FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
---------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _________ to _________
For Quarter Ended Commission File Number
June 30, 2001 1-718
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TEJON RANCH CO.
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(Exact name of Registrant as specified in its charter)
Delaware 77-0196136
- ------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
P.O. Box 1000, Lebec, California 93243
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (661) 248-3000
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Total Shares of Common Stock issued and outstanding on June 30, 2001, were
14,318,183.
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TEJON RANCH CO.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of 1
Operations for the Three Months and Six Months
Ended June 30, 2001 and June 30, 2000
Unaudited Consolidated Condensed Balance Sheets 2
as of June 30, 2001 and December 31, 2000
Unaudited Consolidated Condensed Statements of 3
Cash Flows for the Six Months Ended
June 30, 2001 and 2000
Unaudited Consolidated Condensed Statements of
Stockholders' Equity 4
Notes to Unaudited Consolidated Financial 5
Statements
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
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PART I - FINANCIAL INFORMATION
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
Revenues: 2001 2000 2001 2000
---------------------------- --------------------------
Farming $ 259 $ 235 $ 316 $ 405
Real Estate 2,894 1,998 4,385 3,310
Interest Income 510 154 983 312
---------------------------- --------------------------
3,663 2,387 5,684 4,027
Cost and Expenses:
Farming 694 612 1,373 1,039
Real Estate 1,748 1,429 3,449 2,976
Corporate Expense 830 749 1,778 1,509
Interest Expense 21 399 130 561
---------------------------- --------------------------
3,293 3,189 6,730 6,085
---------------------------- --------------------------
Operating Income (Loss) Before Minority Interest 370 (802) (1,046) (2,058)
Minority Interest 6 - (97) -
---------------------------- --------------------------
Operating Income (Loss) Before Income Tax
Expense (Benefit) 364 (802) (949) (2,058)
Income Tax Expense (Benefit) 138 (305) (361) (782)
---------------------------- --------------------------
Income (Loss) from Operations 226 (497) (588) (1,276)
Income from Discontinued Operations,
Net of Applicable Income Taxes 690 282 706 490
---------------------------------------------------------
Net Income (Loss) $ 916 $ (215) $ 118 $ (786)
=========================================================
Income (Loss) From Operations Per Share, Basic $ 0.02 $ (0.04) $ (0.04) $ (0.10)
Income From Discontinued Operations Per Share, Basic $ 0.04 $ 0.02 $ 0.05 $ 0.04
Income (Loss) Per Share, Basic $ 0.06 $ (0.02) $ 0.01 $ (0.06)
Income (Loss) From Operations Per Share, Diluted $ 0.02 $ (0.04) $ (0.04) $ (0.10)
Income From Discontinued Operations Per Share, Diluted $ 0.04 $ 0.02 $ 0.05 $ 0.04
Income (Loss) Per Share, Diluted $ 0.06 $ (0.02) $ 0.01 $ (0.06)
1
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In Thousands)
June 30, 2001 December 31, 2000*
------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 31,041 $ 2,286
Marketable Securities 11,845 11,055
Accounts & Notes Receivable 3,828 4,542
Inventories:
Farming 3,280 739
Other 113 361
Assets of Discontinued Operations 29,781 31,489
Prepaid Expenses and Other 738 1,106
------------- -----------------
Total Current Assets 80,626 51,578
PROPERTY AND EQUIPMENT - NET 52,628 46,526
OTHER ASSETS 1,155 183
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TOTAL ASSETS $ 134,409 $ 98,287
============= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Accounts Payable $ 2,552 $ 1,969
Other Acrued Liabilities - 1,150
Short-Term Borrowings 10,613 2,810
Other Current Liabilities 456 435
Borrowings of Discontinued Operations 19,782 21,893
Current Liabilities of Discontinued Operations 928 3,446
------------- -----------------
Total Current Liabilities 34,331 31,703
LONG TERM DEBT 21,102 19,323
OTHER LIABILITIES 1,484 -
DEFERRED INCOME TAXES 4,201 4,287
------------- -----------------
Total Liabilities 61,118 55,313
MINORITY INTEREST IN EQUITY OF
CONSOLIDATED JOINT VENTURE 389 485
STOCKHOLDERS' EQUITY
Common Stock 7,159 6,356
Additional Paid-In Capital 30,157 683
Retained Earnings 36,274 36,156
Deferred Compensation - (43)
Accumulated Other Comprehensive Income (688) (663)
------------- -----------------
Total Stockholders' Equity 72,902 42,489
------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 134,409 $ 98,287
============= =================
See Notes to Consolidated Financial Statements.
* The Consolidated Condensed Balance Sheet at December 31, 2000 has been
derived from the audited financial statements at the date and reclassified
for comparison purposes. The Consolidated Condensed Balance Sheet was
reclassified to retroactively show the impact of discontinued operations.
