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 September 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
September 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
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(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
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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 September 30, 2001, were
14,318,183.
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 Nine Months
Ended September 30, 2001 and September 30, 2000
Unaudited Consolidated Condensed Balance Sheets 2
as of September 30, 2001 and December 31, 2000
Unaudited Consolidated Condensed Statements of 3
Cash Flows for the Nine Months Ended
September 30, 2001 and 2000
Unaudited Consolidated Condensed Statements of
Stockholders' Equity 4
Notes to Unaudited Condensed 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
PART I - FINANCIAL INFORMATION
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ----------------------
2001 2000 2001 2000
--------------------- ----------------------
Revenues:
Farming $1,696 $2,503 $ 2,012 $ 2,908
Real Estate 3,720 4,955 8,105 8,265
Interest Income 447 159 1,430 471
--------------------- ----------------------
5,863 7,617 11,547 11,644
Cost and Expenses:
Farming 1,690 2,447 3,063 3,486
Real Estate 2,209 2,928 5,658 5,904
Corporate Expense 661 857 2,439 2,366
Interest Expense 165 678 295 1,239
--------------------- ----------------------
4,725 6,910 11,455 12,995
--------------------- ----------------------
Operating Income (Loss) Before Minority Interest 1,138 707 92 (1,351)
Minority Interest 20 - (77) -
--------------------- ----------------------
Operating Income (Loss) Before Income Tax
Expense (Benefit) 1,118 707 169 (1,351)
Income Tax Expense (Benefit) 425 269 64 (513)
--------------------- ----------------------
Income (Loss) from Operations 693 438 105 (838)
Income (Loss) from Discontinued Operations,
Net of Applicable Income Taxes (403) (409) 303 81
--------------------- ----------------------
Net Income (Loss) $ 290 $ 29 $ 408 $ (757)
===================== ======================
Income (Loss) From Operations Per Share, Basic $ 0.05 $ 0.03 $ 0.01 $ (0.07)
Income (Loss) From Discontinued Operations
Per Share, Basic $(0.03) $(0.03) $ 0.02 $ 0.01
Net Income (Loss) Per Share, Basic $ 0.02 $ - $ 0.03 $ (0.06)
Income (Loss) From Operations
Per Share, Diluted $ 0.05 $ 0.03 $ 0.01 $ (0.07)
Income (Loss) From Discontinued Operations
Per Share, Diluted $(0.03) $(0.03) $ 0.02 $ 0.01
Net Income (Loss) Per Share, Diluted $ 0.02 $ - $ 0.03 $ (0.06)
1
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In Thousands)
September 30, 2001 December 31, 2000*
---------------------- ----------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 488 $ 2,286
Marketable Securities 19,340 11,055
Accounts & Notes Receivable 4,563 4,542
Inventories:
Farming 3,945 739
Other 112 361
Assets of Discontinued Operations 14,147 31,489
Prepaid Expenses and Other 1,105 1,106
-------- -------
Total Current Assets 43,700 51,578
PROPERTY AND EQUIPMENT - NET 57,299 46,526
OTHER ASSETS 1,154 183
-------- -------
TOTAL ASSETS $102,153 $98,287
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Accounts Payable $ 2,792 $ 1,969
Other Accrued Liabilities - 1,150
Short-Term Borrowings 261 2,810
Other Current Liabilities 668 435
Borrowings of Discontinued Operations 2,901 21,893
Current Liabilities of Discontinued Operations 417 3,446
-------- -------
Total Current Liabilities 7,039 31,703
LONG TERM DEBT 16,118 19,323
OTHER LIABILITIES 1,318 -
DEFERRED INCOME TAXES 3,994 4,287
-------- -------
Total Liabilities 28,469 55,313
MINORITY INTEREST IN EQUITY OF
CONSOLIDATED JOINT VENTURE 409 485
STOCKHOLDERS' EQUITY
Common Stock 7,159 6,356
Additional Paid-In Capital 30,109 683
Retained Earnings 36,564 36,156
Deferred Compensation - (43)
Accumulated Other Comprehensive Income (557) (663)
-------- -------
Total Stockholders' Equity 73,275 42,489
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $102,153 $98,287
======== =======
See Notes to Consolidated Condensed Financial Statements.
