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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-7183
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 (IRS Employer Identification
of incorporation or organization) Number)
P.O. Box 1000, Lebec, California 93243
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(Address of principal executive office)
Registrant's telephone number, including area code: (661) 248-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------------------- ----------------------------
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
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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
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of Registrant's Common Stock, $.50 par value per
share, held by persons other than those who may be deemed to be affiliates of
Registrant on March 25, 2002 was $433,966,241 based on the closing price on that
date on the New York Stock Exchange.
The number of the Company's outstanding shares of Common Stock on March 25,
2002 was 14,360,233 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 7, 2002 relating to the directors and executive officers of the
Company are incorporated by reference into Part III.
Total Pages - 155
Exhibit Index - 36
PART I
ITEM 1. BUSINESS
Throughout Item 1 - "Business," Item 2 - "Properties," Item 3 - "Legal
Proceedings," Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," we have made forward-looking
statements, including statements regarding strategic alliances, the almond
industry, the future plantings of permanent crops, future yields, prices and
water availability for our crops and real estate operations, future prices,
production and demand for oil and other minerals, future development of our
property, future revenue and income of our jointly-owned travel plaza, almond
plant and industrial building, potential losses to the Company as a result of
pending environmental proceedings, the adequacy of future cash flows to fund our
operations, market value risks associated with investment and risk management
activities and with respect to inventory, accounts receivable and our own
outstanding indebtedness and other future events and conditions. These
forward-looking statements are subject to factors beyond our control (such as
weather, market and economic forces) and, with respect to the future development
of our 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 the forward-looking statements.
Tejon Ranch Co. is a diversified, growth oriented land development and
agribusiness company whose purpose is to increase the value of our real estate
and resource holdings and maximize our market value for our stockholders. Our
prime asset is approximately 270,000 acres of contiguous, largely undeveloped
land which, at its most southerly border, is 60 miles north of Los Angeles and,
at its most northerly border, is 15 miles east of Bakersfield. We believe that
our land holdings offer attractive development opportunities. We also have
significant, existing commercial real estate developments along Interstate 5 (a
major, north-south federal highway in California that runs through our land),
and we have significant farming and mineral extraction operations.
Over the last five years we have been implementing a strategic plan that set out
a broad strategy for enhancing stockholder value. Specifically, the plan has
focused on planning and development of portions of our largest and most valuable
asset, our 270,000-acre land holding, as well as growing our other core
business.
In implementing our strategic plan, we have:
. Nearly completed a program to sell our cattle and feedlot operations
to provide a source of capital for the reduction of outstanding debt,
and for future real estate development activities.
. Sold $6 million of non-strategic real estate assets, using the
proceeds to purchase commercial and industrial buildings for current
and future revenue sources.
. Begun development of the 351-acre Tejon Industrial Complex, with the
first occupant being the 51-acre Petro Travel Plaza that opened for
business in 1999 and the first purchaser being IKEA, an international
home furnishings retailer. IKEA constructed a regional warehouse
having 900,000 square feet at the Complex and IKEA will ultimately
have 1.8 million square feet of building at the Complex when
completed.
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. Completed construction of a 650,000 square foot building on 31 acres
within the Tejon Industrial Complex in a joint venture with DP
Properties.
. Leased land to a subsidiary of Calpine Corp. for the development of a
power plant on our land, which is currently under construction.
. Signed a joint venture agreement with three well-known home builders
for the creation of a new master-planned community on our land in Los
Angeles County, which we call Centennial.
. Purchased an almond hulling and processing plant to enhance and expand
our farming operations.
. Successfully completed a rights offering on January 16, 2001, raising
$30 million in new capital.
