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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 126-2)

Total Shares of Common Stock issued and outstanding on May 10, 2003, were 14,473,135.

TEJON RANCH CO.

INDEX

PART I - FINANCIAL INFORMATION

TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

See Notes to Consolidated Condensed Financial Statements.

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TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)

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TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(In Thousands)
(Unaudited)

See Notes to Consolidated Condensed Financial Statements.

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UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
($’s in thousands except shares outstanding)

See Notes to Consolidated Condensed Financial Statements.

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TEJON RANCH CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

March 31, 2002

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.

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 and a summary of significant accounting policies, 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, 2002.

NOTE B – NET INCOME (LOSS) PER SHARE

Basic net loss per share is based upon the weighted average number of shares of common stock outstanding during the period, which at March 31, 2003 was 14,428,557 and at March 31, 2001 was 14,340,325.  Diluted net loss 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 upon exercise of stock options per Financial Accounting Standards Board (FASB) Statement No. 128.  For the first quarters of 2003 and 2002, diluted net loss 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

Statement on Financial Accounting Standards 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.

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The following is a summary of available-for-sale securities at March 31, 2003 and December 31, 2002:

As of March 31, 2003, the adjustment to accumulated other comprehensive loss in the consolidated condensed statement of stockholder’s equity reflects the fact that an unrealized gain on marketable securities available for sale at March 31, 2003 was less than the unrealized gain at December 31, 2002, which results in a reduction in the amount of the cumulative adjustment to stockholders’ equity.  The amount of the reduction to stockholder’s equity is $25,000, which is net of a tax benefit of $16,000.  As of March 31, 2003, the Company’s gross unrealized holding gains equal $354,000 and gross unrealized holding losses equal $145,000.  On March 31, 2003, the weighted average maturity of U.S. Treasury and agency securities was 1.72 years and corporate notes was 1.74 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 – CONTINGENCIES

The Tejon Ranch Public Facilities Financing Authority Community Facilities District (“CFD”), a joint powers authority formed by Kern County and the Tejon-Castac Water District, has placed liens on 1,728 acres of the Company’s land.  These liens are to secure payment of special taxes related to $17.0 million of bond debt sold by the CFD.  The Company is obligated, as a landowner in the district, to pay its share of the special taxes assessed each year.  The 1,728 acres of land includes the Tejon Industrial Complex development.  Proceeds from the sale of CFD bonds went to reimburse the Company for public infrastructure related to the Tejon Industrial Complex development. In the quarter ended March 31, 2003, the Company did not pay any special taxes related to the CFD.  In 2002, the Company paid approximately $100,000 in special taxes.   As development occurs at Tejon Industrial Complex, new owners of land and new lease tenants, through triple net leases, will begin to pay their portion of the assessed special tax.  As this happens, the Company’s obligation will be reduced.  It is expected that the Company will have additional special tax payments due in 2003 of $100,000, but this could change in the future based on the amount of bonds outstanding within the CFD and the amount of taxes paid by others.  As development and values increase around the Tejon Industrial Complex, the Company may be able to have approximately 1,400 acres released from the CFD lien.

At March 31, 2003, the Company was guaranteeing the repayment of $1.4 million of debt of the Petro Travel Plaza LLC, an unconsolidated joint venture.  Total debt outstanding at March 31, 2003 for Petro Travel

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Plaza LLC is approximately $11.7 million and is related to the construction and long-term financing of the travel plaza.  Our partner in this joint venture is also guaranteeing $400,000 of this debt.  This loan will mature in 2010. 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 approximately $11.8 million. The maturity date of this loan is July 2003, and it is anticipated that the joint venture will refinance this loan in July 2003. The Company does not expect either of these guarantees to ever be enforced.

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 and 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 and maintains an ongoing groundwater monitoring system.  Lafarge has also completed the site investigation with respect to chlorinated hydrocarbons and has installed a pump and treat system to clean up the groundwater.  Lafarge has also removed high concentrations PCE from the 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.  We are advised that National and Lafarge have consolidated, closed and capped the cement kiln dust piles.  Maintenance of the cap and groundwater monitoring remain as on-going activities.  Lafarge and National have been directed by the Regional Water Board to investigate the extent of contamination resulting from a diesel fuel tank and pipeline, and initiate clean-up activities.  Lafarge and National have completed their investigation and installed an air sparging system to clean up the soil and ground water.  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 orders.  Due to the financial strength of National and Lafarge, the Company believes that a material effect on the Company as a result of this situation is remote at this time.

