**UNITED STATES**

##### **SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10 - Q**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2003**

 

**or**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom     to     **

 

**Commissionfile number 1-8885**

 

**THE NEWHALL LAND AND FARMINGCOMPANY**

**(a California Limited Partnership)**

(Exact name of Registrant as specified in its charter)

 

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

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES  ý  NO  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).

 

YES  ý  NO  o

 

23,913,801 partnership units outstanding at October 31, 2003

 

 

----

 

Part I. Financial Information

Item 1. Financial Statements

 

**ConsolidatedStatements of Income**

*(Unaudited)*

 
|                                                                  |   | **Three  Months Ended  September  30,** |   | **Nine  Months Ended  September  30,** |   |
|-----------------------------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
| **In thousands except per unit**                                      |   | **2003**                                     |   | **2002**                                    |   | **2003** |   | **2002** |   |
| **Revenues**                                                          |   |                                         |   |                                        |   |   |   |   |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Real  estate                                                          |   |                                         |   |                                        |   |   |   |   |   |
| Residential  land sales                                               |   | $                                            | 9,344  |                                        | $      | 37,761 |   | $ | 60,101 |   | $ | 82,536 |   |
| Industrial  and commercial sales                                      |   | 13,241                                       |   | 3,331                                       |   | 23,247 |   | 34,894 |   |
| Commercial  operations                                                |   |                                         |   |                                        |   |   |   |   |   |
| Income-producing  properties                                          |   | 10,940                                       |   | 9,700                                       |   | 30,314 |   | 29,171 |   |
| Valencia  Water Company                                               |   | 4,736                                        |   | 4,427                                       |   | 10,681 |   | 10,706 |   |
|                                                                  |   | 38,261                                       |   | 55,219                                      |   | 124,343 |   | 157,307 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Agriculture  operations                                               |   | 1,244                                        |   | 2,971                                       |   | 3,154 |   | 4,902 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Total  revenues                                                       |   | $                                            | 39,505 |                                        | $      | 58,190 |   | $ | 127,497 |   | $ | 162,209 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| **Contribution to Income**                                            |   |                                         |   |                                        |   |   |   |   |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Real  estate                                                          |   |                                         |   |                                        |   |   |   |   |   |
| Residential  land sales                                               |   | $                                            | 6,722  |                                        | $      | 12,338 |   | $ | 28,794 |   | $ | 26,403 |   |
| Industrial  and commercial sales                                      |   | 6,841                                        |   | 121                                         |   | 6,637 |   | 14,857 |   |
| Community  development                                                |   | (3,581                                       | )      | (5,933                                      | )      | (10,040 | ) | (13,652 | ) |
| Commercial  operations                                                |   |                                         |   |                                        |   |   |   |   |   |
| Income-producing  properties                                          |   | 1,715                                        |   | 3,121                                       |   | 6,449 |   | 9,300 |   |
| Valencia  Water Company                                               |   | 1,048                                        |   | 981                                         |   | 1,681 |   | 2,157 |   |
|                                                                  |   | 12,745                                       |   | 10,628                                      |   | 33,521 |   | 39,065 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Agriculture  operations                                               |   | 399                                          |   | (296                                        | )      | 993 |   | (29 | ) |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| General  and administrative expense                                   |   | (5,262                                       | )      | (2,980                                      | )      | (12,299 | ) | (9,329 | ) |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Operating  income                                                     |   | 7,882                                        |   | 7,352                                       |   | 22,215 |   | 29,707 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Interest  and other, net                                              |   | (948                                         | )      | (685                                        | )      | (2,157 | ) | (2,542 | ) |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Net  Income                                                           |   | $                                            | 6,934  |                                        | $      | 6,667 |   | $ | 20,058 |   | $ | 27,165 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Net  income per unit                                                  |   | $                                            | 0.29   |                                        | $      | 0.28 |   | $ | 0.86 |   | $ | 1.13 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Net  income per unit - diluted                                        |   | $                                            | 0.29   |                                        | $      | 0.27 |   | $ | 0.84 |   | $ | 1.11 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Weighted  average number of units used in computing per unit amounts: |   |                                         |   |                                        |   |   |   |   |   |
| Net  income per unit                                                  |   | 23,600                                       |   | 24,013                                      |   | 23,388 |   | 24,100 |   |
| Net  income per unit - diluted                                        |   | 24,131                                       |   | 24,286                                      |   | 23,766 |   | 24,486 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Cash  distributions per unit:                                         |   |                                         |   |                                        |   |   |   |   |   |
| Regular                                                               |   | $                                            | 0.10   |                                        | $      | 0.10 |   | $ | 0.30 |   | $ | 0.30 |   |
| Special                                                               |   | —                                       |   | —                                      |   | — |   | 0.13 |   |

 

*Seenotes to consolidated financial statements*

 

2

----

 

**ConsolidatedBalance Sheets**

 
| **In thousands**                                                                                                                                                                                              |   | **September  30,  2003** |    | **December  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                          |   | **(Unaudited)**          |    |                    |   |
| **ASSETS**                                                                                                                                                                                                    |   |                     |    |                    |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Cash  and cash equivalents                                                                                                                                                                                    |   | $                        | 68,793  |                    | $      | 25,403 |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Accounts  and notes receivable                                                                                                                                                                                |   | 8,356                    |    | 6,131                   |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Land  under development                                                                                                                                                                                       |   | 38,537                   |    | 47,428                  |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Land  held for future development                                                                                                                                                                             |   | 19,053                   |    | 19,154                  |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Income-producing  properties, net                                                                                                                                                                             |   | 170,550                  |    | 159,971                 |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Property  and equipment, net                                                                                                                                                                                  |   | 78,503                   |    | 76,449                  |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Investment  in joint venture                                                                                                                                                                                  |   | 1,366                    |    | 1,199                   |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Other  assets and deferred charges                                                                                                                                                                            |   | 28,648                   |    | 23,890                  |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
|                                                                                                                                                                                                          |   | $                        | 413,806 |                    | $      | 359,625 |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                                                                                                                    |   |                     |    |                    |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Accounts  payable                                                                                                                                                                                             |   | $                        | 42,642  |                    | $      | 35,948 |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Accrued  expenses                                                                                                                                                                                             |   | 57,830                   |    | 43,119                  |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Deferred  revenues                                                                                                                                                                                            |   | 29,818                   |    | 22,696                  |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Mortgage  and other debt                                                                                                                                                                                      |   | 65,118                   |    | 60,037                  |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Advances  and contributions from developers for utility construction                                                                                                                                          |   | 40,131                   |    | 38,490                  |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Other  liabilities                                                                                                                                                                                            |   | 24,417                   |    | 23,639                  |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Total  liabilities                                                                                                                                                                                            |   | 259,956                  |    | 223,929                 |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Partners’  capital                                                                                                                                                                                       |   |                     |    |                    |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| 23,913  units outstanding, excluding 12,859 units in treasury (cost-$325,157), at  September 30, 2003 and 23,518 units outstanding, excluding 13,254 units in  treasury (cost-$330,358), at December 31, 2002 |   | 155,128                  |    | 136,974                 |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
| Accumulated  other comprehensive income                                                                                                                                                                       |   | (1,278                   | )       | (1,278                  | )      |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
|                                                                                                                                                                                                          |   | 153,850                  |    | 135,696                 |   |
|                                                                                                                                                                                                          |   |                     |    |                    |   |
|                                                                                                                                                                                                          |   | $                        | 413,806 |                    | $      | 359,625 |   |

 

*Seenotes to consolidated financial statements*

 

3

----

 

**ConsolidatedStatements of Cash Flow**

*(Unaudited)*

 
|                                                                                                               |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
| **In thousands**                                                                                                   |   | **2003**                              |   | **2002** |   |
|                                                                                                               |   |                                  |   |   |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                          |   |                                  |   |   |   |
|                                                                                                               |   |                                  |   |   |   |
| Net  income                                                                                                        |   | $                                     | 20,058 |   | $ | 27,165 |   |
|                                                                                                               |   |                                  |   |   |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                                 |   |                                  |   |   |   |
|                                                                                                               |   |                                  |   |   |   |
| Depreciation  and amortization                                                                                     |   | 9,763                                 |   | 8,561 |   |
| Increase  in land under development                                                                                |   | (31,830                               | )      | (68,412 | ) |
| Cost  of sales and other inventory changes                                                                         |   | 40,823                                |   | 72,477 |   |
| (Increase)  decrease in accounts and notes receivable                                                              |   | (2,225                                | )      | 3,106 |   |
| Increase  in accounts payable, accrued expenses and deferred revenues                                              |   | 28,528                                |   | 30,985 |   |
| Cost  of property sold                                                                                             |   | 1,537                                 |   | 127 |   |
| Other  adjustments, net                                                                                            |   | (4,051                                | )      | (1,065 | ) |
|                                                                                                               |   |                                  |   |   |   |
| Net  cash provided by operating activities                                                                         |   | 62,603                                |   | 72,944 |   |
|                                                                                                               |   |                                  |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                          |   |                                  |   |   |   |
|                                                                                                               |   |                                  |   |   |   |
| Development  of income-producing properties                                                                        |   | (19,015                               | )      | (11,968 | ) |
| Purchase  of property and equipment                                                                                |   | (4,906                                | )      | (6,802 | ) |
| Investment  in joint venture                                                                                       |   | (167                                  | )      | (509 | ) |
|                                                                                                               |   |                                  |   |   |   |
| Net  cash used in investing activities                                                                             |   | (24,088                               | )      | (19,279 | ) |
|                                                                                                               |   |                                  |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                          |   |                                  |   |   |   |
|                                                                                                               |   |                                  |   |   |   |
| Distributions  paid                                                                                                |   | (7,048                                | )      | (10,398 | ) |
| Increase  (decrease) in mortgage and other debt, net                                                               |   | 5,081                                 |   | (26,630 | ) |
| Increase  in advances and contributions from developers for utility construction                                   |   | 1,641                                 |   | 4,185 |   |
| Purchase  of partnership units                                                                                     |   | (8,787                                | )      | (14,959 | ) |
| Issuance  of partnership units                                                                                     |   | 13,988                                |   | 2,406 |   |
|                                                                                                               |   |                                  |   |   |   |
| Net  cash provided by (used in) financing activities                                                               |   | 4,875                                 |   | (45,396 | ) |
|                                                                                                               |   |                                  |   |   |   |
| **Net increase in cash and cash equivalents**                                                                      |   | 43,390                                |   | 8,269 |   |
|                                                                                                               |   |                                  |   |   |   |
| **Cash and cash equivalents, beginning of period**                                                                 |   | 25,403                                |   | 3,050 |   |
|                                                                                                               |   |                                  |   |   |   |
| **Cash and cash equivalents, end of period**                                                                       |   | $                                     | 68,793 |   | $ | 11,319 |   |
|                                                                                                               |   |                                  |   |   |   |
| **Supplemental Disclosure of Cash Flow Information:**                                                              |   |                                  |   |   |   |
|                                                                                                               |   |                                  |   |   |   |
| Interest  paid (net of amount capitalized of $1,736 as of September 30, 2003 and $1,053  as of September 30, 2002) |   | $                                     | 1,293  |   | $ | 2,538 |   |

 

*Seenotes to consolidated financial statements*

 

4

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**Notes toConsolidated Financial Statements (unaudited)**

 

Note1. Accounting Policies

 

The Newhall Land andFarming Company’s (“the Company”) unaudited interim financial statements havebeen prepared pursuant to the rules and regulations promulgated by theSecurities and Exchange Commission. Certain information and footnote disclosure normally included in financialstatements prepared in accordance with generally accepted accounting principleshave been condensed or omitted pursuant to such rules and regulations, althoughthe Company believes that the disclosures are adequate to make the informationpresented not misleading. In the opinion of the Company, all adjustments,consisting of normal and recurring items, necessary for a fair presentation ofthe results of operations for the three and nine months ended September 30,2003 and 2002 have been made.  For additionalinformation, your attention is directed to the footnote disclosures found onpages 36 through 51 of the Company’s 2002 Annual Report on Form 10-K.  In addition, a summary of the accountingpolicies that management considers significant in the preparation of theCompany’s consolidated financial statements is included below and in Item2:  Management’s Discussion and Analysisof Financial Condition and Results of Operations.

