult to predict. Theability to, or length of time required to, remediate any property couldincrease the costs of, and restrict, prevent or delay the development of a newproject.

 

20

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** **

**Item 7A. Quantitativeand Qualitative Disclosures about Market Risk**

 

The Company is exposed to market risk primarily due to fluctuations ininterest rates.  The Company utilizesboth fixed rate and variable rate debt. At December 31, 2001,  theCompany had $23.7 million of variable debt with an average interest rate of3.30% and $61.8 million of fixed rate debt with interest rates ranging from7.25% to 8.45%. 

 

The table below presents principal cash flows and related weightedaverage interest rates of the Company’s long-term fixed rate and variable ratedebt at December 31, 2001 by expected maturity dates:

 
|                           |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   | **Fair**  |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|-----------|--------|
| **Dollars in  thousands**      |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   | **Value** |   |
|                           |   |     |   |
| Mortgage and  Other Debt       |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |   |   |   |   |   |   |   |   |
| Fixed Rate Debt                |   | $        | 4,097  |     | $      | 10,970   |   | $        | 1,509  |     | $      | 1,657          |   | $         | 23,525 |      | $      | 20,053 |   | $ | 61,811 |   | $ | 66,085 | (2) |
| Weighted Average Interest Rate |   | 7.36     |   | 8.32     |   | 7.38     |   | 7.35     |   | 7.43     |   | 7.70           |   | 7.67      |   |      |   |
|                           |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |
| Variable Rate Debt (1)         |   | $        | 2,000  |     |   |     | $      | 21,700   |   |     |   |           |   |      |   | $         | 23,700 |   | $ | 23,700 |   |
| Weighted Average Interest Rate |   | 3.39     |   |     |   | 3.29     |   |     |   |     |   |           |   | 3.30      |   |      |   |
|                                |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

(1)        The Company has a $50 million revolving mortgage facility which bearsinterest at LIBOR plus 1.40%, against which no borrowings were outstanding atDecember 31, 2001.  The Company also hasunsecured lines of credit consisting of a $130 million line on which theinterest rate is LIBOR plus 1.25% - 1.45% and a $2 million line on which therate is LIBOR plus 1.35%, against which borrowings of $21.7 million and $2million were outstanding, respectively, at December 31, 2001.  The amounts set forth in the table aboveassume that the outstanding amounts under the variable rate credit facilitieswill be repaid at the facilities’ respective maturity dates.  Management believes that these lines will berenewed at maturity with similar terms, subject to market conditions existingat the times of renewal.  A $10 millionline of credit which matured in November 2001 was not renewed by the Company.

 

(2)        The fair values of the Company’s fixed rate debt either approximatecarrying value or are estimated using discounted cash  flow analyses based in the Company’s current incrementalborrowing arrangements ranging from 5.0% to 7.5%.

 

The table below presents principal cash flows and related weightedaverage interest rates of the Company’s long-term fixed rate and variable ratedebt at December 31, 2000 by expected maturity dates:

 
|                           |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   | **Fair**  |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|-----------|--------|
| **Dollars in thousands**       |   | **2001** |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **Thereafter** |   | **Total** |   | **Value** |   |
|                           |   |     |   |
| Mortgage and Other Debt        |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |   |   |   |   |   |   |   |   |
| Fixed Rate Debt                |   | $        | 1,362  |     | $      | 1,481    |   | $        | 10,970 |     | $      | 1,509          |   | $         | 1,657  |      | $      | 43,578 |   | $ | 60,557 |   | $ | 60,557 |   |
| Weighted Average Interest Rate |   | 7.57     |   | 7.55     |   | 8.32     |   | 7.35     |   | 7.37     |   | 7.55           |   | 7.68      |   |      |   |
|                           |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |
| Variable Rate Debt             |   | $        | 12,000 |     | $      | 2,000    |   |     |   |     |   |           |   |      |   | $         | 14,000 |   | $ | 14,000 |   |
| Weighted Average Interest Rate |   | 7.94     |   | 7.97     |   |     |   |     |   |     |   |           |   | 7.94      |   |      |   |

 

There is inherent rollover risk for borrowings as they mature and arerenewed at current market rates.  Theextent of this risk is not quantifiable or predictable because of thevariability of future interest rates and the Company’s future financingrequirements.  The Company manages its interestrate risk by maintaining a conservative ratio of fixed rate, long-term debt tototal debt in order to maintain variable rate exposure at an acceptable leveland by taking advantage of favorable market conditions for long-term debt.  In addition, the Company’s guideline fortotal debt is not to exceed 60% of the appraised value of the incomeportfolio.  As of December 31, 2001 theCompany’s debt to income portfolio ratio as 33%.

 

21

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**Item8.  Financial Statements andSupplementary Data**

 

| INDEX TO FINANCIAL STATEMENTS INCLUDED IN ITEM 8:            |
|--------------------------------------------------------------|
|                                                         |
| Reports of Independent Auditors                              |
|                                                         |
| Consolidated Statements of Income for the years ended        |
| December 31, 2001, 2000 and 1999                             |
|                                                         |
| Consolidated Balance Sheets at                               |
| December 31, 2001 and 2000                                   |
|                                                         |
| Consolidated Statements of Cash Flows for the years          |
| ended December 31, 2001, 2000 and 1999                       |
|                                                         |
| Consolidated Statements of Changes in Partners’ Capital |
| for the years ended December 31, 2001, 2000  and 1999        |
|                                                         |
| Notes to Consolidated Financial Statements                   |

 

22

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**Report of Independent Auditors**

 

The Board ofDirectors of Newhall Management Corporation and Partners of The Newhall Landand Farming Company:

 

We haveaudited the accompanying consolidated balance sheet of The Newhall Land andFarming Company and Subsidiaries (the “Company”) as of December 31, 2001 andthe related consolidated statement of income, changes in partners’ capital, andcash flows for the year then ended. Our audit also included the financialstatement schedule listed in the index at Item 14. These financial statementsand the financial statement schedule are the responsibility of the managementof the Company. Our responsibility is to express an opinion on these financialstatements and the financial statement schedule based on our audit.

 

We conductedour audit in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In ouropinion, such consolidated financial statements present fairly, in all materialrespects, the financial position of the Company as of December 31, 2001, andthe results of their operations and their cash flows the year then ended inconformity with accounting principles generally accepted in the United Statesof America. Also in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects, the information set forththerein.

 
|                    |   |
|-------------------------|--------|
| Los Angeles, California |   | /s / DELOITTE & TOUCHE LLP |
| January 15, 2002        |   |

 

************************************************

** **

**Report of Independent Auditors**

 

The Board ofDirectors of Newhall Management Corporation and Partners of The Newhall Landand Farming Company:

 

We haveaudited the accompanying consolidated balance sheet of The Newhall Land and FarmingCompany and subsidiaries as of December 31, 2000, and the relatedconsolidated statements of income, changes in partners’ capital, and cash flowsfor each of the years in the two-year period ended December 31, 2000.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in the UnitedStates of America. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of The Newhall Landand Farming Company and subsidiaries as of December 31, 2000, and theresults of their operations and their cash flows for each of the years in thetwo-year period ended December 31, 2000, in conformity with accountingprinciples generally accepted in the United States of America.

 
|                     |   |
|--------------------------|--------|
| Los Angeles,  California |   | /s/ KPMG LLP |
| January 16,  2001   |   |

 

23

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**ConsolidatedStatements of Income**

 
|                                         |   | **Years ended December 31,** |         |
|----------------------------------------------|--------|------------------------------|--------------|
| **In thousands, except per unit**            |   | **2001**                     |         | **2000** |   | **1999** |   |
|                                         |   |                         |         |
| Revenues                                     |   |                         |         |   |   |   |   |
| Real estate                                  |   |                         |         |   |   |   |   |
| Residential home and land sales              |   | $                            |  15,701 |   | $ |  27,210 |   | $ |  109,608 |   |
| Industrial and commercial sales              |   | 162,839                      |         | 295,119 |   | 109,200 |   |
| Commercial operations                        |   |                         |         |   |   |   |   |
| Income-producing properties                  |   | 42,258                       |         | 58,219 |   | 50,459 |   |
| Valencia Water Company                       |   | 13,601                       |         | 13,132 |   | 12,202 |   |
| Agriculture                                  |   |                         |         |   |   |   |   |
| Operations                                   |   | 7,216                        |         | 7,288 |   | 12,080 |   |
| Ranch sales                                  |   | —                       |         | — |   | 28,957 |   |
| Total Revenues                               |   | 241,615                      |         | 400,968 |   | 322,506 |   |
|                                         |   |                         |         |   |   |   |   |
| Costs and Operating Expenses                 |   |                         |         |   |   |   |   |
| Real estate                                  |   |                         |         |   |   |   |   |
| Residential home and land sales              |   | 15,902                       |         | 23,361 |   | 71,904 |   |
| Industrial and commercial sales              |   | 58,807                       |         | 196,508 |   | 67,936 |   |
| Community development                        |   | 12,527                       |         | 11,501 |   | 12,257 |   |
| Commercial operations                        |   |                         |         |   |   |   |   |
| Income-producing properties                  |   | 27,151                       |         | 35,629 |   | 33,332 |   |
| Valencia Water Company                       |   | 10,268                       |         | 9,715 |   | 9,302 |   |
| Agriculture                                  |   |                         |         |   |   |   |   |
| Operations                                   |   | 7,653                        |         | 6,281 |   | 8,567 |   |
| Ranch sales                                  |   | —                       |         | — |   | 3,995 |   |
| Total Costs and Operating Expenses           |   | 132,308                      |         | 282,995 |   | 207,293 |   |
|                                         |   |                         |         |   |   |   |   |
| Operating Income                             |   | 109,307                      |         | 117,973 |   | 115,213 |   |
| General and administrative expense           |   | (12,470                      | )            | (14,642 | ) | (14,431 | ) |
| Interest and other expense, net              |   | (5,780                       | )            | (17,935 | ) | (10,390 | ) |
| Net Income                                   |   | $                            |  91,057 |   | $ |  85,396 |   | $ |  90,392 |   |
|                                         |   |                         |         |   |   |   |   |   |   |   |
| Net Income Per Unit                          |   | $                            |  3.60   |   | $ |  3.09 |   | $ |  2.88 |   |
|                                         |   |                         |         |   |   |   |   |   |   |   |
| Net Income Per Unit — Assuming Dilution |   | $                            |  3.56   |   | $ |  3.05 |   | $ |  2.85 |   |

 

*See notes to consolidated financialstatements*

 

24

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**ConsolidatedBalance Sheets**

 
|                                                                                                                                                                                                            |   | **December 31** |          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|---------------|
| **In thousands**                                                                                                                                                                                                |   | **2001**        | ** **    | **2000** |   |
|                                                                                                                                                                                                            |   |            |
| Assets                                                                                                                                                                                                          |   |            |          |   |   |
| Cash and cash equivalents                                                                                                                                                                                       |   | $               |  3,050   |   | $ |  3,717 |   |
| Accounts and notes receivable                                                                                                                                                                                   |   | 17,310          |          | 17,154 |   |
| Land under development                                                                                                                                                                                          |   | 85,317          |          | 53,988 |   |
| Land held for future development                                                                                                                                                                                |   | 22,029          |          | 22,419 |   |
| Income-producing properties held for sale,  net                                                                                                                                                                 |   | 2,322           |          | 12,720 |   |
| Income-producing properties, net                                                                                                                                                                                |   | 143,163         |          | 147,785 |   |
| Property and equipment, net                                                                                                                                                                                     |   | 72,763          |          | 67,631 |   |
| Investment in joint ventures                                                                                                                                                                                    |   | 743             |          | 591 |   |
| Other assets and deferred charges                                                                                                                                                                               |   | 13,607          |          | 16,536 |   |
|                                                                                                                                                                                                            |   | $               |  360,304 |   | $ |  342,541 |   |
| Liabilities and Partners’ Capital                                                                                                                                                                          |   |            |          |   |   |
| Accounts payable                                                                                                                                                                                                |   | $               |  21,544  |   | $ |  28,267 |   |
| Accrued expenses                                                                                                                                                                                                |   | 47,371          |          | 59,765 |   |
| Deferred revenues                                                                                                                                                                                               |   | 13,681          |          | 3,137 |   |
| Mortgage and other debt                                                                                                                                                                                         |   | 85,511          |          | 74,557 |   |
| Advances and contributions from developers  for utility construction                                                                                                                                            |   | 34,200          |          | 32,166 |   |
| Other liabilities                                                                                                                                                                                               |   | 22,786          |          | 25,445 |   |
| Total liabilities                                                                                                                                                                                               |   | 225,093         |          | 223,337 |   |
| Commitments and contingencies (Note 9)                                                                                                                                                                          |   |            |          |   |   |
|                                                                                                                                                                                                            |   |            |          |   |   |
| Partners’ capital                                                                                                                                                                                          |   |            |          |   |   |
| 24,374 units outstanding, excluding 12,398  units in treasury  (cost - $304,335) at December 31, 2001 and 26,590 units  outstanding, excluding 10,182 units in treasury  (cost - $242,098) at December 31, 2000 |   | 135,211         |          | 119,204 |   |
|                                                                                                                                                                                                            |   | $               |  360,304 |   | $ |  342,541 |   |

 

*See notes to consolidated financial statements*

 

25

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**ConsolidatedStatements of Cash Flows**

 
|                                                                                        |   | **Years ended December 31,** |   |
|---------------------------------------------------------------------------------------------|--------|------------------------------|--------|
| **In thousands**                                                                            |   | **2001**                     |   | **2000** |   | **1999** |   |
|                                                                                        |   |                         |
| Cash Flows from Operating Activities:                                                       |   |                         |   |   |   |   |   |
| Net income                                                                                  |   | $                            | 91,057 |   | $ | 85,396 |   | $ | 90,392 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:          |   |                         |   |   |   |   |   |
| Depreciation and amortization                                                               |   | 11,597                       |   | 13,800 |   | 15,296 |   |
| (Increase) decrease in land under development                                               |   | (31,329                      | )      | (8,436 | ) | 9,670 |   |
| (Increase) decrease in accounts and notes  receivable                                       |   | (156                         | )      | 42,766 |   | (31,312 | ) |
| (Decrease) increase in accounts payable,  accrued expenses and deferred revenues            |   | (8,637                       | )      | (4,863 | ) | 9,847 |   |
| Cost of property sold                                                                       |   | 15,435                       |   | 82,608 |   | 26,617 |   |
| Loss on sale of office buildings                                                            |   | –                       |   | 4,888 |   | – |   |
| Loss on divestiture of joint venture                                                        |   | –                       |   | 4,445 |   | – |   |
| Write-down of note receivable                                                               |   | –                       |   | 2,149 |   | – |   |
| Other adjustments, net                                                                      |   | 642                          |   | (1,012 | ) | 1,840 |   |
| Net cash provided by operating activities                                                   |   | 78,609                       |   | 221,741 |   | 122,350 |   |
| Cash Flows from Investing Activities:                                                       |   |                         |   |   |   |   |   |
| Development of income-producing properties                                                  |   | (8,231                       | )      | (27,441 | ) | (67,988 | ) |
| Purchase of property and equipment                                                          |   | (8,895                       | )      | (9,669 | ) | (8,672 | ) |
| Investment in joint ventures                                                                |   | (152                         | )      | (84 | ) | (4,190 | ) |
| Net cash used in investing activities                                                       |   | (17,278                      | )      | (37,194 | ) | (80,850 | ) |
| Cash Flows from Financing Activities:                                                       |   |                         |   |   |   |   |   |
| Distributions paid                                                                          |   | (12,733                      | )      | (21,213 | ) | (19,746 | ) |
| Borrowings on mortgage and other debt                                                       |   | 27,000                       |   | 82,600 |   | 115,698 |   |
| Repayment of mortgage and other debt                                                        |   | (16,046                      | )      | (169,845 | ) | (62,506 | ) |
| Increase (decrease) in advances and  contributions from developers for utility construction |   | 2,034                        |   | 6,476 |   | (776 | ) |
| Purchase of partnership units                                                               |   | (66,135                      | )      | (82,306 | ) | (75,818 | ) |
| Other, net                                                                                  |   | 3,882                        |   | 1,834 |   | 1,084 |   |
| Net cash used in financing activities                                                       |   | (61,998                      | )      | (182,454 | ) | (42,064 | ) |
| Net (Decrease) Increase in Cash and Cash  Equivalents                                       |   | (667                         | )      | 2,093 |   | (564 | ) |
| Cash and Cash Equivalents, Beginning of  Year                                               |   | 3,717                        |   | 1,624 |   | 2,188 |   |
| Cash and Cash Equivalents, End of Year                                                      |   | $                            | 3,050  |   | $ | 3,717 |   | $ | 1,624 |   |
| Supplemental Disclosure of Cash Flow  Information:                                          |   |                         |   |   |   |   |   |
| Interest paid (net of amount capitalized)                                                   |   | $                            | 5,694  |   | $ | 20,504 |   | $ | 13,396 |   |
| Supplemental Schedule of Non-Cash Investing  and Financing Activities:                      |   |                         |   |   |   |   |   |
|                                                                                        |   |                         |   |   |   |   |   |
| Divesture of joint venture                                                                  |   | –                       |   | $ | 16,469 |   | – |   |
| Note payable in connection with investment  in joint venture                                |   | –                       |   | (12,024 | ) | $ | 12,024 |   |
| Assumption of debt on sale of real estate                                                   |   | –                       |   | (48,999 | ) | – |   |
| Payable for unit repurchases                                                                |   | $                            | (64    | ) | (4,232 | ) | – |   |

 

*See notes to consolidated financialstatements*

 

26

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**ConsolidatedStatements of Changes in Partners’ Capital**

 
|                                |   | **Number   of Units** |   | **Partners’  Capital** |          |
|-------------------------------------|--------|-----------------------|--------|-----------------------------|---------------|
| **In thousands**                    |   |                  |   |
|                                |   |                  |   |
| Balance at December 31, 1998        |   | 32,676                |   | $                           |  143,813 |   |
| Net income                          |   | –                |   | 90,392                      |          |
| Distributions                       |   | –                |   | (19,746                     | )             |
| Purchase of partnership units       |   | (3,111                | )      | (75,818                     | )             |
| Unit ownership plans and other, net |   | 103                   |   | 1,084                       |          |
| Balance at December 31, 1999        |   | 29,668                |   | 139,725                     |          |
| Net income                          |   | –                |   | 85,396                      |          |
| Distributions                       |   | –                |   | (21,213                     | )             |
| Purchase of partnership units       |   | (3,176                | )      | (86,538                     | )             |
| Unit ownership plans and other, net |   | 98                    |   | 1,834                       |          |
| Balance at December 31, 2000        |   | 26,590                |   | 119,204                     |          |
| Net income                          |   | –                |   | 91,057                      |          |
| Distributions                       |   | –                |   | (12,733                     | )             |
| Purchase of partnership units       |   | (2,455                | )      | (66,199                     | )             |
| Unit ownership plans and other, net |   | 239                   |   | 3,882                       |          |
| Balance at December 31, 2001        |   | 24,374                |   | $                           |  135,211 |   |

 

*See notes to consolidated financial statements*

 

27

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**Notes to Consolidated Financial Statements**

December 31, 2001

----

**Note 1. Organization**

 

The Newhall Land and Farming Company, aCalifornia Limited Partnership (“the Company” or “the Partnership”), isorganized as a publicly traded limited partnership. The general partners of theCompany are Newhall Management Limited Partnership, the Managing GeneralPartner, and Newhall General Partnership. Two executive officers and theManaging General Partner are the general partners of Newhall GeneralPartnership.

----

**Note2. Business Segments and Summary of Significant Accounting Policies**

**Nature of Operations and Business Segments**

The Company operates in two lines ofbusiness: real estate and agriculture. The business segments of the Company’sreal estate operations consist of residential; industrial and commercial;development and operation of income-producing properties; Valencia WaterCompany, a public water utility; and community development. Agricultureconsists primarily of farming and energy operations and sales of non-strategicfarm land.

Information as to identifiable assets,capital expenditures and depreciation for these segments is summarized andreconciled in Note 10. Significant accounting policies related to the Company’ssegments are:

 

**Residential**

Land Sales

Sales are recorded at the time escrow isclosed provided that: (1) there has been a minimum down payment of 20% or 25%depending upon the type and timeframe for development of property sold, (2) thebuyer has met adequate continuing investment criteria and (3) the Company, asthe seller, has no material continuing involvement in the property. Where theCompany has an obligation to complete certain future development, revenue isdeferred in the ratio of the cost of development to be completed to the totalcost of the property being sold under percentage of completion accounting. Landunder development includes land, direct and allocated construction costs forland and infrastructure development plus project amenities. As land is sold,estimated total costs at completion for the specific project are chargedratably to cost of sales.

 

Home Sales

 

The Company’s income from home sales comesfrom sales of completed single- and multi-family homes to homebuyers throughjoint ventures. The Company records revenues and income as the venture closesescrow on sales to homebuyers.  Since1999, the Company has not had any homebuilding joint ventures.

 

**Industrial and Commercial**

 

Industrial and commercial land sales andrespective land under development inventories are accounted for under the samecriteria as described in the Residential Land Sales section.