On February 20, 2003, the Center for Biological Diversity and other environmental groups filed a lawsuit in Kern County Superior Court against Kern County.   A subsidiary of the Company is the real party in interest.  This suit challenges the County’s certification of the environmental impact report for Tejon Industrial Complex-East (“TIC-East”), the Company’s 1100-acre expansion of the industrial park at the south end of the San Joaquin Valley.  Principal environmental issues raised in the suit involve the project’s likely effects on air quality and endangered species, the impact of converting farmland to development and the related potential for growth inducement, and the cumulative impact of the project when combined with other development on the Ranch and elsewhere.  The suit also challenges the land use entitlements granted by the County as being inconsistent with the County’s general plan and zoning policies. 

The Company has an obligation to indemnify and defend the County and has undertaken defense of this suit in close coordination with County counsel.  The Company believes that the lawsuit is without merit, and intends to defend it vigorously.

The suit does not ask for damages, but if plaintiffs prevail, the Company would be called upon to pay their attorneys fees.  The suit raises questions as to the practicality of developing TIC-East while the suit is pending.  While a delay in the Company’s ability to develop TIC-East could restrict its opportunities to serve

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industrial customers, the Company has inventory of land remaining at the approved industrial development across the freeway.  This opportunity cost would be partially offset by postponing capital expenditure costs for TIC-East infrastructure.  The suit is expected to be heard by the trial court judge this summer, with a decision rendered shortly thereafter.  Appeals to California’s intermediate appeals court and the California Supreme Court could extend the effects of the suit after a decision is rendered by the trial court.  If plaintiffs prevail, which the Company considers unlikely, further delays would be incurred while the environmental impact report is revised to correct any deficiencies determined to exist, re-approved by the County and possibly re-litigated by the plaintiffs.

For further discussion refer to the Company’s 2002 Form 10-K, Part I, Item 3, - “Legal Proceedings”.  There have been no significant changes since the filing of the 2002 Form 10-K.

NOTE E – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

The Company maintains investments in unconsolidated joint ventures.  The Company accounts for its investments in these unconsolidated joint ventures using the equity method of accounting.  The Company’s investment in its unconsolidated joint ventures at March 31, 2003 is $1,754,000.  The equity in the net loss of the unconsolidated joint ventures is $113,000 for the quarter ended March 31, 2003, which is included in Real Estate operations in the accompanying consolidated condensed statements of operations.  The Company’s current unconsolidated joint ventures are as follows:

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Unaudited condensed financial information of the Company’s unconsolidated joint ventures as of and for the quarter ended March 31 is as follows (in thousands):

Condensed Combined Statement of Operations Information

Condensed Combined Balance Sheet Information

The Company’s investment balance in its unconsolidated joint ventures differs from its equity in unconsolidated income/losses shown above and 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 F – DISCONTINUED OPERATIONS

During April 2001 the Company finalized its plan for the sale of its cattle and feedlot division.  The Company has been disposing 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 was completed at the end of April 2002.  At December 31, 2002, there were no assets or liabilities remaining in discontinued operations.   Revenues from discontinued operations as of March 31, 2002 consisted of the sale of cattle.  Expenses consisted of cost of sales related to the sale of cattle. 

Condensed statement of operations information related to the discontinued operations for the quarter ended March 31 is as follows:

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NOTE G – INTEREST RATE RISK MANAGEMENT

The Company entered into interest rate swap agreements with respect to $11.3 million of its long term debt to manage interest rate risk by converting floating interest rate debt to fixed rate debt.  These swap agreements have maturities ranging from 4 months to 3 years, and are contracts to exchange variable rate for fixed rate interest payments periodically over the lives of the agreements.  The interest rate swap fixed rate is 6.91%.  Amounts currently due to or from interest swap counterparties are recorded in interest expense in the period in which they are incurred.  The swap agreements are being accounted for as cash flow hedges in accordance with FASB Statement No. 133, “Accounting for Derivative Investments and Hedging Activities”.

As of March 31, 2003 the cumulative decrease in the fair value of the interest rate swaps was $165,000. Changes in the fair value of the interest rate swaps are reported in accumulated other comprehensive loss, net of applicable income taxes.  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 were reclassified to interest expense during the first quarter of 2003.  Estimated fair value of the swaps was determined by market price quotes as of March 31, 2003, received from our bank.

NOTE H – COMMON STOCK AND STOCK OPTION INFORMATION

The 1992 Stock Option Plan provided for the granting of options to purchase a maximum of 230,000 shares of our common stock to employees, advisors, and consultants of the Company at 100% of the fair market value as of the date of grant.  The 1992 Stock Option Plan expired during March 2002.  Options granted under this Plan in prior years had ten-year expiration terms.  There continue to be outstanding options under this plan to purchase 59,592 shares granted at an exercise price of $16.00.  These grants expire in 2006.