 

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

 

•                                          Land salesoccur irregularly and are recognized at the close of escrow, provided profitrecognition criteria are met, or, if the Company has an obligation to completecertain future improvements, on the percentage of completion basis.

 

•                                          Sales of incomeproperties and non-developable farmland occur irregularly and are recognizedupon close of escrow provided profit recognition criteria are met.

 

•                                          Agriculturalcrops are on an annual cycle and income is recognized upon harvest. Most majorcrops grown by the Company or its contractors are harvested during the fall andwinter.

 

*Basisof Consolidation:*The consolidated financial statementsinclude the accounts of The Newhall Land and Farming Company and itssubsidiaries, which are wholly-owned or controlled by the Company. Allsignificant intercompany balances and transactions are eliminated.

 

*Reclassifications:** ***Certainreclassifications have been made to prior years’ amounts to conform to thecurrent year presentation.

 

*JointVenture:** ***The equitymethod is used to account for an investment in a joint venture with HiltonInns, Inc., which is not controlled by the Company.

 

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

 

*Income-ProducingProperties; Property and Equipment:** ***Property isstated at cost.  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.

 

*Stock-BasedEmployee Compensation: *Stock-basedemployee compensation is accounted for using the intrinsic value method allowedunder APB Opinion No. 25, *Accounting for Stock Issued to Employees*.  No stock-based employee compensation expenseis reflected in net income, as options granted under the Company’s plans havean exercise price equal to the market value of the Company’s partnership unitson the date of grant.  The followingtable illustrates the effect on net income and net income per unit if theCompany had applied the fair value provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation* to stock-based employee compensation.

 

5

----

 
|                                             |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
| **In thousands, except per unit**                |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                             |   |                                   |   |                                  |   |   |   |   |   |
| Net  Income, as reported                         |   | $                                      | 6,934  |                                  | $      | 6,667 |   | $ | 20,058 |   | $ | 27,165 |   |
| Total  stock-based employee compensation expense |   | (1,033                                 | )      | (932                                  | )      | (2,856 | ) | (2,212 | ) |
| Pro  forma net income                            |   | $                                      | 5,901  |                                  | $      | 5,735 |   | $ | 17,202 |   | $ | 24,953 |   |
|                                             |   |                                   |   |                                  |   |   |   |   |   |
| Net  income per unit                             |   |                                   |   |                                  |   |   |   |   |   |
|                                             |   |                                   |   |                                  |   |   |   |   |   |
| Basic  - as reported                             |   | $                                      | 0.29   |                                  | $      | 0.28 |   | $ | 0.86 |   | $ | 1.13 |   |
| Basic  - pro forma                               |   | 0.25                                   |   | 0.24                                  |   | 0.74 |   | 1.04 |   |
|                                             |   |                                   |   |                                  |   |   |   |   |   |
| Diluted  - as reported                           |   | 0.29                                   |   | 0.27                                  |   | 0.84 |   | 1.11 |   |
| Diluted  - pro forma                             |   | 0.24                                   |   | 0.24                                  |   | 0.72 |   | 1.02 |   |

 

*Management’s Estimates: *The preparation of financial statements in conformity withgenerally accepted accounting principles requires management to make certainestimates and assumptions. These affect the reported amounts of assets andliabilities, the disclosure of any contingent assets or liabilities and thereported amounts of revenues and expenses during the reporting periods. Actualresults could differ from the estimates made.

 

*Income Taxes:** ***The Companyis not a taxable entity; accordingly, no provision for income taxes has beenmade in the consolidated financial statements. Partners are taxed on theirallocable share of the Company’s earnings, which is reportable on their incometax returns.

 

Note2. Details of Land Under Development

 
| **(In $000)**                               |   | **September  30,  2003** |   | **December  31,  2002** |   |
|---------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                                        |   |                     |   |                    |   |
| Residential  land development               |   | $                        | 32,804 |                    | $      | 27,706 |   |
| Industrial  and commercial land development |   | 5,733                    |   | 19,722                  |   |
|                                        |   |                     |   |                    |   |
| Total  land under development               |   | $                        | 38,537 |                    | $      | 47,428 |   |

 

6

----

 

Note3. Details for Earnings per Unit Calculation

 
| **(in 000’s except per unit)**        |   | **Income  (numerator)** |   | **Units  (denominator)** |   | **Per Unit** |   |
|--------------------------------------------|--------|-------------------------|--------|--------------------------|--------|--------------|--------|
| For  three months ended September 30, 2003 |   |                    |   |                     |   |         |   |
| Net  income per unit                       |   |                    |   |                     |   |         |   |
| Net  income available to unitholders       |   | $                       | 6,934  |                     | 23,600 |         | $      | .29 |   |
| Effect  of dilutive securities             |   |                    |   |                     |   |         |   |
| Unit options                               |   | —                  |   | 531                      |   | —       |   |
| Net  income per unit - diluted             |   | $                       | 6,934  |                     | 24,131 |         | $      | .29 |   |
|                                       |   |                    |   |                     |   |         |   |
| For  three months ended September 30, 2002 |   |                    |   |                     |   |         |   |
| Net  income per unit                       |   |                    |   |                     |   |         |   |
| Net  income available to unitholders       |   | $                       | 6,667  |                     | 24,013 |         | $      | .28 |   |
| Effect  of dilutive securities             |   |                    |   |                     |   |         |   |
| Unit  options                              |   | —                  |   | 273                      |   | (.01         | )      |
| Net  income per unit - diluted             |   | $                       | 6,667  |                     | 24,286 |         | $      | .27 |   |
|                                       |   |                    |   |                     |   |         |   |
| For  nine months ended September 30, 2003  |   |                    |   |                     |   |         |   |
| Net  income per unit                       |   |                    |   |                     |   |         |   |
| Net  income available to unitholders       |   | $                       | 20,058 |                     | 23,388 |         | $      | .86 |   |
| Effect  of dilutive securities             |   |                    |   |                     |   |         |   |
| Unit  options                              |   | —                  |   | 378                      |   | (.02         | )      |
| Net  income per unit - diluted             |   | $                       | 20,058 |                     | 23,766 |         | $      | .84 |   |
|                                       |   |                    |   |                     |   |         |   |
| For  nine months ended September 30, 2002  |   |                    |   |                     |   |         |   |
| Net  income per unit                       |   |                    |   |                     |   |         |   |
| Net  income available to unitholders       |   | $                       | 27,165 |                     | 24,100 |         | $      | 1.13 |   |
| Effect  of dilutive securities             |   |                    |   |                     |   |         |   |
| Unit  options                              |   | —                  |   | 386                      |   | (.02         | )      |
| Net  income per unit - diluted             |   | $                       | 27,165 |                     | 24,486 |         | $      | 1.11 |   |

 

Note4. Details of Income-Producing Properties and Property and Equipment

 
| **(In $000s)**                |   | **September  30,  2003** |    | **December  31,  2002** |   |
|-------------------------------|--------|--------------------------|---------|-------------------------|--------|
| Income-producing  properties  |   |                     |    |                    |   |
| Land                          |   | $                        | 36,612  |                    | $      | 36,600 |   |
| Buildings                     |   | 143,231                  |    | 134,002                 |   |
| Other                         |   | 11,674                   |    | 9,655                   |   |
| Properties  under development |   | 27,514                   |    | 23,741                  |   |
|                          |   | 219,031                  |    | 203,998                 |   |
| Accumulated  depreciation     |   | (48,481                  | )       | (44,027                 | )      |
|                          |   | $                        | 170,550 |                    | $      | 159,971 |   |

 

7

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| **(In $000s)**                            |   | **September  30,  2003** |   | **December  31,  2002** |   |
|-------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| Property  and equipment                   |   |                     |   |                    |   |
| Land                                      |   | $                        | 3,760  |                    | $      | 3,760 |   |
| Buildings                                 |   | 6,403                    |   | 6,034                   |   |
| Equipment                                 |   | 8,789                    |   | 8,957                   |   |
| Water  supply systems, orchards and other |   | 96,383                   |   | 91,465                  |   |
| Construction  in progress                 |   | 6,086                    |   | 7,188                   |   |
|                                      |   | 121,421                  |   | 117,404                 |   |
| Accumulated  depreciation                 |   | (42,918                  | )      | (40,955                 | )      |
|                                      |   | $                        | 78,503 |                    | $      | 76,449 |   |

 

Note 5.  Disclosure about Certain Financial StatementCaptions

 

*Cashand cash equivalents -*The Company had $68.8 million in cashand short-term investments at September 30, 2003, representing a $43.4 millionincrease in cash and cash equivalents for the first nine months of 2003compared to the Company’s ending balance of cash and equivalents at December31, 2002.  Cash generated fromresidential lot sales and commercial and industrial land sales combined totaledapproximately $86 million for the nine months ended September 30, 2003.  Included in the cash balance at September30, 2003 was a $5 million deposit received by the Company in July 2003 relatedto the pending merger transaction with Lennar Corporation and LNR PropertyCorporation.  Upon the closing of themerger transaction, the $5 million deposit becomes part of the purchase pricefrom the Lennar/LNR venture.  (Seefurther discussion of the merger below in Note 8:  Merger.) Additionally, in June 2003, the Company refinanced a mortgage secured bythe New Columbia Ranch.  The existingmortgage of $9.6 million was repaid and a new $15 million mortgage wasexecuted.  (See additional discussionbelow on the Mortgage and other debt financial statement caption.)  At September 30, 2003, with the exception of$19.3 million in outstanding letters of credit, the Company had no outstandingbalances on its available lines of credit. Due to prepayment penalties, the Company invests its excess cash inshort-term investments rather than pay down its fixed rate debt.  (See the Consolidated Statements of CashFlows and further discussion in Item 2: Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.)

 

*Land under development -*The $8.9 million decreasein land under development at September 30, 2003 compared to the prior year endwas primarily due to $41 million in cost allocations to residential lot salesand commercial and industrial land sales reported in the financial results forthe first nine months of 2003.  This waspartially offset by $32 million in capitalized project costs, net ofapproximately $8 million in fee reimbursements received from the ValenciaBridge and Major Thoroughfare District, during the nine months ended September30, 2003.  (See definitions of projectcosts and cost allocations in the “Critical Accounting Policies and Estimates”section of Item 2:  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.)

 

*Accruedexpenses -*The $14.7 million increase in accrued expenses atSeptember 30, 2003 compared to December 31, 2002 primarily related to the collection of school fees frommerchant builders for residential lots sold. As monies are collected from merchant builders to fund the Company’s portionof future schools to be built in Valencia, the accrual account isincreased.  The Company reduces theaccrual as funding requests are paid by the Company to the school districts.

 

*Deferredrevenues -*The $7.1 million net increase in deferred revenuesfor the nine months ended September 30, 2003 was primarily attributable to approximately $18 million in deferredrevenues for certain residential lots and commercial land sold under percentageof completion accounting in 2003, including $536,000 recorded in the2003 third quarter.  (See definition ofpercentage of completion in the “Critical Accounting Policies and Estimates”section of Item 2:  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.)  Thisincrease was partially offset by recognizing about $11 million of deferredrevenues earned in 2003 to date, including $2.3 million of deferredrevenues recognized in the 2003 third quarter.