2
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
----------------------------------------------
(In Thousands)
(Unaudited)
Six Months Ended
--------------------------------
June 30
--------------------------------
2001 2000
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OPERATING ACTIVITIES
Net Income (Loss) $ 118 $ (786)
Items Not Affecting Cash:
Depreciation and Amortization 1,577 1,227
Deferred Income Taxes (84) 337
Minority Interest In Loss of Consolidated Joint Venture (97) -
Equity in Net Loss from Unconsolidated Joint Venture 105 131
Changes in Operating Assets and Liabilities:
Receivables, Inventories and other Assets, Net (1,482) (5,070)
Current Liabilities, Net (546) (2,028)
--------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (409) (6,189)
INVESTING ACTIVITIES
Maturities and Sales of Marketable Securities 2,872 1,599
Funds Invested in Marketale Securities (3,287) (2,012)
Property and Equipment Expenditures (7,659) (6,037)
Investment in Unconsolidated Joint Venture - (1,606)
Change in Breeding Herds 11 (136)
Cash Contribution from Investor in Consolidated Joint Venture - 300
Other 289 -
--------------- --------------
NET CASH USED IN INVESTING ACTIVITIES $ (7,774) $ (7,892)
--------------- --------------
FINANCING ACTIVITIES
Proceeds from Revolving Line of Credit 11,311 30,015
Payments of Revolving Line of Credit (3,508) (26,208)
Proceeds from Long-Term Debt 1,845 4,181
Payments of Long-Term Debt (66) (1,875)
Bond Reimbusement from Community Facilities District - 8,065
Proceeds from Issuance of Common Stock 29,845 -
Exercise of Stock Options 432 -
--------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 39,859 14,178
--------------------------------
NET CHANGE IN DISCONTINUED OPERATIONS (2,921) -
INCREASE IN CASH AND CASH EQUIVALENTS 28,755 97
CASH AND CASH EQUIVALENTS AT BEGINNING OF YR 2,286 423
--------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 31,041 520
================================
See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
($'s in thousands except shares outstanding
Accumulated
Common Additional Other
Stock Shares Common Paid-In Deferred Comprehensive Retained
Outstanding Stock Capital Compensation Income Earnings Total
--------------------------------------------------------------------------------------------
Balance at January 1, 2000 12,697,179 $ 6,349 $ 379 $ - $ (269) $ 36,701 $ 43,160
Net Loss - - - (545) (545)
Defined Benefit Plan Funding
Adjustments, Net of Taxes of
$234,000 - - - (350) - (350)
Changes in Unrealized Gains on
Available-For-Sale Securities,
Net of Taxes of $106,000 - - - 160 - 160
Interest Rate Swap Adjustment - - - (204) - (204)
---------
Comprehensive Loss (939)
---------
Restricted Stock Issuance 9,057 4 211 (215) - - -
Exercise of Stock Options 6,000 3 93 - - - 96
Amortization of Deferred
Compensation 0 - - 172 - - 172
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Balance at December 31, 2000 12,712,236 6,356 683 (43) (663) 36,156 42,489
Net Income - - - - - 118 118
Changes in Unrealized Gains on
Available-For-Sale Securities,
Net of Taxes of $128,000 - - - - 247 - 247
Interest Rate Swap Adjustment - - - - (272) - (272)
---------
Comprehensive Income - - - - - - 93
---------
Amortization of Deferred -
Compensation - - - 43 - - 43
Exercise of Stock Options 27,000 14 418 - - - 432
Common Stock Issuance, -
Rights Offering 1,578,947 789 29,056 - - - 29,845
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Balance at June 30, 2001 14,318,183 $ 7,159 $ 30,157 $ - $ (688) $ 36,274 $ 72,902
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4
TEJON RANCH CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
June 30, 2001
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The summarized information furnished by the Company pursuant to the instructions
to part I of Form 10-Q is unaudited and reflects all adjustments which are, in
the opinion of the Company's management, necessary for a fair statement of the
results for the interim period. All such adjustments are of a normal recurring
nature.
Certain amounts in the 2000 quarterly financial statements have been
reclassified to conform to the current year presentation.
The results of the period reported herein are not indicative of the results to
be expected for the full year due to the seasonal nature of the Company's
agricultural activities. Historically, the largest percentages of revenues are
recognized during the third and fourth quarters.
For further information, refer to the Consolidated Financial Statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
NOTE B - NET INCOME PER SHARE
- -----------------------------
Basic net income per share is based upon the weighted average number of shares
of common stock outstanding during the year, which for the three months ended
June 30, 2001 was 14,303,490 and for the six months ended June 30, 2001 was
14,156,986. For the three months and six months ending June 30, 2000 the
average number of shares of common stock outstanding was 12,706,236. Diluted
net income per share is based upon the weighted average number of shares of
common stock outstanding and the weighted average number of shares outstanding
assuming the issuance of common stock for stock options using the treasury stock
method (14,475,293 for the three months ended June 30, 2001 and 14,275,206 for
the six months ended June 30, 2001). The weighted average shares subject to
dilutive stock options were 171,803 for the three months ended June 30, 2001 and
118,220 for the six months ended June 30, 2001. For both the second quarter and
the first six months of 2000, diluted net income per share is based on the
weighted average number of shares of common stock outstanding because the impact
of stock options is antidilutive.
NOTE C - MARKETABLE SECURITIES
- ------------------------------
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", requires that an enterprise classify all debt securities as either
held-to-maturity, trading, or available-for-sale. The Company has elected to
classify its securities as available-for-sale and therefore is required to
adjust securities to fair value at each reporting date.