The industrial and commercial division isalso responsible for the development of the Company’s income-producingproperties.  Upon completion ofconstruction, the property is reported with Income-Producing Properties.

 

**Community Development**

 

Preliminary planning and entitlement costsare charged to expense when incurred. After the earlier of specific plan ortentative map approval, certain development costs are capitalized to theidentified project.

 

**Income-Producing Properties**

 

The Company owns and leases shopping centers,hotels, commercial buildings and land to tenants. Rents are typically based onthe 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, insuranceand certain other operating expenses applicable to leased properties.

 

28

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**Valencia Water Company**

 

Valencia Water Company (a Californiacorporation), a wholly-owned subsidiary, is a public water utility subject toregulation by the California Public Utilities Commission. Water utilityrevenues include amounts billed monthly to customers and an estimatedamount  of unbilled revenues. Incometaxes are included in operating expenses. Deferred income taxes are reflectedin the consolidated financial statements.

 

**Agriculture**

 

Revenue is recognized as crops are deliveredto farm cooperatives and other purchasers. At the time of delivery, the Company estimates the proceeds to bereceived from the cooperatives and records these amounts as unbilled receivables.  Costs incurred during the development stageof orchard and vineyard crops (ranging from 3 to 10 years) are capitalized andamortized over the productive life of the trees or vines.  Farming inventories include crops in processand harvested crops and are valued at the lower of cost or market, determinedon the first-in, first-out method.

 

Agricultural ranch sales are accounted forunder the same criteria as described for land sales in the Residential LandSales section.

 

**Central Administration**

 

Central Administration includes the Company’scorporate functions including executive offices, treasury, tax, employeerelations, corporate accounting, finance, information systems, headquartersfacilities, secretary/legal, investor relations, market research, internalaudit and, in prior years, land acquisition. Except for certain costs relating to the headquarters facilities andspecific services billed to Valencia Water Company, expenses for thesefunctions are expensed as general and administrative expenses and are notallocated to the Company’s operating business segments.

 

**Othergeneral accounting policies are:**

 

Basis of Consolidation: The consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries. All significant intercompany balances and transactions areeliminated.

Reclassifications: Certain reclassificationshave been made to prior years’ amounts to conform to the current yearpresentation.

 

Joint Ventures: The equity method is used toaccount for an investment a joint venture with Hilton Inns, Inc., which is notcontrolled by the Company.  A jointventure with Kaufman and Broad of Southern California, Inc. was divested in2000 and a $5.2 million loss was recorded within Residential Home and LandSales in connection with the divestiture and expenses incurred prior to thedivestiture.

 

Cash and Cash Equivalents: The Companyconsiders all highly liquid investments with original maturity dates of 90 daysor less to be cash equivalents.

 

Income-Producing Properties: Property andEquipment: Property is stated at the lower of cost or market. Depreciation isprovided on the straight-line basis over the estimated useful lives of thevarious assets without regard to salvage value. Lives used for calculatingdepreciation are as follows: buildings – 25 to 40 years; equipment – 3 to 10years; water supply systems, orchards and other – 5 to 75 years.

 

Impairment of Assets: Long-lived assets andassets held for sale are reviewed for impairment whenever events or changes incircumstances indicate that an impairment may have occurred.  No impairment loss was recorded in 2001. In2000, an impairment loss of $4.9 million was recorded within Industrial andCommercial Sales on four office buildings held for sale, which subsequently weresold.

 

There is no depreciation expense recorded onassets held for sale. Income-Producing Properties Held for Sale avoideddepreciation expense of $378,000 for 2001 and $2.5 million for 2000.  Revenues from operations of Income-ProducingProperties Held for Sale continue to be reported with Commercial Operations –Income-Producing Properties in the accompanying consolidated statements ofincome.  For 2001 and 2000, revenuesfrom such properties, after the properties were classified as held for sale,totaled $586,000 and $6.8 million, respectively.

 

29

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Environmental Matters: Environmental clean-upcosts are charged to expense or established reserves when incurred and are notcapitalized. Reserves are recorded for environmental clean-up costs when remediationefforts are probable and can be reasonably estimated. To date, environmentalclean-up costs have not been significant.

 

Management’s Estimates: The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make certain estimates and assumptions. Theseaffect the reported amounts of assets and liabilities, the disclosure of anycontingent assets or liabilities and the reported amounts of revenues andexpenses during the reporting periods. Actual results could differ from theestimates made.

 

Income Taxes: The partnership is not ataxable entity; accordingly, no provision for income taxes has been made in theconsolidated financial statements. Partners are taxed on their allocable shareof the Partnership’s earnings, which is reportable on their income tax returns.

 

The Revenue Act of 1987 contained provisionswhich, in some cases, taxes publicly traded partnerships as corporations.Beginning in 1998, 90% of the Partnership’s gross income, as defined, must bederived from rent, sales of real estate, interest, and income from other“natural resources” as provided in Internal Revenue Section 7704. ThePartnership’s 2001, 2000 and 1999 gross income qualifies under this provisionand the Company expects to continue to be taxed as a partnership for theforeseeable future.

 

Amounts per Partnership Unit: The followingis a reconciliation of the numerators and denominators of the basic and dilutedincome net per unit computations:

 
| **(in 000’s  except per unit)**   |   | **Income*(numerator)*** | ** **   | **Income*(denominator)*** | ** ** | **Per Unit** |   |
|----------------------------------------|--------|-------------------------|--------------|---------------------------|------------|--------------|--------|
|                                   |   |                    |         |
| *For the year ended December 31, 2001* |   |                    |         |                      |       |         |   |
| Net income per unit - basic            |   |                    |         |                      |       |         |   |   |   |
| Net income available to unitholders    |   | $                       | 91,057       |                      | 25,284     |         | $      | 3.60 |   |
| Effect of dilutive securities          |   |                    |         |                      |       |         |   |
| Unit options                           |   | –                  |         | 296                       |       | (.04         | )      |
| Net income per unit – diluted     |   | $                       |  91,057 |                      | 25,580     |         | $      |  3.56 |   |
| *For the year ended December 31, 2000* |   |                    |         |                      |       |         |   |
| Net income per unit - basic            |   |                    |         |                      |       |         |   |
| Net income available to unitholders    |   | $                       |  85,396 |                      | 27,658     |         | $      |  3.09 |   |
| Effect of dilutive securities          |   |                    |         |                      |       |         |   |
| Unit options                           |   | –                  |         | 311                       |       | (.04         | )      |
| Net income per unit – diluted     |   | $                       |  85,396 |                      | 27,969     |         | $      |  3.05 |   |
| *For the year ended December 31, 1999* |   |                    |         |                      |       |         |   |
| Net income per unit - basic            |   |                    |         |                      |       |         |   |
| Net income available to unitholders    |   | $                       |  90,392 |                      | 31,388     |         | $      |  2.88 |   |
| Effect of dilutive securities          |   |                    |         |                      |       |         |   |
| Unit options                           |   | –                  |         | 280                       |       | (.03         | )      |
| Net income per unit – diluted     |   | $                       |  90,392 |                      | 31,668     |         | $      |  2.85 |   |
|                                        |        |                         |              |                           |            |              |        |  |  |  |

 

New Accounting Pronouncements:  SFAS No. 142 – *Goodwill and Other Intangible Assets* is effective for fiscalyears beginning after December 15, 2001. This pronouncement is not expected to have a material impact on theCompany’s financial position or results of operations.

 

SFAS No. 144 – *Accounting for the Impairment or Disposal of Long-Lived Assets*iseffective for fiscal years beginning after December 15, 2001.  This pronouncement supercedes SFAS No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of*, and applies to alllong-lived assets, including discontinued operations.  SFAS No. 144 establishes a single accounting model for theimpairment and/or disposal of long-lived assets, including discontinuedoperations.  Additionally, SFAS No. 144expands the scope of discontinued operations to include all components of anentity with operations that (1) can be distinguished from the rest of theentity and (2) will be eliminated from the ongoing operations of the entity ina disposal transaction.  The Company

 

30

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has not yet completed its evaluation of theimpact of the adoption of SFAS No. 144 but does not expect a the pronouncementto have a material impact on the Company’s financial position or results ofoperations.

----

**Note 3. Federal Income Tax Results of thePartnership**

 

The Partnership has elected under Section 754of the Internal Revenue Code to adjust the basis of property upon the purchaseof units by investors. For investors who purchase units, this election providesfor the reflection of the investor’s price of the units in the tax basis of thePartnership’s properties. The excess of the purchase price over the monetaryassets and liabilities is allocated to real estate assets and results in a newbasis which is used to calculate operating expenses for tax purposes.

 

At December 31, 2001, the net tax basis ofthe Company’s assets and liabilities exceeded the Company’s consolidatedfinancial statement basis of its assets and liabilities by $233,143,000. Thisexcess amount does not reflect the step-up in asset basis allocated to individualpartners upon purchase of units subsequent to the formation of the Partnership.

 

The Partnership’s tax returns for the pastfour years are subject to examination by federal and state taxing authorities.Because many types of transactions are susceptible to varying interpretationsunder federal and state income tax laws and regulations, the tax basis amountsmay be subject to change at a later date upon final determination by the taxingauthorities.

----

**Note 4. Disclosures About Fair Value ofFinancial Instruments**

** **

The estimated fair values of certain of theCompany’s financial instruments are as follows:

 
|                                               |   | **December 31,**     |       |
|----------------------------------------------------|--------|----------------------|------------|
|                                               |   | **2001**             |       | **2000** |   |
| **In thousands**                                   |   | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
|                                               |   |                 |
| Notes receivable from land sales                   |   | $                    | 11,711     |   | $ | 11,711 |   | $ | 10,470 |   | $ | 10,470 |   |
| Mortgage and other debt                            |   | 85,511               |       | 89,785 |   | 74,557 |   | 74,557 |   |
| Advances from developers for utility  construction |   | 10,265               |       | 2,851 |   | 10,627 |   | 2,866 |   |
|                                                    |        |                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

The following methods and assumptions wereused to estimate the fair value of each class of financial instruments forwhich it is practicable to estimate that value:

 

Cash and Cash Equivalents; AccountsReceivable and Payable: The carrying amounts approximate the fair values ofthese instruments due to their short-term nature.

 

Notes Receivable from Land Sales: Thecarrying amounts of notes receivable approximate fair value. Generally, thesenotes are interest-bearing with maturities of less than one year from close ofescrow. If applicable, the carrying amount reflects imputed interest to reducethe note receivable to its fair value.

 

Mortgage and Other Debt: The fair values ofthe Company’s fixed rate debt either approximate carrying value or areestimated using discounted cash flow analyses based on the Company’s currentincremental borrowing rates for similar types of borrowing arrangements rangingfrom 5.0% to 7.5%.

 

Advances from Developers for UtilityConstruction: Generally, advances are refundable to the developer withoutinterest at the rate of 2.5% per year over 40 years. The fair value isestimated as the discounted value (12%) of the future cash flows to be paid onthe advances.

 

31

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** **

**Note 5. Composition of Certain FinancialStatement Captions**

 
|                                                                                        |   | **December 31*****,*** |           |
|---------------------------------------------------------------------------------------------|--------|------------------------|----------------|
| **In thousands**                                                                            |   | **2001**               |           | **2000** |   |
|                                                                                        |   |                   |
| Accounts and notes receivable                                                               |   |                   |           |   |   |
| Trade receivables, less allowance for  doubtful accounts of $1,588 and $1,297, respectively |   | $                      |   1,934   |   | $ |  1,588 |   |
| Notes receivable from land sales                                                            |   | 11,711                 |           | 10,470 |   |
| Unbilled accounts receivable                                                                |   |                   |           |   |   |
| Agriculture                                                                                 |   | 549                    |           | 647 |   |
| Other                                                                                       |   | 1,289                  |           | 1,712 |   |
| Other                                                                                       |   | 1,827                  |           | 2,737 |   |
|                                                                                        |   | $                      |   17,310  |   | $ |  17,154 |   |
| Land under development                                                                      |   |                   |           |   |   |
| Valencia                                                                                    |   |                   |           |   |   |
| Residential development                                                                     |   | $                      |   52,343  |   | $ |  25,154 |   |
| Industrial and commercial land development                                                  |   | 32,687                 |           | 28,522 |   |
| Agriculture                                                                                 |   | 287                    |           | 312 |   |
|                                                                                        |   | $                      |   85,317  |   | $ |  53,988 |   |
| Income-producing properties held for sale                                                   |   |                   |           |   |   |
| Office                                                                                      |   | $                      |   2,720   |   | $ |  8,503 |   |
| Other                                                                                       |   | –                 |           | 7,311 |   |
|                                                                                        |   | 2,720                  |           | 15,814 |   |
| Accumulated depreciation                                                                    |   | (398                   | )              | (3,094 | ) |
|                                                                                        |   | $                      |   2,322   |   | $ |  12,720 |   |
| Income-producing properties                                                                 |   |                   |           |   |   |
| Land                                                                                        |   | $                      |   36,600  |   | $ |  34,822 |   |
| Buildings                                                                                   |   | 132,432                |           | 106,916 |   |
| Other                                                                                       |   | 8,754                  |           | 10,468 |   |
|                                                                                        |   | 177,786                |           | 152,206 |   |
| Accumulated depreciation                                                                    |   | (36,790                | )              | (30,201 | ) |
|                                                                                        |   | 140,996                |           | 122,005 |   |
| Properties under development                                                                |   | 2,167                  |           | 25,780 |   |
|                                                                                        |   | $                      |   143,163 |   | $ |  147,785 |   |
| Property and equipment                                                                      |   |                   |           |   |   |
| Land                                                                                        |   | $                      |   3,760   |   | $ |  3,759 |   |
| Buildings                                                                                   |   | 6,022                  |           | 5,974 |   |
| Equipment                                                                                   |   | 9,770                  |           | 9,470 |   |
| Water supply systems, orchards and other                                                    |   | 87,462                 |           | 81,620 |   |
| Construction in progress                                                                    |   | 5,115                  |           | 5,545 |   |
|                                                                                        |   | 112,129                |           | 106,368 |   |
| Accumulated depreciation                                                                    |   | (39,366                | )              | (38,737 | ) |
|                                                                                        |   | $                      |   72,763  |   | $ |  67,631 |   |

 

32

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|                                                   |   | **December 31*****,*** |          |
|--------------------------------------------------------|--------|------------------------|---------------|
| **In thousands**                                       |   | **2001**               |          | **2000** |   |
|                                                   |   |                   |
| Other assets and deferred charges                      |   |                   |          |   |   |
| Prepaid expenses                                       |   | $                      |   1,649  |   | $ |  2,583 |   |
| Unamortized loan fees                                  |   | 657                    |          | 1,190 |   |
| Deferred charges and assets of Valencia  Water Company |   | 4,499                  |          | 4,516 |   |
| Other                                                  |   | 6,802                  |          | 8,247 |   |
|                                                   |   | $                      |   13,607 |   | $ |  16,536 |   |
| Accrued expenses                                       |   |                   |          |   |   |
| Deferred compensation                                  |   | $                      |   8,800  |   | $ |  12,898 |   |
| Operating and other accruals                           |   | 15,161                 |          | 16,924 |   |
| Project accruals                                       |   | 8,313                  |          | 10,399 |   |
| Lease obligation, net                                  |   | 10,798                 |          | 10,803 |   |
| Other                                                  |   | 4,299                  |          | 8,741 |   |
|                                                   |   | $                      |   47,371 |   | $ |  59,765 |   |
| Other liabilities                                      |   |                   |          |   |   |
| Warranty and other reserves                            |   | $                      |   4,068  |   | $ |  6,089 |   |
| Deferred taxes of Valencia Water Company               |   | 6,698                  |          | 6,317 |   |
| Other                                                  |   | 12,020                 |          | 13,039 |   |
|                                                   |   | $                      |   22,786 |   | $ |  25,445 |   |

----

**Note6. Commercial Leases**

 

As of December 31, 2001, minimum leasepayments to be received under non-cancelable operating leases and a leaseobligation to be paid in conjunction with the sale of four office buildings areas follows:

 

| **In  thousands** |   | **Lease  Receipts** | *** ***  | **Lease  Obligation** | *** *** |
|-------------------|--------|---------------------|---------------|-----------------------|--------------|
|              |   |                |
| 2002              |   | $                   |  15,883  |                  | $            |  1,645 |   |
| 2003              |   | 13,490              |          | 1,694                 |         |
| 2004              |   | 13,036              |          | 1,745                 |         |
| 2005              |   | 10,885              |          | 1,797                 |         |
| 2006              |   | 10,116              |          | 1,851                 |         |
| **Thereafter**    |   | **61,374**          | ** **    | **13,471**            | ** **   |
|              |   | $                   |  124,784 | *                     | $            |  22,203 |   |

 

*  *The amount does not include contingent rentals which may be receivedunder certain leases based on lessee sales. For the years ended December 31,2000 and 1999, contingent rentals also include receipts received from apartmentrentals until the Company sold its four apartment complexes in December 2000.Contingent rentals received for the years ended December 31, 2001, 2000, and1999 were (in thousands) $2,666, $15,778 and $12,606, respectively.*

----

**Note7. Mortgage and Other Debt**

 
|                                               |   | **Interest  Rates** |     | **December 31,** |         |
|----------------------------------------------------|--------|---------------------|----------|------------------|--------------|
| In thousands                                       |   |                | **2001** |             | **2000**     |   |
|                                               |   |                |     |             |         |
| Unsecured lines of credit                          |   | Variable            |     | $                |  23,700 |   | $ |  2,000 |   |
| Prudential (shopping center loans)                 |   | 7.44                | %        | 24,157           |         | 24,549 |   |
| Prudential (ranch mortgage)                        |   | 8.45                | %        | 9,840            |         | 10,080 |   |
| Pacific Life (Valencia Water Company)              |   | 8.00                | %        | 11,000           |         | 11,000 |   |
| Wells Fargo (Valencia Town Center)                 |   | –              |     | –           |         | 12,000 |   |
| Community facilities bonds (Valencia Town  Center) |   | 7.33                | %*       | 14,198           |         | 14,928 |   |
| Vidler Water Company (water rights)                |   | 7.25                | %        | 2,616            |         | – |   |
|                                               |   |                |     | $                |  85,511 |   | $ |  74,557 |   |

 

*Weighted-average rate

 

33

----

 

In November 2000, the Company replaced itsexisting bank lines, totaling $159 million, with a $130 million three-year,unsecured line of credit from Wells Fargo and Bank of America. The interestrate is LIBOR plus 1.25% - 1.45% and the commitment fee is .25% per annum ofthe unused portion. In addition, the Company has a $2 million unsecured line ofcredit with Valencia Bank & Trust on which the rate is LIBOR plus1.35%.  Letters of credit outstandingagainst available lines of credit totaled $13.7 million and $21.2 million,respectively, at December 31, 2001 and 2000.

 

In September 1999, the Company completed twofinancings totaling $25 million with Prudential Insurance Company ofAmerica.  Each loan is secured by a retailshopping center and is due in seven years. Principal and interest are paid monthly based on a 7.44% interest rateand 25-year amortization.

 

The Prudential ranch mortgage is anon-recourse mortgage financing secured by the 14,000-acre New Columbia Ranchproperty. The terms of the note call for interest payments on each May 1 andNovember 1 and annual principal payments of $240,000 until maturity on November1, 2003.

 

Valencia Water Company has an $11 millionfinancing with Pacific Life secured by the utility’s property and equipment.The terms of the financing call for semi-annual interest payments with theprincipal payable in full at maturity on June 1, 2009. The loan is notguaranteed by the Company. Valencia Water Company also has available a $2 millionline of credit with Wells Fargo which is not guaranteed by the Company.

 

In November 2000, a $50 million revolvingmortgage facility secured by Valencia Town Center replaced a $40 millionfacility.  The facility bore interest atLIBOR plus 1.25% and was scheduled to mature in November 2001.  In October 2001, the facility was renewedfor 3 years plus a 2 year extension and bears interest at LIBOR plus 1.40%during the initial term and LIBOR plus 1.45% during the extension term.

 

In October 1992, tax-exempt communityfacilities bonds were issued to finance a portion of the costs of certainpublic infrastructure improvements located within or in the vicinity ofValencia Town Center, the Company’s regional shopping mall. The bonds will berepaid over 20 years from special taxes levied on the mall property.

 

In March 2001, Vidler Water Company, Inc.(“Vidler”) assigned to the Company a portion of the water rights Vidler isparty to in the Semitropic Water Storage District.  The Company acquired these water rights for the development ofNewhall Ranch.  In May 2001, the Companyexecuted a $2.6 million Vidler promissory note for the water rights withinterest at 7.25% and a May 21, 2002 maturity date.

 

Annual maturities of mortgage and other debtare approximately (in thousands) $6,097 in 2002, $10,970 in 2003, $23,209 in2004, $1,657 in 2005, $23,525 in 2006 and $20,053 thereafter.