 

8

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*Mortgageand other debt* – The $5.1 million increase in mortgage andother debt for the nine months ended September 30, 2003 was primarily due tothe refinancing of the New Columbia Ranch mortgage in June 2003.  The existing mortgage of $9.6 million wasrepaid and a new $15 million mortgage was executed.  The existing mortgage had an 8.45% interest rate and was tomature in November 2003.  The newmortgage has a term of 15 years and bears interest at 3.07% per annum for thefirst three years and converts to a variable rate, reset quarterly,thereafter.  This increase was partiallyoffset by principal payments on other of the Company’s outstanding fixed ratedebt based on contractual terms.  (Seefurther discussion in the “Financial Condition” section of Item 2:  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.)

 

Note 6.  Business Segment Reporting

 

The following tableprovides financial information regarding revenues from external customers,income and total assets for the Company’s business segments and also provides areconciliation to the Company’s consolidated totals:

 
|                         |   | **Three months ended September 30, 2003** |   |
|------------------------------|--------|-------------------------------------------|--------|
| **(In $000s)**               |   | **Revenues**                              |   | **Contribution  to Income** |   | **Assets** |   |
| Real  Estate                 |   |                                      |   |   |   |   |   |
| Residential                  |   | $                                         | 9,344  |   | $ | 6,841 |   | $ | 41,597 |   |
| Industrial and commercial    |   | 13,241                                    |   | 7,050 |   | 24,361 |   |
| Community development        |   | —                                    |   | (3,339 | ) | 33,244 |   |
| Income-producing  properties |   | 10,940                                    |   | 1,752 |   | 156,792 |   |
| Valencia  Water Company      |   | 4,736                                     |   | 1,103 |   | 84,698 |   |
| Agriculture                  |   | 1,244                                     |   | 425 |   | 5,790 |   |
| Central  administration      |   | —                                    |   | (4,700 | ) | 67,324 |   |
| All other                    |   | —                                    |   | (1,250 | ) | — |   |
|                         |   | 39,505                                    |   | 7,882 |   | 413,806 |   |
| Interest and other,  net     |   | —                                    |   | (948 | ) | — |   |
|                         |   | $                                         | 39,505 |   | $ | 6,934 |   | $ | 413,806 |   |

 

 
|                         |   | **Three months ended September 30,  2002** |   |
|------------------------------|--------|--------------------------------------------|--------|
| **(In $000s)**               |   | **Revenues**                               |   | **Contribution  to Income** |   | **Assets** |   |
| Real  Estate                 |   |                                       |   |   |   |   |   |
| Residential                  |   | $                                          | 37,761 |   | $ | 12,410 |   | $ | 32,018 |   |
| Industrial and  commercial   |   | 3,331                                      |   | 270 |   | 53,932 |   |
| Community development        |   | —                                     |   | (5,763 | ) | 35,069 |   |
| Income-producing  properties |   | 9,700                                      |   | 3,146 |   | 149,101 |   |
| Valencia  Water Company      |   | 4,427                                      |   | 1,015 |   | 77,967 |   |
| Agriculture                  |   | 2,971                                      |   | (282 | ) | 6,025 |   |
| Central  administration      |   | —                                     |   | (2,619 | ) | 16,433 |   |
| All other                    |   | —                                     |   | (825 | ) | — |   |
|                         |   | 58,190                                     |   | 7,352 |   | 370,545 |   |
| Interest and other,  net     |   | —                                     |   | (685 | ) | — |   |
|                         |   | $                                          | 58,190 |   | $ | 6,667 |   | $ | 370,545 |   |

 

9

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|                         |   | **Nine months ended September 30,  2003** |    |
|------------------------------|--------|-------------------------------------------|---------|
| **(In $000s)**               |   | **Revenues**                              |    | **Contribution  to Income** |   | **Assets** |   |
| Real  Estate                 |   |                                      |    |   |   |   |   |
| Residential                  |   | $                                         | 60,101  |   | $ | 29,068 |   | $ | 41,597 |   |
| Industrial and  commercial   |   | 23,247                                    |    | 7,158 |   | 24,361 |   |
| Community development        |   | —                                    |    | (9,441 | ) | 33,244 |   |
| Income-producing  properties |   | 30,314                                    |    | 6,539 |   | 156,792 |   |
| Valencia  Water Company      |   | 10,681                                    |    | 1,809 |   | 84,698 |   |
| Agriculture                  |   | 3,154                                     |    | 1,049 |   | 5,790 |   |
| Central  administration      |   | —                                    |    | (10,967 | ) | 67,324 |   |
| All other                    |   | —                                    |    | (3,000 | ) | — |   |
|                         |   | 127,497                                   |    | 22,215 |   | 413,806 |   |
| Interest  and other, net     |   | —                                    |    | (2,157 | ) | — |   |
|                         |   | $                                         | 127,497 |   | $ | 20,058 |   | $ | 413,806 |   |

 

 
|                         |   | **Nine months ended September 30,  2002** |    |
|------------------------------|--------|-------------------------------------------|---------|
| **(In $000s)**               |   | **Revenues**                              |    | **Contribution  to Income** |   | **Assets** |   |
| Real  Estate                 |   |                                      |    |   |   |   |   |
| Residential                  |   | $                                         | 82,536  |   | $ | 26,696 |   | $ | 32,018 |   |
| Industrial and  commercial   |   | 34,894                                    |    | 15,403 |   | 53,932 |   |
| Community development        |   | —                                    |    | (13,022 | ) | 35,069 |   |
| Income-producing  properties |   | 29,171                                    |    | 9,395 |   | 149,101 |   |
| Valencia  Water Company      |   | 10,706                                    |    | 2,293 |   | 77,967 |   |
| Agriculture                  |   | 4,902                                     |    | 33 |   | 6,025 |   |
| Central  administration      |   | —                                    |    | (7,916 | ) | 16,433 |   |
| All other                    |   | —                                    |    | (3,175 | ) | — |   |
|                         |   | 162,209                                   |    | 29,707 |   | 370,545 |   |
| Interest  and other, net     |   | —                                    |    | (2,542 | ) | — |   |
|                         |   | $                                         | 162,209 |   | $ | 27,165 |   | $ | 370,545 |   |

 

Note 7.  New Accounting Pronouncement

 

In April 2003, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 149, *Amendment of Statement 133 onDerivative Instruments and Hedging Activities.* SFAS No. 149 amendsand clarifies financial accounting and reporting for derivative instruments,including certain derivative instruments imbedded in other contracts and forhedging activites under SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*.  The statement is generally effective forcontracts entered into or modified after June 30, 2003 and for hedgingrelationships designated after June 30, 2003. It is not anticipated that the adoption of this statement will have amaterial effect on the Company’s results of operations and financial conditionfor the year ending December 31, 2003.

 

In May 2003, the FASBissued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.  SFAS No. 150 established standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  In addition, the statement requires the presentation of theminority interest in certain consolidated entities at fair market value.  The statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003.  However, on October 29, 2003, theFASB decided to defer indefinitely the implementation date for reporting atfair value minority interests in certain consolidated entities, whichpreviously was effective beginning in the third quarter of 2003.  As a result of this deferral, it is notanticipated that the adoption of this statement will have a material effect on the Company’sresults of operations and financial condition for the year ending December 31,2003.

 

10

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Note 8.  Merger

 

OnJuly 21, 2003, the Company entered into a merger agreement with LennarCorporation, a Delaware corporation, LNR Property Corporation, a Delawarecorporation, NWHL Investment LLC, a Delaware limited liability company and NWHLAcquisition, L.P., a California limited partnership.  On September 4, 2003, the Company announced the completion of duediligence by the Lennar/LNR interests. The transaction remains subject to the approval by the California PublicUtilities Commission (CPUC) of the change of control of the Company’s wholly-ownedsubsidiary, Valencia Water Company, as well as customary closingconditions.  The Hart-Scott-Rodino Actwaiting period has been terminated by the Department of Justice and the FederalTrade Commission.

 

TheProxy Statement for the Special Meeting of Untiholders was mailed on September25, 2003 to unitholders of record on September 22, 2003.  The Special Meeting of Unitholders was heldon November 6, 2003 at The Crowne Plaza Hotel - Los Angeles InternationalAirport, 5985 West Century Boulevard, Los Angeles, California. At the meeting,unitholders approved the principal terms of a merger pursuant to the Agreementand Plan of Merger, dated July 21, 2003, by and among the Company, on the onehand, and Lennar Corporation, LNR Property Corporation, NWHL Investment LLC,and NWHL Acquisition, L.P., on the other hand.

 

Theapplication for change of control of Valencia Water Company was filed with theCPUC on August 18, 2003.  Three protestsrequesting evidentiary and public hearings were received by the CPUC inconnection with the application.  OnOctober 3, 2003, the Administrative Law Judge and the Assigned Commissionerissued a ruling confirming the determination that hearings are notnecessary.  On October 23, 2003, theAdministrative Law Judge and the Assigned Commissioner issued a ruling modifyingthe schedule and seeking comments on proposed conditions the Commission mightimpose, should it approve the change in control of Valencia Water Company.  Under the new schedule, parties were givento October 27, 2003 to file and serve briefs and proposed conditions.  Reply briefs were to be filed no later thanOctober 31, 2003.  Applicants for thechange in control, which includes the Company, Lennar and LNR Property, filedtimely their brief and their reply brief with the CPUC which included commentson the proposed conditions.  Subsequentscheduling and action is subject to the Administrative Law Judge’s and CPUC’sdiscretion.  The Company had previouslystated it expected the transaction to close by the middle of 2004.  However, based on the progress to date, itnow appears that the closing may take place substantially earlier thanoriginally anticipated.

 

11

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Part I. FinancialInformation

Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

 

##### **CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

TheCompany’s unaudited interim financial statements have been prepared pursuant tothe rules and regulations promulgated by the Securities and ExchangeCommission.  Certain information andfootnote disclosure normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations, although the Company believesthat the disclosures are adequate to make the information presented notmisleading.  For further information,your attention is directed to the footnote disclosures found on pages 36through 51 of the Company’s 2002 Annual Report on Form 10-K.

 

Inherentin the preparation of these financial statements are certain estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities.  The Company evaluates these estimates andassumptions on a regular basis taking into account historical experience andother relevant current factors. Therefore, actual results may differ from reported amounts underdifferent assumptions or conditions.

 

The accounting policiesused by the Company in the preparation of its consolidated financial statementsas they relate to its business segments are presented above in Note 1 to theconsolidated financial statements.  Asummary of the accounting policies management considers significant in the preparationof the Company’s consolidated financial statements follows.  The Company’s audit committee has reviewedthe selection, application and disclosure of the Company’s critical accountingpolicies.

 

*Revenue recognition* – The majority ofrevenues for the Company result from land sales.  The Company follows the provisions in Statement of FinancialAccounting Standards (SFAS) No. 66, *Accounting for Sales of Real Estate*, torecord these sales.  SFAS No. 66provides specific sales recognition criteria to determine when land salesrevenues can be recorded.  For example,SFAS No. 66 requires a land sale must be consummated with a sufficient downpayment of the sales price depending upon the type and timeframe for developmentof the property sold, and that any receivable from the sale cannot be subjectto future subordination.  The sellercannot retain any material continuing involvement in the property sold.

 

*Percentage of completion* – When theCompany has an obligation to complete development on sold property it utilizesthe percentage of completion method of accounting to record revenues andincome.  Under percentage of completionaccounting, the Company recognizes revenues and income based upon the ratio ofdevelopment cost completed to the estimated total cost of the property 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 development progressestoward completion.

 

*Project costs* – Costs incurred by theCompany to record maps and develop specific real estate projects arecapitalized as a cost of that project and included as an asset in land underdevelopment on the balance sheet. Project litigation costs are charged to expense when incurred.  Indirect costs that do not clearly relate toprojects under development, including general and administrative expenses, arecharged to expense when incurred.