5
The following is a summary of available-for-sale securities at June 30, 2001 and
December 31, 2000:
June 30, 2001 December 31, 2000
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Estimated Estimated
Cost Fair Value Cost Fair Value
----------------------------------------------------------------
Marketable Securities:
(in thousands)
U.S. Treasury and agency notes $ 5,842 $ 5,960 $ 5,987 $ 5,258
Corporate notes and Commercial paper 5,812 5,885 5,252 5,797
----------------------------------------------------------------
$11,654 $11,845 $11,239 $11,055
================================================================
As of June 30, 2001, the adjustment to accumulated other comprehensive income in
consolidated stockholders' equity is an unrealized gain on available-for-sale
securities of $247,000, which is net of a tax expense of $128,000. This
adjustment reflects the improvement in the fair value of investments when
compared to December 31, 2001. As of June 30, 2001, the Company's gross
unrealized holding gains equal $235,000 and gross unrealized holding losses
equal $44,000. On June 30, 2001, the average maturity of U.S. Treasury and
agency securities was 2.6 years and corporate notes was 2.5 years. Currently,
the Company has no securities with a remaining term to maturity of greater than
five years.
Market value equals quoted market price, if available. If a quoted market price
is not available, market value is estimated using quoted market prices for
similar securities. The Company's investments in corporate notes are with
companies with a credit rating of A or better.
NOTE D - COMMODITY CONTRACTS USED TO HEDGE PRICE FLUCTUATIONS
- -------------------------------------------------------------
The Company uses commodity derivatives to manage risk on its purchased stocker
cattle and its cattle feed costs. The objective is to protect or create a
future price for stocker cattle that will protect a profit or minimize a loss
once the cattle are sold and all costs are deducted and to protect us against a
significant cattle market decline or feed cost increase. These costs and risks
of ownership are now included in discontinued operations and we expect to
complete the sale of livestock operations during the first few months of 2000.
To help achieve this objective we use both the futures commodity markets and
options commodity markets. A futures contract is an obligation to make or take
delivery at a specific future time of a specifically defined, standardized unit
of a commodity at a price determined when the contract is executed. Options are
contracts that give their owners the right, but not the obligation, to buy or
sell a specified item at a set price on or before a specified date. We
continually monitor any open futures and options contracts on a daily basis in
accordance with formal policies to determine the appropriate hedge based on
market movement of the underlying asset. The options and futures contracts used
typically expire on a quarterly or semi-annual basis and are structured to
expire close to or during the month the stocker cattle and feed are scheduled to
be sold or purchased. The risk associated with this strategy for us is that it
limits or caps the potential profits if cattle prices begin to increase or can
add additional costs for feed if grain prices fall.
Realized gains, losses, and costs associated with both open and closed contracts
are recognized in discontinued operations sales expense. During the six months
ended, June 30, 2001 there were $723,000 of losses associated with futures and
option contracts included in cost of sales.
6
The following table identifies the cattle futures contract amounts outstanding
at June 30, 2001 (in thousands, except number of contracts):
Original Estimated
No. Contract/Cost Fair Value
Cattle Future / Option Description Contracts (Bought) Sold (Bought) Sold
- -----------------------------------------------------------------------------------------------------------
Corn futures bought, 50,000 lbs. per contract 20 $(207) $ 200
Cattle futures sold, 40,000 lbs. per contract 20 602 (589)
Cattle options bought, 40,000 lbs. per contract 109 (56) 16
Cattle options sold, 40,000 lbs. per contract 80 16 (14)
The June 30, 2001 futures contracts and options expire between August 2001 and
October 2001. Estimated fair value at settlement is based upon quoted market
prices at June 30, 2001.
NOTE E - CONTINGENCIES
- ----------------------
Effective June 30, 2001, the Company was guaranteeing the repayment of $3.8
million of debt of the Petro Travel Plaza L.L.C. Total debt at Petro Travel
Plaza L.L.C. is $13.0 million and is related to the construction of the travel
plaza. The Company does not expect the guarantee to ever be enforced due to the
positive cash flow provided by the operations of the Petro Travel Plaza, L.L.C.
The Company leases land to National Cement Company of California, Inc.
(National) for the purpose of manufacturing portland cement from limestone
deposits on the leased acreage. National, Lafarge Corporation (the parent
company of the previous operator) and the Company have been ordered to cleanup
or abate an old industrial waste landfill site, a storage area for drums
containing lubricants and solvents, an underground storage tank for waste oil
and solvents, an underground plume of hydrocarbons, diesel fuel which leaked
from a pipeline, and the cement kiln dust piles on the leased premises. Lafarge
has undertaken the investigation and remediation of landfills and has completed
the removal of contaminated soils above the groundwater level from the
landfills. Lafarge has also completed a substantial amount of the site
investigation with respect to chlorinated hydrocarbons. The plume of
chlorinated hydrocarbons covers an extensive area and has migrated off of the
leased premises in one direction where it has been found to be leaking into a
local creek. Lafarge is undertaking additional investigation work as directed
by the Regional Water Board and is developing a feasibility study evaluating
different remediation options. Lafarge has also removed high concentrations of
PCE from the drum storage site. The order for the kiln dust piles now requires
only site stabilization measures of the sort previously undertaken by National
and does not call for transporting the large piles offsite. Under the orders,
the Company is secondarily liable and will be called upon to perform work only
if National and Lafarge fail to do so. Under the lease agreements with National
and Lafarge, each of the companies is required to indemnify the Company for its
designated portion of any costs and liabilities incurred in connection with the
cleanup order. Due to the financial strength of National and Lafarge, the
Company believes that a material effect on the company is remote at this time.