 

Interest Expense, Capitalized Interest andInterest Income: During 2001, 2000, and 1999, total interest expense incurredamounted to (in thousands) $5,714, $20,622, $13,910, net of $1,481, $329 and$1,563, which was capitalized, respectively. Interest income from investmentsand notes receivable totaled (in thousands) $478 in 2001, $3,000 in 2000 and$3,949 in 1999.

----

**Note 8. Employee Benefit Plans**

 

Incentive CompensationPlan:  Under the terms of the Company’sExecutive Incentive Plan, the Board of Directors may authorize incentivecompensation awards to key management personnel of up to 7% of income. The Boardof Directors authorized awards of $4,020,000 (4.4%), $4,728,000 (5.5%) and$5,164,000 (5.7%) for the years ended December 31, 2001, 2000 and 1999,respectively.

 

Unit Compensation Plans: The Company has twounit-based compensation plans which are described below.  The Company applies the provisions of APBOpinion No. 25 and related interpretations in accounting for its plans.  Accordingly, compensation expense is onlyrecognized for market price fluctuations in connection with option appreciationrights under the unit option plan. Had compensation costs been determinedconsistent with SFAS No. 123, the Company’s net income and net income per unitwould have been reduced to the pro forma amounts indicated on the followingpage:

 

34

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|                            |   | ***Years ended December 31,*** |         |
|---------------------------------|--------|--------------------------------|--------------|
| In  thousands, except per unit  |   | **2001**                       |         | **2000** |   | **1999** |   |
|                            |   |                           |         |
| Net Income                      |   |                           |         |   |   |   |   |
| As reported                     |   | $                              |  91,057 |   | $ |  85,396 |   | $ |  90,392 |   |
| Pro forma                       |   | 88,322                         |         | 81,050 |   | 86,168 |   |
| Income Per Unit                 |   |                           |         |   |   |   |   |
| As reported - assuming dilution |   | $                              |  3.56   |   | $ |  3.05 |   | $ |  2.85 |   |
| Pro forma                       |   | 3.45                           |         | 2.90 |   | 2.72 |   |

 

Unit Option Plan:  In January 1995, the Board of Directorsapproved the 1995 Option/Award Plan, which superseded the Option, AppreciationRights and Restricted Units Plan.  Underthe terms of the Plan, an additional 600,000 units may be granted as options,restricted units, unit rights or appreciation rights to key employees.  In November 1997, the Plan was amended toincrease the number of units which may be granted by 3,050,000 units.

 

Generally, non-qualifiedoptions and appreciation rights are exercisable 25% after the end of each ofthe first four years and terminate in ten years.  The following non-qualified, market price options, all withoutappreciation rights, were granted: 2001 - 327,198; 2000 - 316,707; 1999 -270,784.  An expense of $393,000 wasrecorded in 2001, a recovery of $400,000 was recorded in 2000 and no expense orrecovery was recorded in 1999 for market price fluctuations in connection withoption appreciation rights granted prior to 1992. Restricted unit rights grantedprior to July 2000 as part of the Company’s Management Unit Ownership Programvest 20% at the end of each of the first five years.  Unit rights granted subsequent to July 2000 vest at 33% at theend of each of the first three years. The following restricted unit rights were granted: 2001 - 10,830; 2000 -6,205; 1999- 4,342.

 

In November 1997, the Board ofDirectors granted premium price options for key executives tied to theperformance of the Company’s partnership units. Options totaling 2.45 millionunits were granted to key executives. The number of options granted was largerthan the Company’s typical market-price option program due to the increasedrisks associated with the premium price and forfeiture provisions and was inlieu of market price options for the executives over the three-year periodended November 2000. Under the terms of the program, participants were grantedoptions in two tranches, each of which had a five-year option life and becomesexercisable in three years but is subject to forfeiture if certain performancecriteria are not met.  The secondtranche was canceled in November 2000 because price objectives were notmet.  At December 31, 2000, 891,200 unitsof the 1997 grant were outstanding.  InNovember 2000, a total of 490,000 premium price options were granted to keyexecutives.  All of these options wereoutstanding at December 31, 2001.

 

In October 2001, the Board ofDirectors approved a grant of 64,000 restricted units to key executives.  The restrictions lapse on 50% of the unitsin October 2004 and on the remainder in October 2005.  An expense of $86,000 was recorded in 2001 based upon the vestingprovisions and market price at the date of grant.

 

The per unit weighted-averagefair value of non-qualified, market price options granted in 2001, 2000 and1999 was $8.72, $9.35 and $8.12, respectively, on the date of grant using theBlack-Scholes option pricing model with the following weighted-averageassumptions: 2001 - distribution yield of 2.62%, expected volatility of 26.7%, risk-freeinterest rate of 4.77% and expected life of 10 years; 2000 - distribution yieldof 2.85%, expected volatility of 29.5%, risk-free interest rate of 6.06% andexpected life of 10 years; 1999 - distribution yield of 3.0%, expectedvolatility 29.7%, risk-free interest rate of 6.0% and an expected life of 10years.

 

The per unit weighted-averagefair value of premium price options granted in 1997 was $3.53 for the firsttranche and $3.82 for options granted in 2000 using the Black-Scholes optionpricing model with the following weighted- average assumptions: 1997 grant -distribution yield of 1.6%, expected volatility of 21.0%, risk-free interestrate of 6.4%, expected life of five years; 2000 grant - distribution yield of2.4%, expected volatility of 23.3%, risk-free interest rate of 6.1%, expectedlife of five years.

 

35

----

 

At December 31, 2001, 720,533units were available for future grants. A summary of the status of theCompany’s Option/Award Plan is presented below:

 
|                              |   | **Units**  |   | **Weighted  Average Exercise Price** |        |
|-----------------------------------|--------|------------|--------|--------------------------------------|-------------|
| Outstanding  at December 31, 1998 |   | 3,876,052  |   | $                                    |  27.96 |   |
| Granted                           |   | 275,126    |   | 24.14                                |        |
| Exercised                         |   | (76,087    | )      | 15.67                                |        |
| Canceled                          |   | (608,448   | )      | 31.04                                |        |
| Outstanding  at December 31, 1999 |   | 3,466,643  |   | 27.34                                |        |
| Granted                           |   | 812,912    |   | 27.58                                |        |
| Exercised                         |   | (80,414    | )      | 16.99                                |        |
| Canceled                          |   | (1,225,853 | )      | 30.22                                |        |
| Outstanding  at December 31, 2000 |   | 2,973,288  |   | 25.42                                |        |
| Granted                           |   | 402,028    |   | 29.07                                |        |
| Exercised                         |   | (181,248   | )      | 18.45                                |        |
| Canceled                          |   | (30,115    | )      | 26.21                                |        |
| Outstanding  at December 31, 2001 |   | 3,163,953  |   | $                                    |  26.11 |   |

 

At December 31, 2001 and 2000,the number of options exercisable was 2,231,101 and 1,863,610, respectively,and the weighted-average exercise price of those options was $25.71 and $24.70,respectively.

 

The following summarizesinformation about outstanding options at December 31, 2001:
| **Range of**

**Exercise Prices** |          | **Number**

** Outstanding*** |      | **Weighted-Average**

**Exercise Price** |   | **Weighted-Average**

**Remaining Life** |   |   |
|-----------------------------------|---------------|------------------------------------|-----------|------------------------------------------|--------|------------------------------------------|--------|--------|
|                              | $13.00-$16.75 |                               | 506,375   |                                     | $14.93 |                                     | 2.9    |   |
|                              | $19.75-$27.88 |                               | 696,013   |                                     | $24.63 |                                     | 7.3    |   |
|                              | $28.00-$31.30 |                               | 1,878,420 |                                     | $29.94 |                                     | 3.7    |   |
|                                   |               |                                    |           |                                          |        |                                          |        |        |  |  |

 

 

* *Excludes 19,145 restricted units granted as part of the Company’sManagement Unit Ownership Program*

 

The following summarizesinformation about exercisable options at December 31, 2001:
| **Range of  Exercise  Prices** |          | **Number**

** Outstanding** |   | **Weighted-Average**

** Exercise Price** |   |
|-------------------------------------|---------------|-----------------------------------|--------|------------------------------------------------|--------|
|                                | $13.00-$16.75 |                              |   | 506,375                                        |   |   | $14.93 |   |
|                                | $19.75-$27.88 |                              |   | 380,388                                        |   |   | $23.55 |   |
|                                | $28.00-$31.30 |                              |   | 1,344,338                                      |   |   | $30.39 |   |

 

Employee Unit Purchase Plan:Under the terms of the Employee Unit Purchase Plan, employees may have up to15% of their base salary withheld to purchase the Company’s partnership units.The purchase price is a specified percentage (no less than 85% and no more than100%, as determined by the Plan Administrator for each purchase period) of thelower of the market price on the first day of the purchase period or the lastday of the purchase period.  At December31, 2001, a total of 202,693 units is available for future issuance under theplan.

 

Under the plan, the Companysold 7,340, 8,922 and 9,996 units to employees in 2001, 2000 and 1999,respectively. The weighted-average fair value of the purchase discount was$1.78 for 2001, $1.63 for 2000 and $2.33 for 1999, using the Black-Scholesmodel with the following assumptions: expected life of seven months due to salarywithholdings throughout the year; distribution yield of 2.33% and expectedvolatility of 24.10% for 2001, distribution yield of 2.3% and expectedvolatility of 24.1% for 2000, distribution yield of 2.2% and expectedvolatility of 29.4% for 1999; risk-free interest rate of 6.00% for 2001, 4.39%for 2000 and 4.54% for 1999; and an exercise price equal to 85% of the lower ofthe market price on the first day of the purchase period and the market priceon the last day of the purchase period.

 

Retirement Plans: TheRetirement Plan is a defined benefit plan that is Company funded and qualifiedunder ERISA. Generally, all employees of the Company and subsidiaries of theCompany are eligible to participate in the Retirement Plan after one year ofemployment and attainment of age 21. Participants’ benefits accumulated throughDecember 31, 1996 are calculated as 40.5% of the highest average annualearnings up to Social Security covered compensation, plus 60% of average annualearnings in excess of covered compensation, reduced pro rata for years ofservice less than 30. Benefits which accumulate after January 1, 1997 arecalculated as 32.4% of the Social Security wage base and 48% of the excess overcovered compensation.

 

36

----

 

The Company’s contribution tothe Retirement Plan is determined by consulting actuaries on the basis ofcustomary actuarial considerations, including total covered payroll ofparticipants, benefits paid, earnings and appreciation in the Retirement Planfunds.

 

The Board of Directors hasadopted a Pension Restoration Plan, pursuant to which the Company will pay anydifference between the maximum amount payable under ERISA and the amountotherwise payable under the Plan.

 

The Company’s funding policy isto contribute no more than the maximum tax-deductible amount. Plan assets areinvested primarily in equity and fixed income funds.

 

The cost of the Company’sSupplemental Executive Retirement Plan and a Retirement Plan for Directors whowere retired prior to the termination of the plan in 1997 was $102,000 in 2001,$109,000 in 2000 and $105,000 in 1999.

 

The following table sets forththe plans’ funded status and amounts recognized in the Company’s consolidatedfinancial statements for the Retirement and the Pension Restoration Plans:

 
|                                              |   | **December 31,** |   |
|---------------------------------------------------|--------|------------------|--------|
| In thousands                                      |   | **2001**         |   | **2000** |   |
|                                              |   |             |   |
| Change  in Benefit Obligation                     |   |             |   |   |   |
| Projected benefit obligation,  beginning of year: |   | $                | 28,826 |   | $ | 23,809 |   |
| Service cost                                      |   | 714              |   | 677 |   |
| Interest cost                                     |   | 1,946            |   | 1,715 |   |
| Benefits paid                                     |   | (5,511           | )      | (1,079 | ) |
| Actuarial (gain) loss                             |   | (643             | )      | 3,704 |   |
| Projected benefit obligation,  end of year        |   | $                | 25,332 |   | $ | 28,826 |   |
|                                              |   |             |   |   |   |
| Change  in Plan Assets                            |   |             |   |   |   |
| Plan assets, beginning of year:                   |   | $                | 20,901 |   | $ | 19,502 |   |
| Actual (loss) return on plan  assets              |   | (1,944           | )      | 2,477 |   |
| Employer contribution                             |   | 3,571            |   | 1 |   |
| Benefits paid                                     |   | (5,511           | )      | (1,079 | ) |
| Plan assets, end of year                          |   | $                | 17,017 |   | $ | 20,901 |   |
|                                              |   |             |   |   |   |
| Funded status                                     |   | $                | (8,315 | ) | $ | (7,925 | ) |
| Unrecognized transition  obligation               |   | -                |   | - |   |
| Unrecognized prior service cost                   |   | 594              |   | 686 |   |
| Unrecognized loss                                 |   | 3,416            |   | 2,300 |   |
| Net amount recognized - accrued  benefit cost     |   | $                | (4,305 | ) | $ | (4,939 | ) |

 

37

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|                                                |   | ***December 31,*** |        |
|-----------------------------------------------------|--------|--------------------|-------------|
| In  thousands                                       |   | **2001**           |        | **2000** |   | **1999** |   |
|                                                |   |               |        |
| Components of Net Periodic Benefit Cost             |   |               |        |   |   |   |   |
| Service cost                                        |   | $                  |  714   |   | $ |  677 |   | $ |  838 |   |
| Interest cost                                       |   | 1,946              |        | 1,715 |   | 1,505 |   |
| Expected return on plan assets                      |   | (1,844             | )           | (1,671 | ) | (1,650 | ) |
| Amortization of unrecognized transition  obligation |   | -                  |        | (34 | ) | (34 | ) |
| Amortization of unrecognized prior service  cost    |   | 92                 |        | 92 |   | 92 |   |
| Amortization of unrecognized loss                   |   | 141                |        | 60 |   | 105 |   |
| Pension expense                                     |   | $                  |  1,049 |   | $ |  839 |   | $ |  856 |   |

 

The projected benefitobligation, accumulated benefit obligation (ABO) and fair value of assets forthe plan with assets less than ABO (Pension Restoration Plan) were $5,596,199,$1,980,424 and $0 at December 31, 2001 and $11,101,624, $3,668,964 and $0 atDecember 31, 2000, respectively.
|                                          |   | **December  31,** |   |
|-----------------------------------------------|--------|-------------------|--------|
|                                          |   | **2001**          |   | **2000** |   |
| The  assumptions used in the accounting were: |   |              |   |   |   |
| Discount  rate                                |   | 7.25              | %      | 7.75 | % |
| Rate  of increase in compensation levels      |   | 5.00              | %      | 5.00 | % |
| Expected  long-term return of assets          |   | 9.00              | %      | 9.00 | % |

 

Employee Savings Plan: TheCompany has an Employee Savings Plan which is available to all eligibleemployees. Certain employee contributions may be supplemented by Companycontributions. Company contributions approximated $496,000 in 2001, $451,000 in2000 and $438,000 in 1999.

 

Deferred Cash Bonus Plan: InFebruary 1991, the Compensation Committee of the Board of Directors awardeddeferred bonuses payable January 15, 1999. The amount paid was based upon therelative percentage return on the market value of the Company’s units comparedto the percentage return on the Standard and Poor’s 500 Index over a nine-yearperiod. A total of $176,500 was earned and paid in 1999 under this program.

 

Other Benefits: The Companydoes not provide postretirement or postemployment benefits other than thoseplans described above and, as such, there is no obligation to be recognizedunder SFAS Nos. 106 and 112.

----

**Note 9. Commitments and Contingencies**

 

The Company is involved inlitigation and various claims, including those arising from its ordinaryconduct of business. Management is of the opinion that the ultimate liabilityfrom this litigation will not materially affect the Company’s consolidated financialstatements. The Company believes it has adequate insurance to protect itselfagainst any future material property and casualty losses in excess ofestablished reserves.

 

In the ordinary course ofbusiness, and as part of the entitlement and development process, the Companyis required to provide performance bonds to the County of Los Angeles and theCity of Santa Clarita to assure completion of certain public facilities. AtDecember 31, 2001, the Company had performance bonds outstanding totaling approximately$171 million.

 

As a significant landowner,developer and holder of commercial properties, there exists the possibilitythat environmental contamination conditions may exist that would require theCompany to take corrective action. The Company believes such costs will notmaterially affect the Company’s consolidated financial statements.

----

**Note10. Business Segment Reporting**

 

The Company’s reportablebusiness segments and respective accounting policies of the segments are thesame as those described in Note 2 - Business Segments and Summary ofSignificant Accounting Policies. Management 

 

38

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evaluates segment performancebased primarily on revenues and contribution to income before allocation ofincentive compensation.

 

Interest income and expensesare evaluated and reported on a consolidated net basis and are not allocated tothe Company’s business segments.

 

The following table providesfinancial information regarding management’s measures of the Company’s businesssegments and other significant items and also provides a reconciliation to theCompany’s consolidated totals:

 
|                             |   | **Year Ended  December 31, 2001** |    |
|----------------------------------|--------|-----------------------------------|---------|
| **In thousands**                 |   | **Revenues**                      |    | **Contribution****to Income** |   | **Depreciation and Amortization** |   | **Assets** |   | **Capital Expenditures** |   |
|                             |   |                              |    |
| Real Estate                      |   |                              |    |   |   |   |   |   |   |   |   |
| Residential                      |   | $                                 | 15,701  |   | $ | 166 |   | $ | 120 |   | $ | 40,456 |   | $ | - |   |
| Industrial and commercial        |   | 162,839                           |    | 105,017 |   | - |   | 43,171 |   | - |   |
| Community development            |   | -                                 |    | (11,562 | ) | 73 |   | 35,750 |   | 98 |   |
| Income-producing properties      |   | 42,258                            |    | 15,269 |   | 7,963 |   | 152,916 |   | 8,231 |   |
| Valencia Water Company           |   | 13,601                            |    | 3,581 | (a) | 2,521 |   | 71,807 |   | 8,165 |   |
| Agriculture                      |   | 7,216                             |    | (309 | ) | 446 |   | 6,133 |   | 306 |   |
| Central administration           |   | -                                 |    | (9,446 | ) | 474 |   | 10,071 |   | 326 |   |
|                             |   | 241,615                           |    | 102,716 |   | 11,597 |   | 360,304 |   | 17,126 |   |
| Interest and other  expense, net |   | -                                 |    | (5,780 | ) | - |   | - |   | - |   |
| All other                        |   | -                                 |    | (5,879 | ) | - |   | - |   | - |   |
| *Consolidated Total*             |   | $                                 | 241,615 |   | $ | 91,057 |   | $ | 11,597 |   | $ | 360,304 |   | $ | 17,126 | ** ** |

 
|                            |   | **Year Ended December 31, 2000** | *** *** |
|---------------------------------|--------|----------------------------------|--------------|
| **In thousands**                |   | **Revenues**                     |         | **Contribution****to Income** |   | **Depreciation and  Amortization** |   | **Assets** |   | **Capital  Expenditures** |   |
|                            |   |                             |         |
| Real Estate                     |   |                             |         |   |   |   |   |   |   |   |   |
| Residential                     |   | $                                | 27,210       |   | $ | 4,335 |   | $ | 120 |   | $ | 12,702 |   | $ | - |   |
| Industrial and commercial       |   | 295,119                          |         | 99,475 |   | 6 |   | 71,741 |   | - |   |
| Community development           |   | -                                |         | (10,799 | ) | 70 |   | 30,557 |   | 64 |   |
| Income-producing properties     |   | 58,219                           |         | 22,752 |   | 10,475 |   | 141,477 |   | 27,441 |   |
| Valencia Water Company          |   | 13,132                           |         | 3,633 | (a) | 2,247 |   | 66,539 |   | 8,974 |   |
| Agriculture                     |   | 7,288                            |         | 1,115 |   | 477 |   | 6,510 |   | 220 |   |
| Central administration          |   | -                                |         | (12,180 | ) | 405 |   | 13,015 |   | 411 |   |
|                            |   | 400,968                          |         | 108,331 |   | 13,800 |   | 342,541 |   | 37,110 |   |
| Interest and other expense, net |   | -                                |         | (17,935 | ) | - |   | - |   | - |   |
| All other                       |   | -                                |         | (5,000 | ) | - |   | - |   | - |   |
| *Consolidated Total*            |   | $                                | 400,968      |   | $ | 85,396 |   | $ | 13,800 |   | $ | 342,541 |   | $ | 37,110 |   |

 
|                            |   | **Year Ended December 31, 1999** | *** *** |
|---------------------------------|--------|----------------------------------|--------------|
|                            |   | **Revenues**                     |         | **Contribution****to Income** |   | **Depreciation and  Amortization** |   | **Assets** |   | **Capital Expenditures** |   |
|                            |
| **In thousands**                |
|                            |   |                             |         |
| Real Estate                     |   |                             |         |   |   |   |   |   |   |   |   |
| Residential                     |   | $                                | 109,608      |   | $ | 38,424 |   | $ | 116 |   | $ | 27,505 |   | $ | - |   |
| Industrial and commercial       |   | 109,200                          |         | 42,104 |   | 10 |   | 116,666 |   | 10,546 |   |
| Community development           |   | -                                |         | (11,597 | ) | 66 |   | 19,725 |   | 138 |   |
| Income-producing properties     |   | 50,459                           |         | 17,307 |   | 12,127 |   | 253,214 |   | 57,442 |   |
| Valencia Water Company          |   | 12,202                           |         | 3,200 | (a) | 2,017 |   | 60,272 |   | 7,437 |   |
| Agriculture                     |   | 41,037                           |         | 28,715 |   | 613 |   | 17,541 |   | 586 |   |
| Central administration          |   | -                                |         | (11,371 | ) | 347 |   | 9,901 |   | 511 |   |
|                            |   | 322,506                          |         | 106,782 |   | 15,296 |   | 504,824 |   | 76,660 |   |
| Interest and other expense, net |   | -                                |         | (10,390 | ) | - |   | - |   | - |   |
| All other                       |   | -                                |         | (6,000 | ) | - |   | - |   | - |   |
| *Consolidated Total*            |   | $                                | 322,506      |   | $ | 90,392 |   | $ | 15,296 |   | $ | 504,824 |   | $ | 76,660 |   |

 

All of the Company’s realestate operations are conducted on the Company’s properties in north LosAngeles County.  Agricultural operationsare conducted on the Company’s properties in Southern and CentralCalifornia.  Accordingly, financialinformation based on geographic area is not presented.