 

*Cost allocations* – The Company generallyallocates onsite costs to individual parcels within a project on a square footbasis if the parcels in the project are of similar value.   In mixed-use projects, where there may beboth a residential and a commercial component with varying fair values, onsitecosts are allocated to the respective parcels using the relative sales valuemethod.  Under the relative sales valuemethod, each parcel in the project under development is allocated onsite costsin proportion to the estimated overall sales prices of the project such thateach parcel to be sold reflects the same gross profit margin.  Since this method requires the Company toestimate the expected sales prices for the entire project, the profit margin onsubsequent parcels sold will be impacted by both changes in the estimated totalrevenues as well as any changes in the estimated total costs of the project.

 

Offsite improvements withregional benefit, such as freeway on-ramps and off-ramps and water storagetanks, are referred to as infrastructure costs.  The Company estimates the total cost to develop theinfrastructure within a defined major development area and allocates this costto the land within the area.  Changes inthe estimated

 

12

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remaining infrastructure costs or changes in the remaining developableacreage will impact the infrastructure cost allocation and corresponding profitmargin for unsold land within a major development area.

 

*Stock-basedemployee compensation* – The Company accounts for stock-basedemployee compensation using the intrinsic value method allowed under APBOpinion No. 25, *Accounting for Stock Issued to Employees*.  No stock-based employee compensation expenseis reflected in net income, as options granted under the Company’s plans havean exercise price equal to the market value of the Company’s partnership unitson the date of grant.  Refer to Note 1to the consolidated financial statements for additional disclosures, includingthe pro forma effect for the fair value method of accounting (expensing) forstock-based employee compensation.

 

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**RESULTS OF OPERATIONS**

 

Comparison of Third Quarter and Nine Months of 2003 to Third Quarterand Nine Months of 2002

*Unaudited*

* *

The amounts of increase or decrease in revenues and incomefrom the prior year third quarter and nine months are as follows (in 000s,except per unit):

 
|                                                                  |   | **Third  Quarter**       |    | **Nine  Months**         |   |
|-----------------------------------------------------------------------|--------|--------------------------|---------|--------------------------|--------|
|                                                                  |   | **Increase  (Decrease)** |    | **Increase  (Decrease)** |   |
|                                                                  |   | **Amount**               |    | **%**                    |   | **Amount** |   | **%** |   |
| **Revenues**                                                          |   |                     |    |                     |   |   |   |   |   |
| Real  estate                                                          |   |                     |    |                     |   |   |   |   |   |
| Residential  land sales                                               |   | $                        | (28,417 | )                        | -75    | % | $ | (22,435 | ) | -27 | % |
| Industrial  and commercial sales                                      |   | 9,910                    |    | 298                      | %      | (11,647 | ) | -33 | % |
| Commercial  operations                                                |   |                     |    |                     |   |   |   |   |   |
| Income-producing  properties                                          |   | 1,240                    |    | 13                       | %      | 1,143 |   | 4 | % |
| Valencia  Water Company                                               |   | 309                      |    | 7                        | %      | (25 | ) | 0 | % |
|                                                                  |   | (16,958                  | )       | -31                      | %      | (32,964 | ) | -21 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| Agriculture  Operations                                               |   | (1,727                   | )       | -58                      | %      | (1,748 | ) | -36 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| Total  revenues                                                       |   | $                        | (18,685 | )                        | -32    | % | $ | (34,712 | ) | -21 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| **Contribution to Income**                                            |   |                     |    |                     |   |   |   |   |   |
| Real  estate                                                          |   |                     |    |                     |   |   |   |   |   |
| Residential  land sales                                               |   | $                        | (5,616  | )                        | -46    | % | $ | 2,391 |   | 9 | % |
| Industrial  and commercial sales                                      |   | 6,720                    |    | 5554                     | %      | (8,220 | ) | -55 | % |
| Community  development                                                |   | 2,352                    |    | 40                       | %      | 3,612 |   | 26 | % |
| Commercial  operations                                                |   |                     |    |                     |   |   |   |   |   |
| Income-producing  properties                                          |   | (1,406                   | )       | -45                      | %      | (2,851 | ) | -31 | % |
| Valencia  Water Company                                               |   | 67                       |    | 7                        | %      | (476 | ) | -22 | % |
|                                                                  |   | 2,117                    |    | 20                       | %      | (5,544 | ) | -14 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| Agriculture  operations                                               |   | 695                      |    | 235                      | %      | 1,022 |   | 3524 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| General  and administrative expense                                   |   | (2,282                   | )       | -77                      | %      | (2,970 | ) | -32 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| Operating  income                                                     |   | 530                      |    | 7                        | %      | (7,492 | ) | -25 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| Interest  and other, net                                              |   | (263                     | )       | -38                      | %      | 385 |   | 15 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| Net  income                                                           |   | $                        | 267     |                     | 4      | % | $ | (7,107 | ) | -26 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| Net  income per unit                                                  |   | $                        | 0.01    |                     | 4      | % | $ | (0.27 | ) | -24 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| Net  income per unit - diluted                                        |   | $                        | 0.02    |                     | 7      | % | $ | (0.27 | ) | -24 | % |
|                                                                  |   |                     |    |                     |   |   |   |   |   |
| Weighted  average number of units used in computing per unit amounts: |   |                     |    |                     |   |   |   |   |   |
| Net  income per unit                                                  |   | (413                     | )       | -2                       | %      | (712 | ) | -3 | % |
| Net  income per unit - diluted                                        |   | (155                     | )       | -1                       | %      | (720 | ) | -3 | % |

 

14

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The increases anddecreases in revenues and income for the three and nine months are attributableto the following:

 

Revenues totaled $39.5million for the three months ended September 30, 2003 compared to revenues of$58.2 million for the three months ended September 30, 2002.  The company reported income of $6.9 million,or $.29 per partnership unit, for the 2003 third quarter compared to $6.7million, or $.27 per partnership unit, for the same period in 2002.

 

Although revenues for the2003 third quarter were 32% lower than the same period in 2002, income was 4%higher for the three month period ended September 30, 2003 compared to the 2002third quarter.  This relationship was primarilydue to a high-margin apartment land sale and $2.2 million in revenues receivedunder residential price and profit participation agreements in the currentquarter.  No significant price andprofit participation revenues were reported in the 2002 third quarter.

 

The primary contributorsto the 2003 third quarter results were the sales of 10 custom home sites in theWestridge golf course community, the sales of 12 acres of commercial andindustrial land, including a 7.8 acre apartment land sale, operations from theCompany’s income-producing portfolio and revenues received by the Company underprice and profit participation agreements. Combined, these activities contributed $31.2 million to revenues and$15.3 million to income in the third quarter of 2003.

 

Residential land saleswere the major contributor to 2002 third quarter results with 217 residentiallots in the Westridge community closing escrow, contributing $34.8 million torevenues and $13.0 million to income.

 

Homesales by merchant builders on lots previously purchased from the Companycontinue to be strong with 657 homes sold during the first nine months of 2003compared to 849 new homes sold during the same period last year.  At September 30, 2003, merchant builders had512 homes in escrow and unsold inventory of 1,684 lots previously purchasedfrom the Company, compared to 406 homes in escrow and unsold inventory of 1,339lots at the end of the 2002 third quarter. While the Company does notparticipate directly in profits generated from escrow closings bymerchant builders, indirectly the Company generally shares with the merchantbuilders in the overall revenues and profits of home building projects aboveagreed upon thresholds.  The sale ofpreviously sold lots to homebuyers is also key to the Company’s future successin selling additional lots.

 

Revenues for the ninemonths ended September 30, 2003 totaled $127.5 million and income totaled$20.1million, or $.84 per partnership unit, compared to revenues of $162.2million and income of $27.2 million, or $1.11 per partnership unit, for thesame period in 2002.

 

The sales of all 759residential lots in the Company’s Creekside community, the sales of 24 customhome sites in the Westridge golf course community, the sales of approximately30 acres of commercial and industrial land, and operations from the Company’sincome-producing portfolio were the primary contributors to the Company’sresults for the nine months ended September 30, 2003. Combined, thesecontributed $100.8 million to revenues and $38.1 million to income for thenine-month period.  In addition,revenues and income recorded by the Company under price and profitparticipation agreements for the first nine months of 2003 totaled $4.4 million.

 

Major contributors to2002 nine-month results were the sales of 620 residential lots in the Westridgecommunity, the sale of the entire 329 entitled, unimproved lots in the AltaVista community and the sales of approximately 57 acres of commercialland.  Combined, these sales contributed$110.5 million to revenues and $45.7 million to income for the 2002 nine monthperiod.

 

OnJuly 21, 2003, the Company entered into a merger agreement with LennarCorporation, a Delaware corporation, LNR Property Corporation, a Delawarecorporation, NWHL Investment LLC, a Delaware limited liability company and NWHLAcquisition, L.P., a California limited partnership.  On September 4, 2003, the Company announced the completion of duediligence by the Lennar/LNR interests. The transaction remains subject to the approval by the California PublicUtilities Commission (CPUC) of the change of control of the Company’swholly-owned subsidiary, Valencia Water Company, as well as customary closingconditions.  The Hart-Scott-Rodino Actwaiting period has been terminated by the Department of Justice and the FederalTrade Commission.

 

15

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TheProxy Statement for the Special Meeting of Untiholders was mailed on September25, 2003 to unitholders of record on September 22, 2003.  The Special Meeting of Unitholders was heldon November 6, 2003 at The Crowne Plaza Hotel - Los Angeles International Airport, 5985 West Century Boulevard, LosAngeles, California. At the meeting, unitholders approved the principal termsof a merger pursuant to the Agreement and Plan of Merger, dated July 21, 2003,by and among the Company, on the one hand, and Lennar Corporation, LNR PropertyCorporation, NWHL Investment LLC, and NWHL Acquisition, L.P., on the otherhand.

 

Theapplication for change of control of Valencia Water Company was filed with theCPUC on August 18, 2003.  Three protestsrequesting evidentiary and public hearings were received by the CPUC inconnection with the application.  OnOctober 3, 2003, the Administrative Law Judge and the Assigned Commissionerissued a ruling confirming the determination that hearings are notnecessary.  On October 23, 2003, theAdministrative Law Judge and the Assigned Commissioner issued a rulingmodifying the schedule and seeking comments on proposed conditions theCommission might impose, should it approve the change in control of ValenciaWater Company.  Under the new schedule,parties were given to October 27, 2003 to file and serve briefs and proposedconditions.  Reply briefs were to befiled no later than October 31, 2003. Applicants for the change in control, which includes the Company, Lennarand LNR Property, filed timely their brief and their reply brief with the CPUCwhich included comments on the proposed conditions.  Subsequent scheduling and action is subject to the AdministrativeLaw Judge’s and CPUC’s discretion.  TheCompany had previously stated it expected the transaction to close by themiddle of 2004.  However, based on theprogress to date, it now appears that the closing may take place substantiallyearlier than originally anticipated.

 

As a result of a cashpayment received on October 17, 2003 under the terms of a settlement agreementrelated to Company-initiated litigation (see Part II, Item 1.  Legal Proceedings), and projected resultsfor the 2003 fourth quarter, the Company expects net income for the full yearending December 31, 2003 to range from approximately $1.50 to $1.60 perunit.  This is an increase over thepreviously reported range for 2003’s earnings of $1.15 to $1.25 per unit.  This estimate reflects the forecasted saleof about 793 residential lots with a combined sales price of approximately $67million and up to 56 acres of commercial and industrial land with a combinedexpected sales value of $44 million for 2003. As of September 30, 2003, 783 residential lots and 30 acres ofcommercial and industrial land had closed escrow.  As of October 31, 2003, escrows closed on an additional twocustom estate lots, which will be reflected in the results for the 2003 fourthquarter.  The Company’s portfolio ofincome-producing properties is expected to contribute approximately $8 millionto income in 2003, after deductions for administrative expenses anddepreciation.  Net operating income fromthe income-producing portfolio, which is the industry-accepted performancemeasure for such assets, is expected to be approximately $20 - $21 million for2003.  Net operating income representsearnings from the income portfolio before deductions for administrativeexpenses and depreciation, but after accounting for approximately $700,000 inprojected start-up expenses for the Tournament Players Club at Valencia golfcourse, in 2003.