Two years ago we decided to focus our primary efforts and resources on real
estate development instead of trying to grow all of our businesses at the same
time. In addition to our Tejon Industrial Complex and the Centennial residential
project, we are engaged in the constraints and feasibility analyses and phase I
planning of a master-planned mountain community. We envision that the major
components of any proposed project would include mountain homes, a high quality
golf and spa resort, a commercial component and substantial open space. We call
this concept "Tejon Mountain Village." Although the size of this development
concept has not been finalized, it could involve several thousand acres. While
we have not defined the products to be offered, they could include sites for
homes in a rural, mountain environment. In September 2000 we decided to commit
the resources necessary to refine our concept, develop detailed plans, prove up
the project's feasibility and, if all goes well, perform preliminary work
necessary to apply for governmental approvals for this proposal.
We are also in the process of seeking entitlements to expand the Tejon
Industrial Complex by 1,103 acres. These entitled acres will add room to build
some 15 million square feet of industrial space in the future. We expect to
receive these entitlements by late summer of 2002. Our undertaking construction
of these residential and industrial projects is subject to a number of
contingencies and uncertainties, and we cannot assure you that the developments
will occur or that they will be successful.
In order to provide additional working capital for our real estate development
activities, we decided in 2001 to sell the assets of our livestock and feedlot
division. Since then, we have been disposing of the cattle and feedlot assets.
While the sale of these assets has provided working capital and allowed us to
reduce outstanding debt, it will also result in a loss of significant revenues,
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 our breeding herd was completed during June 2001, and the sale of the
feedlot was completed during July 2001. We began the year with approximately
40,000 head of cattle, and ended the year with 4,300 head of cattle. These
remaining head of stocker cattle are expected to be sold by the end of April
2002. During June 2001, we sold our remaining breeding herd for $2.6 million to
Centennial Livestock, an unrelated California agriculture company. In July 2001,
we completed the sale of our feedlot in Texas for $3.2 million. The combined
gain on the sales, net of applicable income taxes, was $700,000.
The following table shows the revenues, operating profits and identifiable
assets of each of our continuing industry segments for the last three years:
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
---------------------------------------------
(Amounts in thousands of dollars)
2001 2000 (1) 1999 (1)
------- ------- -------
Revenues From Continuing Operations
- -----------------------------------
Real estate $10,990 $10,947 $ 8,906
Farming 6,425 7,225 7,433
------- ------- -------
Segment revenues 17,415 18,172 16,339
Interest income 1,897 632 639
------- ------- -------
Total revenues from continuing operations $19,312 $18,804 $16,978
======= ======= =======
Segment Profits and Net Income
- ------------------------------
Real estate $ 3,762 $ 2,366 $ 3,304
Farming (1,343) 71 1,148
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Segment profits (2) 2,419 2,437 4,452
Interest income 1,897 632 639
Corporate expense (3,347) (3,029) (3,198)
Interest expense (695) (1,426) (214)
------- ------- -------
Operating income (loss) from continuing operations
before income taxes and minority interest in
consolidated joint venture 274 (1,386) 1,679
Minority interest in consolidated joint venture (189) (185) --
------- ------- -------
Operating income (loss) from continuing operations
before income taxes 85 (1,571) 1,679
Operating income (loss) from continuing operations
after income taxes 52 (970) 1,041
Income from discontinued operations,
Net of applicable income taxes 242 425 140
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Net income (loss) $ 294 $ (545) $ 1,181
======= ======= =======
Identifiable Assets by Segment (3)
- ----------------------------------
Real estate $44,523 $31,197 $31,975
Farming 18,912 17,698 13,574
Corporate 35,713 49,392 45,970
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Total Assets $99,148 $98,287 $91,519
======= ======= =======
(1) Certain industry segment information presented for the years ended
prior to December 31, 2001 have been reclassified to conform to their
presentation for the year ended December 31, 2001.
(2) Segment Profits are revenues from continuing operations less operating
expenses, excluding interest income and expense, corporate expense and
income taxes.
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(3) Identifiable Assets by Segment include both assets directly identified
with those operations and an allocable share of jointly-used assets.
Corporate assets consist of cash and cash equivalents, refundable and
deferred income taxes, buildings and improvements, and the net assets
of discontinued operations.