The 1998 Stock Incentive Plan originally provided for the making of awards to employees, consultants, and advisors of the Company with respect to 800,000 shares of common stock.  On March 6, 2001, the Board of Directors adopted an amendment to the 1998 Stock Incentive Plan.  The purpose of the amendment was to provide additional shares under the Plan to cover new award grants.  The amendment provides for an additional 800,000 shares to be available for awards under the Plan.  Since the adoption of the Incentive Plan through March 31, 2002, the Company has outstanding options to purchase 1,094,204 shares at a price equal to the fair market value at date of grant.

The Non-Employee Director Stock Incentive Plan is intended to enable us to attract, retain, and motivate non-employee directors by providing for or increasing the proprietary interests of such persons in the Company.  The plan provides for making of awards to non-employee directors with respect to an aggregate of 200,000 shares of common stock.  On March 6, 2001, the Board of Directors adopted an amendment to extend the date through which awards can be granted under the Plan from December 31, 2002 to December 31, 2007, and the date through which shares can be issued from December 31, 2012 to December 31, 2017.  Since the adoption of the plan through March 31, 2002, the Company has granted options under the plan to purchase 85,200 shares at a price equal to the fair market value at date of grant.

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The amendments to the 1998 Stock Incentive Plan and the Non-Employee Director Stock Incentive Plan were approved by stockholders at the Company’s Annual Meeting on May 1, 2001.

During the first quarter of 2003 and 2002 no compensation expense was recorded related to the granting of stock options.  Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its stock options under the fair value method of the statement.  The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for the options granted in 2002:  risk-free interest rate of 5.00%; dividend rate of 0.0%; volatility factor of the expected market price of our common stock of 0.27; and a weighted average expected life of the options of five years from the option grant date. 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  In addition, this option valuation model requires the input of highly subjective assumptions including the expected stock price volatility.  Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of stock options outstanding under the Company’s stock option plans.

Had compensation expense been determined based on fair value at the grant date for awards, consistent with the provisions of SFAS No. 123, in 2002 and 2001, the Company’s net earnings and net earnings per share would have been reduced to the pro forma amounts indicated in the following table as of March 31:

A summary of the Company’s stock option activity and related information for the quarter ended March 31, 2003 and the year ended December 31, 2002 follows:

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The weighted average fair value per share of options granted per the Black-Scholes model in 2003 was  $9.51.

Exercise prices for options outstanding as of March 31, 2002 ranged from $16.00 to $27.90.  The weighted-average remaining contractual life of those options is approximately six years.

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Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk” below and “Notes to Consolidated Financial Statements” on the preceding pages of this report, management has made forward-looking statements regarding future developments, future revenue and income of our crops, future special taxes associated with our industrial complex, our ability to refinance construction debt due in July 2003, potential losses to the Company as a result of pending environmental proceedings, our risks with respect to guarantees of indebtedness on our jointly owned travel plaza and jointly owned industrial building, and market value risks associated with investment and risk management activities and with respect to inventory, accounts receivable, marketable securities, and outstanding indebtedness.  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.

New Accounting Pronouncements

In September 2001, FASB issued Statement No. 143 “Accounting for Asset Retirement Obligations.”  This statement covers obligations that a company incurs for the retirement of tangible long-lived assets such as drilling rigs or manufacturing plants.  We do not anticipate this pronouncement having a significant impact on our consolidated financial position or results of operations when it comes effective for the 2003 financial year.

FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, was issued in June 2002.  This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and not at the date of the commitment to an exit plan.  We do not expect this statement to have a significant impact on our consolidated financial position or results of operations when it becomes effective for the 2003 financial year.

On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), “Accounting for Stock-based Compensation – Transition and Disclosure.”  SFAS 148 amends SFAS 123, “Accounting for Stock-based Compensation,” to provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation.  SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure, in the summary of significant accounting policies, of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.  While the statement does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 123 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB Opinion No. 25.

SFAS 148’s amendment of the transition and annual disclosure requirements of SFAS 123 and APB Opinion No. 28 are effective for fiscal years ending after December 15, 2002.  The Company has implemented these new disclosure provisions.  See Note H of Notes to Consolidated Financial Statements.

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FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” was issued in November 2002.  The initial recognition and measurement requirements of the interpretation are effective on a prospective basis to guarantees issued or modified after December 31, 2002.  Under the requirements a guarantee would have to be recorded as a liability equal to the expected present value of the estimated probability-weighted range of contingent payments under the guarantee arrangement.  We have not yet determined the anticipated impact of the application of the interpretation, however it could have a significant impact on our consolidated financial position when it becomes effective for the 2003 financial year.

FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, was issued in January 2003.  This interpretation addresses consolidation by business enterprises of joint ventures and special purpose entities  (described as variable interest entities in this interpretation) that have certain characteristics.  The implementation of this interpretation could have a material impact on our consolidated financial statements because we may have to begin to consolidate one or more of the joint ventures we have entered into.  We are currently reviewing all of our joint venture agreements to determine what the potential impact may be related to the implementation of this interpretation. 

Results of Operations

Total revenues, including interest income for the first quarter of 2003 was $2,977,000 compared to $2,417,000 for the first quarter of 2002.  The improvement in revenues during the first quarter of 2003 is due to improved real estate and farming revenues.  Real estate revenues increased $333,000 and farming revenues increased $353,000.  The increase in the real estate revenues was attributable to increased oil and mineral revenues of $106,000 due to higher prices received for oil and a $146,000 increase in game management revenues.  Increased revenues of $50,000 in landscape maintenance and $37,000 in the filming department accounted for the remainder of the increase.  Farming revenues increased due to the extended almond processing season at Pacific Almond, our almond processing plant.  These increases were partially offset by a decrease of $126,000 in interest income on investments due to lower interest rates.

The net loss for the first quarter of 2003 including both continuing operations and discontinued operations was $533,000 or $0.04 per share, diluted, compared to a net loss of $962,000 or $0.07 per share, diluted, for the same period of 2002.  Operating activities from continuing operations during the first quarter of 2003 resulted in a net loss of $533000, or $0.04 per share, diluted, compared to a net loss of $782,000, or $0.06 per share, diluted, for the same period of 2002.  The loss from continuing operations during the first quarter of 2003declined when compared to the same period of 2002 due to the increase in revenues described above.  The improvement in revenues was partially offset by an increase in real estate expenses of $184,000.  The increase in real estate expenses is primarily related to increases in contract and professional services, and increased property taxes.

In future periods, as in the year 2002, 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 a modest percentage of our land holdings.  The actual timing and completion of entitlement and development related activities is difficult to predict due to the uncertainties of the approval process and market factors. In the marketing of Tejon Industrial Complex, we continue to see signs that leasing activity is slowing down and that lease prices have been gradually declining. The tenant in the Tejon Dermody Industrial joint venture building is having financial difficulties and filed for Chapter 11 bankruptcy protection during early May 2003.

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Currently, this tenant has paid its rent to date.  Depending on the outcome of our tenant’s reorganization, this building could become vacant and joint venture revenues would be significantly impacted.

We will also continue to evaluate land resources to determine the highest and best uses for our land holdings. Future sales of land are dependent on market circumstances and specific opportunities.  Our goal in the future is to increase land value and create future revenue growth through planning and development of commercial, industrial, resort and residential programs.

All of our crops are particularly sensitive to the size of each year’s world crop.  Large crops in California and abroad can rapidly depress prices.  Although it is early in the year to accurately predict production estimates for this year’s crops, we continue to believe that, on a statewide basis, the long-term production trend will continue to increase for the nut crops we grow and particularly for wine grapes.  This long-term trend in production could lead to a decline in the prices we receive for our crops. We believe that there continues to be an imbalance between the supply of wine grapes and demand as a result of many new plantings coming into production.  During early March 2003, we contracted our 2003 grape production.  At that time, we also contracted our French colombard grape production for 2004 and 2005.  These contracts are at minimum prices varying from $65.00/per ton to $125.00/per ton.

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.  As mentioned above, we continue to expect pricing pressure on our almonds over the next few years due to new statewide plantings beginning to produce higher volumes of almonds.  This increase in production may be somewhat negated by old almond orchards being removed, and steady increases in global demand for almonds.  This potential increase in overall almond production will positively impact our almond processing operation because of more almonds being available to process. 

For further discussion of the risks and uncertainties that could potentially adversely affect us, please refer to the Company’s 2002 Form 10-K, Part I, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

We continue to be involved in various environmental proceedings related to leased acreage.  For a further discussion, refer to Note D – Contingencies.

Results of Discontinued Operations

During April 2001, the Company finalized its plan for the sale of its cattle and feedlot division.  Since then, we have disposed of our cattle and feedlot operations to provide capital for real estate development activities and to reduce outstanding debt.    While the on going sale of livestock assets has provided significant working capital, it also resulted in a loss of significant revenues, even after taking into account the revenue stream from grazing leases that we have entered into in connection with the sales of the breeding herd.  During April 2002, we completed the process of liquidating the remaining stocker cattle herd.  There were no discontinued operation assets at March 31, 2003 or at December 31, 2002.