 

Theability of the Company to complete sales projected in 2003 will be dependentupon a variety of factors including, but not limited to, identification ofsuitable buyers for its land, reaching agreement with the buyers on definitiveterms, the successful completion of the due diligence work by buyers, theavailability of financing to suitable buyers, satisfactory resolution ofregulatory and legal issues, and market and general economic and otherconditions, the timing and outcome of which may be beyond the control of theCompany.  Generally, revenues and incomefrom land sales are recorded under the percentage of completion method ofaccounting.  Accordingly, certainrevenues and income from land sales in the current year may be deferred tofuture periods when the Company has an obligation to complete development on aproperty sold.

 

**ResidentialLand Sales**

 

The Company primarilysells lots to merchant builders who, in turn, build homes for sale.  Revenues and income are recorded when titleis transferred to the merchant builder. Generally, residential lot sale agreements contain a provision wherebythe Company will receive from the merchant builder a portion of the home salesprices above an agreed upon base price (price participation) and/or in theoverall profitability of the home building project after the merchant builderhas received an agreed upon return (profit participation).  If home prices and/or project profitabilityfall short of the participation thresholds, the Company receives no additionalrevenues or income and has no financial obligation to the builder.

 

Inthe 2003 third quarter, 10 custom home sites closed escrow in the Company’sWestridge golf course community, contributing $4.8 million to revenues and $3.3million to income under the percentage of completion accounting method.  Additionally, revenues of $2.3 million andincome of $944,000 were recognized in the 2003

 

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third quarter under percentage of completion accounting on lotspreviously sold by the Company.  Also,during the three-month period ended September 30, 2003, revenues and income of$2.2 million were recognized under price and profit participation agreementsrelated to prior year lot sales.

 

Results for the ninemonths ended September 30, 2003 included the sale of the entire 759 lots in theCreekside community to merchant builders and the closing of escrows on 24custom home sites in the Westridge community. The sale of these 783 lots contributed a combined total of $49.2 millionto revenues and $21.9 million to income under the percentage of completionmethod of accounting through September 30, 2003.  In addition, results for the nine-month period ended September30, 2003 included $6.4 million in revenues recognized under percentage ofcompletion accounting on lots previously sold by the Company, which, whencombined with revised estimates to complete the land development on the soldlots, generated $4.8 million in income for the first nine months of 2003.  Also, $4.4 million in revenues and incomewere recognized in the nine-month period ended September 30, 2003 from cashpayments received by the Company under price and profit participationagreements related to prior year lot sales.

 

Atotal of 217 residential lots in Valencia Westridge closed escrow in the 2002third quarter, contributing $34.8 million to revenues and $13.0 million toincome under percentage of completion accounting.   For the nine months ended September 30, 2002, a total of 949residential lots closed escrow, contributing $77.9 million to revenues and$27.4 million to income under percentage of completion accounting.  Included in the 949 lots sold were the entireinventory of 329 entitled, unimproved residential lots in the community of AltaVista, contributing $15.8 million to revenue and $6.2 million to income, and620 entitled, improved lots in the Westridge golf course community,contributing $62.1 million to revenues and $21.2 million to income.

 

Noresidential lots were in escrow to merchant builders at the end of the 2003third quarter.  As of October 31, 2003,escrows closed on two additional custom lots for a combined sales price of$950,000, which will be reflected in the results for the fourth quarter2003.  At September 30, 2002, the entire275 residential lots in the community of Hidden Creek and 106 residential lotsin Westridge were in escrow for closings in the 2002 fourth quarter.  In addition, the entire 759 residential lotsin the Creekside community were in escrow for closings reported in the resultsfor the 2003 first quarter.

 

# **Industrialand Commercial Sales**

## ** **

## **IndustrialLand Sales**

 

Whiledemand for industrial land in Valencia’s business parks remains at low levels,the industrial market continues to show signs of improvement with a combinedvacancy rate in both Valencia Industrial Center and Valencia Commerce Centerbelow 10% as of September 30, 2003 compared to 11% at the end of the 2003second quarter and 12% at September 30, 2002. At September 30, 2003, the Company had approximately 360 net acres ofindustrial land remaining in Valencia.

 

A2.1-acre industrial parcel closed escrow during the 2003 third quarter,contributing $1.0 million to revenues and $137,000 to income.  Results for the nine months ended September30, 2003 included the sales of a total of 7.8 acres of industrial land, which,combined, contributed $3.8 million to revenues and $546,000 to income.  No industrial land was sold or in escrowduring the three or nine months ended September 30, 2002.

 

TheCompany expects to market for sale approximately 14 acres of industrial land in2003, including the 7.8 acres which closed during the nine months endedSeptember 30, 2003.  At September 30,2003, approximately 2 acres of industrial land were in escrow for $889,000,with closing expected in the 2003 fourth quarter.  The ability of the Company to complete sales projected in 2003 isdependent upon a variety of factors including, but not limited to,identification of suitable buyers for its land, reaching agreement with thebuyers on definitive terms, the successful completion of the due diligence workby buyers, the availability of financing to suitable buyers, satisfactoryresolution of regulatory and legal issues, and market and general economic andother conditions, the timing and outcome of which may be beyond the control ofthe Company.  All escrow closings aresubject to market and other conditions that may be beyond the control of theCompany.

 

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## **CommercialLand Sales**

 

Two commercial parcelstotaling 10.0 acres closed escrow during the 2003 third quarter, contributing$12.2 million to revenues and $7.9 million to income.  The parcels that closed escrow in the 2003 third quarter includeda 188-unit apartment complex site on 7.8 net acres.  For the nine months ended September 30, 2003, six commercialparcels totaling 22.5 acres closed escrow, contributing a total of $17.4million to revenues and $9.2 million to income under percentage of completionaccounting.

 

During the 2002 thirdquarter, two commercial parcels totaling 1.6 acres closed escrow andcontributed $1.1 million to revenues and $522,000 to income.  In addition, $1.0 million in revenues and$613,000 in income were recognized under the percentage of completion method ofaccounting on sales closed earlier in 2002, and $1.2 million in revenues and$629,000 in income were recognized from prior year sales.  For the nine months ended September 30,2002, nine commercial parcels totaling 57.1 acres closed escrow, contributing$32.7 million to revenues and $18.3 million to income under percentage ofcompletion accounting.

 

At September 30, 2003, atotal of approximately 59 acres were in escrow for about $43 million, withclosings expected beginning later in 2003. At September 30, 2002, a total of 8.6 acres of commercial land was inescrow for closings in the 2002 fourth quarter.  All escrow closings are subject to market and other conditionsthat may be beyond the control of the Company.

 

# **CommunityDevelopment**

 

Communitydevelopment expenses decreased 40% and 26% for the three- and nine-monthperiods ended September 30, 2003, respectively, compared to the same 2002periods primarily due to the Company’s reduction in corporate marketingexpenses as a result of the Company’s streamlining of its administration, salesand marketing efforts and a decrease in costs related to certain legal challenges.  For all of 2003, community developmentexpenses, excluding an $8.9 million cost recovery received on October 17, 2003related to the settlement of Company initiated litigation (see Part II, Item1.  Legal Proceedings), are expectedto decrease about 25% from 2002 due to the Company’s anticipated reduction inmarketing expenses and a decrease in costs related to legal challenges.  These expense reductions are anticipated tobe partially offset by continuing expenses related to obtaining entitlementsand planning for the completion of the projected sellout of Valenciaresidential land, and positioning Newhall Ranch to commence development.

 

InJune, 2000, a Kern County Superior Court identified six issues in the NewhallRanch Environmental Impact Report as requiring further review.  On October 14, 2003, the Company returned tothe Kern County Superior Court to address the additional analyses performed onthese six issues.  A hearing was held todetermine the sufficiency of the environmental documents for the Newhall RanchSpecific Plan, which was approved by the Los Angeles County Board ofSupervisors on May 27, 2003.  Prior tothe hearing, Ventura County withdrew from the lawsuit because the county’sissues had been adequately resolved.  OnOctober 22, 2003, the judge ruled that the court was satisfied with theadequacy of the additional environmental analysis that was performed at thecourt’s direction and granted Los Angeles County’s motion to discharge the writof mandate related to Newhall Ranch.  ThePetitioners have 60 days from the entry of judgment to appeal the court’sdecision.  The Company continues to workon subdivision maps in several different villages within Newhall Ranch and willbegin to process permit applications and environmental documents.  Initial development is expected to begin in2006.  The length of time necessary toobtain completion of governmental review and approvals necessary for theproject, and the timing of any judicial processes that may result, aredifficult to predict and actual commencement of development may be delayedbeyond the target date.

 

# **Income-ProducingProperties**

 

For the three-monthperiod ended September 30, 2003, revenues increased 13% over the same period in2002 while income decreased 45% over the 2002 third quarter.  The increase in revenues was primarily dueto revenues from Tournament Players ClubÒ(TPC) at Valencia championship golf course, which opened for play on June 26,2003.  The decrease in income wasprimarily due to a net loss recorded by TPC at Valencia golf course

 

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resulting from thestart-up of initial operations combined with lower income from Valencia TownCenter regional shopping mall.

 

Forthe nine-month period ended September 30, 2003, revenues increased 4% overrevenues for the nine months ended September 30, 2002 while income was down 31%over the prior year.  The increase inrevenues was primarily due to revenues from the TPC at Valenciachampionship golf course partially offset by a decrease in occupancy atValencia Town Center.  The decrease in income was primarily theresult of a net loss recorded from the TPC at Valencia golf course,including pre-opening and marketing expenses, increased operating expenses atValencia Town Center and a decrease in operating income from the hotelproperties.

 

Netoperating income represents earnings from the income portfolio beforedeductions for administrative expenses and depreciation, and is theindustry-accepted performance measure for such assets.  Net operating income for the third quarter2003 and the nine-month period ended September 30, 2003 decreased 13% and 10%,respectively, over the same periods in 2002 primarily due to a $200,000 net operating loss at the TPC atValencia golf course, increased operating expenses at Valencia Town Center anda decrease in operating income from both hotel properties.

 

**Income-Producing Properties**

*(Dollarsin thousands)*

 
|                         |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                         |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                         |   |                                  |   |                                 |   |   |   |   |   |
| Net Operating Income(1), (2) |   | $                                     | 4,918  |                                 | $      | 5,492 |   | $ | 15,068 |   | $ | 16,642 |   |
| Admin/Depreciation           |   | (3,203                                | )      | (2,371                               | )      | (8,619 | ) | (7,342 | ) |
| Total Contribution to Income |   | $                                     | 1,715  |                                 | $      | 3,121 |   | $ | 6,449 |   | $ | 9,300 |   |

 

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(1) Includes NorthPark Village Square and RiverOaks shopping centers, Valencia Town Center regional mall and entertainmentcenter, retail along Town Center Drive, Hyatt Valencia and Valencia Hiltonhotels, TPC at Valencia golf course, restaurants, leases, etc.

(2) Before administrative expenses anddepreciation.  Net operating income isthe industry-accepted performance measure for income-producing properties.  Maintenance expensed as incurred.