* The Consolidated Condensed Balance Sheet at December 31, 2000 has been
derived from the audited financial statements at that 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 FLOWS
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(In Thousands)
(Unaudited)
Nine Months Ended
------------------------------
September 30
------------------------------
2001 2000
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OPERATING ACTIVITIES
Net Income (Loss) 408 (757)
Items Not Affecting Cash and Cash Equivalents:
Depreciation and Amortization 2,306 1,908
Deferred Income Taxes 0 337
Minority Interest In Loss of Consolidated Joint Venture (77) 0
Equity in Net Loss from Unconsolidated Joint Venture 84 163
Changes in Operating Assets and Liabilities:
Receivables, Inventories and other Assets, Net (2,977) (5,248)
Current Liabilities, Net (644) (1,112)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (900) (4,709)
INVESTING ACTIVITIES
Maturities and Sales of Marketable Securities 27,569 2,639
Funds Invested in Marketable Securities (35,585) (3,236)
Property and Equipment Expenditures (13,049) (8,547)
Investment in Unconsolidated Joint Venture 0 (1,611)
Sale of Land 0 1,463
Change in Breeding Herds 15 108
Cash Contribution from Investor in Consolidated Joint Venture 0 300
Other 356 0
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NET CASH USED IN INVESTING ACTIVITIES (20,694) (8,884)
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FINANCING ACTIVITIES
Proceeds from Revolving Line of Credit 14,337 49,713
Payments of Revolving Line of Credit (16,886) (46,585)
Proceeds from Long-Term Debt 1,845 4,181
Payments of Long-Term Debt (5,050) (2,055)
Bond Reimbusement from Community Facilities District 0 8,065
Proceeds from Issuance of Common Stock 29,797 0
Exercise of Stock Options 432 96
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NET CASH PROVIDED BY FINANCING ACTIVITIES 24,475 13,415
-------- --------
NET CHANGE IN DISCONTINUED OPERATIONS (4,679) 0
DECREASE CASH AND CASH EQUIVALENTS (1,798) (178)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 2,286 423
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 488 $ 245
======== ========
See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
(In thousands, except shares outstanding)
Accumulated
Common Stock Additional Other
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 - - - 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 - - - - - 408 408
Changes in Unrealized Gains on
Available-For-Sale
Securities, Net of
Taxes of $165,000 - - - - 270 - 270
Interest Rate Swap Adjustment - - - - (164) - (164)
--------
Comprehensive Income - - - - - - 106
--------
Amortization of Deferred -
Compensation - - - 43 - - 43
Exercise of Stock Options 27,000 14 418 - - - 432
Common Stock Issuance,
Rights Offering, Net 1,578,947 789 29,008 - - - 29,797
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Balance at September 30, 2001 14,318,183 $7,159 $30,109 $ - $(557) $36,564 $73,275
=============================================================================================
See Notes to Consolidated Condensed Financial Statements
4
TEJON RANCH CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
September 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 period 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 period, which for the three months ended
September 30, 2001 was 14,318,183 and for the nine months ended September 30,
2001 was 14,208,198. For the three months and nine months ended September 30,
2000 the average number of shares of common stock outstanding was 12,712,236 and
12,708,236, respectively. Diluted net income per share is based upon the
weighted average number of shares outstanding assuming the issuance of common
stock for stock options using the treasury stock method (14,498,458 for the
three months ended September 30, 2001 and 14,319,557 for the nine months ended
September 30, 2001). The weighted average shares subject to dilutive stock
options were 180,275 for the three months ended September 30, 2001 and 111,359
for the nine months ended September 30, 2001. For the three months ended
September 30, 2000 the diluted weighted average shares outstanding was
12,825,798, and the number of shares subject to dilutive options were 113,562.
For the nine months ended September 30, 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 was 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 September 30,
2001 and December 31, 2000:
September 30, 2001 December 31, 2000
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Estimated Estimated
Cost Fair Value Cost Fair Value
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Marketable Securities:
(in thousands)
U.S. Treasury and agency notes $ 5,116 $ 5,199 $ 5,987 $ 5,258
Corporate notes and Commercial paper 13,954 14,141 5,252 5,797
----------------------------------------------------------
$19,070 $19,340 $11,239 $11,055
==========================================================
As of September 30, 2001, the adjustment to accumulated other comprehensive
income in consolidated stockholders' equity is an unrealized gain on available-
for-sale securities of $270,000, which is net of a tax expense of $165,000.