Real Estate Operations
Our real estate operations consist of four principal activities: land planning
and entitlement, real estate development, commercial sales and leasing, and
income portfolio management. Our 270,000-acre land holding offers significant
real estate development opportunities. Our land is characterized by diverse
topography and scenic vistas and is conveniently served by three inter-regional
highways. Interstate 5, one of the nation's most heavily traveled freeways,
brings approximately 60,000 vehicles a day through our land, which includes 16
miles of Interstate 5 frontage and the commercial land surrounding four
interchanges. The strategic plan for real estate focuses on development
opportunities along the Interstate 5 corridor as well as laying the necessary
groundwork for moving forward with potential destination uses, including
residential and resort projects.
During 2001 and 2000, development activity was principally focused on the
351-acre Tejon Industrial Complex at the Interstate 5/Laval Road interchange.
The activity at the industrial complex was primarily related to infrastructure
construction and marketing of commercial sites. Interest in developing
industrial, warehouse, and distribution facilities on the remaining acreage at
the Tejon Industrial Complex is being expressed by developers and end users. We
have begun marketing building sites at the industrial complex to these groups.
In September 2000, we closed the first sale of a building site, 80 acres
purchased by IKEA, an international home furnishings retailer, and in March 2001
we entered into a joint venture agreement with DP Properties for the development
of a 650,000 square foot building on 31 acres within the Tejon Industrial
Complex. This building was completed during January 2002. During March 2002 the
joint venture entered into a 15-year lease with Daisytek International, a
distributor of name-brand computer and office supply products and accessories,
for 325,000 square feet. We are in direct competition for customers with other
industrial sites in Northern, Central, and Southern California, including the
inland empire region of Southern California.
In March 2000, we formed a limited liability company with three well-known
homebuilders and community developers (Lewis Investment Company, LLC, Pardee
Construction Company and Standard Pacific Corp.), to develop a master-planned
community initially on 4,000 acres of our land in Los Angeles County that we
call Centennial (formerly Rolling Meadows). Under the terms of the agreement we
are to contribute the land and $500,000 for feasibility studies and the
developers are to invest a matching amount of funds up to an aggregate of $15.0
million to perform planning and feasibility work and to prepare and process
applications for entitlements for the project, which they hope to file with Los
Angeles County in mid 2002. The parties have agreed in principle to increase the
size of the project to approximately 12,000 acres, consisting of 6,000 acres of
developable land and 6,000 acres of open space and recreational areas. This
means we would contribute additional land and the developers would contribute
additional cash to the project. Negotiations are continuing and binding
agreements have not been entered into for this expansion of the project. If and
when the entitlements have been obtained, we expect the limited liability
company to make the required infrastructure improvements and to sell the lots to
developers for the construction of homes. The three development companies
participating in the project have the right to purchase up to 60% of the lots.
We are entitled to receive 50% of the
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profits and cash flow, if any, from the development, which is not expected to be
completed for several years.
In April 1999, we entered into an agreement with Enron North America Corp. and
one of its affiliates which we call collectively "Enron". Under this agreement,
Enron had the right to receive 1) the use of approximately 31 acres of
undeveloped land owned by us at the southern end of the San Joaquin Valley for
construction and operation of a power plan having an anticipated capacity of 750
megawatts of electricity and 2) services from us related to the entitlement of
such land. One of the major contingencies to the project was removed due to
Enron receiving approvals from the California Energy Commission for the
construction and operation of the power plant on our site in early 2001. Under
the Enron arrangement, we received $1,551,000 in 1999, $2,100,000 in 2000 and an
additional $1,400,000 for the period from January 2001 through April 2001 as
compensation for the use of the land and for services related to the entitlement
of the land.