 

Sales by business segment toindividual customers representing more than 10% of the Company’s consolidatedrevenues are as follows:
|                       |   | **2001** |   | **2000** |   | **1999** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| **In thousands**           |   |     |   |
| Industrial  and Commercial |   | $        | 65,000 |     | $      | 201,251  |   | - |   |
|                            |        |          |        |          |        |          |        |  |  |

* *

* *

*(a)Includes income tax expense of (in thousands) $1,933 in 2001, $1,847 in2000 and $1,463 in 1999.*

 

 

39

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**Note11. Selected Quarterly Financial Data (Unaudited)**

 

Quarterly financial informationfor the Company fluctuates due to the uneven nature of real estate closingactivity and the skewing of results by individual large sales. The following isa summary of selected quarterly financial data for 2001 and 2000:

 
|                                             |   | **Quarter** |       |
|--------------------------------------------------|--------|-------------|------------|
|                                             |   | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| **In  thousands, except per unit**               |   | **2001**    |       | **2000** |   | **2001** |   | **2000** |   | **2001** |   | **2000** |   | **2001** |   | **2000** | ** ** |
|                                             |   |        | ** ** |
| Revenues                                         |   | $           | 22,534     |   | $ | 28,364 |   | $ | 105,777 |   | $ | 55,319 |   | $ | 37,216 |   | $ | 46,470 |   | $ | 76,688 |   | $ | 270,815 |   |
| Operating Income                                 |   | 4,915       |       | 8,860 |   | 81,500 |   | 12,923 |   | 4,041 |   | 6,981 |   | 18,851 |   | 89,209 |   |
| Net income (loss)                                |   | 1,039       |       | 3,197 |   | 75,337 |   | 6,348 |   | 486 |   | (612 | ) | 14,195 |   | 76,463 |   |
| Net income (loss) per unit -  basic*             |   | 0.04        |       | 0.11 |   | 2.94 |   | 0.23 |   | 0.02 |   | (0.02 | ) | 0.58 |   | 2.85 |   |
| Net income (loss) per unit -  assuming dilution* |   | 0.04        |       | 0.11 |   | 2.91 |   | 0.22 |   | 0.02 |   | (0.02 | ) | 0.57 |   | 2.83 |   |
|                                                  |        |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

* Due to unit repurchases during the year, quarterly per unit amountsdo not add up to the total per unit for the year

** **

**Item9.    Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

None

 

40

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**PARTIII**

 

**Item 10. Directors and Executive Officers ofthe Company**

 

The Partnership was reorganizedfrom a corporation to a California limited partnership on January 8, 1985. Thegeneral partners of the Partnership are Newhall Management Limited Partnershipand Newhall General Partnership. Two executive officers and Newhall ManagementLimited Partnership are the general partners of Newhall General Partnership.Newhall Management Corporation and Newhall General Partnership are the generalpartners of Newhall Management Limited Partnership.

 

Newhall Management LimitedPartnership has exclusive management and control of the affairs of thePartnership and shares in Partnership income and losses on the basis of thenumber of Partnership units owned by it. Newhall Management Corporation is themanaging general partner of Newhall Management Limited Partnership, and makesall decisions and takes all action deemed by it necessary or appropriate to conductthe business and affairs of Newhall Management Limited Partnership and,therefore, of the Partnership.

 

The duties and responsibilitiesof directors are carried out by the Board of Directors of Newhall ManagementCorporation. Each voting shareholder of Newhall Management Corporation also isa director of Newhall Management Corporation (“Corporation”) and only votingshareholders may be directors of the Corporation. Every voting shareholder anddirector has a number of votes in all matters equal to the number of votes ofevery other voting shareholder and director. Upon ceasing to be a director, ashareholder may be a nonvoting shareholder for a period of time prior to therepurchase of his or her shares by the Corporation. See further discussion of theshareholders’ agreement and voting trust agreement below.

 

The shareholder-directors ofNewhall Management Corporation are as follows:

 

Gary M. Cusumano, age 58, wasappointed President and Chief Executive Officer of the Corporation in March2001, and previously served as President and Chief Operating Officer of theCorporation and the former managing general partner from 1989 to March 2001.Mr. Cusumano has served as a director of the Corporation since 1995. Mr.Cusumano is a director of Henry Mayo Newhall Memorial Hospital, CaliforniaChamber of Commerce and the California Business Roundtable.

 

Thomas V. McKernan, Jr., age57, has served as a director of the Corporation since 1994. Mr. McKernan hasbeen President and Chief Executive Officer of the Automobile Club of SouthernCalifornia since 1991. He is a director of Blue Shield of California, theAmerican Automobile Association, Payden & Rygel Investment Group, ForestLawn Memorial Park, California Chamber of Commerce, Los Angeles Area Chamber ofCommerce, Orthopaedic Hospital, California Business Roundtable and Los AngelesPolice Foundation.

 

Henry K. Newhall, age 63, hasserved as a director of the Corporation, the former managing general partnerand the predecessor corporation, respectively, since 1982. Dr. Newhall retiredin 1998 as General Manager, Technology, Oronite Additives Division of ChevronChemical Company. He served in various managerial and consulting positions withChevron since 1971.

 

Jane Newhall, age 88, hasserved as a director of the Corporation, the former managing general partnerand the predecessor corporation, respectively, since 1960. Ms. Newhall, aprivate investor, is a director of the Henry Mayo Newhall Foundation. She is alife trustee of Mills College, the San Francisco Theological Seminary, and theGraduate Theological Union.

 

Peter T. Pope, age 67, hasserved as a director of the Corporation since 1992. Mr. Pope served as Chairmanof Pope & Talbot, Inc. from 1990 to 2000 and as Chief Executive Officerfrom 1971 until his retirement in 1999. He is a director and general partner ofPope Resources, and a director of Pope & Talbot, Inc.

 

Carl E. Reichardt, age 70, hasserved as a director of the Corporation, the former managing general partnerand the predecessor corporation, respectively, since 1980. Mr. Reichardt wasChairman of the Board of Directors of Wells Fargo & Company and Wells FargoBank, N.A. from 1983 until 1994 and a director until 1998. He is a 

 

41

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director and Vice Chairman ofFord Motor Company. He also is a director of The Irvine Company, HCA Inc.,PG&E Corporation, ConAgra Foods Inc., McKesson HBOC, Inc. and HSBC HoldingsPLC.

 

Thomas C. Sutton, age 59, hasserved as a director of the Corporation since 1991. He has been Chairman of theBoard and Chief Executive Officer of Pacific Life Insurance Company since 1990.Mr. Sutton is a director of Edison International, The Irvine Company,Association of California Life Insurance Companies, American Council of LifeInsurance and California Chamber of Commerce.

 

Barry Lawson Williams, age 57,has served as a director of the Corporation since 1996. Mr. Williams served asPresident and Chief Executive Officer of The American Management AssociationInternational from November 2000 to June 2001. Mr. Williams also has been Presidentof Williams Pacific Ventures, Inc., a venture capital consulting and businessmediation firm that he founded, and a general partner of WDG Ventures Ltd., areal estate development fund, since 1987. Mr. Williams is a director ofPG&E Corporation, CH2M Hill, Ltd., Simpson Manufacturing Company, R.H.Donnelly & Co., USA Education, Inc. (Sallie Mae), Synavant Inc. and KaiserPermanente. He is a trustee of Northwestern Mutual Life Insurance Company.

 

Ezra K. Zilkha, age 76, hasserved as a director of the Corporation, the former managing general partnerand the predecessor corporation, respectively, since 1977. Since 1956, Mr.Zilkha has been President of Zilkha & Sons, Inc., a private investmentcompany. He is a director of the International Center for the Disabled, andChairman of the Board and a director of Heartland Technology, Inc.Mr. Zilkha is a trustee of The American Society of the French Legion ofHonor, trustee emeritus of Wesleyan University and an honorary trustee of theBrookings Institution.

 

Each of theshareholder-directors may be contacted at the principal executive offices ofthe Partnership and is a citizen of the United States.

 

The Board of Directors managesand controls the overall business and affairs of the Corporation, of NewhallManagement Limited Partnership, and of the Partnership. The members of theBoard of Directors are elected by the shareholder-directors of the Corporation,unless there is a vacancy on the Board in which case the remaining boardmembers may fill the vacancy, without the approval of the limited partners andwith each shareholder-director of the Corporation having an equal number ofvotes. Because the shareholders and directors are the same persons, it isexpected that the shareholders will re-elect themselves to serve as directors.

 

It is the current policy of theCorporation that all directors of the Corporation, except for the initialdirectors of the former managing general partner, will retire at age 70. If anew director is elected, he or she is required to become a shareholder bypurchasing the number of shares determined by the Board of Directors.

 

The limited partnershipagreement (the “Partnership Agreement”) of the Partnership requires the generalpartners to own at least one percent (1%) of the total number of Partnershipunits outstanding at all times. In order to meet this 1% requirement, theshareholder-directors had originally contributed Partnership units as capitalto the former managing general partner. The determination as to how many Partnershipunits each shareholder-director would contribute was based upon theshareholdings of the shareholder-director in the predecessor corporation andhis or her ability to contribute such Partnership units in order that thegeneral partners would own at least 1% of the total number of Partnership unitsoutstanding at all times.

 

Messrs. Henry Newhall andZilkha each effectively have contributed to Newhall Management LimitedPartnership a total of 72,000 Partnership units. Ms. Newhall effectively hascontributed to Newhall Management Limited Partnership a total of 71,650Partnership units. Mr. Cusumano effectively has contributed to NewhallManagement Limited Partnership a total of 66,020 Partnership units.Mr. Thomas E. Dierckman, Senior Vice President of the Corporation,effectively has contributed 20 Partnership units to Newhall Management LimitedPartnership. Messrs. Reichardt, Pope, Sutton, McKernan and Williams eacheffectively have contributed to Newhall Management Limited Partnership a totalof 2,000 Partnership units. The Partnership units contributed to NewhallManagement Limited Partnership total 291,690 or 1.1% of the total number ofPartnership units outstanding at December 31, 2001.

 

A unitholder receives the samedistributions from the Partnership with regard to his or her Partnership unitsregardless of whether such Partnership units are represented by limited partnerinterests in Newhall Management 

 

42

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Limited Partnership or bygeneral partner interests in Newhall Management Limited Partnership (which inturn are represented by common stock in the Corporation). All Partnershipdistributions and allocations to Newhall Management Limited Partnership withrespect to the Partnership units held by such partner will be passed on to eachlimited partner of Newhall Management Limited Partnership or shareholder of theCorporation as distributions in proportion to the actual number of units orshares beneficially owned by such limited partner or shareholder, as the casemay be.

 

The shareholder-directors ofthe Corporation and the Corporation are parties to a shareholders’ agreementand a voting trust agreement. These agreements provided for the transfer of allthe shares of Newhall Management Corporation to a voting trust, held in thename of the Trustee. The Secretary of Newhall Management Corporation serves asTrustee. In all matters the Trustee will vote all the shares in accordance withthe direction of a majority of the shareholder-directors, with eachshareholder-director having one vote on each matter (irrespective of the actualnumber of shares beneficially owned by such person).

 

The shareholders’ agreement andthe bylaws of the Corporation restrict the ability of a shareholder-director totransfer ownership of shares of the Corporation. Certain events, such asfailure to own at least one limited partner unit in Newhall Management LimitedPartnership, failure to consent to a Subchapter S election under the InternalRevenue Code, failure to re-execute the trust agreement, ceasing to serve as adirector, failure of a shareholder-director’s spouse to sign any requiredconsent, 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 existingdirector upon approval of the Board of Directors, are considered to berepurchase events. Upon such a repurchase event, the shareholder mustimmediately resign as a director and the shareholder will lose voting rightsunder the voting trust agreement. Upon the occurrence of a repurchase event, ashareholder’s shares will be repurchased by the Corporation or the Corporationmay direct their purchase by a successor director. The Corporation has agreedto repurchase for cash equal to the market value of the Partnership unitsrepresenting such shares (or provide for the purchase of) all shares of ashareholder-director subject to a repurchase event within one year of therepurchase event and to use its best efforts to effect such repurchase(purchase) as soon as possible after the repurchase event. There can be noassurance that the Corporation will be able to find a replacement for adeparting shareholder-director who will purchase shares.

 

The shareholders’ agreement expiresif Newhall Management Corporation ceases to serve as the managing generalpartner of the managing general partner of the Partnership, or NewhallManagement Limited Partnership ceases to be the managing general partner of thePartnership, if all parties to the shareholders’ agreement consent to itstermination, or with respect to any individual shareholder, upon the repurchaseof all the shareholder’s shares.

 

The term of the voting trust islimited by law to 10 years, but a party to the voting trust will be deemed tohave resigned as a director of the Corporation and will have to sell hisshares, subject to repurchase by the Corporation, unless, at the times providedin the voting trust agreement, the party re-executes and renews the votingtrust for the purpose of keeping it continually in effect. In July 2000, theshareholder-directors extended the voting trust agreement for an additional 10years. The voting trust agreement terminates if Newhall Management Corporationceases to serve as a general partner of the managing general partner of thePartnership, or Newhall Management Limited Partnership ceases to be themanaging general partner of the Partnership, or with respect to any individualshareholder if a shareholder no longer owns any shares.

 

The shareholder-directors, aslimited partners, are also parties to the limited partnership agreement ofNewhall Management Limited Partnership. The limited partnership agreement hasrestrictions on transfer similar to the shareholders’ agreement and provides forrepurchase of the limited partnership units of a limited partner upon theoccurrence of repurchase events which are similar to those of the shareholders’agreement, including the cessation of being a director by a limited partner inthe case of a limited partner who is a director.

 

Upon the occurrence of arepurchase event, Newhall Management Limited Partnership would have one fullyear to transfer Partnership units representing the limited partner’s interestto the limited partner. A limited partner could not compel the return ofPartnership units for at least one year from the date a limited partner choosesto obtain return of Partnership units. Even then, Newhall Management LimitedPartnership cannot, and cannot be compelled to, distribute Partnership units tothe limited partner if Newhall Management Limited Partnership would thereafterown less than 1% of the Partnership’s Partnership units.

 

43

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The limited partners, aslimited partners, have no voting rights except as expressly set forth in the limitedpartnership agreement or granted pursuant to law. Such voting privilegesinclude matters such as (i) electing general partners in specified instances,(ii) amending the limited partnership agreement, (iii) dissolving the limitedpartnership, (iv) electing a general partner to serve as the managing generalpartner, and (v) removing a general partner. Items (ii) and (iii) require theseparate concurrence of the Corporation.

 

Persons other than directors ofNewhall Management Corporation may serve as limited partners of NewhallManagement Limited Partnership and Newhall Management Corporation has theauthority pursuant to the limited partnership agreement to cause additionalunits to be issued. The limited partnership agreement provides limited instancesin which a general partner shall cease to be a general partner.

 

Newhall Management LimitedPartnership will dissolve (i) when a general partner ceases to be a generalpartner (other than by removal) unless there is at least one other generalpartner or all partners agree in writing to continue the business of thepartnership and to admit one or more general partners, (ii) if NewhallManagement Limited Partnership becomes insolvent, (iii) upon the disposition ofsubstantially all assets of Newhall Management Limited Partnership, (iv) 90days after an affirmative vote of the limited partners to dissolve pursuant tothe partnership agreement, or (v) upon the occurrence of any event which makesit unlawful for the business of Newhall Management Limited Partnership to becontinued.

 

Newhall General Partnership, aCalifornia general partnership, is a general partner for the purposes ofcontinuing the business of the Partnership and serving as an interim managinggeneral partner if Newhall Management Limited Partnership or its successorceases to serve as managing general partner. So long as Newhall ManagementLimited Partnership or its successor remains as managing general partner,Newhall General Partnership will have no right to take part in the managementand control of the affairs of the Partnership.

 

The general partners of NewhallGeneral Partnership are Newhall Management Limited Partnership, the chiefexecutive officer of Newhall Management Corporation and another officer ordirector of Newhall Management Corporation selected from time to time by theboard of directors of Newhall Management Corporation. Gary M. Cusumano andThomas E. Dierckman are general partners of Newhall General Partnership. For aslong as Newhall Management Limited Partnership serves as a general partner ofthe Partnership, Newhall Management Limited Partnership shall serve as ageneral partner of Newhall General Partnership and the individual generalpartners of Newhall General Partnership shall be the chief executive officer ofNewhall Management Corporation and another officer or director selected by theboard of directors of Newhall Management Corporation.

 

The managing partner of NewhallGeneral Partnership is the chief executive officer of Newhall ManagementCorporation and shall have management and control of the ordinary course ofday-to-day business of Newhall General Partnership. Matters outside theordinary course of the day to day business of Newhall General Partnership shallbe decided by a majority vote of the partners except that a unanimous vote willbe required to, among other things, admit a new partner (other than the chiefexecutive officer or other officer or director of Newhall ManagementCorporation).

 

After giving effect to 2-for-1unit splits on December 20, 1985 and January 29, 1990, each of the partners ofNewhall General Partnership has contributed twenty Partnership units to NewhallGeneral Partnership. No additional capital contributions are required. Theincome, losses and distributions allocated to Newhall General Partnership withrespect to the units will be allocated among the partners of Newhall GeneralPartnership in the ratio of the units contributed by each of them.

 

The ability of a partner towithdraw from Newhall General Partnership or to transfer an interest in NewhallGeneral Partnership is limited by the partnership agreement of Newhall GeneralPartnership. Individual partners of Newhall General Partnership may notwithdraw except upon appointment of a successor by the board of directors ofNewhall Management Corporation. In addition, an individual general partner maynot transfer his interest in Newhall General Partnership except with thewritten consent of Newhall Management Limited Partnership. Newhall ManagementLimited Partnership, as a general partner of Newhall General Partnership, maynot withdraw unless: (i) it no longer serves as a general partner of thePartnership; (ii) Newhall General Partnership no longer serves as a generalpartner of the Partnership; or (iii) Newhall General Partnership dissolves andits business is not continued.

 

44

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If Newhall Management LimitedPartnership no longer serves as a general partner of the Partnership,simultaneously, it will stop serving as a general partner of Newhall GeneralPartnership. Any individual general partner of Newhall General Partnership whois serving as a general partner by virtue of holding an office or position withNewhall Management Corporation, will stop serving as a general partner ofNewhall General Partnership if either (i) Newhall Management LimitedPartnership is replaced as a general partner of the Partnership, or (ii)Newhall Management Limited Partnership is no longer a general partner ofNewhall General Partnership and individual partners are designated pursuant tothe partnership agreement.

 

Newhall General Partnershipwill dissolve when the Partnership is dissolved, liquidated and wound up andany trust or other entity formed for the purpose of liquidating or winding upthe Partnership is liquidated and wound up. Newhall General Partnership willdissolve earlier upon: (i) the distribution of substantially all of itsproperty; (ii) the unanimous agreement of its partners; (iii) ceasing to serveas a general partner of the Partnership; or (iv) the occurrence of an eventwhich would make it unlawful to conduct its business.

 

The Partnership Agreementrequires the Partnership to pay all of the costs and expenses incurred oraccrued by the general partners in connection with the business and affairs ofthe Partnership as the managing general partner in its sole discretionauthorizes or approves from time to time. These costs and expenses includeoverhead and operating expenses, officer, employee, director and generalpartner compensation and other employee benefits paid by the general partners.Such compensation and benefits may be determined and changed from time to timewithout the approval of the limited partners.