7
For further discussion refer to the Company's 2000 Form 10-K, Part I, Item 3, -
"Legal Proceedings". There have been no significant changes since the filing of
the 2000 Form 10-K.
NOTE F - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
- ----------------------------------------------------
The Company maintains investments in unconsolidated joint ventures, including an
investment as a member in a limited liability company, Petro Travel Plaza, LLC,
in which it has an ownership interest of 60%. The Company's other
unconsolidated joint venture is R.M. Development in which the Company has a 50%
ownership interest. R.M. Development is the entity that is planning the
development of Company lands in Los Angeles County. The Company accounts for
its investments in its unconsolidated joint ventures using the equity method of
accounting. The Company's investment deficit in its unconsolidated joint
ventures is $510,000 at June 30, 2001. The equity in net loss in earnings of
its unconsolidated joint ventures is $105,000 for the six months ended June 30,
2001, which is included in Real Estate operations in the accompanying
consolidated condensed statements of operations.
Condensed financial information of the Company's unconsolidated joint ventures
as of and for the six months ended June 30 is as follows (in thousands):
Condensed Combined Statement of Operations
2001 2000
------- -------
Net sales $18,216 $16,040
======= =======
Net loss $ (189) $ (222)
Partner's share of net loss (84) (91)
------- -------
Net loss of unconsolidated joint ventures $ (105) $ (131)
======= =======
Condensed Combined Balance Sheet Information
2001 2000
-------- --------
Current assets $ 1,893 $ 2,356
Property and equipment, net 20,678 16,830
Long-term debt (12,838) (13,000)
Other liabilities (1,558) (1,382)
-------- --------
Net assets $ 8,175 $ 4,804
======== ========
The Company's investment deficit balance in its unconsolidated joint ventures
and its equity in the net loss of unconsolidated joint ventures shown above
differ from its capital accounts in the respective joint ventures. The
differential represents the difference between the cost basis of assets
contributed by the Company and the agreed upon contribution value of the assets
contributed.
8
NOTE G - DISCONTINUED OPERATIONS
- --------------------------------
During April 2001 the Company finalized its plan for the sale of its cattle and
feedlot division. Management intends to dispose of its cattle and feedlot
division to provide capital for real estate development activities and to reduce
outstanding debt of the Company. The process of selling the Company's breeding
herd, stocker cattle herd, and feedlot is expected to be completed by the end of
April 2002. At June 30, 2001, the assets of the division consisted of accounts
receivable, inventories, premises, and equipment amounting to approximately
$29.8 million. Liabilities of the division consist primarily of accounts
payable and debt totaling approximately $20.7 million. Revenues from
discontinued operations consist of sales of cattle and revenue from feedlot
operations. Expenses consist of cost of sales related to the sale of cattle and
expenses related to the operations of a cattle feedlot. There is no allowance
for loss on disposal of division assets because the Company expects to recognize
a net gain on the disposal of the division assets. During June 2001, the
Company completed the sale of a portion of its breeding herd for $2.6 million to
Centennial Livestock, a California agricultural company.
In addition, the Company completed the sale of its feedlot in Texas for $3.2
million during July of 2001. The combined gain on sale, net of applicable
income taxes, for both the sale, which occurred in June 2001 and the sale which
occurred in July 2001 was $700,000.
Condensed income statement information related to the discontinued operations
for the period ending June 30 is as follows:
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
2001 2000 2001 2000
------- ------- ------- -------
Revenues $11,925 $13,752 $24,944 $21,276
Expenses 10,813 13,297 23,806 20,486
------- ------- ------- -------
Income from discontinued operations,
before income taxes 1,112 455 1,138 790
Income taxes 422 173 432 300
------- ------- ------- -------
Income from discontinued operations, net
of income taxes $ 690 $ 282 $ 706 $ 490
======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------
9
NOTE H - INTEREST RATE RISK MANAGEMENT
- --------------------------------------
During 2000, the Company entered into interest rate swap agreements with
notional amounts totaling $11.9 million to manage interest rate risk by
converting floating interest rate debt to fixed rate debt. Notional amounts
correspond to the amount of our indebtedness affected by the interest rate
swaps. These swap agreements, which have maturities ranging from 3 to 5 years,
are contracts to exchange variable rate for fixed rate interest payments
periodically over the lives of the agreements. Amounts currently due to or from
interest rate swap counterparties are recorded in interest expense in the period
in which they are incurred.
As of June 30, 2001, the cumulative decrease in the fair value of the interest
rate swaps was $476,000. Changes in the fair value of the interest rate swaps
are reported in accumulated other comprehensive income. These amounts are
subsequently reclassified into interest expense as yield adjustment in the same
period in which the related interest on the floating rate obligations affects
earnings. No such amounts were reclassified to interest expense during the
first quarter of 2001.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Quantitative and Qualitative Disclosures About Market
Risk," and "Notes to Consolidated Financial Statements" on the preceding pages
of this report, management has made forward-looking statements regarding future
developments in the cattle industry and the disposition of the cattle and
feedlot division, future yield and prices of our cattle and crops, future
revenue and income of our jointly-owned travel plaza, market demand for land and
buildings in our industrial complex, potential losses to the Company as a result
of pending environmental proceedings, market value risks associated with
investment and risk management activities and with respect to inventory,
accounts receivable, marketable securities, outstanding indebtedness, and the
impact of the energy shortages in California. These forward-looking statements
are subject to factors beyond the control of the Company (such as weather,
market and economic forces) and, with respect to the Company's future
development of its land, the availability of financing and the ability to obtain
various governmental entitlements. No assurance can be given that the actual
future results will not differ materially from those in the forward-looking
statements.