This adjustment reflects the improvement in the fair value of investments when
compared to December 31, 2000. As of September 30, 2001, the Company's gross
unrealized holding gains equal $411,000 and gross unrealized holding losses
equal $141,000. On September 30, 2001, the average maturity of U.S. Treasury
and agency securities was 2.6 years and corporate notes was 1.3 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 2002.
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 increase, and it adds
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. During the nine months ended,
September 30, 2001 there were $519,000 of losses associated with futures and
option contracts included in this category.
6
The following table identifies the cattle futures contract amounts outstanding
at September 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 5 $(52,000) $54,000
Cattle options bought, 40,000 lbs. per contract 10 (5,000) 7,000
Cattle options sold, 40,000 lbs. per contract 50 12,000 -
The September 30, 2001 futures contracts and options expire between October 2001
and December 2001. Estimated fair value at settlement is based upon quoted
market prices at September 30, 2001.
NOTE E - CONTINGENCIES
- ----------------------
The Company is guaranteeing the repayment of $3.8 million of debt of the Petro
Travel Plaza LLC, an unconsolidated joint venture. Total debt at Petro Travel
Plaza LLC, 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, LLC.
The Company is also guaranteeing 50% of a construction loan to Tejon/Dermody
Industrial, LLC, an unconsolidated joint venture, for the construction of a
building to lease. The amount of the loan is $12.8 million.
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 clean up
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 and has performed preliminary remediation work 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 long-term
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 ventures are RM Development, LLC in which the Company has a
50% ownership interest, and Tejon/Dermody Industrial, LLC. RM Development is
the entity that is planning the development of Company lands in Los Angeles
County. Tejon/Dermody Industrial, LLC is a joint venture between the Company
and Dermody Properties for the development and ownership of an industrial
building to lease. 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 $489,000 at
September 30, 2001. The equity in the net loss in its unconsolidated joint
ventures is $84,000 for the nine months ended September 30, 2001, which is
included in Real Estate operations in the accompanying consolidated condensed
statements of operations.
Condensed combined financial information of the Company's unconsolidated joint
ventures as of and for the nine months ended September 30 is as follows (in
thousands):
Condensed Combined Statement of Operations Information
Nine Months Ended
September 30
-------------------------------
2001 2000
-------------------------------
Revenues $ 28,252 $26,388
======== =======
Net loss $ (201) $ (278)
Partner's share of net loss (117) (111)
-------- -------
Equity in net loss of unconsolidated joint $ (84) $ (167)
ventures ======== =======
Condensed Combined Balance Sheet Information
2001 2000
-------- --------
Current assets $ 3,403 $ 2,454
Property and equipment, net 20,701 16,583
Long-term debt (12,675) (13,000)
Other liabilities (1,592) (1,289)
-------- --------
Net assets $ 9,837 $ 4,748
======== ========
8
The Company's investment deficit balance in its unconsolidated joint ventures
and its equity in the net loss its 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.
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 September 30, 2001, the assets of the division consisted of
accounts receivable and inventories amounting to approximately $14.1 million.
Liabilities of the division consist primarily of accounts payable and debt
totaling approximately $3.3 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. 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 approximately $700,000.