 

45

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| **Executive Officers of the Corporation**                             |   | **Age**  |   | **Date of  Office** |
|-----------------------------------------------------------------------|--------|----------|--------|---------------------|
| ***Gary M. Cusumano***                                                |   | ***58*** |   |                |
| President and Chief Executive Officer                                 |   |     |   | 03/01               |
| President and Chief Operating Officer                                 |   |     |   | 07/89               |
|                                                                  |   |     |   |                |
| *Thomas E. Dierckman*                                                 |   | *53*     |   |                |
| Senior Vice President - Valencia Division                             |   |     |   | 03/01               |
| Senior Vice President - Commercial and  Industrial, Valencia Division |   |     |   | 09/94               |
|                                                                  |   |     |   |                |
| *Stuart R. Mork*                                                      |   | *49*     |   |                |
| Senior Vice President and Chief Financial  Officer                    |   |     |   | 01/96               |
| Vice President and Chief Financial Officer                            |   |     |   | 01/95               |
|                                                                  |   |     |   |                |
| *Daniel N.  Bryant*                                                   |   | *42*     |   |                |
| Vice President - Asset Management                                     |   |     |   | 01/98               |
| Director - Asset Management                                           |   |     |   | 07/96               |
| Director - Property Management and Leasing                            |   |     |   | 12/94               |
|                                                                  |   |     |   |                |
| ***Kevin C. Farr***                                                   |   | ***41*** |   |                |
| Vice President - Residential, Valencia  Division                      |   |     |   | 01/01               |
| Executive Vice President - Valencia Company                           |   |     |   | 09/99               |
| Senior Vice President - Valencia Company                              |   |     |   | 03/98               |
| Senior Vice President /Controller - Valencia  Company                 |   |     |   | 12/96               |
| Controller - Residential Division                                     |   |     |   | 12/95               |
|                                                                  |   |     |   |                |
| ***Donald L. Kimball***                                               |   | ***44*** |   |                |
| Vice President - Finance and Controller                               |   |     |   | 01/97               |
| Vice  President - Controller                                          |   |     |   | 07/94               |
|                                                                  |   |     |   |                |
| ***Margaret M. Lauffer***                                             |   | ***42*** |   |                |
| Vice President - Marketing and Communications                         |   |     |   | 12/00               |
| Vice President - Corporate Communications                             |   |     |   | 12/94               |
|                                                                  |   |     |   |                |
| ***Ross J. Pistone***                                                 |   | ***46*** |   |                |
| Vice President - Operations                                           |   |     |   | 01/98               |
| Senior Vice President - Valencia Company                              |   |     |   | 12/95               |
|                                                                  |   |     |   |                |
| *Trude  A. Tsujimoto*                                                 |   | *48*     |   |                |
| Vice President, Secretary and General Counsel                         |   |     |   | 01/02               |
| Secretary and General Counsel                                         |   |     |   | 04/99               |
|                                                                  |   |     |   |                |
| *Steven D. Zimmer*                                                    |   | *54*     |   |                |
| Vice President - Newhall Ranch Division                               |   |     |   | 07/99               |
| Partner - Rupp, Holmberg & Zimmer                                 |   |     |   | 1992-07/99          |

 

The officers serve at thepleasure of the Board of Directors.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

Section 16(a) of the SecuritiesExchange Act of 1934, as amended, requires the Corporation’s executive officersand directors, the general partners, and persons who own more than ten percentof the Company’s Partnership units, to file reports of ownership and changes inownership with the Securities and Exchange Commission. The Company assists itsexecutive officers, directors and general partners to file their Section 16(a)reports and retains a copy of the forms filed. Based upon our review of copiesof the reports and on written statements from our executive officers, directorsand general partners, the Company believes that all such forms were filed on atimely basis by the executive officers, directors and general partners during2001.

 

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**Item 11. Executive Compensation**

 

                Thefollowing tables set forth information as to each of the five highest paidExecutive Officers and the former Chief Executive Officer and theircompensation for services rendered tothe Company and its subsidiaries:

 

**Summary Compensation Table**

 
|                      |   |     |   |                          |    |                       |   |       |   |
|---------------------------|--------|----------|--------|-------------------------------|---------|----------------------------|--------|------------|--------|
|                      |   |     |   | **Annual  Compensation** |    | **Long Term Compensation** |   |       |   |
|                      |   |     |   |                          |    |                       |   |       |   | **Awards** |   | **Payouts** |   |   |   |
|                      |   |     |   |                          |    |                       |   |       |   |   |   |   |   |   |   |   |   |
|                      |   |     |   |                          |    |                       |   | **Other**  |   | **Restricted** |   | **Number of** |   |   |   | **All** |   |
|                      |   |     |   |                          |    |                       |   | **Annual** |   | **Stock** |   | **Securities** |   |   |   | **Other** |   |
| **Name and**              |   |     |   |                          |    | **Bonus**                  |   | **Comp.**  |   | **Awards** |   | **Underlying** |   | **LTIP** |   | **Comp.** |   |
| **Principal Position**    |   | **Year** |   | **Salary**                    |    | ***(1)***                  |   | ***(2)***  |   | ***(3)*** |   | **Options/SARs** |   | **Payouts** |   | ***(4)*** |   |
| *Gary M. Cusumano*        |   | 2001     |   | $                             | 410,200 |                       | $      | 823,934    |   | $ | 66,000 |   | $ | 886,400 |   |   |   |   |   | $ | 53,962 |   |
| President and             |   | 2000     |   | 336,000                       |    | 543,200                    |   | 66,500     |   |   |   | 100,000 |   |   |   | 61,462 |   |
| Chief Executive Officer   |   | 1999     |   | 336,000                       |    | 704,880                    |   | 66,980     |   |   |   |   |   |   |   | 43,506 |   |
|                      |   |     |   |                          |    |                       |   |       |   |   |   |   |   |   |   |   |   |
| *Thomas E. Dierckman*     |   | 2001     |   | 251,400                       |    | 285,600                    |   | 50,513     |   | 443,200 |   |   |   |   |   | 29,090 |   |
| Senior Vice President     |   | 2000     |   | 271,000                       |    | 286,650                    |   | 6,050      |   |   |   | 80,000 |   |   |   | 26,070 |   |
|                      |   | 1999     |   | 226,000                       |    | 256,396                    |   | 5,250      |   |   |   |   |   |   |   | 20,278 |   |
|                      |   |     |   |                          |    |                       |   |       |   |   |   |   |   |   |   |   |   |
| *Thomas L. Lee **         |   | 2001     |   | 149,400                       |    |                       |   | 19,853     |   |   |   |   |   |   |   | 3,628,621 |   |
| Chairman and              |   | 2000     |   | 440,000                       |    | 727,500                    |   | 63,550     |   |   |   | 230,000 |   |   |   | 79,657 |   |
| Chief Executive Officer   |   | 1999     |   | 440,000                       |    | 930,600                    |   | 61,425     |   |   |   |   |   |   |   | 52,795 |   |
|                      |   |     |   |                          |    |                       |   |       |   |   |   |   |   |   |   |   |   |
| *Stuart R. Mork*          |   | 2001     |   | 298,100                       |    | 259,350                    |   | 2,747      |   | 443,200 |   |   |   |   |   | 25,888 |   |
| Senior Vice President and |   | 2000     |   | 275,000                       |    | 254,150                    |   | 600        |   |   |   | 80,000 |   |   |   | 23,536 |   |
| Chief Financial Officer   |   | 1999     |   | 230,000                       |    | 239,890                    |   | 560        |   |   |   |   |   |   |   | 18,614 |   |
|                      |   |     |   |                          |    |                       |   |       |   |   |   |   |   |   |   |   |   |
| *Ross J.  Pistone*   |   | 2001     |   | 159,200                       |    | 110,656                    |   |       |   |   |   | 16,000 |   |   |   | 20,687 |   |
| Vice President            |   | 2000     |   | 150,000                       |    | 108,045                    |   |       |   |   |   | 16,000 |   |   |   | 11,794 |   |
|                      |   | 1999     |   | 140,000                       |    | 97,347                     |   |       |   |   |   | 15,000 |   |   |   | 9,508 |   |
|                      |   |     |   |                          |    |                       |   |       |   |   |   |   |   |   |   |   |   |
| *Steven D. Zimmer*        |   | 2001     |   | 199,200                       |    | 138,220                    |   |       |   |   |   | 16,000 |   |   |   | 5,841 |   |
| Vice President            |   | 2000     |   | 190,000                       |    | 123,165                    |   |       |   |   |   | 16,000 |   |   |   | 2,519 |   |
| *(5)*                     |   | 1999     |   | 102,100                       |    | 77,099                     |   |       |   |   |   | 3,000 |   |   |   | 515 |   |
|                      |   |     |   |                          |    |                       |   |       |   |   |   |   |   |   |   |   |   |
|                           |        |          |        |                               |         |                            |        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

* Retired in March 2001.

 

*(1)   *Represents bonusaccrued during the current calendar year based on earnings for such period andpaid in the subsequent calendar year. A part of the 2001 bonus was paid inpartnership units in accordance with the Company’s Management Unit OwnershipProgram as follows: Mr. Mork ($84,350) and Mr. Zimmer ($69,110). Part of the2000 and 1999 bonuses were paid in partnership units as follows: Mr. Cusumano(2000 - $271,600); Mr. Dierckman (2000 - $106,650; 1999 - $51,279); Mr. Lee(2000 - $363,750); Mr. Mork (2000 - $54,150; 1999 - $97,190); Mr. Pistone (1999- $37,964) and Mr. Zimmer (2000 - $61,582; 1999 - $38,546).

 

*(2)*    Includesgeneral partner fees paid to Messrs. Cusumano, Dierckman and Lee as generalpartners of Newhall General Partnership as follows: Mr. Cusumano (2001 -$60,000; 2000 - $60,000; 1999 - $60,000); Mr. Dierckman (2001 - $45,000) andMr. Lee (2001 - $15,000; 2000 - $60,000; 1999 - $60,000). In addition, for2001, 2000, and 1999 director fees of $4,000 each were paid to Messrs. Cusumanoand Dierckman as directors of a wholly-owned subsidiary. The balance are taxpreparation/estate planning fees. 

 

*(3)*    Theaggregate restricted unit holdings and value at December 31, 2001, were asfollows: Mr. Cusumano (32,000 units - $947,200); Mr. Dierckman (16,000 units -$473,600) and Mr. Mork (16,000 units - $473,600). Partnership unitdistributions (dividends) will be paid by the Company on the restricted unitsin the same amounts paid on all outstanding units. In addition, as of December31, 2001, Messrs. Cusumano, Dierckman, Mork, Pistone and Zimmer have accrued3,640, 4,073, 2,292, 1,016 and 965, unit rights under the Company’s ManagementUnit Ownership Program, respectively, which entitles them to receive onepartnership unit for each unit right under certain circumstances.  The amounts set forth in the table abovereflect the value of restricted units on the date of grant.

 

*(4)*    Totalsinclude the following:  Company matchingcontributions to the Employee Savings Plan and Savings Restoration Plan, excesslife insurance premiums, the value of the purchase discount of units purchasedunder the Employee Unit Purchase Plan for Mr. Pistone, long-term disabilityinsurance premium for Mr. Cusumano and a severance payment of $3,588,464 to Mr.Lee.

 

*(5)   *Hired May 1999

 

47

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**Option / SAR Grants in Last Fiscal Year**

 
|                  |   | **Individual  Grants**                                    | ** ** |                                                             |   |
|-----------------------|--------|-----------------------------------------------------------|------------|------------------------------------------------------------------|--------|
| **Name**              |   | **Number of  Securities Underlying Options/SARs Granted** |       | **% of Total  Options/SARs Granted To Employees in Fiscal Year** |   | **Excercise  Or Base Price  ( $ / Sh )** |   | **Expiration   Date** |   | **Value of  Options as of Grant Date as Computed by the Modified Black-Scholes Options  Valuation   Model (2)** |   |
| *Gary M. Cusumano*    |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
|                  |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
| *Thomas E. Dierckman* |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
|                  |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
| *Thomas L. Lee*       |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
|                  |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
| *Stuart R. Mork*      |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
|                  |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
| *Ross J. Pistone*     |   | 16,000                                                    | (1)        | 5                                                                | %      | $ | 29.10 |   | 7-17-11 |   | $ | 139,520 |   |
|                  |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
| *Steven D. Zimmer*    |   | 16,000                                                    | (1)        | 5                                                                | %      | 29.10 |   | 7-17-11 |   | 139,520 |   |
|                  |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
|                  |   |                                                      |       |                                                             |   |   |   |   |   |   |   |
|                       |        |                                                           |            |                                                                  |        |  |  |  |  |  |  |  |  |

(1)   Non-qualified options without appreciationrights granted at 100% of fair market value on the date of grant. Options areexercisable 25% at the end of each of the first four years following date ofgrant and expire ten years after date of grant.

 

(2)   The modified Black-Scholes Options ValuationModel modifies the Black-Scholes formula to include the impact of distributionsand to allow option exercise prior to maturity.  A distribution yield of 2.6% was used in the model.

 

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**Aggregated Option / SAR-Exercises in LastFiscal Yearand Fiscal Year End Option / SAR Values**

 
|                  |   |                                   |   |                |    | **Number of  Securities Underlying   Unexercised Options/SARs  at Fiscal Year****-****End** |      | **Value of Unexercised  In-the-Money Options/SARs at Fiscal Year-End(1)** |    |
|-----------------------|--------|----------------------------------------|--------|---------------------|---------|---------------------------------------------------------------------------------------------|-----------|---------------------------------------------------------------------------|---------|
| **Name**              |   | **Shares  Acquired  On  Exercise (#)** |   | **Value  Realized** |    | **Exercisable**                                                                             |      | **Unexercisable**                                                         |    | **Exercisable** |   | **Unexercisable** |   |
| *Gary M. Cusumano*    |   | 6,651                                  |   | $                   | 196,900 |                                                                                        | 406,198   |                                                                      | 66,666  |   | $ | 1,671,109 |   | $ | 106,666 |   |
|                  |   |                                   |   |                |    |                                                                                        |      |                                                                      |    |   |   |   |   |
| *Thomas E. Dierckman* |   | 4,036                                  |   | 120,120             |    | 265,626                                                                                     |      | 53,333                                                                    |    | 1,085,005 |   | 85,333 |   |
|                  |   |                                   |   |                |    |                                                                                        |      |                                                                      |    |   |   |   |   |
| *Thomas L. Lee*       |   | 50,000                                 |   | 565,000             |    | 683,118                                                                                     |      | -                                                                         |    | 2,110,520 |   | - |   |
|                  |   |                                   |   |                |    |                                                                                        |      |                                                                      |    |   |   |   |   |
| *Stuart R. Mork*      |   | 2,018                                  |   | 60,060              |    | 263,626                                                                                     |      | 53,333                                                                    |    | 1,067,555 |   | 85,333 |   |
|                  |   |                                   |   |                |    |                                                                                        |      |                                                                      |    |   |   |   |   |
| *Ross J. Pistone*     |   | -                                      |   | -                   |    | 33,600                                                                                      |      | 38,500                                                                    |    | 190,610 |   | 81,013 |   |
|                  |   |                                   |   |                |    |                                                                                        |      |                                                                      |    |   |   |   |   |
| *Steven D. Zimmer*    |   | -                                      |   | -                   |    | 5,500                                                                                       |      | 29,500                                                                    |    | 18,863 |   | 48,163 |   |
|                  |   |                                   |   |                |    |                                                                                        |      |                                                                      |    |   |   |   |   |
| Total                 |   | 62,705                                 |   | $                   | 942,080 |                                                                                        | 1,657,668 |                                                                      | 241,332 |   | $ | 6,143,662 |   | $ | 406,508 |   |
|                       |        |                                        |        |                     |         |                                                                                             |           |                                                                           |         |  |  |  |  |  |  |  |  |

 

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(1)   Based on the difference in the unit price of$29.60 at December 31, 2001 and the exercise price of the underlying options.

 

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**EmployeeBenefit Plans**

 

The following are descriptionsof the principal employee benefit plans of the Company.

 

**RetirementPlans**

** **

Under the Retirement Plan,participants’ benefits are calculated as 40.5% of the average annualcompensation, including salary and bonus, of the highest five calendar years ofthe preceding ten years up to Social Security covered compensation, plus 60% ofthe average annual compensation in excess of covered compensation, reduced prorata for years of service less than 30. Benefits, which accumulate afterJanuary 1, 1997, are calculated at 32.4% of the social security wage base and48% of the excess over covered compensation. Under the Pension RestorationPlan, the Company will pay any difference between the ERISA and InternalRevenue Code maximum amount payable under the Retirement Plan and the amount otherwisepayable, including amounts restricted by the compensation limit.

 

The following table reflectsthe estimated annual benefits paid as a single life annuity upon retirement atage 65 under the Retirement Plan and Pension Restoration Plan at various assumedcompensation ranges and credited years of service:

 
|             |    | **Years of  Service** |   |
|------------------|---------|-----------------------|--------|
| **Compensation** |    | **10**                |   | **20** |   | **30** |   | **40** |   |
| $                | 125,000 |                  | $      | 20,000 |   | $ | 43,000 |   | $ | 65,000 |   | $ | 68,000 |   |
|             | 200,000 |                  |   | 33,000 |   |   | 71,000 |   |   | 108,000 |   |   | 113,000 |   |
|             | 275,000 |                  |   | 47,000 |   |   | 99,000 |   |   | 152,000 |   |   | 158,000 |   |
|             | 350,000 |                  |   | 60,000 |   |   | 127,000 |   |   | 195,000 |   |   | 203,000 |   |
|             | 425,000 |                  |   | 73,000 |   |   | 155,000 |   |   | 238,000 |   |   | 248,000 |   |
|             | 450,000 |                  |   | 77,000 |   |   | 165,000 |   |   | 252,000 |   |   | 263,000 |   |
|             | 500,000 |                  |   | 86,000 |   |   | 184,000 |   |   | 281,000 |   |   | 293,000 |   |
|             | 550,000 |                  |   | 95,000 |   |   | 202,000 |   |   | 310,000 |   |   | 323,000 |   |
|             | 600,000 |                  |   | 104,000 |   |   | 221,000 |   |   | 339,000 |   |   | 353,000 |   |
|             | 750,000 |                  |   | 130,000 |   |   | 278,000 |   |   | 425,000 |   |   | 443,000 |   |
|             | 800,000 |                  |   | 139,000 |   |   | 296,000 |   |   | 454,000 |   |   | 473,000 |   |
|                  |         |                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Credited years of service as ofDecember 31, 2001 (to the nearest whole year) and average annual compensationfor the highest five years of the last ten years are as follows: 32 years and$770,000 for Mr. Cusumano; 19 years and $440,000 for Mr. Dierckman; 14 yearsand $440,000 for Mr. Mork; 15 years and $195,000 for Mr. Pistone and 3 yearsand $135,000 for Mr. Zimmer.

 

**Retentionand Change of Control Severance Programs**

 

The Partnership has enteredinto severance agreements with Messrs. Cusumano, Dierckman, Mork, Pistone,Zimmer and other vice presidents, which agreements provide benefits in theevent of a “change of control.” Under the provisions of the severanceagreements, a “change of control” is deemed to have occurred when (i) any“person” (other than a trustee or similar person holding securities under an employeebenefit plan of the Partnership, or an entity owned by the unitholders insubstantially the same proportions as their ownership of units) becomes thebeneficial owner of 25% or more of the total voting power represented by thePartnership’s then outstanding voting securities, (ii) Newhall ManagementCorporation is removed as managing general partner of Newhall ManagementLimited Partnership, (iii) the holders of the voting securities of thePartnership approve a merger or consolidation of the Partnership with any otherentity, other than a merger or consolidation which would result in the votingsecurities of the Partnership outstanding immediately prior thereto continuingto represent (either by remaining outstanding or by being converted into votingsecurities of the surviving entity) at least 75% of the total voting powerrepresented by the voting securities of the Partnership or such survivingentity outstanding immediately after such merger or consolidation, or (iv) aplan of complete liquidation of the Partnership is adopted or the holders ofthe voting securities of the Partnership approve an agreement for the sale ordisposition by the 

 

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Partnership (in one transactionor a series of transactions) of all or substantially all the Partnership’sassets. Entitlement to benefits arises if, within two years following a changeof control, the executive officer’s employment is terminated or if he or sheelects to terminate his or her employment following action by the Partnershipwhich results in (i) a reduction in salary or other benefits, (ii) change inlocation of employment (iii) a change in position, duties, responsibilities orstatus inconsistent with the executive officer’s prior position or a reductionin responsibilities, duties, or offices as in effect immediately before thechange in control, or (iv) the failure of the Partnership to obtain expressassumption by any successor of the Partnership’s obligations under theseverance agreement.

 

Benefits payable under theseverance agreement with Mr. Cusumano consist of (i) payment in a single lumpsum equal to base salary and general partners fees for three years, (ii)payment in a single lump sum of three times the average bonus payments for thetwo fiscal years preceding the change in control, (iii) continuation ofparticipation in insurance and certain other fringe benefits for three years,(iv) immediate vesting of deferred compensation, nonqualified retirementbenefits, options and other unit-based rights, (v) a retirement benefit equivalentto the additional benefits that would have accrued under retirement plans ifemployment had continued for two years, and (vi) reduction of required servicefor full retirement benefits from 30 years to 20 years through a non-qualifiedarrangement. The benefits payable to Messrs. Dierckman and Mork are the same asfor Mr. Cusumano except that base salary, bonus and fringe benefits would bepaid for two years and the retirement benefit for one year. Messrs. Pistone andZimmer and other vice presidents will receive base salary, bonus and fringebenefits for one year under the severance agreements. Benefits payable underthe agreements are in lieu of any severance benefits under the Partnership’sgeneral severance policy. The agreements are not contingent upon the executiveofficers actively seeking other employment, but provide for offset of fringebenefits provided by a new employer.