Results of Operations
- ---------------------
Total revenues, including interest income for the first six months of 2001, were
$5,684,000 compared to $4,027,000 for the same period in 2000. The improvement
in revenues during the first six months of 2001 compared to the same period of
2000 is due to increased real estate revenues and higher interest income. Real
estate revenues increased $1,075,000 due to an increase in leasing revenues and
to the receipt of additional milestone payments related to a power plant project
being built by Calpine Corp. Interest income increased $671,000 due to the
investment of $29.9 million of proceeds from the rights offering to Company
stockholders that was completed in January 2001. These improvements were
partially offset by a decrease of $89,000 in farming revenues due to reduced
water sales to farming tenants and to the receipt in 2000 of revenue associated
with the 1999 almond and pistachio harvest.
10
Net income for the first six months of 2001 including both continuing operations
and discontinued operations, was $118,000 or $0.01 per share, diluted, compared
to a net loss of $786,000 or $0.06 per shared, diluted, for the same period of
2000. Operating activities from continuing operations during the first six
months of 2001 resulted in a net loss of $588,000 or $0.04 per share, diluted,
compared to a net loss of $1,276,000 or $0.10 per share, diluted, for the same
period of 2000. The improvement in net income when compared to 2000 is due to
the increase in revenues described above. This improvement in revenues was
partially offset by higher farming, real estate, and corporate expenses.
Expenses within our real estate division increased $473,000 due to higher
maintenance costs, staffing costs, and marketing costs. Farming costs for the
period increased $334,000 due primarily to an increase in costs at Pacific
Almond, our almond processing plant. The increase in cost at Pacific Almond is
due to the timing of the purchase of the plant which resulted in less than a
full year of operations in 2000, and to plant processing activities for the 2000
crop year not concluding until January 2001. Corporate expenses increased
$269,000 due to higher professional services fees, higher staffing costs, and to
higher stockholder relations expenses.
Total revenues for the second quarter of 2001, including interest income, were
$3,663,000 compared to $2,387,000 for the second quarter of 2000. The increase
is due primarily to real estate revenues increasing $896,000 for the same
reasons as described above and to higher interest income for the quarter.
For the second quarter of 2001 the Company had net income of $916,000, or $0.06
per share, diluted, compared to a net loss of $215,000, or $0.02 per share,
diluted, for the same period of 2000. Income from continuing operations for the
second quarter of 2001 was $226,000, or $0.02 per share, diluted, compared to a
net loss of $497,000, or $0.04 per share, diluted, for the same period of 2000.
The improvement in net income is due to the increase in revenues described above
and to lower interest expense. These improvements were partially offset by
increased real estate and corporate costs. Real estate costs increased due to
higher staffing costs and maintenance costs related to real estate development
activities. Corporate expenses increased due to higher staffing costs and
shareholder costs.
In future periods, as in the year 2000, our real estate division will continue
to see an increase in costs primarily related to professional service fees,
planning costs, entitlement costs, and staffing costs as we continue to increase
real estate activities and pursue development opportunities. These types of
real estate development activities and costs could continue over several years
as we develop our land holdings. Our current industrial development, Tejon
Industrial Complex, is continuing forward with infrastructure development to
support the construction of a 1,800,000 square foot building by IKEA, the
international furniture retailer and a new 650,000 square foot building
undertaken as a joint venture with Dermody Properties, a real estate developer.
Interest is continuing to be shown in our site despite the economic slow down
and the electricity and energy problems within California. Despite the
continuing interest in our site, we do expect that the activity at our
industrial site will be slower than originally planned due the current economic
climate and the power situation within California.
Production for many of the crops we grow, especially wine grapes and almonds, is
expected on a statewide basis to have a record or near record production year.
We believe that there is an imbalance between the supply of wine grapes and the
demand as a result of so many new plantings coming into production. This
increased production is forcing prices to historically low levels. We are also
still in the process of contracting to sell our 2001 grape production. We
cannot assure you that we will find buyers for all or any significant portion of
our wine grape production in 2001. The lack of purchasers for our wine grapes
would materially affect our business. The overall increase in production within
the almond industry is continuing to keep pressure on the prices we receive for
our product. It is still too early in the harvest season to
11
accurately predict the final prices we may receive for our 2001 crops, but we do
expect prices to be lower than we have historically received. The expected
increase in almond production within the state will positively impact our almond
processing operation because more almonds will be available for processing.
We continue to be involved in various environmental proceedings related to
leased acreage. For a further discussion, refer to Note E - Contingencies.
Prices received by the Company for many of our products are dependent upon
prevailing market conditions and commodity prices. Therefore, we are unable to
accurately predict revenue, just as we cannot pass on any cost increases caused
by general inflation, except to the extent reflected in market conditions and
commodity prices. The operations of the Company are seasonal and results of
operations cannot be predicted based on quarterly results.