Condensed income statement information related to the discontinued operations
for the period ended September 30 is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
2001 2000 2001 2000
------- ------- ------- -------
Revenues $14,291 $12,061 $39,235 $33,337
Expenses 14,940 12,720 38,746 33,206
------- ------- ------- -------
Income (loss) from discontinued operations,
before income taxes (649) (659) 489 131
Income taxes expense (benefit) (246) (250) 186 50
------- ------- ------- -------
Income (loss) from discontinued operations, net
of income taxes $ (403) $ (409) $ 303 $ 81
======= ======= ======= =======
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9
NOTE H - INTEREST RATE RISK MANAGEMENT
- --------------------------------------
During 2000, the Company entered into interest rate swap agreements with
notional amounts totaling $11.4 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 September 30, 2001, the cumulative decrease in the fair value of the
interest rate swaps was $550,000. 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 a yield adjustment in the
same period in which the related interest on the floating rate obligations
affects earnings. No such amounts have been reclassified to interest expense
during 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 in "Notes to Consolidated Financial Statements" in this report,
management has made forward-looking statements regarding future developments in
the cattle industry and the disposition of the cattle division, future yields
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 nine months of 2001,
were $11,547,000 compared to $11,644,000 for the same period in 2000. The
decline in revenues during the first nine months of 2001 compared to the same
period of 2000 is due to lower farming revenues and a slight decrease in real
estate revenues. These unfavorable variances were partially offset by an
increase in interest income. The decline in farming revenues is due primarily
to lower crop revenues and water sales to farming tenants. A reduction in crop
revenues of $1,464,000 is due to the timing of the harvest of crops in 2001,
lower overall production on almonds harvested because of damage to trees and
poor pollination due to winter storms in early 2001, and to lower prices on
almonds. During the third quarter of 2001, the harvest was completed on only a
portion of the almond orchards, while the harvest of grapes, walnuts, and
pistachios was just beginning in September. During 2000, almond and walnut
harvests were completed as well as harvests of two varieties of grapes.
Partially offsetting this reduction in crop revenues was an increase in revenues
of $740,000 at Pacific Almond, our almond processing plant. This increase is
due to the timing of processing customer almonds and to the sale of almond hulls
from last years' almond harvest. Increases in revenue during 2001
10
from the Petro Travel Plaza operation, increased lease income from our
properties in Phoenix, and additional milestone and lease payments related to
the Calpine power plant project were more than offset by the sale of land for
$2,000,000 during the third quarter of 2000. These variations resulted in Real
Estate revenues being down $160,000 when compared to the same period of 2000.
Net income for the first nine months of 2001, including both continuing
operations and discontinued operations, was $408,000 or $0.03 per share,
diluted, compared to a net loss of $757,000 or $0.06 per share, diluted, for the
same period 2000. Operating activities from continuing operations during the
first nine months of 2001 resulted in income of $105,000 or $0.01 per shared,
diluted, compared to a loss of $838,000 or $0.07 per share, diluted, for the
same period of 2000. The improvement in net income is due to a reduction in
expenses offsetting the small decline in revenues described above. The
reduction in expenses is due to lower farming costs, real estate expenses, and
lower interest costs. Farming costs declined $423,000 primarily due to the
timing of crop harvests. Real estate costs are lower due to a decline in
commissions from the sale of land and to lower fixed water costs. Interest
costs declined due to a reduction in outstanding debt, the capitalization of
interest cost to real estate projects, and the allocation of interest cost to
discontinued operations.
Total revenues for the third quarter of 2001, including interest income, were
$5,863,000 compared to $7,617,000 for the third quarter of 2000. The decrease
in revenues during the third quarter of 2001 is due to a reduction in farming
revenues due to the timing of crop harvests and to reduced real estate revenues
due to the $2,000,000 sale of land in 2000. Partially offsetting these declines
in revenue was an increase in interest income.
For the third quarter of 2001 the Company had net income, including both
continuing and discontinued operations, of $290,000 or $0.02 per share, diluted,
compared to net income of $29,000 or $0.00 per share, diluted, for the same
period 2000. The improvement in net income is due to a reduction in expense
when compared to 2000. Farming expenses are down due to the timing of the 2001
crop harvest. Real estate costs are down due to a reduction in sales
commissions when compared to the same period of 2000. Corporate costs are lower
during the third quarter 2001 due to lower professional service costs and lower
shareholder costs when compared to the same period of 2000.
In future periods, our real estate division will continue to see an increase in
indirect project 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 slowdown 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 may be slower than
originally planned due primarily to the current economic climate and to a lesser
extent, to the power situation within California.
Planning work on the master planned community envisioned for Ranch lands in
northern Los Angeles County has progressed during the year. The development
partnership, which includes three of the largest homebuilders in Southern
California, now contemplates filing entitlement applications with Los Angeles
County during the first half of 2002. The partners have agreed in principle to
increase the size of the community to 6,000 acres of development area and 6,000
or more acres of recreation and open space,
11
but no definitive agreements have been executed. We have a 50% ownership
interest in this partnership. The funds needed for development are contributed
by our partners until their contributions equal the agreed upon value of the
land we are contributing, after which additional funds will be provided on a 50-
50 basis. In return, we are entitled to 50% of the net profits and cash flow
from the development, although if we do not contribute our share of the
additional funds requirement, our share of the net profits and cash flow will be
reduced. Any profits or cash flow that we might receive will not be realized for
several years.