 

Effective March 2001, thePartnership entered into retention agreements with Messrs. Cusumano, Dierckmanand Mork, which agreements provide severance benefits in the event therespective executive’s employment is involuntarily terminated without cause andwhich termination did not arise from a change of control described above.Benefits payable to Mr. Cusumano under the retention agreement consist of (i)payment in a single lump sum equal to three times his then current base salary(including general partner fees) on the termination date, (ii) payment in asingle lump sum equal to three times the average of the bonus payments for thethree years preceding the termination date, and (iii) immediate vesting of unitoptions and other unit-based rights or compensation. In the event theinvoluntary without cause termination occurs in the last two calendar quarters,a pro-rated bonus will be payable by the Partnership at the same time and underthe same terms as the Partnership’s annual incentive bonuses for that year. Thebenefits payable to Messrs. Dierckman and Mork are similar to Mr. Cusumano’sexcept that base salary and bonus lump sum amounts would be equal to two timestheir respective base salary and three-year average bonus. Benefits payableunder the retention agreements are in lieu of any severance benefits under thechange of control severance agreement described above, or the Partnership’sgeneral severance policy.

 

**Compensationof the Directors**

** **

The Partnership Agreementprovides that the compensation of the general partners and their partners,directors, officers and employees shall be determined by Newhall ManagementLimited Partnership. Both the Compensation Committee and theNominating/Corporate Governance Committee of the Board of Directors of NewhallManagement Corporation, the managing general partner of Newhall ManagementLimited Partnership, have been granted authority by the Board of Directors todetermine certain compensation issues. Non-employee members of the Boardreceive annual retainer fees of $24,000 for serving on the Board, $2,000 forserving on the Audit Committee and $1,000 for serving on any other committee ofthe Board. In addition, non-employee directors receive a fee of $1,000 forattending each meeting of the Board or committee of which they are a member.Committee chairpersons receive a fee of $500 in addition to the regular meetingfee for each committee meeting they conduct. Employees serving on the Board ofDirectors do not receive directors’ fees. Directors’ compensation may bedeferred until separation from the Board. Deferred amounts earn interest at theWells Fargo Bank prime rate. Members of the Board of Directors will alsoreceive reimbursement for travel and other expenses related to attendance atmeetings of the Board of Directors and of the committees. In addition, thePartnership Agreement requires the Partnership to reimburse Newhall ManagementLimited Partnership for any federal or California income taxes imposed upon themanaging general partner or its managing general partner as a result of itsactivities as managing general partner. Under the terms of the 1995Option/Award Plan each non-employee Board 

 

51

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member may elect to have all orany portion of his or her annual retainer fees paid in Partnership units or inoptions thereon instead of cash.

 

The 1995 Option/Award Plan alsoprovides each non-employee director who served on the Board on January 18,1995, and each subsequent newly elected or appointed non-employee director,with a non-statutory option (“Automatic Option”) to purchase 1,500 depositaryunits. On the third Wednesday of July of each year that occurs after January18, 1995, each continuing non-employee director will automatically receive anAutomatic Option to purchase 500 Partnership units. Each Automatic Option vestsimmediately and has a term of 10 years. Generally, the non-employee directormay exercise his or her option for a period of 3 months after termination ofservice as a non-employee director for any reason other than death or“retirement,” 12 months after the date of death and 36 months after the date of“retirement.” “Retirement” means the first day the non-employee director ceasesto serve as a non-employee director after serving as a non-employee directorfor at least five years.

 

In addition, non-employeedirectors automatically receive 500 unit rights on the third Wednesday of Julyof each year pursuant to the terms of the Deferred Equity Compensation Plan forOutside Directors which was adopted effective November 1, 1996. Unit rightsentitle a director to receive an equal number of Partnership units uponseparation from the Board of Directors for any reason.

 

**CompensationCommittee Interlocks and Insider Participation**

** **

In June 1994, Valencia WaterCompany, a wholly-owned subsidiary of the Company, borrowed $11 million fromPacific Life Insurance Company at a rate of 8% per annum. The terms of the loanrequire semi-annual interest payments with principal due at maturity.  Interest payments for the year endedDecember 31, 2001 totaled $880,000.  Inaddition, in 1993 and 1994 the Company acquired two variable life insurancepolicies for its two senior executive officers with face amounts ofapproximately $1.5 million each from Pacific Life. The policy originallyacquired for Thomas L. Lee was surrendered in 2001. The policy for Gary M.Cusumano remains in force. The annual premium cost in 2001 was $50,000.  Thomas C. Sutton, a director of theCorporation, is Chairman of the Board and Chief Executive Officer of PacificLife Insurance Company.

 

All of the foregoingtransactions are at rates and terms believed to be comparable to those ofsimilar transactions with unrelated parties.

 

**Reportof the Compensation Committee of the Board of Directors of Newhall ManagementCorporation**

** **

**Compensation Committee Charter**

 

The Compensation Committee,which is comprised of independent directors, evaluates the performance of the ChiefExecutive Officer, determines or approves compensation of all executiveofficers of the Company and reviews management development issues. It hasregularly scheduled meetings two times a year, and meets at other times asappropriate. During 2001, the Committee met four (4) times.

 

**Senior Management Compensation Philosophy**

 

The Company believes itssuccess is greatly influenced by the caliber of its employees. The Company’scompensation program for senior management is designed to attract, motivate andretain a highly skilled, professional and dedicated work force. In this regard,the Company’s senior management compensation program consists of:

 
| · | Base salary  compensation tied to prevailing real estate industry compensation practices.                                                                       |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Annual merit  and incentive pay compensation (bonuses) primarily relate to the Company’s  and the manager’s performance for the previous fiscal year. |

 

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| · | Long-term  incentive compensation in the form of unit options, restricted units and unit  rights directly tied to increasing unitholder value. This component of  compensation can be highly volatile because it is directly related to the  Company’s unit price performance. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The Company’s objective is forthe base salary, annual incentive compensation and long-term incentivecompensation of senior management to approximate the median levels for anindustry comparison group consisting primarily of real estate companies withwhich the Company competes for executive talent. From year-to-year, however,relative compensation levels may vary due largely to variances in individualand Company performance. The companies with which the Company competes forexecutive talent are not the same as those in the Wilshire Real EstateOperating Company Index shown in the stock performance graph. In addition, formanagers other than the Chief Executive Officer, there is a subjective elementto incentive compensation which relates to his or her success in meetingindividual business and personal goals determined at the beginning of eachyear. The goals for the business segment he or she manages are based primarilyon increasing unitholder values through profitability, net cash generation and,most importantly, the value of the Company’s landholdings.

 

**Base Salary Compensation**

 

The base salary for eachexecutive officer is determined on the basis of an evaluation of theresponsibilities of each position compared to other positions in the Companyand to base salary levels in effect for comparable positions at the Company’sprincipal competitors for executive talent. In addition, the qualifications ofthe executive officer, including training and experience, is considered indetermining base salary. Salaries are reviewed periodically and adjustments maybe made, as appropriate, to each executive officer’s base salary. Externalsalary data provided to the Committee by independent compensation survey andconsulting firms indicate that salaries for 2001 generally were at medianlevel.

 

**Annual Merit and Incentive Compensation(Bonuses)**

 

For 2001, the annual bonusespaid under the Company’s Executive Incentive Plan were determined on the basisof the Company’s earnings, the net cash generated for unit repurchases andattainment of individual goals. Target earnings, target net cash flowgeneration and individual goals were developed at the beginning of the year.Target bonuses are determined as percentages of base salaries for eachmanagement group based upon ability to influence the success of the Company andare generally set to produce bonuses comparable to other real estate companiesover a period of time. At the end of the year, bonuses were determined byutilizing the percentages of Company and individual goals achieved as comparedto the Company and individual goals determined at the beginning of the year.The aggregate amount of such incentive bonuses may not exceed 7% of theCompany’s net income after deducting the incentive awards. The target bonuses(except for Mr. Cusumano’s bonus) are recommended by the Company’s ChiefExecutive Officer, Mr. Cusumano, and approved by the Compensation Committee andthe Board of Directors.

 

Senior executives are paid aportion of their current year’s bonus in Partnership units until they reachtheir unit ownership guidelines described below. Additionally, any manager mayelect to receive all or any part of his or her annual bonus in Partnershipunits and to defer receipt of such Partnership units for up to five (5) years.

 

The total of the bonuses paidfor 2001 was $4.02 million (or 4.4% of 2001 income after deducting bonuses),versus $4.728 million in 2000 (or 5.5% of income after deducting bonuses), aslight decrease (less than 1%) from 2000 to 2001.

 

The incentive targets for 2001were focused on net cash generation for the Company’s unit repurchase program,the same focus as for 2000, but a change from the prior years’ targets thatfocused incentives on the Company’s earnings. For purposes of the IncentivePlan, “net cash generation” included cash from all sources includingoperations, land sales and asset sales, minus all uses of cash, includingoperating expenses, infrastructure  andinventory expenditures, principal reductions required by asset sales,Partnership distributions and capital expenditures. Approximately 296% of thetargeted “net cash generation” was achieved for 2001.

 

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**Long-Term Incentive Compensation**

 

The Committee endorses the viewthat equity ownership of the Company aligns management’s and unitholders’interests and thereby enhances unitholders’ value. The equity component oflong-term incentive compensation includes unit options, appreciation rights,restricted units, unit rights and bonuses paid in Partnership units (describedabove) under the Company’s 1995 Option/Award Plan. Option awards are generallymade at mid-year to key management personnel who are in positions to makesubstantial contributions to the long-term success of the Company. These awardsvest and are expected to grow in value over time and for that reason representcompensation 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 ownerwith an equity stake in the business.

 

The size of the unit optionsgranted to each executive officer is based on the aggregate exercise price.Generally it is set at a multiple of salary which the Committee deemsappropriate in order to create a meaningful opportunity for ownership basedupon the individual’s current position with the Company. The unit optionsgranted also take into account comparable awards to individuals in similarpositions in the industry, as reflected in external surveys, and theindividual’s potential for future responsibility and promotion over the optionterm.

 

The Company adopted unitownership guidelines for senior executives, which encourage senior executivesto own units having a market value of at least 50% of base salary. As aninducement to purchase Partnership units, the Company offers one unit right forevery five units purchased. A unit right entitles the recipient to receive onePartnership unit for each unit right. Historically, unit rights vested at therate of 20% a year over a five-year period. Unit rights granted after July 2000vest at the rate of 33 1/3% per year over a three-year period.

 

In November 1997, a special grantof premium price options was made to the Company’s senior executive officers toprovide them additional incentive to deliver near-term, substantial pricegrowth in the outstanding Partnership units and to enhance their incentivecompensation to be more comparable with that of other publicly-traded realestate companies. The options were granted in two tranches, both of which wereexercisable in three years provided certain price performance objectives weremet. The first tranche vesting requirements provided that the optioned unitsgranted in the tranche would vest if during the three-year period commencing onthe date of grant: 1) the unit market price of the Partnership units increasedby 25% from the date of grant (to $31.30 per unit) and that unit market pricewas sustained or exceeded for at least ten of twenty consecutive trading days;or 2) total return on a Partnership unit equaled or exceeded the 75thpercentile of shares of a peer group of other publicly-traded real estatecompanies. The first tranche vested during 1998 because the price requirementwas met. The second tranche would have vested if: 1) the unit market price ofthe Partnership units increased by 33 1/3% from the date of grant (to $33.39per unit) and was sustained or exceeded for at least ten of twenty consecutivetrading days; or 2) met the total return requirement previously described.Neither the unit price requirement nor the total return requirement for thesecond tranche were accomplished during the requisite three-year period.Consequently, the second tranche premium price options expired. The firsttranche of the premium price options that vested in 1998 expire in November2002.

 

The premium price options wereintended to replace market price options for three years. Consequently, nooptions were granted to the senior executive officers during the subsequentthree-year period. At the end of the three-year period, the CompensationCommittee requested an independent compensation consulting firm to assesssenior executive compensation, including long-term incentive compensation, ascompared to other publicly-held real estate companies. The assessmentdetermined that senior executive total compensation generally was below themedian for the Company’s competitors. Consequently, in November 2000 theCommittee granted new premium price options to four senior executive officersat an exercise price of $28.00, which was approximately 21.5% above the thencurrent unit market price. The options vest at a rate of 33 1/3% per yearcommencing on the first anniversary date of the grant and will expire fiveyears following the grant date.

 

In 2001, the Committeerequested an independent compensation consulting firm to generally assesssenior executive long-term incentive compensation as compared to other realestate companies. The assessment indicated the Company’s long-term incentivecompensation paid to senior executives was below median levels for other realestate companies. The assessment also indicated the prevalence of premium priceoption grants have declined; options are not the exclusive form of long-termincentive compensation; and several other companies have utilized restrictedstock to provide balance to their long-term incentive compensation packages.Consequently, in October 2001 the Committee granted restricted units to thethree senior executive officers, which 

 

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grants were intended to makethe respective executive’s long-term incentive compensation comparable to themedian-level long-term incentive compensation for comparable executivepositions at other real estate companies. The restricted units vest 50% on thethird anniversary of the grant date and 50% on the fourth anniversary of thegrant date.

 

Also in 2001, the Committeeadopted a retention incentive program for the executive officers and certainother officers and managers that is intended to retain and incent the employeesto achieve the Company’s key objectives over the next several years. Thebenefit payable under the program will be a cash payment equal to the respectiveemployee’s annual base salary on the “trigger date,” but payable in two equalinstallments. The first installment (50% of base salary) would be paid as soonas practicable following the “trigger date,” and the second installment wouldbe payable one year after the “trigger date.” The “trigger date” is deemed tobe the achievement of certain specified long-term Company goals. TheCompensation Committee has the discretion in determining whether the goals havebeen achieved.

 

**Chief Executive Officer Compensation**

** **

Mr. Thomas L. Lee served as theCompany’s Chief Executive Officer from 1989 until his retirement in March 2001.At the time of his retirement, Mr. Lee’s annual base salary was $440,000, thesame base salary during 1999 and 2000. During those prior years, he also waspaid general partner fees of $60,000 per year for managing Newhall GeneralPartnership, a general partner of the Company. The general partner fees werepaid quarterly such that during 2001 Mr. Lee was paid $15,000 in general partnerfees. Upon Mr. Lee’s retirement, he entered into a severance and consultingagreement with the Company, under which he was paid a lump-sum cash paymentequal to three times his annual base salary (including general partner fees)and three-year average bonus. In addition, vesting of unit-based incentivecompensation accelerated such that any unit-based compensation that was notalready 100% vested, became 100% vested. The agreement also provided for Mr.Lee to render consulting services (for no additional compensation) to theCompany for the remainder of 2001.

 

Upon Mr. Lee’s retirement,Mr. Cusumano was appointed Chief Executive Officer in March 2001, at which timehis base salary was increased to $436,000 per year. Prior to assuming ChiefExecutive Officer responsibilities, Mr. Cusumano’s annual base salary in2000 was $336,000. In addition, during 2001 he was paid general partner fees of$60,000 for managing Newhall General Partnership, a general partner of theCompany, and director fees of $4,000 for serving as a director of awholly-owned subsidiary. Mr. Cusumano also was paid a bonus for 2001 of$823,934 for total “cash” compensation of $1,298,134 for 2001. Mr. Cusumano’s2001 bonus was approximately 296% of his target bonus, which was approximately 59%of his base compensation (including general partner and director fees) pursuantto the Company’s Executive Incentive Plan (see description of Annual Merit andIncentive Compensation (Bonuses)).  Aspreviously described, targeted net cash generation was determined at thebeginning of the year to incent management to generate “net cash” for theCompany’s unit repurchase program. Mr. Cusumano’s targeted incentive bonus wasdependent entirely on the Company’s net cash generation during the year. Thecalculation to determine the amount of the bonus earned was based entirely onthe Company’s achievement of targeted net cash generation, which was 296% oftargeted net cash generation.

 

Mr. Cusumano also received agrant of 32,000 restricted units as described above. The benefits of thisgrant, as well as previously granted premium price and market price options,were expected to be realized over the next three to five years during which Mr.Cusumano’s strategic initiatives are expected to yield benefits to the Company’sinvestors.

 

**Section 162 Limit**

 

Section 162(m) of the InternalRevenue Code limits federal income tax deductions for compensation paid to theChief Executive Officer and other highly compensated officers of a publiccompany to $1 million per year, but contains an exception for performance-basedcompensation that satisfies certain conditions. The Company has been advisedthat Section 162(m) does not apply to limited partnerships such as the Company.

 

Compensation Committee of theBoard of Directors of Newhall Management Corporation:

Peter T. Pope(Chairman)

Thomas V.McKernan, Jr.

Carl E.Reichardt

 

55

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Thomas C.Sutton

Barry LawsonWilliams

 

The preceding CompensationCommittee Report and the following Stock Price Performance graphs shall not bedeemed incorporated by reference into any filing under the Securities Act of1933 or under the Securities Exchange Act of 1934, except to the extent thatthe Company specifically incorporates this information by reference, and shallnot otherwise be deemed filed under such Acts.

 

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**The Newhall Land and Farming Company**

**Stock Performance Analysis**

 

**Five-Year Total Return**

 

**Ten-Year Total Return**

 

Assumes $100 invested on December 31, 1996for the 5-year graph and December 31, 1991 for the 10-year graph. Total returnincludes reinvestment of dividends. Returns are compounded annually.

 

* As of 1/07/02 the Wilshire Real EstateOperating Company Index consisted of the following real estate operatingcompanies: Catellus Development Corporation, Extended Stay America, BrookfieldProperties, The Newhall Land and Farming Company, Prime Hospitality Co.,Starwood Hotels & Resorts, Trizec Hahn Corp. and Wyndham International Inc.

 

 

57

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**Item 12. SecurityOwnership of Certain Beneficial Owners and Management**

 

**Directors and Officers**

 

The following table sets forththe number of units beneficially owned by each director of Newhall ManagementCorporation, each of the Company’s five highest paid executive officers, andall directors and officers as a group as of February 28, 2002.

 
| **Name**                                            |   | **Amount and Nature  of Beneficial Ownership** |   | **Percent  of Class(%)** |   |
|-----------------------------------------------------|--------|------------------------------------------------|--------|--------------------------|--------|
| Gary M. Cusumano                                    |   | 584,942                                        |   | (1) (2) (3) (5)          |   | 2.38 |   |
|                                                |   |                                           |   |                     |   |   |   |
| Thomas E. Dierckman                                 |   | 312,680                                        |   | (1) (2) (3) (5) (6)      |   | 1.28 |   |
|                                                |   |                                           |   |                     |   |   |   |
| Thomas V. McKernan, Jr.                             |   | 20,034                                         |   | (1) (3) (4)              |   | * |   |
|                                                |   |                                           |   |                     |   |   |   |
| Stuart R. Mork                                      |   | 299,744                                        |   | (2) (3) (5) (6)          |   | 1.22 |   |
|                                                |   |                                           |   |                     |   |   |   |
| Henry K. Newhall                                    |   | 323,250                                        |   | (1) (3) (4) (7)          |   | 1.33 |   |
|                                                |   |                                           |   |                     |   |   |   |
| Jane Newhall                                        |   | 455,737                                        |   | (1) (3) (4)              |   | 1.88 |   |
|                                                |   |                                           |   |                     |   |   |   |
| Ross J. Pistone                                     |   | 42,168                                         |   | (3) (5) (6)              |   | * |   |
|                                                |   |                                           |   |                     |   |   |   |
| Peter T. Pope                                       |   | 31,181                                         |   | (1) (3) (4)              |   | * |   |
|                                                |   |                                           |   |                     |   |   |   |
| Carl E. Reichardt                                   |   | 98,203                                         |   | (1) (3) (4) (8)          |   | * |   |
|                                                |   |                                           |   |                     |   |   |   |
| Thomas C. Sutton                                    |   | 20,987                                         |   | (1) (3) (4) (9)          |   | * |   |
|                                                |   |                                           |   |                     |   |   |   |
| Barry Lawson Williams                               |   | 11,890                                         |   | (1) (3) (4)              |   | * |   |
|                                                |   |                                           |   |                     |   |   |   |
| Ezra K.  Zilkha                                     |   | 1,234,754                                      |   | (1) (3) (4)  (10)        |   | 5.10 |   |
|                                                |   |                                           |   |                     |   |   |   |
| Steven D. Zimmer                                    |   | 13,561                                         |   | (3) (5)                  |   | * |   |
|                                                |   |                                           |   |                     |   |   |   |
| All directors and officers as a group (20  persons) |   | 3,616,557                                      |   | (11)                     |   | 14.18 |   |

 

----

                                                * Represents less than 1% of the securitiesoutstanding.