During April 2001, Enron completed a transaction to sell the power plant
development project to Calpine Corp. Under the documents they assumed in the
transaction with Enron, Calpine Corp. continued to pay us $100,000 per month for
their use of the land prior to the execution of a lease agreement. In addition,
we received approximately $1,600,000 in milestone payments attributable to the
use of the land, additional land easements, and services we provided related to
the entitlement of such land.
During July 2001, a subsidiary of Calpine Corp. executed a lease agreement with
us for the development of the power plant, for which construction is now
underway. Under this executed lease agreement, we are to receive lease payments
in the amount of $100,000 per month. In addition, payments under this lease
agreement, which include payments for both rent and compensation for significant
easement rights over other parts of our land, will increase to $2,600,000 per
year (subject to certain adjustments which could be material), commencing when
the plant becomes operational or earlier under certain circumstances, and are
subject to escalation based upon changes in a designated consumer price index.
We are also entitled to receive additional rent after commercial operation of
the plant begins, based upon production capacity at the plant and energy prices.
This additional rent could vary significantly from year to year. The term of the
lease is 25 years from the date the plant becomes operational (or earlier under
certain circumstances), and Calpine has three five-year options to extend the
term. During the construction of the plant, we are to continue to receive
$100,000 per month for a 24-month period that began in July 2001. For the period
from July 2001 to December 31, 2001, we received $600,000 under this agreement.
In addition to the Petro Travel Plaza facility, we lease to various tenants land
which is used for a full-service truck stop facility, a truck wash, four auto
service stations with convenience stores, four full-service restaurants, five
fast-food operations, a motel, two antique shops, and a United States Postal
Service facility. In addition, several microwave repeater locations, radio and
cellular transmitter sites, and fiber optic cable routes are also leased. In the
commercial sales and leasing area, we are in direct competition with other
landowners which have highway interchange locations along Interstate 5 and State
Route 99 in the southern San Joaquin Valley and the Tehachapi Mountains.
We lease certain portions of our land to oil companies for the exploration for,
and production of, oil and gas but do not ourselves engage in any such
exploratory or extractive activities.
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As of December 31, 2001, approximately 12,212 acres were committed to producing
oil and gas leases from which the operators produced and sold approximately
245,789 barrels of oil, 57,164 MCF of dry gas, and 3,047 gallons of wet gas
during 2001. Our share of production based upon the average royalty rate during
the last three years has been 84, 57 and 49 barrels of oil per day for 2001,
2000, and 1999, respectively. Approximately 405 producing oil wells were located
on the leased land as of December 31, 2001. Three new wells were drilled on
Tejon's land, or land unitized with Tejon's land, in 2001.
Estimates of oil and gas reserves on our properties are unknown to us. We do not
make such estimates, and our lessees do not make information concerning reserves
available to us.
We have approximately 2,440 acres under lease to National Cement Company of
California, Inc., which we call "National," for the purpose of manufacturing
portland cement from limestone deposits found on the leased acreage. National
owns and operates on the property a cement manufacturing plant having an
original design capacity of approximately 600,000 tons of cement per year. The
manufacturing plant has recently increased its production capacity to 1,000,000
tons per year. The amount of payment that we receive under the lease is based
upon shipments from the cement plant. The term of this lease expires in 2006,
but National has remaining options to extend the term for two additional
successive increments of 20 years each and one final increment of 19 years.
Significant proceedings under environmental laws relating to the cement plant
are in process, see Item 3--"Legal Proceedings."
Farming Operations
In the San Joaquin Valley, we farm permanent crops including the following
acreage: wine grapes--1,308, almonds--1,387, pistachios--985 and walnuts--295.