California is in the midst of an energy crisis that could disrupt our
operations, increase our expenses and affect real estate projects planned and in
process. In the event of power shortages California has implemented and is
expected in the future to continue to implement, rolling blackouts throughout
most parts of the state. The energy crisis is expected to continue for several
years until additional generator capacity is built. We are currently upgrading
our backup generators for our offices but do not have backup generators or
alternate sources of power in the event of a blackout for most of our
operations, and our current insurance does not provide coverage for any damages
our customers or we may suffer as a result of any interruption in our power
supply. Our farming operations are particularly vulnerable because electrical
power is used for pumping and distributing water used in irrigation. We
believe, however, that we can alter irrigation schedules if necessary to deal
with intermittent losses of power for limited periods of time. The power
shortage could also affect the market demand for warehouse and industrial space
in the Tejon Industrial Complex. Also rental and royalty payments from our
tenants engaged in the manufacture of cement and in oil and gas extraction could
be adversely affected. Our power is provided by Pacific Gas and Electric
Company, which filed bankruptcy proceedings because of the significant losses it
has incurred in providing electricity to its customers. We are unable to
predict the impact of the bankruptcy and the power shortage in general on our
operations, but they could have a material adverse effect, both in the short and
long term.
Results of Discontinued Operations
- ----------------------------------
During April 2001, the Company finalized its plan for the sale of its cattle and
feedlot division. Management intends to dispose of its cattle and feedlot
division to provide capital for real estate development activities and to reduce
outstanding debt of the Company. While the sale of livestock assets would
likely provide significant working capital, it would also result in a loss of
significant revenues and income, even after taking into account the revenue
stream from grazing leases that we expect to enter into in connection with the
sales of the breeding herd. The process of selling a major portion the
Company's breeding herd was completed in June, and the sale of the feedlot was
completed during July 2001. The sale of the remaining stocker cattle is
expected to be completed by the end of April 2002. During June 2001, the
Company completed the sale of a portion of its breeding herd for $2.6 million to
Centennial Livestock, a California agricultural company.
In addition, the Company completed the sale of its feedlot in Texas for $3.2
million during July of 2001. The combined gain on sale, net of applicable
income taxes, for both the sale, which occurred in June 2001 and the sale, which
occurred in July 2001, was $700,000.
12
Total revenues from discontinued operations for the six months of 2001 were
$24,944,000 compared to $21,276,000 for the first six months of 2000. This
increase over 2000 is primarily due to an increase in cattle sales of
approximately $3,500,000. This increase is due to 4,355 additional head of
cattle being sold in 2001 and to improved cattle prices during that time period.
Included in these revenues are revenues from the sale of a large portion of our
breeding herd of approximately $2,600,000.
Income from discontinued operations, net of applicable income taxes, for the
first six months of 2001 were $706,000, or $0.05 per share, diluted, compared to
net income, net of applicable income taxes, of $490,000 or $0.04 per share
diluted, for the first six months of 2000. The increase is primarily related to
the growth in revenues described above and a gain from the sale of a portion of
the breeding herd. These improvements were partially offset by an increase in
costs of sales due to the increased number of cattle sold and to higher feeding
costs.
Cattle prices are continuing to show strength due to the perception of lower
overall inventories of cattle in the United States. Demand for beef products is
continuing to remain steady and is showing some strength for high quality
branded products. These trends should be helpful to us as we continue to sell
stocker cattle throughout the remainder of 2001 and into the first quarter of
2002.
Liquidity and Capital Resources
- -------------------------------
Our cash, cash equivalents and short-term investments totaled approximately
$42,886,000 at June 30, 2001, compared to $13,341,000 at December 31, 2000.
Working capital as of June 30, 2001 was $46,295,000 compared to $19,875,000 at
December 31, 2000. The increase in working capital during the first quarter of
2001 is due primarily to funds received from the sale of common stock.
We have a revolving line of credit of $27,000,000 that as of June 30, 2001 had a
balance outstanding of $19,773,000 bearing interest at the rate of 6.50%, which
floats with changes in the lending bank's prime interest rate. At the Company's
option, the interest rate on this line of credit can be fixed at 1.50% over a
selected LIBOR rate or float at .50% less than the bank's prime lending rate.
The Company's feedlot also has a short-term revolving line of credit for the
feedlot with a local bank for $12,000,000 with an outstanding balance at June
30, 2001 of $8,507,000 and an interest rate of 6.50%, which floats with changes
in the lending bank's prime interest rate. The revolving line of credit at the
feedlot is used as a short-term cash management tool and for the financing of
customer cattle, feed receivables and purchase of cattle. In the current
quarter, short-term debt related to livestock operations declined due to the
sale of cattle without buying replacement cattle. This decrease was offset by
increased real estate activities.
Our outstanding long-term debt increased $1.8 million at the end of June 2001
compared to December 31, 2000. Long-term debt is being used to fund real estate
development infrastructure, farming assets on our land, commercial buildings in
Phoenix, Arizona, our feedlot in Texas, and the almond processing plan purchased
in 2000.
13
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations, or cash flows due to adverse changes
in financial or commodity market prices or rates. We are exposed to market risk
in the areas of interest rates and commodity prices.
Financial Market Risks
- ----------------------
The Company's exposure to financial market risks, includes changes to interest
rates and credit risk related to marketable securities, interest rate related to
our own outstanding indebtedness and trade receivables.
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields and prudently managing risk. To
achieve this objective and limit interest rate exposure, we limit our
investments to securities with a maturity of less than five years and an
investment grade of A or better from Moody's or Standard and Poors. See Note C,
Marketable Securities - Notes to Consolidated Financial Statements.