 

1)             Includes72,000 units each for Messrs. Henry K. Newhall and Zilkha, 71,650 units for Ms.Jane Newhall, 2,000 units each for Messrs. McKernan, Pope, Reichardt, Suttonand Williams, which are held by Newhall Management Limited Partnership.Includes 66,000 units held by Newhall Management Limited Partnership and 20units contributed to Newhall General Partnership by Mr. Cusumano. Also includes20 units contributed to Newhall General Partnership by Mr. Dierckman. Of thetotal of 291,690 units held by the Newhall Management Limited Partnership beneficiallyfor the directors and Mr. Dierckman, 20 units have been contributed toNewhall General Partnership, and of those 20 units, 10 units have beencontributed back to Newhall Management Limited Partnership by Newhall GeneralPartnership. See Item 10 of this Annual Report on Form 10-K for information ona shareholders’ agreement, voting trust agreement and limited partnershipagreement relating to these units.

 

58

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2)                                      Includes the following number of restricted units: 32,000 for Mr.Cusumano; 16,000 each for Messrs. Dierckman and Mork.

 

3)                                      Includes the following number of units subject to options that areexercisable within 60 days of February 28, 2002: 406,198 units for Mr.Cusumano; 265,626 for Mr. Dierckman; 7,632 units for Mr. McKernan; 263,626 for Mr.Mork; 4,500 for Ms. Newhall; 33,600 for Mr. Pistone; 14,911 for Mr. Pope; 4,365for Mr. Williams; 5,000 each for Messrs. Newhall, Reichardt, Sutton and Zilkha;and 5,500 for Mr. Zimmer.

 

4)                                      Includes the following number of units subject to unit rights pursuant tothe Deferred Equity Compensation Plan for Outside Directors, which units aredistributable upon separation from the Board of Directors: 3,402 for Mr.McKernan; 7,659 for Mr. Newhall; 13,817 for Ms. Newhall; 6,044 for Mr. Pope;11,903 for Mr. Reichardt; 4,597 for Mr. Sutton; 2,660 for Mr. Williams; and17,154 for Mr. Zilkha.

 

5)                                      Includes the following number of units subject to unit rights pursuant tothe 1995 Option/Award Plan: 3,673 for Mr. Cusumano; 13,347 for Mr. Dierckman;11,439 for Mr. Mork; 3,117 for Mr. Pistone; and 7,771 for Mr. Zimmer.  Also includes the following number of unitssubject to unit rights pursuant to the Employee Unit Purchase Plan: 122 for Mr.Pistone; and 38 for Mr. Zimmer.

 

6)                                      Includes the following number of units held by the Company’s EmployeeSavings Plan on behalf of the respective officer: 2,793 for Mr. Dierckman;3,093 for Mr. Mork; and 417 for Mr. Pistone. The Employee Savings Plan holdsPartnership units for the participants in a unitized account. Consequently, thenumber of units for each of the officers is determined by the dollar value ofthe participant’s account divided by the closing market unit price on any givenday.

 

7)                                      The Partnership is advised that Henry K. Newhall has sole voting andinvestment power as to 83,218 units, of which 70,616 units are held by a trustfor which he is the trustee and beneficiary. Voting and investment power isshared with others as to 167,975 units held by certain trusts of which hedisclaims beneficial ownership.

 

8)                                      Includes 2,000 units held by trusts for which Mr. Reichardt has solevoting and investment power as the trustee and for which he disclaimsbeneficial ownership.

 

9)                                      The Partnership is advised that Mr. Sutton has sole voting and investmentpower as to 9,390 units held by a trust for which he is a trustee.

 

10)                                Includes 230,600 units held by Zilkha & Sons, Inc. for which thePartnership is advised that Mr. Zilkha has sole voting and investment power,and 70,000 units held by Mr. Zilkha’s wife for which he disclaims beneficialownership.

 

11)                                Includes 1,171,758 units subject to options that are exercisable within60 days from February 28, 2002 pursuant to the Partnership’s 1995 Option/AwardPlan; and 117,085 units subject to unit rights pursuant to the Partnership’s DeferredEquity Compensation Plan for Outside Directors, its 1995 Option/Award Plan andits Employee Unit Purchase Plan.

 

Except as indicated otherwisein the above notes, the specified persons possess sole voting and investmentpower as to the indicated number of units to the best of the Company’sknowledge.

 

Certain provisions of thePartnership’s Limited Partnership Agreement require the affirmative vote ofholders of at least 75% of the Partnership’s voting power to approve (i) theremoval of any general partner or the election of any general partner as thePartnership’s managing general partner; or (ii) certain business combinationsand other specified transactions (“Business Combination”) with, or proposed byor on behalf of, persons beneficially owning 10% or more of the Partnership’svoting power, unless such Business Combination is either approved by a majorityof the present directors of Newhall Management Corporation (or by directors whoare nominated by them) or certain price and procedural requirements aresatisfied.

 

59

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**CertainUnitholders**

 

The following table sets forthinformation about unitholders who beneficially own more than 5% of outstandingPartnership units as of December 31, 2001.

 
| **Name and Address**                                                   |   | **Number of  Units  Beneficially Owned** |   | **Percent  Of Class** |   |
|------------------------------------------------------------------------|--------|------------------------------------------|--------|-----------------------|--------|
| State Farm Mutual AutomobileInsurance Company, and related entities(a) |   | 3,400,758                                |   | 13.95%                |   |
| One State Farm Plaza                                                   |   |                                     |   |                  |   |
| Bloomington, Illinois 61710-0001                                       |   |                                     |   |                  |   |
|                                                                   |   |                                     |   |                  |   |
| Highfields Capital Management LP(b)                                    |   | 2,534,100                                |   | 10.40%                |   |
| Highfields GP LLC                                                      |   |                                     |   |                  |   |
| Jonathon S. Jacobsen                                                   |   |                                     |   |                  |   |
| Richard L. Grubman                                                     |   |                                     |   |                  |   |
| Highfields Capital II LP                                               |   |                                     |   |                  |   |
| c/o Highfields Capital Management LP                                   |   |                                     |   |                  |   |
| 200 Clarendon Street                                                   |   |                                     |   |                  |   |
| Boston, Massachusetts 02117                                            |   |                                     |   |                  |   |
|                                                                   |   |                                     |   |                  |   |
| Leon G. Cooperman (c)                                                  |   | 2,028,900                                |   | 8.32%                 |   |
| c/o  Omega Associates, LLC                                             |   |                                     |   |                  |   |
| 88 Pine Street, 31st Floor                                             |   |                                     |   |                  |   |
| New York, New York  10005                                         |   |                                     |   |                  |   |
|                                                                   |   |                                     |   |                  |   |
| Ezra K.  Zilkha (d)                                                    |   | 1,234,626                                |   | 5.06%                 |   |
| c/o  Zilkha & Sons, Inc.                                           |   |                                     |   |                  |   |
| 767 Fifth Avenue                                                       |   |                                     |   |                  |   |
| New York, New York  10153                                         |   |                                     |   |                  |   |
|                                                                   |   |                                     |   |                  |   |
|                                                                   |   |                                     |   |                  |   |

(a)                                  Information is based upon a Schedule 13G (Amendment No. 16) dated January26, 2002. State Farm Mutual Automobile Insurance Company has disclosed it hassole voting and investment power over all of the units.

 

(b)                                 Information is based upon Schedules 13G (Amendment No. 2) dated February14, 2001. The reporting persons disclosed they have sole voting and investmentpower over all the units.

 

(c)                                  Information is based upon a Schedule 13G (Amendment No. 1) dated January31, 2002. Mr. Cooperman disclosed he beneficially owns 2,028,900 units throughvarious entities which he is deemed to control. Mr. Cooperman also disclosed hehas sole voting and investment power over 1,117,800 units and shared voting andinvestment power over 911,100 units.

 

(d)                                 Information is based upon a Schedule 13G dated February 6, 2002. Mr.Zilkha has disclosed he beneficially owns 1,234,626 units of which 72,000 unitsare held by Newhall Management Limited Partnership. The voting and investmentpower over such 72,000 units are subject to the terms of the limitedpartnership agreement and Newhall Management Corporation shareholders’ andvoting trust agreements more fully described under Item 10 of this AnnualReport on Form 10–K. Mr. Zilkha also disclosed he disclaims beneficialownership of 70,000 units held by his wife. Mr. Zilkha reported that he holdssole voting and investment power with respect to the remaining 1,092,626 units,of which 5,000 units are issuable upon the exercise of director options thatare immediately exercisable, and 17,026 unit rights issued under the Company’sDeferred Equity Compensation Plan for Outside Directors that are issuable uponseparation from the Newhall Management Corporation Board of Directors.

 

60

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**Item13.  Certain Relationships and RelatedTransactions**

** **

Barry Lawson Williams, directorof the Corporation, also is a director of CH2M Hill, Ltd. and KaiserPermanente.  For the year ended December31, 2001, the Company paid to CH2M Hill, Ltd. $2,136,000 for consulting andengineering services rendered in the Company’s community development planning,and paid to Kaiser Foundation Health $137,000 in employee health insurancepremiums.  The Company expects thatpayments to these entities in 2002 will be higher in 2002 due to continueddevelopment of the Company’s communities and increasing health insurancepremiums.

 

Thomas E. Dierckman, SeniorVice President of the Company, is a director of Valencia Bank and Trust.  At December 31, 2001, the Company had $2million outstanding on a line of credit with Valencia Bank and Trust and paid$156,000 in interest payments related to outstanding borrowings in 2001.

 

All of the foregoingtransactions are at rates and terms believed to be comparable to those ofsimilar transactions with unrelated parties.

 

For additional related partyinformation see the section entitled “Compensation Committee Interlocks andInsider Participation” under Item 11 - “Executive Compensation.”

 

**Independent Accountants**

** **

During the past several years,the Securities and Exchange Commission has promulgated rules governingindependence of accountants and disclosure requirements applicable to certainpublic companies.  The disclosurerequirements require public companies to provide information concerning thecompany’s board of directors, audit committee and its independent accountantsin the company’s proxy statement sent to its shareholders.  The Company, as a partnership, does notprovide an annual proxy statement to its holders of its partnership units.  Consequently, the Company is not required toprovide the information to its unitholders. However, the Company is providing the information voluntarily.

 

**AuditCommittee Report**

 

Inaccordance with its written charter (filed as an Exhibit to the Form 10-K), theNewhall Management Corporation Board of Directors Audit Committee’s (the “AuditCommittee” or the “Committee”) primary function is to assist the Board ofDirectors in fulfilling its oversight responsibilities by reviewing theCompany’s financial information, the Company’s systems of internal controls andaudit and financial reporting processes. During 2001, the Audit Committee was comprised of Mr. George L. Argyros,who resigned from the Board of Directors in November 2001 to become U.S.Ambassador to Spain, and Messrs. McKernan, Newhall, Sutton and Williams.  Mr. Sutton served as chairman of theCommittee.  Each of the members of theAudit Committee is independent as determined by the Board of Directors pursuantto the listing standards of the New York Stock Exchange.

 

Managementis responsible for the Company’s financial reporting process including itssystem of internal control, and for the preparation of consolidated financialstatements in accordance with generally accepted accounting principles.  The Company’s independent accountants are responsiblefor auditing those financial statements. The Committee’s responsibility is to monitor and review theseprocesses.  It is not our duty or ourresponsibility to conduct auditing or accounting reviews or procedures.  The members of the Audit Committee are notand may not represent themselves to be or to serve as, accountants oraccountants by profession or experts in the fields of accounting orauditing.  Therefore, the Committeemembers have relied, without independent verification, on management’srepresentation that the financial statements have been prepared with integrityand objectivity and in conformity with accounting principles generally acceptedin the United States of America and on the representations of the Company’sindependent accountants included in their report on the Company’s financialstatements.  The Committee’s oversightdoes not provide us with an independent basis to determine that management hasmaintained appropriate accounting and financial reporting principles orpolicies, or appropriate internal controls and procedures designed to assurecompliance with accounting standards and applicable laws and regulations.  Furthermore, the Committee’s considerationsand discussions with management and the independent accountants do not assurethat the Company’s financial statements are presented in accordance withgenerally accepted accounting principles, that the audit of our Company’sfinancial statements has been carried

 

61

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outin accordance with generally accepted auditing standards or that the Company’sindependent accountants are in fact “independent.”

 

Inthis context, the Audit Committee has reviewed and discussed with managementand the independent accountants the Company’s audited financial statements forthe year ended December 31, 2001. Management represented to the Audit Committee that the Company’sfinancial statements were prepared in accordance with generally acceptedaccounting principles.  The Committeehas discussed with the independent accountants the matters required to bediscussed by the Statement on Auditing Standards No. 61, *Communication With Audit Committees*.

 

TheCompany’s independent accountants provided to the Audit Committee the writtendisclosures required by Independence Standards Board Standard No. 1, *Independence Discussions with Audit Committees*,and the Audit Committee discussed with the independent accountants theirindependence from the Company and its management.

 

Basedon the reviews and discussions referred to above, the Audit Committee recommendedto the Board of Directors that the audited financial statements be included inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2001,to be filed with the Securities and Exchange Commission.

 

Thisreport is respectfully submitted by the members of the Audit Committee of theBoard of Directors of Newhall Management Corporation:

 

Thomas C. Sutton, Chairman

ThomasV. McKernan, Jr.

Henry K. Newhall

BarryLawson Williams

 

Thepreceding Audit Committee Report shall not be deemed incorporated by referenceinto any filing under the Securities Act of 1933 or the Exchange Act of 1934,except to the extent that the Company incorporates it by reference, and shallnot otherwise be deemed filed under such Acts.

 

**IndependentAccountant Fees**

 

TheAudit Committee received the following information concerning the fees paid tothe Company’s independent accountants for services rendered for the year endedDecember 31, 2001, and has considered whether the provision of these servicesis compatible with maintaining the independence of the independent accountants:

 
|                                                          |   | **(in $000)** |   |
|---------------------------------------------------------------|--------|---------------|--------|
| Audit  Fees                                                   |   | $             | 175    | (a) |
| Financial Information Systems  Design and Implementation Fees |   | $             | **-**  |   |
| All Other Fees                                                |   | $             | 48     | (b) |

 

(a)Audit Fees include the annual audit of the Company’s consolidated financialstatements, quarterly reviews of interim financial statements in the Company’sForm 10-Q reports and annual subsidiary and certain income-property audits.

 

(b)All Other Fees include $10,000 for tax compliance services, $17,000 for theaudits of employee benefit plans, $20,000 for tax advisory services and $1,000for all other services.

 

62

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**PARTIV**

 

**Item 14                  Exhibit****s, FinancialStatement Schedules and Reports on Form 8-K**

 
| (a)    | Documents  filed with this report: |                                                                                                                                                                                                                                                                        |
|--------|------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 1.                                 | See Index to  Financial Statements on page 22 of this Annual Report on Form 10-K.                                                                                                                                                                                           |   |
|   |                               |                                                                                                                                                                                                                                                                        |   |
|   | 2.                                 | Financial  Statement Schedules:  Schedule III -  Real Estate and Accumulated Depreciation.   Other schedules have been omitted because they are not applicable or  the required information is shown in the consolidated financial statements  and notes thereto. |   |
|   |                               |                                                                                                                                                                                                                                                                        |   |
|   | 3.                                 | Exhibits  (listed by numbers corresponding to the Exhibit Table of Item 601 in  Regulation S-K):                                                                                                                                                                            |   |
|   |                               |                                                                                                                                                                                                                                                                        |   |
|   |                               |                                                                                                                                                                                                                                                                        |   |   |
|   |                               |                                                                                                                                                                                                                                                                        | 3(a) | The Newhall  Land and Farming Company (a California Limited Partnership) Limited  Partnership Agreement incorporated by reference to Exhibit 3(e) to  Registrant’s Registration Statement on Form S-14 filed August 24,1984 |
|   |                               |                                                                                                                                                                                                                                                                        |   |   |   |
|   |                               |                                                                                                                                                                                                                                                                        |   | (b) | First  Amendment to Limited Partnership Agreement of The Newhall Land and Farming  Company (a California Limited Partnership) incorporated by reference to  Exhibit 3(b) of the Company’s Annual Report on Form 10-K for the year ended  December 31, 1993 (Commission File Number 1-8885). |
|   |                               |                                                                                                                                                                                                                                                                        |   |
|   |                               |                                                                                                                                                                                                                                                                        | 4. | Depositary  Receipt for Units of Interest, The Newhall Land and Farming Company (a  California Limited Partnership) incorporated by reference to Exhibit 4 of the  Company’s Annual Report on Form 10 K for the year ended December 31, 1990  (Commission File Number 1 8885) |   |
|   |                               |                                                                                                                                                                                                                                                                        |   |
|   |                               | •                                                                                                                                                                                                                                                                      | 10(a) | The Newhall  Land and Farming Company 1995 Option/Award Plan incorporated by reference to  the Company’sRegistration Statement on Form S-8 dated March 22, 1995  (Commission File Number 33-58171). |
|   |                               |                                                                                                                                                                                                                                                                        |   |   |
|   |                               | •                                                                                                                                                                                                                                                                      | (b) | Newhall  Executive Incentive Plan (as amended July 11, 1990) incorporated by reference  to Exhibit 10 (b) of theCompany’s Annual Report on Form 10-K for the year  ended December 31, 1999 (Commission File Number 1-8885) |
|   |                               |                                                                                                                                                                                                                                                                        |   |   |
|   |                               | •                                                                                                                                                                                                                                                                      | (c) | The Newhall  Land and Farming Company Employee Savings Plan incorporated by reference to  the Company’sRegistration Statement on Form S-8 dated May 24, 1994  (Commission File Number 33-53769). |
|   |                               |                                                                                                                                                                                                                                                                        |   |   |
|   |                               | •                                                                                                                                                                                                                                                                      | (d) | The Newhall  Land and Farming Company Retirement Plan Restatement, Amendments No. 1  through 5, incorporated by reference to Exhibit 10(d) to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1993 (Commission File  Number 1-8885). |
|   |                               |                                                                                                                                                                                                                                                                        |   |   |
|   |                               | •                                                                                                                                                                                                                                                                      | (e) | Form of  Severance Agreements incorporated by reference to Exhibit 10(e) of the  Company’s Annual Report on Form 10-K for the year ended December 31, 1997  (Commission File Number 1-8885). |
|   |                               |                                                                                                                                                                                                                                                                        |   |   |
|   |                               | •                                                                                                                                                                                                                                                                      | (f) | The Newhall  Land and Farming Company Supplemental Executive Retirement Plan (Restated  effective January 15,1992) incorporated by reference to Exhibit 10(g) to the  Company’s Annual Report on Form 10-K for the year ended December 31, 1991  (Commission File Number 1-8885). |
|   |                               |                                                                                                                                                                                                                                                                        |   |   |
|   |                               | •                                                                                                                                                                                                                                                                      | (g) | The Newhall  Land and Farming Company Senior Management Survivor Income Plan incorporated  by reference to Exhibit 10(h) to the Company’s Annual Report on Form 10-K for  the year ended December 31, 1993 (CommissionFile Number 1-8885). |
|   |                               |                                                                                                                                                                                                                                                                        |   |   |
|   |                               |                                                                                                                                                                                                                                                                        | (h) | Form of  Indemnification Agreement between the Partnership and its General Partners  and the general partners,partners, shareholders, officers and directors of  its General Partners, or of the Managing General Partner of the anaging  General Partner, as amended, incorporated by |
|        |                                    |                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |  |  |

 