Included in these acreage figures are 300 acres of almonds planted in 1998 and
300 acres of almonds planted early in 1999. The 1998 almond development had a
small crop during 2001 and the 1999 almond development is expected to have a
harvestable crop in 2002. We are also anticipating the development of an
additional 300 acres of almonds in early 2003. Our objective in planting new
trees is to offset the normal yield decline as our older plantings reach
productive maturity and to improve revenues from farming operations in future
years. As certain of our permanent plantings age to the point of declining
yields, we will evaluate the advisability of replanting those crops or replacing
them with different plantings, depending upon market conditions. During 2001, we
removed 247 acres of wine grapes due to market conditions. This 247 acres was
then replanted with pistachio trees. During 2001 we also removed 598 acres of
almond trees due to damage sustained in storms. These trees were also of an age
that yields were beginning to decline and the trees were becoming less
profitable. The lost production from these trees will be replaced in the future
from the new plantings described previously. We also lease approximately 1,600
acres to third parties for the farming of row crops.
We sell our farm commodities to several commercial buyers. As a producer of
these commodities, we are in direct competition with other producers within the
United States and throughout the world. Prices received by us for our
commodities are determined by total industry production and demand levels. We
attempt to improve price margins by producing high quality crops through
cultural practices and by obtaining better prices through marketing arrangements
with handlers. In order to control the quality of our almonds through the
processing phase and to reduce future processing costs, we formed a joint
venture with D.
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Billings Family Trust, a significant San Joaquin Valley farming company, in May
2000 to own and operate an almond hulling, shelling and processing plant
purchased by us in January 2000. The purchase price was $2,700,000. We are
entitled to two-thirds of the profits and cash flow after debt service. In
addition to using the almond processing plant to process our crop and that of
our co-venturer, we also hull, shell and process almonds for outside growers.
In 2001 our almonds were primarily sold to various commercial buyers, with one
of the buyers receiving approximately 38% of the crop. Since we now process our
own almonds, we have considerably more flexibility over the timing and nature of
our sales. We do not believe that we would be adversely affected by the loss of
our largest buyers because of the size of the almond market, the large number of
other buyers that would be available to us and the fact that the prices for
these commodities do not vary based on the identity of the buyer.
The California almond industry is subject to a federal marketing order which
empowers the California Secretary of Agriculture to set the percentage of
almonds which can be sold during any crop year and the percentage of almonds to
be held in reserve in order to assist in the orderly marketing of the crop.
During 1999, the State of California had a record almond crop that led the
Almond Board of California, an industry group, to request an almond marketing
reserve that was approved by the Secretary of Agriculture. The marketing order
had allowed us to sell only 77% of the 1999 crop until the summer of 2000, when
the marketing order was lifted and we were able to sell the remaining 23% during
the third quarter of 2000. Historically, marketing orders have been lifted in
the following year after the size of the crop for that year is determined.
During 2001 and 2000 the saleable percentage was set at 100%.
In 2001, the majority of our pistachios were sold to one customer, and our
walnuts were sold to two customers, each receiving approximately 50% of the
crop. We believe that the loss of any of these customers would not adversely
impact us because, like almonds, there are a number of potential purchasers of
pistachios and walnuts, and prices do not change based on the identity of the
buyer. During 2001, wine grapes were sold to a number of wineries, with one
winery receiving approximately 61% of the crop. During 2000, our contract with
Golden State Vintners expired with the purchase of that year's crop. We believe
that there is an imbalance between the supply of wine grapes and the demand as
the result of so many new plantings coming into production. We cannot assure you
that we will find buyers for all of our wine grape production in 2002. We have,
however, contracted our French Colombard grape production for a two-year period
beginning with the 2002 crop and signed a multi-year contract beginning in 2002
for our ruby cabernet grape production. The lack of purchasers for our remaining
wine grapes would materially affect our business.
Overall crop revenues from our farming operation was less than 2000 levels
primarily due to reduced almond production and to lower grape prices and grape
production. Grape prices declined approximately 27% when compared to 2000
prices. Grape production declined due primarily to the removal of 247 acres of
unprofitable cabernet sauvignon grapes. The overall decline in grape prices is
directly related to the growth in grape production throughout California. See
"Management's Discussion and Analysis of Financial Statements and Results of
Operations".