 

Occupancy rates at the Company’s various income-producing propertieswere as follows at September 30, 2003 and 2002:

 
| **Occupancy Rates(a):**                |   | **September 30, 2003** |   | **September 30, 2002** |   |
|----------------------------------------|--------|------------------------|--------|------------------------|--------|
| Valencia Town Center  Mall(b)          |   | 91                     | %      | 80                     | %      |
| Entertainment Center(c)                |   | 94                     | %      | 97                     | %      |
| Valencia Town Center  Master Lease(d)  |   | 83                     | %      | 94                     | %      |
| NorthPark/River Oaks  Shopping Centers |   | 100                    | %      | 99                     | %      |
| Hotels                                 |   | 77                     | %      | 76                     | %      |

 

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(a) Includes signed lease space and leases to short-term tenants.

(b) Includes approximately 329,929 square feet of leasable retail spacein the mall and along Town Center Drive, and 8,431 square feet of officespace.  Vacant space includesapproximately 40,000 square feet, which is not available for occupancy due toconstruction activities at the property.

(c) Includes 128,745 square feet of leasable space.

(d) Includes 51,019 squarefeet of retail space from a 12-1/2 year leaseback agreement that was part ofthe sale of four office buildings along Town Center Drive that closed escrow inearly December 2000.

 

The primary contributorto the vacancy at Valencia Town Center regional shopping mall was theapproximately 12% of non-anchor gross leasable area that was not available foroccupancy due to the construction related to the second phase of the remodelproject underway at the property.  Thefirst phase of the remodel involved relocating an expanded food court to the west end of the shopping mall where Edwards Theatres was previouslylocated. This was completed in February 2003. The second phase of the remodel in progress is to create newretail space in the former food court location and is expected to be open laterthis year for the holidays.

 

Results for the 2002third quarter and the nine months ended September 30, 2002 included thefavorable effect of the cessation of depreciation totaling $19,000 and $58,000,respectively, on income-producing properties held for sale.  One minor income property was sold in the2002 fourth quarter.  There were noproperties held for sale at September 30, 2003 or during the nine month periodthen ended.

 

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TheCompany’s portfolio of income-producing properties is expected to contributeapproximately $8 million to income in 2003, after deductions for administrativeexpenses and depreciation.  Netoperating income from the income-producing portfolio is expected to beapproximately $20 - $21 million after accounting for approximately $700,000 inprojected start-up costs for the TPC at Valencia golf course in 2003.

 

**ValenciaWater Company**

 

ValenciaWater Company is a regulated utility serving approximately 26,000 customers andis a wholly-owned subsidiary of the Company. Third quarter 2003 revenues and income increased 7% from the same periodin 2002.  For the first nine months of2003, Valencia Water Company recorded a decrease of 22% in income over thenine-month period ended September 30, 2002 while revenues remained flat ascompared to the same 2002 period.  Theincrease in revenues and income for the 2003 third quarter was primarily due toa slight increase to the water company’s authorized revenues approved by theCalifornia Public Utilities Commission in May 2003 combined with an increase ofapproximately 2% in metered connections. The decrease in income for the nine months ended September 30, 2002 wasprimarily due to higher administrative expenses and expenses related to legalproceedings in which Valencia Water Company is involved.

 

# **Agricultural Operations**

 

The Company’s remainingagricultural properties include the 14,000-acre New Columbia Ranch in MaderaCounty and the 1,250-acre Newhall Orchard in Ventura County.  Most of the remaining 14,750 acres inVentura County owned by the Company has been leased for cattle grazing.  The Company has leased out a majority of theNew Columbia Ranch to farming tenants in 2003 to minimize the Company’s fixedoverhead costs and its exposure to crop commodity price fluctuations.

 

For the three- andnine-month periods ended September 30, 2003, agriculture revenues, includingthe Company’s energy operations, decreased 58% and 36%, respectively, comparedto revenues for the same periods in 2002. The decrease in revenues was primarily due to discontinuation of asubstantial portion of the Company’s farming operations at New Columbia Ranchand reduced prices on citrus, partially offset by increased land rents at NewColumbia Ranch combined with higher oil and gas production and prices.

 

For both the three- andnine-month periods ended September 30, 2003, income from agriculture operations,including the Company’s energy operations, increased in excess of 100% comparedto the same periods in 2002. The increase in income was primarily due to theincreased land rent revenues, together with a reduction in overhead costsrelated to the leasing of land to farming tenants at New Columbia Ranch and anincrease from energy operations.  Inaddition, results for the nine months ended September 30, 2002 included costsassociated with the Spineflower searchwarrant on certain areas of Newhall Ranch and an alleged streambed violation,both of which were subsequently resolved in the 2003 first quarter.

 

# **General and Administrative Expense**

 

Generaland administrative expenses for the 2003 third quarter increased 77% over 2002third quarter general and administrative expenses.  For the nine months ended September 30, 2003, general andadministrative expenses increased 32% from the same period in 2002.  The increase in the 2003 third quarter wasprimarily due to expenses incurred related to the Company’s pending mergertransaction with Lennar Corporation and LNR Property Corporation announced onJuly 21, 2003.  (See “Results ofOperations” section of Part I, Item 2. –Management’s Discussion and Analysis of Financial Condition and Results ofOperations, for additional information on themerger.)  The increase for the ninemonths ended September 30, 2003 compared to the same period in the prior yearwas primarily due to merger related expenses together with one time expensesassociated with separation pay and related charges connected with the Company’sstreamlining of its administration, sales and marketing efforts during the 2003first quarter.  For all of 2003, generaland administrative expenses are expected to increase approximately 25% comparedto 2002 levels.

 

# **Interest and Other**

 

Interest and Other, Net increased 38% for the 2003third quarter as compared to the 2002 third quarter.  The increase was primarily due to a decreasein interest income from promissory notes accepted by the Company in

 

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conjunctionwith certain commercial land and residential lot sales and a decrease ininterest capitalized due to fewer active construction projects.  These increases were partially offset bylower interest expense on lines of credit due to lower outstanding balances.

 

For the nine months ended September 30, 2003,Interest and Other, Net decreased 15% compared to the same period in 2002.  The decrease was primarily due to lowerinterest expense on lines of credit due to lower outstanding balances, anincrease in interest capitalized to the Company’s active construction projectsand interest income received from an escrow account related to a freewayinterchange infrastructure improvement. These decreases were partially offsetby a decrease in interest income from promissory notes accepted by the Companyin conjunction with certain commercial land and residential lot sales and a pre-payment penalty incurred in relation with the early payment of the$9.6 million New Columbia Ranch mortgage. Interestexpense in 2003 is expected to be approximately 10% lower than amounts reportedin 2002.

# ** **

 

# **Off-Balance Sheet Arrangements**

 

AtSeptember 30, 2003, a $6.6 million bank loan secured by a deed of trust on theValencia Hilton Garden Inn was outstanding. The loan is payable in quarterly principal installments of $41,250 plusmonthly interest payments until maturity on March 31, 2004.  This loan is non-recourse to theCompany.  As the equity method is usedto account for the Company’s investment in the joint venture with Hilton Inns,Inc., the bank loan is not included in mortgage and other debt on theaccompanying balance sheet.

 

The Company does nothave any other transactions, arrangements or other relationships withunconsolidated entities that are reasonably likely to affect its liquidity orcapital resources. The Company has no special purpose or limited purposeentities that provided off-balance sheet financing, liquidity or market orcredit risk support, engaged in leasing, hedging, research and developmentservices, or other relationships that expose the Company to liability that isnot reflected on the face of the financial statements.

 

**FINANCIALCONDITION**

 

**Liquidity and Capital Resources**

 

AtSeptember 30, 2003, the Company had cash and cash equivalents of $68.8 millionand $162.7 million in available lines of credit, net of $19.3 million in outstandingletters of credit.  Included in the cash balance at September 30, 2003 was a $5 milliondeposit received by the Company in July 2003 related to the pending mergertransaction with Lennar Corporation and LNR Property Corporation.  Upon the closing of the merger transaction,the $5 million deposit will be applied to the purchase price from theLennar/LNR venture.  (See furtherdiscussion of the merger above in Part I, Item 2. –Management’s Discussion and Analysis of Financial Condition and Results ofOperationsand in Part 1, Item 1 – Financial Statements, Note 8: Merger.)  At September 30, 2003, there were noborrowings outstanding on unsecured lines of credit or a revolving mortgagefacility.  The Company had fixed ratedebt outstanding totaling $65.1 million. The Company believes it has adequate sources of cash from operations anddebt capacity, combined with proceeds from anticipated land sales, to financefuture operations on both a short- and long-term basis.  The Company utilizes its available debtcapacity to fund ongoing operations, as well as to fund administration andlegal costs to bring future projects online over the longer term in order toenable the Company to complete the development of Valencia and to begindevelopment of Newhall Ranch.  As aguideline, the Company targets total debt not to exceed 60% of the appraisedvalue of the income portfolio.  TheCompany ended the 2003 third quarter with a conservative debt to incomeportfolio value ratio of 21%, which the Company believes will provide adequatedebt capacity to fund operations.  AtSeptember 30, 2003, there was no debt secured by the Company’s raw land or landunder development inventories.

 

InMay 2001, the Board of Directors authorized a unit repurchase program of up to2,520,000 units, or 10% of the then outstanding units.  In accordance with the program, the Companyrepurchased units from time to time at prevailing market prices and, dependingon market conditions, either through the open market, or unsolicited negotiatedtransactions.  Repurchases weregenerally funded from cash flow generated from normal business operations.  As a result of the merger agreementannounced on July 21, 2003, the Companysuspended the repurchase program. (See “Results of Operations” section of Part I, Item 2. –Management’s Discussion and 

 

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Analysisof Financial Condition and Results of Operations, foradditional information on the merger.) The last unit repurchase under this program was made on June 24,2003.  As of September 30, 2003, a totalof 2,259,415 partnership units had been repurchased under this program for$65.4 million, or an average unit price of $28.95.  Of this total, 302,230 units were repurchased during the firstsix months of 2003 for $8.8 million, or an average unit price of $29.07.  A total of 260,585 units remained to berepurchased under this program at September 30, 2003.

 

For the nine months endedSeptember 30, 2003, the Company invested approximately $8 million (before $8.3million in fee reimbursements received from the Valencia Bridge and MajorThoroughfare District) in major roads and freeway infrastructure improvementsprimarily within Valencia, which amounts are included in land under developmenton the accompanying balance sheet.  Inaddition, the Company invested approximately $7 million in the remodel of theformer Edwards Theatres’ space in Valencia Town Center regional mall torelocate the existing food court and create new retail space in the former foodcourt location, and approximately $10 million on the completion of theconstruction of Tournament Players ClubÒat Valencia championship golf course and clubhouse, in the Company’s Westridgecommunity, which amounts are included in income-producing properties on theaccompanying balance sheet.  For theremainder of 2003, the Company expects to invest approximately $6 million inmajor roads and freeway infrastructure improvements to enable the Company tocontinue its land sales program in Valencia. In addition, another approximately $4 million is expected to be investedin Valencia Town Center regional mall in 2003 to complete the creation of thenew retail space.  The Company expectsto invest another approximately $1 million on the completion of the golf courseand clubhouse.  At September 30, 2003,there were no other material commitments for capital expenditures.