63

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|   |   |   | reference to  Exhibit 28(g) to the Company’s report on Form 8-K filed December 11, 1990  (Commission File Number 1-8885).                                                                                                                                                          |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   |   | (i)    | Tax Payment  and Tax Benefit Reimbursement Agreement incorporated by reference to Exhibit  28(f) to the Company’s report on Form 8-K filed December 11, 1990 (Commission  File Number 1-8885).                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (j)    | The Newhall  Land and Farming Company Deferred Cash Bonus Plan incorporated by reference  to Exhibit 10(l) of the Company’s Annual Report on Form 10-K for the year  ended December 31, 1990 (Commission File Number 1-8885).                                                      |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (k)    | Form of  award issued under The Newhall Land and Farming Company Deferred Cash Bonus  Plan incorporated by reference toExhibit 10(m) of the Company’s Annual Report  on Form 10-K for the year ended December 31, 1990 (Commission File Number  1-8885).                           |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (l)    | The Newhall  Land and Farming Company Employee Savings Restoration Plan As Amended  Effective January 1, 1999, incorporated by reference to Exhibit 10(d) of the  Company’s Report on Form 10-Q for the quarter ended September 30, 1998  (Commission File Number 1-8885).         |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (m)    | The Newhall  Land and Farming Company Pension Restoration Plan (As amended through July  15, 1998) incorporated by reference to Exhibit 10(c) of the Company’s Report  on Form 10-Q for the quarter ended September 30, 1998 (Commission File Number  1-8885).                     |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   |   | (n)    | Trust  Agreement dated January 15, 1992 between the Partnership and Newhall Management  Corporation incorporated by reference to Exhibit 10(p) to the Company’s  Annual Report on Form 10-K for the year ended December 31, 1991 (Commission  File Number 1-8885).                 |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   |   | (o)    | The Newhall  Land and Farming Company Employee Unit Purchase Plan incorporated by  reference to the Company’s Registration Statement on Form S-8 dated May 24,  1994 (Commission File Number 33-53767).                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (p)    | Amendment  No. 1 to The Newhall Land and Farming Company Retirement Plan incorporated by  reference to Exhibit 10(r) of the Company’s Annual Report on Form 10-K for  the year ended December 31, 1994 (Commission File Number 1-8885).                                            |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   |   | (q)    | The Newhall  Land and Farming Company Deferred Equity and Compensation Plan for Outside  Directors incorporated by reference to the Company’s Registration Statement  on Form S-8 dated November 1, 1996 (Commission File Number 333-15303).                                       |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (r)    | Amendment  No. 2 to The Newhall Land and Farming Company Retirement Plan dated August 1,  1996 incorporated by reference to Exhibit 10(r) the Company’s Annual Report  on Form 10-K for the year ended December 31, 1996 (Commission File Number  1-8885).                         |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (s)    | Amendment  No. 3 to The Newhall Land and Farming Company Retirement Plan dated July 15,  1998, incorporated by reference to Exhibit 10(a) of  the Company’s Report on Form 10-Q for the quarter ended  September 30, 1998 (Commission File Number 1-8885).                    |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (t)    | Amendment  No. 1 to The Newhall Land and Farming Supplemental Executive Retirement Plan  dated January 15, 1997 incorporated by reference to Exhibit 10(t) of the  Company’s Annual Report on Form 10-K for the year ended December 31, 1996  (Commission File Number 1-8885).     |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (u)    | First  Amendment  to The Newhall Land and  Farming Company 1995 Option/Award Plan dated November 19, 1997 incorporated  by reference to Exhibit 10(v) of the Company’s Annual Report on Form 10-K for  the year ended December 31, 1997 (Commission File Number 1-8885).      |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (v)    | Form of  award for premium price options granted under The Newhall Land and Farming  Company 1995 Option/Award Plan incorporated by reference to Exhibit 10(w) of  the Company’s Annual Report on Form 10-K for the year ended December 31, 1997  (Commission File Number 1-8885). |
|   |   |   |                                                                                                                                                                                                                                                                                    |
|   | • | (w)    | Amendment  No. 2 to The Newhall Land and Farming Company Savings Plan dated July 15,  1998, incorporated by reference to Exhibit 10(b) the Company’s Report on Form  10-Q for the quarter ended September 30, 1998 (Commission File Number 1-8885).                                |

 

64

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|   | • | (x)    | Valencia  Marketplace Purchase and Sale Agreement dated January 7, 1998 and subsequent  First, Second, Third and Fourth Amendments incorporated by reference to  Exhibit 10 the Company’s Report on Form 10-Q for the quarter ended March 31,  1998 (Commission  File Number 1-8885). |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   |   | (y)    | Fifth  Amendment dated May 29, 1998 to the Valencia Marketplace Purchase and Sale  Agreement incorporated by reference to the Company’s Report on Form 8-K filed  June 19, 1998 (File Number 1-8885).                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (z)    | Amendment  Number One Effective January 1, 1999 to Newhall Executive Incentive Plan (as  amended July 11, 1990) incorporated by reference to Exhibit 10 of the  Company’s Report on Form 10-Q for the quarter ended March 31, 1999  (Commission File Number 1-8885).                  |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (aa)   | Amendment  No. 4 to the Newhall Land and Farming Company Retirement Plan dated July 21,  1999 incorporated by reference to Exhibit 10 of the Company’s Report on Form  10-Q for the quarter ended June 30, 1999 (Commission File Number 1-8885).                                      |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (ab)   | Second  Amendment to The Newhall Land and Farming Company 1995 Option/Award Plan  adopted as of July 15, 1998 incorporated by reference to Exhibit 10(a) of the  Company’s Report on Form 10-Q for the quarter ended June 30, 1999 (Commission  File Number 1-8885).                  |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (ac)   | Amendment  No. 3 to The Newhall Land and Farming Company Employee Savings Plan,  incorporated by reference to Exhibit 10 (a) of the Company’s report on Form  10-Q for the quarter ended September 30, 2000 (Commission File Number  1-8885.)                                         |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (ad)   | The Newhall  Land and Farming Company Employee Savings Restoration Plan (As Amended and  Restated Effective July 19, 2000), incorporated by reference to Exhibit 10(b)  of the Company’s Form 10-Q for the quarter ended September 30, 2000  (Commission File Number 1-8885).         |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (ae)   | Severance  and Consulting Agreement incorporated by reference to Exhibit 10 of the  Company’s report on Form 10-Q for the quarter ended March 31, 2001  (Commission File Number 1-8885).                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (af)   | Amendment  No. 5 to The Newhall Land and Farming Company Retirement Plan (Restatement  Effective January 1, 1989) incorporated by reference to Exhibit 10(a) of the  Company’s report on Form 10-Q for the quarter ended June 30, 2001 (Commission  File Number 1-8885).              |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (ag)   | Amendment  No. 4 to The Newhall Land and Farming Company Employee Savings Plan  incorporated by reference to Exhibit 10(b) of the Company’s report on Form  10-Q for the quarter ended June 30, 2001 (Commission File Number 1-8885).                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (ah)   | Retention  Agreement effective March 31, 2001 between The Newhall Land and Farming  Company and Gary M. Cusumano incorporated by reference to Exhibit 10 (a) of  the Company’s report on Form 10-Q for the quarter ended September 30, 2001  (Commission File Number 1-8885).         |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (ai)   | Retention  Agreement effective March 31, 2001 between The Newhall Land and Farming  Company and Thomas E. Dierckman incorporated by reference to Exhibit 10 (b)  of the Company’s report on Form 10-Q for the quarter ended September 30, 2001  (Commission File Number 1-8885).      |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   | • | (aj)   | Retention  Agreement effective March 31, 2001 between The Newhall Land and Farming  Company and Stuart R. Mork incorporated by reference to Exhibit 10 (c) of the  Company’s report on Form 10-Q for the quarter ended September 30, 2001  (Commission File Number 1-8885).           |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   |   | 11 (a) | Computation  of earnings per unit                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   |   | 21 (a) | Subsidiaries  of the Registrant                                                                                                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   |   | 23 (a) | Independent  Auditors’ Consent                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                       |
|   |   | (b)    | Independent  Auditors’ Consent                                                                                                                                                                                                                                                        |

 

65

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|   |   | 99 (a) | Articles of  Incorporation of Newhall Management Corporation, as amended, incorporated by  reference to Exhibit 28(b) to the Company’s report on Form 8-K filed December  11, 1990 (Commission File Number 1-8885).                                                                                                                                                                                                                                                  |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (b)    | Bylaws of  Newhall Management Corporation incorporated by reference to Exhibit 99 (e) to  the Company’s report on Form 10-Q for the quarter ended June 30, 2000  (Commission File Number 1-8885).                                                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (c)    | Amended and  Restated Shareholders’ Agreement between Newhall Management Corporation, its  shareholders and the Newhall Management Corporation Voting Trust incorporated  by reference to Exhibit 99(a) to the Company’s report on Form 10-Q for the  quarter ended June 30, 2000 (Commission File Number 1-8885).                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (d)    | Extension  Agreement to Voting Trust Agreement between Newhall Management Corporation,  the Trustee, and the individual shareholders of Newhall Management  Corporation, incorporated by reference to Exhibit 99(b) of the Company’s  report on Form 10-Q for the quarter ended June 30, 2000 (Commission File  Number 1-8885).                                                                                                                                      |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (e)    | Voting Trust  Agreement between Newhall Management Corporation, the Trustee, and the  individual shareholders of Newhall Management Corporation incorporated by  reference to Exhibit 28(e) of the Company’s report on Form 8-K filed December  11, 1990 (Commission File Number 1-8885).                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (f)    | Partnership  Agreement of Newhall General Partnership incorporated by reference to Exhibit  28(e) to Registrant’s Registration Statement on Form S-14 filed August 24,  1984, and the Certificate of Amendment of Partnership Agreement of Newhall  General Partnership, dated November 14, 1990 incorporated by reference to  Exhibit 28(e) of the Company’s Annual Report on Form 10-K for the year ended  December 31, 1990 (Commission File Number 1-8885). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (g)    | Limited  Partnership Agreement of Newhall Management Limited Partnership, incorporated  by reference to Exhibit 28(a) to the Company’s report on Form 8-K filed  December 11, 1990 (Commission File Number 1-8885).                                                                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (h)    | Amendment  Number One to Limited Partnership Agreement of Newhall Management Limited  Partnership incorporated by reference to Exhibit 99 (c) of the Company’s  report of Form 10-Q for the quarter ended June 30, 2000 (Commission File  Number 1-8885).                                                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (i)    | Second  Amendment to Partnership Agreement of Newhall General Partnership,  incorporated by reference to Exhibit 99 (d) of the Company’s report on Form  10-Q for the quarter ended June 30, 2000 (Commission File Number 1-8885).                                                                                                                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (j)    | Amended and  Restated Partnership Agreement of Newhall General Partnership incorporated by  reference to Exhibit 99 of the Company’s report on Form 10-Q for the quarter  ended March 31, 2001 (Commission File Number 1-8885).                                                                                                                                                                                                                                      |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (k)    | Newhall  Management Corporation Audit Committee of the Board of Directors Charter (as  amended and restated May 17, 2000)                                                                                                                                                                                                                                                                                                                                                 |

 

|   | •                                                                          | The items  marked above constitute Executive Compensation Plans and Arrangements. |
|--------|---------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|
|   |                                                                            |                                                                              |
| (b)    | No report on  Form 8-K was filed in the fourth quarter ended December 31, 2001. |

 

66

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Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, 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 27, 2002 | By                                   | /S/ Gary M. Cusumano |   |
|                       |                                 | Gary M. Cusumano |
|                       |                                 | President and Chief Executive Officer |
|                            |                                      |  |  |  |

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

 

 
| Date:  March  27, 2002 | /S/ Gary M. Cusumano                              |   |   |
|----------------------------------|---------------------------------------------------|--------|--------|
|                             | Gary M. Cusumano                                  |   |
|                             | President and Chief Executive Officer             |   |
|                             | Newhall Management Corporation                    |   |
|                             | (Principal Executive Officer)                     |   |
|                             |                                              |   |
| Date:  March 27, 2002       | /S/ Stuart R. Mork                                |   |
|                             | Stuart R. Mork                                    |
|                             | Senior Vice President and Chief Financial Officer |
|                             | Newhall Management Corporation                    |
|                             | (Principal Financial Officer)                     |
|                             |                                              |
| Date: March  27, 2002       | /S/ Donald L. Kimball                             |   |   |
|                             | Donald L. Kimball                                 |   |
|                             | Vice President - Finance and Controller           |   |
|                             | Newhall Management Corporation                    |   |
|                             | (Principal Accounting Officer)                    |   |
|                                  |                                                   |        |        |  |  |  |

 

67

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Directors of Newhall Management Corporation:

 
| Date:  March 27, 2002       | /S/ Gary M. Cusumano        |   |
|----------------------------------|-----------------------------|--------|
|                             | Gary M. Cusumano            |
|                             |                        |
| Date:  March  27, 2002 | /S/ Thomas V. McKernan, Jr. |   |
|                             | Thomas V. McKernan, Jr.     |
|                             |                        |
| Date:  March  27, 2002 | /S/ Henry K. Newhall        |   |
|                             | Henry K. Newhall            |
|                             |                        |
| Date:  March  27, 2002 | /S/ Jane Newhall            |   |
|                             | Jane Newhall                |
|                             |                        |
| Date:  March  27, 2002 | /S/ Peter T. Pope           |   |
|                             | Peter T. Pope               |
|                             |                        |
| Date:  March  27, 2002 | /S/ Carl E. Reichardt       |   |
|                             | Carl E. Reichardt           |
|                             |                        |
| Date:  March  27, 2002 | /S/ Thomas C. Sutton        |   |
|                             | Thomas C. Sutton            |
|                             |                        |
| Date:  March  27, 2002 | /S/ Barry Lawson Williams   |   |
|                             | Barry Lawson Williams       |
|                             |                        |
| Date:  March  27, 2002 | /S/ Ezra K. Zilkha          |   |
|                             | Ezra K. Zilkha              |

 

68

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The Newhall Land and Farming Company

ScheduleIII - Real Estate and Accumulated Depreciation

December 31, 2001

(Dollars in thousands)

 
|                                           |   |                |   | **Initial  Cost of Development** |   |                                 |   | **Gross  Amount at Which Carried  at December 31, 2001 (D)** |    |     |   |                                |   |      |   |                                |
|------------------------------------------------|--------|---------------------|--------|----------------------------------|--------|--------------------------------------|--------|--------------------------------------------------------------|---------|----------|--------|-------------------------------------|--------|-----------|--------|-------------------------------------|
| **Description**                                |   | **Encum-  brances** |   | **Land**                         |   | **Buildings   and  Improve-  ments** |   | **Costs  Capital-  ized  Subse-  quent to  Com-  pletion**   |    | **Land** |   | **Buildings  and  Improve-  ments** |   | **Total** |   | **Accumu-  lated  Depreci-  ation** |   | **Year Com-  pleted /   Acquired** |   | **Deprec-  iable  Lives** |   |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| **OPERATING PROPERTIES**                       |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| **Shopping Centers**                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| Valencia Town Center                           |   | $                   | 14,198 |                             | $      | 22,136                               |   | $                                                            | 41,425  |     | $      | (1,111                              | )      | $         | 22,136 |                                | $ | 40,314 |   | $ | 62,450 |   | $ | (17,024 | ) | 1992 |   | (E | ) |
| Valencia Town Center - Ring Road               |   |                |   | 804                              |   | 14,214                               |   | 1,279                                                        |    | 804      |   | 15,493                              |   | 16,297    |   | (2,181                              | ) | 1998 |   | (E | ) |
| River Oaks                                     |   | (A                  | )      | 2,354                            |   | 5,302                                |   | 834                                                          |    | 2,354    |   | 6,136                               |   | 8,490     |   | (2,969                              | ) | 1987 |   | (E | ) |
| NorthPark Village Square                       |   | (A                  | )      | 2,701                            |   | 7,398                                |   | (159                                                         | )       | 2,701    |   | 7,239                               |   | 9,940     |   | (1,377                              | ) | 1996 |   | (E | ) |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| **Hotel**                                      |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| Valencia Hilton Garden Inn   (C)          |   |                |   | -                                |   | -                                    |   | -                                                            |    | -        |   | -                                   |   | -         |   | -                                   |   | 1991 |   | (E | ) |
| Hyatt Valencia Hotel and Conference Center     |   |                |   | 2,131                            |   | 37,497                               |   | 118                                                          |    | 2,131    |   | 37,615                              |   | 39,746    |   | (7,314                              | ) | 1998 |   | (E | ) |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| **Office and Mixed Use Projects**              |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| Valencia Entertainment Center                  |   |                |   | 16,880                           |   | 6,573                                |   | -                                                            |    | 16,880   |   | 6,573                               |   | 23,453    |   | (2,723                              | ) | 1999 |   | (E | ) |
| Valencia Entertainment Center - South          |   |                |   | 34                               |   | 6,077                                |   | -                                                            |    | 34       |   | 6,077                               |   | 6,111     |   | (580                                | ) | 2000 |   | (E | ) |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| **Single Tenant Facilities**                   |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| Office/Records Storage (B)                     |   |                |   | 569                              |   | 2,151                                |   | -                                                            |    | 569      |   | 2,151                               |   | 2,720     |   | (398                                | ) | 1996 |   | (E | ) |
| Retail Store - Trader Joe’s               |   |                |   | 269                              |   | 547                                  |   | -                                                            |    | 269      |   | 547                                 |   | 816       |   | (135                                | ) | 1994 |   | (E | ) |
| Spectrum Health Club                           |   |                |   | 1,000                            |   | 6,156                                |   | -                                                            |    | 1,000    |   | 6,156                               |   | 7,156     |   | (1,000                              | ) | 1997 |   | (E | ) |
| Restaurant - El Torito                         |   |                |   | 248                              |   | 802                                  |   | -                                                            |    | 248      |   | 802                                 |   | 1,050     |   | (439                                | ) | 1986 |   | (E | ) |
| Restaurant - Hamburger Hamlet                  |   |                |   | 460                              |   | 661                                  |   | -                                                            |    | 460      |   | 661                                 |   | 1,121     |   | (284                                | ) | 1990 |   | (E | ) |
| Restaurant - Red Lobster                       |   |                |   | 134                              |   | -                                    |   | -                                                            |    | 134      |   | -                                   |   | 134       |   | -                                   |   | 1986 |   | (E | ) |
| Restaurant - Wendy’s                      |   |                |   | 91                               |   | 300                                  |   | -                                                            |    | 91       |   | 300                                 |   | 391       |   | (130                                | ) | 1984 |   | (E | ) |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| **Other Properties and Land Under Lease**      |   |                |   | 1,795                            |   | 1,157                                |   |                                                         |    | 1,795    |   | 1,157                               |   | 2,952     |   | (634                                | ) | Various |   | (E | ) |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| **TOTAL OPERATING PROPERTIES**                 |   | 14,198              |   | 51,606                           |   | 130,260                              |   | 961                                                          |    | 51,606   |   | 131,221                             |   | 182,827   |   | (37,188                             | ) |   |   |   |   |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| **PROPERTIES UNDER DEVELOPMENT**               |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| Preconstruction costs - various other projects |   |                |   | -                                |   | (154                                 | )      | -                                                            |    | -        |   | (154                                | )      | (154      | )      | -                                   |   |   |   |   |   |
|                                           |   |                |   |                             |   |                                 |   |                                                         |    |     |   |                                |   |      |   |                                |   |   |   |   |   |
| **TOTAL PROPERTIES UNDER DEVELOPMENT**         |   | -                   |   | -                                |   | (154                                 | )      | -                                                            |    | -        |   | (154                                | )      | (154      | )      | -                                   |   |   |   |   |   |
| **TOTAL**                                      |   | $                   | 14,198 |                             | $      | 51,606                               |   | $                                                            | 130,106 |     | $      | 961                                 |   | $         | 51,606 |                                | $ | 131,067 |   | $ | 182,673 |   | $ | (37,188 | ) |   |   |   |   |

 

69

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(A)          Secures two financings with a totalprincipal balance of $24.2 million at December 31, 2001.  

 

(B)           Classifed as “Income-ProducingProperties Held for Sale” on the December 31, 2001 balance sheet

 

(C)           Joint venture accounted for as anequity investment.

 

(D)          The aggregate cost for federal incometax purposes is approximately $197,894 December 31, 2001.

 

(E)           Referenceis made to Note 2 of the Notes to Consolidated Financial Statements forinformation related to depreciation.

 

(F)           Reconciliation of total real estatecarrying value for the three years ended December 31, 2001 are as follows:

 
| (In  thousands)                |   | **2001** |    | **2000** |   | **1999** |   |
|--------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Balance at beginning of period |   | $        | 193,800 |     | $      | 328,969  |   | $ | 288,155 |   |
| Additions:                     |   |     |    |     |   |     |   |
| Cash expenditures              |   | 8,231    |    | 27,441   |   | 67,988   |   |
| Deletions:                     |   |     |    |     |   |     |   |
| Cost of real estate sold       |   | (17,247  | )       | (161,343 | )      | (23,034  | )      |
| Other                          |   | (2,111   | )       | (1,267   | )      | (4,140   | )      |
| Balance at end of period       |   | $        | 182,673 |     | $      | 193,800  |   | $ | 328,969 |   |

 

(G)           Reconciliation of real estateaccumulated depreciation for the three years ended December 31, 2001 are asfollows:

 
| (In  thousands)                |   | **2001** |   | **2000** |   | **1999** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Balance at beginning of period |   | $        | 33,295 |     | $      | 47,909   |   | $ | 39,443 |   |
| Additions:                     |   |     |   |     |   |     |   |
| Charged to expense             |   | 7,689    |   | 10,272   |   | 11,718   |   |
| Other                          |   | -        |   | -        |   | -        |   |
| Deletions:                     |   |     |   |     |   |     |   |
| Cost of real estate sold       |   | (3,450   | )      | (24,886  | )      | -        |   |
| Other                          |   | (346     | )      |     |   | (3,252   | )      |
| Balance at end of period       |   | $        | 37,188 |     | $      | 33,295   |   | $ | 47,909 |   |

 

70

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THE NEWHALL LAND AND FARMING COMPANY

 

INDEX TOEXHIBITS

 

 

Item 14 (a) 3

 

 
| **Exhibit** |   |                                                                              |
|-------------|--------|-----------------------------------------------------------------------------------|
| **Number**  |   | **Description**                                                                   |
|        |   |                                                                              |
| 11          |   | Computation of earnings per unit                                                  |
|        |   |                                                                              |
| 21          |   | Subsidiaries of the Registrant                                                    |
|        |   |                                                                              |
| 23(a)       |   | Independent Auditors’ Consent                                                |
|        |   |                                                                              |
| 23(b)       |   | Independent Auditors’ Consent                                                |
|        |   |                                                                              |
| 99(k)       |   | Newhall Management Corporation Audit  Committee of the Board of Directors Charter |
|        |   | (as amended and restated May 17, 2000)                                            |

 

EXHIBITS NOT INCLUDED

 

71

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