Many of the crops we grow, especially wine grapes and almonds, are still
expected on a statewide basis to have near record production years. 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 have contracted our
2001 grape production, but at prices 50% to 75% less than historical average
prices. During this period of imbalance in production and demand, we cannot
assure that we will find buyers for all or any significant portion of our wine
grape production in future years. The lack of purchasers for our wine grapes
would materially affect our business in future years. The overall increase in
production within the almond industry is continuing to keep pressure on the
prices we receive for our product. However, as stated earlier, we will see
lower production from our almonds due to poor pollination and damage to trees
from winter storms. It is still too early in the harvest season to 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.
During the third quarter of 2001 we removed 598 acres of old almond acreage due
to the age of the trees, declining production of the trees, damage to the trees,
and to these trees being part of our Tejon Industrial Complex development on the
east side of Interstate 5. These trees were of an age that they were fully
depreciated. There will, however, be an impact on revenues due to fewer acres
of producing almond trees. Almonds planted in 1999 and almonds anticipated to
be planted in 2002 or 2003 will provide production in the future to offset the
reduction from the removal of the above acreage.
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 has been experiencing an energy crisis. While the effect of the
crises has not been as severe as predicted earlier, the underlying shortage of
power generation capacity persists. This shortage, together with other factors,
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 may in the future implement, rolling blackouts throughout most
parts of the state. The energy shortage is expected to continue for several
years until additional generator capacity is built. We have upgraded 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,
12
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. Since then, the Company has been disposing of its cattle and
feedlot operations to provide capital for real estate development activities and
to reduce outstanding debt of the Company. While the sale of livestock assets
has provided working capital, it will also result in a loss of significant
revenues and income, even after taking into account the revenue stream from
grazing leases that we entered 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 July the Company completed the sale of its feedlot in
Texas for $3.2 million. The combined gain on sale, net of applicable income
taxes, was $700,000.
Total revenues from discontinued operations for the nine months of 2001 were
$39,235,000 compared to $33,337,000 for the same period in 2000. The increase
over 2000 is due to a increase in cattle sales of $3,386,000 which includes
$2,600,000 of revenues from the sale of a large portion of our breeding herd.
Revenues also increased due to the sale of our feedlot for $3,200,000.
Income from discontinued operations, net of applicable income taxes, for the
first nine months of 2001 were $303,000 or $0.02 per shared, diluted, compared
to net income, net of applicable taxes, of $81,000 or $0.01 per share, diluted,
for the same period of time in 2000. The increase is related to the growth in
revenues described above that resulted in the net gains from the sale of assets
described earlier. These gains were partially offset by an increase in costs of
sales on stocker cattle and to higher feeding costs.
Cattle prices have declined since September 11, 2001 due primarily to a drop in
demand for beef products. The drop in demand is primarily due to lower
restaurant sales since that date. It is anticipated that prices will slowly
recover as demand begins to recover and also as a result of lower cattle
inventories.
Liquidity and Capital Resources
- -------------------------------
Our cash, cash equivalents and marketable securities totaled approximately
$19,828,000 at September 30, 2001, compared to $13,341,000 at December 31, 2000.
Working capital as of September 30, 2001 was $36,661,000 compared to $19,875,000
at December 31, 2000. The increase in working capital is due primarily to funds
received from the sale of common stock, funds from the sale of livestock assets,
and the reduction of short-term debt.
We currently have an unused line of credit of $20,000,000 that, if used today,
would bear interest at 5.00%, but that rate floats with the changes in the
lending bank's prime interest rate. At the Company's option, the
13
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. This line of
credit will be used to fund day-to-day operations as needed and to temporarily
fund real estate development activities. The Company continues to have an
operating line of credit with a bank in Texas to fund a portion of our remaining
stocker cattle inventory. The current outstanding balance is $2,901,000 and
presently bears interest at 4.50%, but this rate floats with changes in the
lending bank's prime interest rate. Short-term debt outstanding at September 30,
2001 is related to the current portion of long-term debt.