 

*The following discussion relates to principal items on theConsolidated Statement of Cash Flows:*

## ** **

## **Operating Activities**

 

Net cash provided by operating activities totaled$62.6 million for the first nine months of 2003 versus $72.9 million for thenine months ended September 30, 2002. Cash generated from operating activities included the sales of theentire 759 residential lots in the Company’s Creekside community, twenty-fourcustom home sites in the Westridge golf course community, and approximately 30acres of commercial and industrial land. Together with revenue from continuing operations of the Company’sportfolio of income-producing properties, these sources contributed $100.8million to revenues.  In addition, theCompany received a $5 million deposit in July 2003 related to the pendingmerger transaction with Lennar Corporation and LNR Property Corporation.  Upon the closing of the merger transaction,the $5 million deposit becomes part of the purchase price from the Lennar/LNRventure.  (See further discussion of themerger above in Part I, Item 2. –Management’s Discussion and Analysis of Financial Condition and Results ofOperationsand in Part 1, Item 1 – Financial Statements, Note 8: Merger.)  This was offset by the acceptance by theCompany of $2.0 million in promissory notes in conjunction with the terms ofcertain commercial land sales during the first nine months of 2003.  During the three months ended September 30,2003, $700,000 was collected against the outstanding notes.  The remaining note balance has a maturitydate prior to December 31, 2003.  Cash used in operating activities included the use of approximately $32million for land development expenditures, primarily related to landpreparation and infrastructure improvements to ready land for development orsale.  Additional uses of cash includedpayment of the Company’s general and administrative expenses and interestexpense.

 

Forthe nine months ended September 30, 2002, cash generated from operatingactivities included the sales of 949 residential lots, the sales ofapproximately 57 acres of commercial land and continuing operations from theCompany’s portfolio of income-producing properties.  These activities combined contributed a total of $139.7 millionto revenues.  In addition, $11.7 millionof notes receivables outstanding at December 31, 2001 were collected in thenine months ended September 30, 2002. This was offset by the Company’s acceptance in the 2002 first quarter of$8.3 million promissory note in conjunction with the terms of a commercial landsale.  The term of the note was lessthan one year and was subsequently collected prior to December 31, 2002.  Cash used in operating activities alsoincluded the use of approximately $68 million for land under developmentexpenditures mostly related to land preparation and infrastructure improvementsto ready the land for development or sale. Additional uses of cash included the Company’s general andadministrative expenses and interest expense.

 

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**Investing Activities**

 

For the nine months endedSeptember 30, 2003 and September 30, 2002, expenditures for development of income-producingproperties totaled $19.0 million and $12.0 million, respectively, and, for bothperiods were primarily for the Valencia Town Center food court remodel andexpansion, and construction of Tournament Players ClubÒat Valencia championship golf course and clubhouse, in the Company’s Westridgecommunity.

 

Purchase of property and equipment totaled $4.9million for the nine-month period ended September 30, 2003 compared to $6.8million for the same 2002 period. Investments in both periods were primarily for water utilityconstruction.

 

# **Financing Activities**

 

Distributionsto unitholders totaling $7.0 million and $10.4 million were made in the ninemonths ended September 30, 2003 and September 30, 2002, respectively,consisting of three regular quarterly distributions of $.10 per unit in eachyear and a $.13 per unit special distribution in 2002.  No special distribution was made in2003.  The Company declared a regular quarterly distribution of $.10 per unit,payable December 8, 2003 to unitholders of record on November 10, 2003.  The Company’s usual practice is toprovide sufficient distributions, including special distributions, to pay theestimated approximate amount of taxes associated with Company earnings.  The declaration of distributions and theamount declared, are determined by the Board of Directors on a quarterly basistaking into account the Company’s earnings, financial condition and prospects.

 

At September 30, 2003, the Company had outstandingbalances in mortgage and other debt of $65.1 million versus $58.9 million atSeptember 30, 2002.  The $6.2 netincrease was primarily due to the refinancing of the $9.6 million mortgagesecured by the New Columbia Ranch, which was to mature on November 1, 2003.  On June 26, 2003, the Company closed therefinancing on the new 15-year mortgage for $15 million, with a fixed interestrate of 3.07% for the first three years. The remaining activity was due to anincrease in the outstanding principal on community facilities bonds due to therefinance of the bonds in October 2002 partially offset by principal paymentson the Company’s outstanding fixed rate debt based on contractual terms.  The Company’s lines of credit are availableto fund recurring operations and distributions.

 

Duringthe nine months ended September 30, 2003, the Company repurchased 302,230partnership units for $8.8 million, or an average unit price of $29.07.  During the nine months ended September 30,2002, 501,835 partnership units were repurchased for $15.0 million, or anaverage price of $29.81.  As aresult of the merger agreementannounced on July 21, 2003, the Company suspended the unit repurchaseprogram.  (See “Results of Operations”section of Part I, Item 2. – Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, for additional information on the merger.)    The last unit repurchase under this program was made onJune 24, 2003.

 

 

# **New Accounting Pronouncement**

 

InApril 2003, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.* SFAS No. 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments imbedded in other contracts and for hedging activitesunder SFAS No. 133, *Accounting forDerivative Instruments and Hedging Activities*.  The statement is generally effective forcontracts entered into or modified after June 30, 2003 and for hedging relationshipsdesignated after June 30, 2003.  It isnot anticipated that the adoption of this statement will have a material effecton the Company’s results of operations and financial condition for the yearending December 31, 2003.

 

In May 2003, the FASBissued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.  SFAS No. 150 established standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  In addition, the statement requires the presentation of the minority interest in certainconsolidated entities at fair market value. The statement is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at the beginning ofthe first interim period beginning after June 15, 2003.  However, on October 29, 2003, the FASB decided to defer indefinitely theimplementation date for reporting at fair value minority interests in certain

 

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consolidatedentities, which previously was effective beginning in the third quarter of2003.  As a result of this deferral, itis not anticipated that the adoption of this statement will have a materialeffect on the Company’s results of operations and financial condition for theyear ending December 31, 2003.

 

**Internet Access to Company Financial Documents**

 

The Company maintainsa website at www.newhall.com.  TheCompany makes available free of charge, either by direct access or a link tothe Securities and Exchange Commission’s website, its annual report on Form10-K, quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)of the Securities Exchange Act of 1934, as amended, as soon as reasonablypracticable after such reports are electronically filed with, or furnished to,the SEC.  The Company’s reports filedwith, or furnished to, the SEC are also available directly at the SEC’s websiteat www.sec.gov.

 

# **FORWARD-LOOKING INFORMATION AND RISK FACTORS**

 

Exceptfor 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,” and similarexpressions. Forward-looking statements include, but are not limited to,statements about plans; opportunities; anticipated regulatory approvals oractions; potential litigation outcomes; negotiations; market and economicconditions; development, construction, and sales activities; and availabilityof financing.

 

Wecaution you not to place undue reliance on these forward-looking statements,which reflect our current beliefs and are based on information currentlyavailable to us.  We expressly undertakeno obligation publicly to revise or update these forward-looking statements toreflect future events or changes in circumstances.

 

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. See our risk factors below.

* *

*Sales of Real Estate:*The majority of theCompany’s revenues is generated by its real estate operations. The ability ofthe Company to consummate sales of real estate is dependent on various factorsincluding, but not limited to, availability of financing to the buyer,agreement with buyers on definitive terms, regulatory and legal issues, andsuccessful completion of the buyer’s due diligence. The fact that a real estatetransaction has entered escrow does not necessarily mean that the transactionultimately will close. Therefore, the timing of sales may differ from thatanticipated by the Company and some anticipated sales may not occur. Theinability to close sales as anticipated could adversely impact the recognitionof revenue in any specific period.

* *

*Economic Conditions:* Development ofresidential, industrial and commercial real estate 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 and defense industries and certain other businesssegments. Consequently, all sectors of the Company’s real estate operations tendto be cyclical. The regional, state and national economies have slowed.  There can be no assurances that the slowdownwill not worsen or the economy will recover in the near future.

* *

*Inflation*: The Company believes it is wellpositioned against the effects of inflation. Historically, during periods ofinflation, the Company has been able to increase selling prices of propertiesto offset rising costs of land development and construction.  A portion of the commercial income portfoliois protected from inflation since percentage rent clauses and Consumer PriceIndex increases in the Company’s leases tend to adjust rental receipts forinflation, while the underlying value of commercial properties has tended torise over the long term.  However, therecan be no assurance that the Company will continue to be able to offset theimpacts of inflation through increases in the selling prices of its propertiesin future periods.

* *

*Interest Rates and Financing*: Fluctuationsin interest rates and the availability of financing have an important impact onthe Company’s performance. Sales of the Company’s properties could be adverselyimpacted by the inability of buyers to obtain adequate financing at ratesacceptable to them. Further, the Company’s real estate development activitiesare dependent on the availability of adequate sources of capital. Certain ofthe Company’s credit facilities bear interest at variable rates and would benegatively impacted by increasing interest rates.

 

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*Competition*: The sale and leasing ofresidential, industrial and commercial real estate is highly competitive, withcompetition coming from numerous and varied sources. The degree of competitionis affected by such factors as the supply of real estate available comparableto that sold and leased by the Company and the level of demand for such realestate. Currently, the residential market in the Santa Clarita Valley,including Valencia, remains strong and has been capturing an increasing portionof Los Angeles County’s new home sales. However, there is no assurance that this trend will continue.  Although there are indications the localmarket for industrial property is strengthening, the industrial market inValencia is experiencing limited demand and vacancy rates remain high since thenational and regional economies have slowed. In addition, local competition has intensified as other business parkswithin the area have opened or are in the planning stages.

* *

*Geographic Concentration*: The Company’sreal estate development activities are focused on the 18,100 acres that it ownsin north Los Angeles County. The Company’s entire commercial real estate incomeportfolio is located in the Valencia area. Therefore, any economic or otherfactors affecting that concentrated area, such as changes in the housingmarket, economic conditions and environmental factors, which cannot bepredicted with certainty, could affect future results.

* *

*Exposure to Natural Occurrences and Acts of Terror:*TheCompany’s assets and real estate operations may be adversely affected bynatural occurrences such as earthquakes, fire and weather conditions, and actsof terrorism or armed conflict that may cause damage to assets, delay progressand increase the costs of infrastructure construction and land development,impact the economy generally or locally, and affect the pace of sales.

* *

*Government Regulation and Entitlement Risks*:In developing its projects, the Company must obtain the approval of numerousgovernmental authorities regulating such matters as permitted land uses,density and traffic, and the provision of utility services such as electricity,water and waste disposal. In addition, the Company is subject to a variety offederal, state and local laws and regulations concerning protection of healthand the environment. This government regulation affects the types of projectswhich can be pursued by the Company and increases the cost of development andownership. The Company devotes substantial financial and managerial resourcesto comply with these requirements. To varying degrees, certain permits andapprovals will be required to complete the developments currently beingundertaken or planned by the Company. Furthermore, the timing, cost and scopeof planned projects may be subject to legal challenges. (See following“Litigation” discussion.) In addition, the continued effectiveness of permitsalready granted may be subject to factors such as changes in policies, rulesand regulations and their interpretation and application. The ability to obtainnecessary approvals and permits for its projects may be beyond the Company’scontrol and could restrict, delay or prevent development of new projects. TheCompany’s results of operations in any period will be affected by the amount ofentitled properties the Company has in inventory.

* *

*Litigation*: The land use approvalprocesses the Company must follow ultimately to develop its projects havebecome increasingly complex. Moreover, the statutes, regulations and ordinancesgoverning the approval processes provide third parties opportunities tochallenge the proposed plans and approvals. As a result, the prospect of, andactual, third-party challenges to planned real estate developments haveprovided additional uncertainties in real estate development planning andentitlement activities. Third-party challenges in the form of litigation will,by their nature, adversely affect the length of time required to obtain thenecessary approvals. In addition, adverse decisions arising from any litigationincrease the costs and may adversely affect the design, scope, plans andprofitability of a project.

* *

*Environmental Remediation andEndangered Species*: The Company owns or formerly owned properties with respect to which theCompany may be required to remediate environmental effects of prior releases ofcontamination.  Future environmentalcosts are difficult to estimate because of factors such as, but not limited to,the unknown magnitude of possible contamination, the unknown timing and extentof remediative actions that may be required, the determination of the Company’spotential liability, and the extent to which such costs are recoverable fromthird parties or from applicable insurance coverages.  In addition, the length of time to perform any requiredremediation or the successful pursuit of responsible third parties is difficultto predict. The ability to, or length of time required to, remediate anyproperty could increase the costs of, and restrict, prevent or delay thedevelopment of a new project. Additionally, the presence of endangered species on the Company’sproperty could delay and increase the cost of development, and, in limitedcircumstances, could prevent the development of some properties.