Discontinued operations for the first quarter of 2002 generated a loss of  $180,000 or $0.01 per share diluted. The loss is due to losses on much of the cattle being sold during the first quarter of 2002 because of lower feeder cattle prices.

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Financial Condition

Our cash, cash equivalents and short-term investments totaled approximately $22,899,000 at March 31, 2003, compared to $25,240,000 at December 31, 2002.  Working capital as of March 31, 2003 was $29,473,000 compared to $30,515,000 at December 31, 2002.  The decrease in working capital during the first quarter of 2003 is due primarily to the continuing use of funds in real estate development activities.

We have a revolving line of credit of $15,000,000 that, as of March 31, 2003, had no outstanding balance. This line of credit bears an interest rate that 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. Our outstanding long-term debt, less current portion of $1,735,000, declined by $195,000 to $14,141,000 at March 31, 2003 when compared to December 31, 2002.  Long-term debt is being used to fund real estate development infrastructure and farming assets on our land, commercial buildings in Phoenix, Arizona , and an almond processing plant.  Long-term debt currently consists of three separate debt obligations.  One long-term note for real estate and farming purposes provides for loan amounts up to $10,500,000 has a current balance of $10,000,000, and is secured by farmland.  This note is due in 2004.  The Company can borrow up to the maximum loan amount of this note through 2004. The second note obligation was used to purchase the buildings in Phoenix, is secured by mortgages on the buildings, has a balance of $4,616,000 and is payable in equal monthly installments through April 2009.  The last note is for a loan used to purchase the almond processing plant in 2000 and has a balance of $1,260,000 with the final payments due February 1, 2010.

The following table shows our contractual long-term obligations and commitments over the next five years:

The standby letter of credit is related to the issuance of Community Facility District bonds by the Tejon Ranch Public Facilities Financing Authority, a joint-powers authority created by Kern County and the Tejon-

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Castac Water District.  The standby letter of credit is in place to provide additional credit enhancement and covers approximately two years worth of interest on the outstanding bonds.  This letter of credit will not be drawn upon unless we, as the largest landowner in the district, fail to make our property tax payments.  This letter of credit will terminate in the future as land in the district becomes developed.

The guarantees include a $1,375,000 guarantee related to the debt of Petro Travel Plaza LLC, an unconsolidated limited liability company in which we are equity owners with Petro Stopping Centers, L.P.  Our partner in this joint venture is also guaranteeing $400,000 of this debt.  Total debt in the venture is approximately $11,700,000 and is related to the construction of the facility.  During 2003 this note is expected to be refinanced with a permanent mortgage loan, and our guarantee will no longer be needed.  The remaining $5,878,000 guarantee relates to debt of the Tejon Dermody Industrial LLC, an unconsolidated joint venture to construct and market a 650,000 square foot building at the Tejon Industrial Complex.  Total debt in the venture is approximately $11,756,000 and was used in the construction of the building.  In the joint venture agreement each partner agreed to guarantee one half of the outstanding construction loan debt through the two-year term of the loan. It is anticipated that this loan will be refinanced during July 2003.  During March 2002, a lease was signed for one half of the building and the lease payments from this lease will cover  debt service requirements under the current loan agreement.  The continuation of this lease is currently in doubt due to the financial condition of the tenant.  At this time we believe that neither of the guarantees nor the standby letter of credit will ever be called upon  due to the capital structures of the two joint ventures. 

It is difficult to accurately predict cash flows due to the nature of our businesses and to fluctuating economic conditions.  Our earnings and cash flows will be affected from period to period by the commodity nature of our farming operations and to the timing of sales and leases of property within our development projects.  The timing of sales and leases within our development projects is difficult to predict due to the time necessary to complete the development process and negotiate sales or lease contracts.  Often, this nuance of land development can lead to particular years or periods having more or less earnings than comparable periods.  Based on our experience, we believe we will have adequate cash flows and cash balances over the next twelve months to fund internal operations.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the 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 rates related to its 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.

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

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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 ($4,616,000 on March 31, 2003) 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 ($11,260,000 on March 31, 2003) 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.  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.  On April 10, 2003 an interest rate swap on $10.0 million of debt expired.  See Note G - Notes to Consolidated Financial Statements.

Market risk related to our inventories ultimately depend on the value of the almonds, grapes, pistachios, and walnuts at the time of payment or sale.  Credit risk related to our receivables depends upon the financial condition of our customers.  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 March 31, 2003
(Dollars in Thousands)