The Company is exposed to interest rate risk on its short-term working capital
line of credit and the long-term debt currently outstanding. The short-term
line of credit interest rate can be tied to the lending bank's prime rate and
would change when that rate changes, or the debt can be tied to a LIBOR rate on
a fixed basis and change only at maturity of the fixed rate feature. A portion
of the long-term debt ($4,707,000) has a fixed interest rate, and the fair value
of this long-term debt will change based on interest rate movements in the
market. The remaining long-term debt ($16,395,000) can either be fixed for
periods of time to a LIBOR rate or float with the lending bank's prime rate.
The floating rate obligations expose us to variability in interest payments due
to changes in interest rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense also
decreases.
We believe it is prudent to limit the variability of a portion of our interest
payments. It is our objective to hedge between 25% and 50% of our variable-rate
interest payments.
To meet this objective we entered into an interest rate swap agreement to manage
the potential fluctuations in cash flows resulting from interest rate risk. See
Note H, Interest Rate Risk Management - Notes to Consolidated Financial
Statements.
Credit and market risks related to our inventories and receivables ultimately
depends on the value of the cattle, almonds, grapes, pistachios, and walnuts at
the time of payment or sale. Based on historical experience with current
customers and periodic credit evaluations of our customers' financial condition,
we believe our credit risk is minimal. Market risk is discussed below in
commodity price exposure.
The following tables provide information about our financial instruments that
are sensitive to changes in interest rates. The tables present our debt
obligations, principal cash flows and related weighted-average interest rates by
expected maturity dates.
14
Interest Rate Sensitivity - Financial Market Risks
Principal Amount by Expected Maturity
At June 30, 2001
(Dollars in thousands)
--------------------------------------------------------------------------------------------------
Fair
There- Value
2001 2002 2003 2004 2005 after Total 12/31/01
- ----------------------------------------------------------------------------------------------------------------------------
Assets:
Marketable Securities $ 1,165 $ 1,764 $3,871 $4,097 $ 757 --- $11,654 $ 11,845
Weighted Average
Interest Rate 6.027% 5.94% 5.97% 6.61% 6.20% --- 6.21% ---
Liabilities
Short-term Debt $30,395 --- --- --- --- --- $30,395 $ 30,395
Weighted Average
Interest Rate 6.50% --- --- --- --- --- 6.50% ---
Long-term debt $ 1,342 $ 1,745 $2,623 $9,751 $ 223 $5,328 $21,102 $ 21,102
Weighted Average
Interest Rate 7.79% 7.79% 7.79% 7.79% 7.79% 7.79% 7.79% ---
Variable-to-fixed
Swap Notional Amount
3-Year Swap --- $11,800 --- --- --- --- $11,800 $ 11,525
Weighted Average
Pay Fixed Rate
Contract Rate 6.91% 6.91% --- --- --- --- 6.91% ---
Weighted Average Pay
Variable Rate, Current 4.13% --- --- --- --- --- 4.13% ---
Rate
--------------------------------------------------------------------------------------------------
15
Interest Rate Sensitivity - Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 2000
(Dollars in Thousands)
There- FairValue
2001 2002 2003 2004 2005 after Total 12/31/00
---- ---- ---- ---- ---- ----- ----- --------
Assets:
Marketable
Securities $ 2,750 $ 1,819 $4,786 $1,884 --- --- $11,239 $11,055
Weighted
Average
Interest Rate 5.84% 5.97% 6.34% 6.85% --- --- 6.24% ---
Liabilities:
Short-Term Debt $20,870 --- --- --- --- --- $20,870 $20,870
Weighted
Average
Interest Rate 8.71% --- --- --- --- --- 8.71% ---
Long-Term Debt $ 1,973 $ 1,977 $2,855 $9,983 $ 455 $5,913 $23,156 $23,156
Weighted
Average
Interest Rate 8.26% 8.26% 8.26% 8.26% 8.21% 7.91% 8.24% ---
Variable-To-Fixed Swap
Notional Amount
3-Year Swap $ --- $11,800 $ --- $ --- $ --- $ --- $11,800 $11,596
Weighted Average
Pay Fixed-Rate
Contract Rate 6.91% 6.91% --- --- --- --- 6.91% ---
Weighted Average
Receive Variable
Rate, Current Rate,
Adjusts Monthly 6.71% --- --- --- --- --- 6.71% ---
In comparison to the prior year the Company's risk in regards to fluctuations in
interest rates has increased overall due to the growth in the use of short-term
lines of credit that fluctuate with the lending bank's prime lending.
Commodity Price Exposure
- ------------------------
We have exposure to adverse price fluctuations associated with certain
inventories, gross margins, accounts receivable, and certain anticipated
transactions in our Livestock and Farming Divisions. Commodities such as corn
and cattle are purchased and sold at market prices that are subject to
volatility. In order to manage the risk of market price fluctuations, we enter
into various exchange-traded futures and option contracts. We closely monitor
and manage our exposure to market price risk on a daily basis in accordance with
formal policies established for this activity. These policies limit the
duration to maturity of contracts entered into as well as the level of exposure
to be hedged.