 

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Part 1.  Financial Information

Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk.

 

The Company is exposed to market riskprimarily due to fluctuations in interest rates.  The Company utilizes both fixed rate and variable rate debt.  At September 30, 2003,  the Company had no outstanding variable ratedebt and $65.1 million of outstanding fixed rate debt with interest ratesranging from 3.07% to 8.00%.

 

The table below presents principal cash flowsand related weighted average interest rates of the Company’s long-term fixedrate and variable rate debt at September 30, 2003 by expected maturity dates:

 
| **Dollars in thousands**        |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
|---------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|-----------------|--------|
|                            |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |            |   |
| Mortgage  and Other Debt        |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |            |   |
| Fixed  Rate Debt (3)            |   | $        | 117    |     | $      | 499      |   | $        | 557    |     | $      | 22,314         |   | $         | 75     |            | $      | 41,556 |   | $ | 65,118 |   | $ | 68,928 | (2) |
| Weighted  Average Interest Rate |   | 7.44     | %      | 7.41     | %      | 7.35     | %      | 7.44     | %      | 5.76     | %      | 5.38           | %      | 6.12      | %      |            |   |
|                            |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |            |   |
| Variable  Rate Debt (1)         |   |     |   |     |   |     |   |     |   |     |   |           |   | $         | — |            | $      | — |   |
| Weighted  Average Interest Rate |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |            |   |
|                                 |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |                 |        |  |  |  |  |  |  |  |  |

 

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(1)          The Company has a $50 million revolvingmortgage facility which bears interest at LIBOR plus 1.40% against which noborrowings were outstanding at September 30, 2003.  The Company also has unsecured lines of credit consisting of a$130 million line on which the interest rate is LIBOR plus 1.40%, against whichno borrowings were outstanding at September 30, 2003.  A $2 million line on which the interest rate was LIBOR plus 1.25%expired in June 2003 and was not replaced.

 

(2)          The fair values of the Company’s fixed ratedebt either approximate carrying value or are estimated using discounted cashflow analyses based on the Company’s current incremental borrowing arrangmentsranging from 3.07% to 6.00%.

 

(3)          Amounts include a $15 million mortgagesecured by New Columbia Ranch.  Themortgage bears interest at 3.07% per annum for the first three years and resetsto a variable rate, reset quarterly, thereafter.

 

The table below presents principal cash flowsand related weighted average interest rates of the Company’s long-term fixedrate and variable rate debt at December 31, 2002 by expected maturity dates:

 
|                            |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   | **Fair**  |   |
|---------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|-----------|--------|
| **Dollars in thousands**        |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   | **Value** |   |
|                            |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |
| Mortgage  and Other Debt        |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |
| Fixed  Rate Debt                |   | $        | 10,055 |     | $      | 499      |   | $        | 557    |     | $      | 22,314         |   | $         | 75     |      | $      | 26,537 |   | $ | 60,037 |   | $ | 64,045 |   |
| Weighted  Average Interest Rate |   | 8.40     | %      | 7.41     | %      | 7.35     | %      | 7.44     | %      | 5.76     | %      | 6.69           | %      | 7.26      | %      |      |   |
|                            |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |
| Variable  Rate Debt (1)         |   |     |   |     |   |     |   |     |   |     |   |           |   | $         | — |      | $      | — |   |
| Weighted  Average Interest Rate |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |
|                                 |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |           |        |  |  |  |  |  |  |  |  |

 

There is inherent rollover risk forborrowings as they mature and are renewed at current market rates.  The extent of this risk is not quantifiableor predictable because of the variability of future interest rates and theCompany’s future financing requirements. The Company manages its interest rate risk by maintaining a conservativeratio of fixed rate, long-term debt to total debt in order to maintain variablerate exposure at an acceptable level and by taking advantage of favorablemarket conditions for long-term debt. In addition, the Company’s guideline for total debt is not to exceed 60%of the appraised value of the income portfolio.  As of September 30, 2003, the Company’s debt to income portfoliovalue ratio was 21%.  The Company doesnot currently hedge any potential interest rate exposure.

 

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**Part 1.  Financial Information**

Item 4.  Controls and Procedures.

 

Asof the end of the period covered by this quarterly report, the Chief ExecutiveOfficer and Chief Financial Officer have concluded that the Company’s disclosurecontrols and procedures (as defined in Rules 13a-15 or 15d-15 under theSecurities Exchange Act of 1934, as amended,) are effective based on theirevaluation of the controls and procedures as required by the rules promulgatedunder the Exchange Act.  There have beenno changes in the Company’s internal controls over financial reporting duringthe last fiscal quarter that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

 

Part II.  OtherInformation

Item 1.  LegalProceedings.

 

The Company initiatedlitigation against gas and oil-field operators to enforce contractualprovisions requiring them to perform adequate restoration and remediation onthe Company’s property.  On May 20,2003, the Los Angeles County Superior Court granted a stay of the case to allowthe parties time to document the details of a tentative settlement which had beenreached and execute a definitive settlement agreement.  A definitive settlement agreement was signedby all parties on October 16, 2003.  Thekey terms of the settlement address the level of property remediation andrestoration to be performed by the defendants, Kerr-McGee and Medallion, thetiming of performance and the financial security provided to the Company toassure completion of the remediation and restoration of the property.  On October 17, 2003, the Company received acash payment of $8.9 million for partial reimbursement of its expenses incurredin pursuing the lawsuit.  This costrecovery will be recorded in the Company’s results for the fourth quarter2003.  All pending actions will bedismissed and restoration operations will commence in 2004.

 

On September 10, 2003,the Valencia Water Company along with other local water agencies, Castaic LakeWater Agency (CLWA), Newhall County Water District and Santa Clarita WaterDivision of CLWA, announced that they have agreed to an interim settlement oftheir lawsuit with the Whittaker Corporation over the discovery of perchloratein five water wells located near Whittaker’s property.  Under the interim settlement, Whittaker hasagreed to pay certain past costs incurred to date and fund up to $5 million toprepare a clean-up plan that will restore water production and capacity of theimpacted wells and protect other wells from future contamination.   The interim settlement provides for aone-year stay of the lawsuit between the parties.  As soon as the clean-up plan is developed and submitted to theregulatory agencies for approval and the cost for the remedy is developed, theparties will enter into good faith negotiations to reach a complete settlement.

 

Pleasealso refer to “Community Development” under Part I, Item 2. –“Management’s Discussion and Analysis of Financial Condition and Results ofOperations”.

 

### Item6. Exhibits and Reports on Form 8-K

 
| (a)    | Exhibits (listed by numbers corresponding to the  Exhibit Table of Item 601 in Regulation S-K): |
|--------|-------------------------------------------------------------------------------------------------|
|   |                                                                                            |   |
|   | 10 (a)                                                                                          | The Newhall Land and  Farming Company Management Unit Ownership Program Amendment No. 4 |
|   |                                                                                            |   |
|   | 31  (a)                                                                                         | Certification  of Quarterly Report By Principal Executive Officer Pursuant to Exchange Act  Rules 13a-14(a) or 15d-14(a) |
|   |                                                                                            |   |
|   | 31 (b)                                                                                          | Certification of Quarterly Report By Principal Financial Officer  Pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a) |
|   |                                                                                            |   |
|   | 32 (a)                                                                                          | Certification  of Principal Executive Officer Pursuant to 18 U.S.C. 1350  (As set forth in Exhibit 32(a) hereof,  Exhibit 32(a) is being furnished and shall not be deemed “filed”.) |
|   |                                                                                            |   |
|   | 32 (b)                                                                                          | Certification  of Principal Financial Officer Pursuant to 18 U.S.C. 1350  (As set forth in Exhibit 32(b) hereof,  Exhibit 32(b) is being furnished and shall not be deemed “filed”.) |

 

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(b)  The following reports on Form 8-Kwere filed in the third quarter ended September 30, 2003:

 
| **Item  Reported**                                                  |   | **Date of Report** |
|---------------------------------------------------------------------|--------|--------------------|
|                                                                |   |               |
| A news release issued by the Company on                             |   | July 15, 2003      |
| July 15, 2003 announcing that the Company                           |   |               |
| declared a regular quarterly distribution                           |   |               |
| of $0.10 per partnership unit.   In addition, a                |   |               |
| news release was issued by the Company on                           |   |               |
| July 16, 2003 announcing the Company’s                         |   |               |
| 2003 second quarter results of $.06 per unit.                       |   |               |
|                                                                |   |               |
| As of July 21, 2003, the Company entered                            |   | July 21, 2003      |
| into a merger agreement with Lennar Corporation,                    |   |               |
| a Delaware corporation, LNR Property Corporation,                   |   |               |
| a Delaware corporation, NWHL Investment LLC,                        |   |               |
| a Delaware limited liability company and NWHL                       |   |               |
| Acquisition, L.P., a California limited partnership                 |   |               |
| (the “Merger Agreement”).  A  joint news release was |   |               |
| issued with Lennar Corporation and LNR Property                     |   |               |
| Corporation on July 21, 2003 announcing that the                    |   |               |
| Company entered into the Merger Agreement.                          |   |               |
|                                                                |   |               |
| A news release issued by the Company on                             |   | September 4, 2003  |
| September 4, 2003 announcing that Lennar                            |   |               |
| Corporation and LNR Property Corporation                            |   |               |
| completed their due diligence in connection                         |   |               |
| with the previously announced acquisition of  the                   |   |               |
| Company, and the Lennar/LNR venture  deposited                      |   |               |
| $25 million into escrow as contemplated by  the                     |   |               |
| Agreement and Plan of Merger between the Company                    |   |               |
| and the Lennar/LNR  venture.                                        |   |               |

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | 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: November 10, 2003 | By:    | / S / GARY M. CUSUMANO                                                                      |   |
|-------------------------|--------|---------------------------------------------------------------------------------------------|--------|
|                    |   | Gary M.  Cusumano, President and Chief Executive Officer  of Newhall Management Corporation |
|                    |   | (Principal  Executive Officer)                                                              |
|                    |   |                                                                                        |
|                    |   |                                                                                        |
| Date: November 10, 2003 | By:    | / S / DONALD L. KIMBALL                                                                     |   |
|                    |   | Donald L.  Kimball, Vice President and Chief Financial                                      |
|                    |   | Officer of  Newhall Management Corporation                                                  |
|                    |   | (Principal  Financial Officer)                                                              |
|                    |   |                                                                                        |
|                    |   |                                                                                        |
| Date: November 10, 2003 | By:    | / S / VICKI M. STILLER                                                                      |   |
|                    |   | Vicki M.  Stiller, Controller of Newhall Management  Corporation                            |
|                    |   | (Principal  Accounting Officer)                                                             |

 

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THE NEWHALL LANDAND FARMING COMPANY

 

INDEX TO EXHIBITS

 

 
| **Exhibit  Number** |   | **Description**                                                                                                          |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                     |
| 10 (a)              |   | The Newhall Land and Farming Company Management Unit  Ownership Program                                                  |
|                |   | Amendment No. 4                                                                                                          |
|                |   |                                                                                                                     |
| 31 (a)              |   | Certification of Quarterly Report By  Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a) or  15d-14(a) |
|                |   |                                                                                                                     |
| 31 (b)              |   | Certification of Quarterly Report By Principal Financial Officer  Pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a)  |
|                |   |                                                                                                                     |
| 32 (a)              |   | Certification of Principal Executive Officer Pursuant to 18 U.S.C.  1350                                                 |
|                |   |                                                                                                                     |
| 32 (b)              |   | Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350                                                  |

 

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