Our outstanding long-term debt declined $3,200,000 at the end of September 2001
compared to December 31, 2000. The decline is due to the sale of the Company's
feedlot and a reduction in debt due to normal debt paydowns. Long-term debt is
being used to fund real estate development infrastructure, farming assets on our
land, commercial buildings in Phoenix, Arizona, and the almond processing plant
purchased in 2000.
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 of the Company 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 ($4,697,000 at September 30, 2001) 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 ($11,421,000 at
September 30, 2001) 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 our long-term debt 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.
14
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.
Interest Rate Sensitivity - Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 2000
(Dollars in Thousands)
There- FairValue at
2001 2002 2003 2004 2005 after Total 12/31/00
- ------------------------------------------------------------------------------------------------------------
Assets:
Marketable
Securities 8,024 1,728 3,892 2,806 2,348 272 19,070 19,340
Weighted
Average
Interest Rate 3.30% 5.93% 5.97% 6.40% 5.46% 5.11% 4.93%
Liabilities:
Short-Term Debt 3,162 3,162 3,162
Weighted
Average
Interest Rate 4.76% 4.76%
Long-Term Debt 12 1,745 1,745 7,223 223 5,170 16,118 16,118
Weighted
Average
Interest Rate 7.60% 8.17% 8.17% 8.17% 8.17% 8.17% 8.17%
Variable-To-Fixed
Swap Notional
Amount 3-Year
Swap 11,420 11,420 10,870
Weighted Average
Pay Fixed-Rate
Contract Rate 6.91% 6.91% 6.91%
Weighted Average
Pay Variable
Rate, Current Rate 3.50%
- ------------------------------------------------------------------------------------------------------------
15
Interest Rate Sensitivity - Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 2000
(Dollars in Thousands)
There- FairValue at
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 decreased overall due to the decrease in outstanding balances
on short-term lines of credit that fluctuate with the lending bank's prime
lending rate.
Commodity Price Exposure
- ------------------------
We have exposure to adverse price fluctuations associated with certain
inventories, gross margins, accounts receivable, and certain anticipated
transactions within discontinued operations. 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 September 30, 2001 were $519,000 as compared to the
approximately $966,000 in losses at December 31, 2000. Hedge losses during 2001
are primarily due to an increase in cattle prices during the first half of 2001,
which caused futures contracts and options to be repriced, creating losses on
the derivative positions.
Inventories consist of cattle for sale and costs related to crop production.
Costs related to crop production are at risk to changing almond, grape,
pistachio and walnut prices. There are no futures or options markets to hedge
these risks. Price fluctuations in the cattle markets 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 September 30, 2001, approximately 85% of the cattle held in
inventory or 9,425 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 10.8 million pounds
of beef. For each $.01 per pound change in price, we have a potential exposure
of $108,000 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
October 26, 2001 was $.67 per pound for cattle being delivered in October 2001.
The following table identifies the futures contract amounts and options contract
costs outstanding at June 30, 2001:
- -----------------------------------------------------------------------------------------------------------
Original Estimated
No. Contract/Cost Fair Value
Cattle Future / Option Description Contracts (Bought) Sold (Bought) Sold
- -----------------------------------------------------------------------------------------------------------
Corn futures bought, 50,000 lbs. per contract 5 $(52,000) $54,000
Cattle options bought, 40,000 lbs. per contract 10 (5,000) 7,000
Cattle options sold, 40,000 lbs. per contract 50 12,000 -
The September 30, 2001 futures contracts and options expire between October 2001
and December 2001. Estimated fair value at settlement is based upon quoted
market prices at September 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 the following year. At September 30, 2001
we have approximately $1.1 million in accounts receivable at risk to changing
prices. All of the amount at risk to changes in prices is attributable to
almonds. The price estimated for recording accounts receivable at September 30,
2001 was $.95 per pound for almonds. For every $.01 change in the price of
almonds, our receivable increases or decreases approximately $12,000. Although
the final price of almonds (and therefore the extent of the risk) is not
presently known, over the last three years the final prices have ranged from
$.89 to $1.85
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
- --------------------------------------------------------------
None
Item 5. Other Information
- ---------------------------
None
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.
19
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)
November 13, 2001 BY /s/ Allen E. Lyda
- --------------------------- ------------------------------
DATE Allen E. Lyda
Vice President, Chief
Financial Officer
20