16
Our goal in managing our cattle and feed costs is to protect or create a range
of selling prices and feed prices that allow us to recognize a profit or
minimize a loss on the sale of cattle once all costs are deducted. See Note D,
Commodity Contracts Used to Manage Risk - Notes to Consolidated Financial
Statements. A futures contract is an obligation to make or take delivery at a
specific future time of a specifically defined, standardized unit of a commodity
at a price determined when the contract is executed. Options are contracts that
give their owners the right, but not the obligation, to buy or sell a specified
item at a set price on or before a specified date. Losses on futures contracts
and options as of June 30, 2001 were $723,000 as compared to the approximately
$966,000 in losses at December 31, 2000. The increase in hedge losses is
primarily due to an increase in cattle prices during the last quarter of 2000,
and an increase in 2001 prices related to the future delivery of cattle, which
caused futures contracts and options to be repriced, creating losses on the
derivative positions. These losses are expected to be offset by the increase in
prices received on the sale of cattle.
Inventories consist primarily of cattle for sale, and price fluctuations are
managed with futures and options contracts. See the table below for contracts
outstanding at the end of the period. We are at risk with respect to changes in
market prices with respect to cattle held for sale that are not protected by
futures and options contracts. At June 30, 2001, approximately 75% of the
cattle held in inventory or 11,250 head of cattle were not protected by futures
and options for price movement. This compares to 26,657 head of cattle at
December 31, 2000. The 2001 number of head of cattle equates to approximately
12.9 million pounds of beef. For each $.01 per pound change in price, we have a
potential exposure of $129,000 in future value. Although the price which the
cattle will ultimately be sold is unknown, over the last three years the market
price has ranged from $.50 per pound to $.78 per pound and the current market
price at August 3, 2001 was $.71 per pound for cattle being delivered in August
2001.
The following table identifies the futures contract amounts and options contract
costs outstanding at June 30, 2001 (in thousands, except number of contracts):
Original Estimated
No. Contract/Cost Fair Value
Cattle Future / Option Description Contracts (Bought) Sold (Bought) Sold
- ------------------------------------------------------------------------------------------------------------------------------
Corn futures bought, 50,000 lbs. per contract 20 $(207) $ 200
Cattle futures sold, 40,000 lbs. per contract 20 602 (589)
Cattle options bought, 40,000 lbs. per contract 109 (56) 16
Cattle options sold, 40,000 lbs. per contract 80 16 (14)
The above futures contracts and options contracts expire between August 2001 and
October 2001. Estimated fair value at settlement is based upon quoted prices at
June 30, 2001.
17
The following table identifies the futures contract amounts and options contract
costs outstanding at December 31, 2000 (in thousands, except number of
contracts).
Original Estimated
No. Contract/Cost Fair Value
Cattle Future / Option Description Contracts (Bought) Sold (Bought) Sold
- ------------------------------------------------------------------------------------------------------------------------------
Cattle futures sold, 40,000 lbs. per contract 230 $6,826,000 $(7,215,000)
Cattle options sold, 40,000 lbs. per contract 25 4,000 (26,000)
Cattle options bought, 40,000 lbs. per contract 95 (934,000) 930,000
Corn options bought, 50,000 lbs. per contract 55 (613,000) 654,000
The above futures contracts and options contracts expired between February 2001
and April 2001. Estimated fair value at settlement is based upon quoted market
prices at December 31, 2000.
With respect to accounts receivable, the amount at risk relates primarily to
farm crops. These receivables are recorded as estimates of the prices that
ultimately will be received for the crops. The final price will not be known
until the third or fourth quarter of 2001. At June 30, 2001, we currently have
no outstanding accounts receivable for our farm crops. The outstanding at risk
receivables at December 31, 2000 of $1,352,000, have been collected.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The response to this Item is submitted in a separate section of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
Not applicable.
18
Item 2. Changes in Securities
- ------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) The Annual meeting of Shareholders was held on May 1, 2001.
(b) During the Annual Meeting an election of directors was submitted to a vote
of the security holders. Each of the persons named in the Proxy Statement
as nominee for director was elected. Following are the voting results on
each of the nominees for director:
Votes Votes
Election of Directors For Withheld
- --------------------- --- --------
Craig Cadwalader 12,984,407 192,308
Rayburn Dezember 12,980,733 196,982
George G. C. Parker 12,955,212 222,503
Robert A. Stine 11,548,753 1,628,962
(c) In addition to the election of directors two other items were submitted to
a vote of security holders as follows:
Votes Votes Broker
For Against Abstain Non-Votes
------------------ ----------------- ------------------ -------------
Approval of the Amendment to
the 1998 Stock Incentive Plan 7,703,315 1,972,348 41,943 4,573,577
Approval of the Amendment to
the Non-Employee Director
Stock Incentive Plan 8,015,710 1,658,005 43,891 4,573,577
Item 5. Other Information
- --------------------------
Not applicable.
19
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits -
3.1 Restated Certificate of Incorporation *
3.2 Bylaws **
(b) Reports - on Form 8-K
None.
* This document, filed with the Securities Exchange Commission in Washington,
D.C. (file number 1-7183) under Item 14 to the Company's Annual report on
Form 10-K for year ended December 31, 1987, is incorporated herein by
reference.
** This document, filed with the Securities Exchange Commission in Washington,
D.C. (file number 1-7183) under Item 14 to the Company's Annual report on
Form 10-K for year ended December 31, 1994, is incorporated herein by
reference.
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEJON RANCH CO.
--------------------------------------
(The Company)
August 14, 2001 BY /s/ ALLEN E. LYDA
- -------------------------------- --------------------------------------
DATE Allen E. Lyda
Vice President, Chief
Financial Officer
21