Almond revenues during 2001 declined due to a large drop in production. The
decline in production is due to storms that impacted the pollination period and
to storm damage to trees. The damaged trees were ultimately removed due to the
damage sustained in the storms and to the
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age of the damaged trees. During 2003 it is currently planned to plant 300 acres
of new almonds to help offset the loss of future production from the trees that
were removed. Pistachio revenues increased in 2001 due to production doubling
when compared to 2000 production. A large part of the increase in production was
due to 300 acres of young pistachio trees producing their first full crop. The
improvement in walnut revenues is due primarily to increased production.
We expect further price pressure on both nuts and grapes as new production
within California comes online. Nut and grape crop markets are particularly
sensitive to the size of each year's world crop. Large crops in California and
abroad can rapidly depress prices.
Our water entitlement for 2001 available from the State Water Project was
adequate for our farming needs. In addition, there was sufficient runoff from
local mountain streams allowing us to capture this water in reservoirs and
utilize it to offset some of the higher priced State Water Project water. The
State Department of Water Resources has announced its 2002 water supply at 45%
of full entitlement Other water supplies that the local water district will be
able to make available to its farmers, combined with this level of state
entitlement, are expected to provide a level of water supply that will cover all
of our farming needs. If in any year the local water district cannot meet all of
our agricultural demands, we will have to rely on ground water sources, water
transfers from the Tejon-Castac Water District and water banking arrangements
that we have entered into. Water from these sources may be more expensive
because of pumping costs and transfer costs, but can be expected to make up for
shortfalls of the kind we have experienced in the past.
See discussion of water contract entitlement and long-term outlook for water
supply under Part I, Item 2, "Properties".
Discontinued Operations
During the first six months of 2001, we continued to conduct a beef cattle
operation upon those portions of our land that were not devoted to farming,
commercial real estate operating assets or other purposes. As indicated above,
we began a program during 2001 to dispose of our cattle and feedlot operations.
The goal in selling these assets is to provide additional working capital for
our real estate development activities and to reduce our outstanding debt.
We began the year with approximately 40,000 head of cattle and ended the year
with 4,300 head of cattle. These remaining head of stocker cattle are expected
to be sold by the end of April 2002.
During December 2000, we sold a portion of our livestock assets to Echeverria
Cattle Company, LLC, which is owned by Matthew J. Echeverria, our former Senior
Vice President, Livestock and Ranch Operations. The transaction involved the
sale of approximately 1,000 cows, 50 bulls, and certain personal property for a
purchase price of $893,000, as well as a grazing lease over approximately 55,000
acres of our land. The lease has a term of ten years with two five-year options
to extend the term, and provides for rent at the rate of $200,000 per year,
subject to adjustments based upon rainfall and the extent to which we exercise
our right to use portions of the land for other purposes. The sale involved
approximately 22% of our breeding herd and approximately 3% of the total amount
of our cattle.
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During June 2001, we completed the sale of our remaining breeding herd for $2.6
million to Centennial Livestock, a California agricultural company. The
transaction with Centennial Livestock also included a grazing lease for
approximately 195,000 acres. This lease also has a term of ten years and
provides for rent at a rate of $680,000 per year and is subject to adjustment
based upon rainfall and the extent to which we exercise our right to use
portions of the land for other purposes. During July 2001, we completed the sale
of our feedlot in Texas for $3.2 million. The combined gain on the sale of the
breeding herd and feedlot in 2001, net of applicable taxes, was $700,000.
While the sale of these assets has provided significant working capital, it will
also result in the loss of significant revenues even after taking into account
the revenue stream from the grazing leases we entered into in connection with
the sale of the breeding herd. Over the last three years, the livestock division
accounted for 71% to 75% of our total revenues. While the operations of the
livestock division created significant revenues, they also used large amounts of
debt and working capital. We concluded that our working capital and debt
facilities would be better allocated to potentially higher returning and value
enhancing real estate development activities, which led to our decision to
dispose of the livestock division assets.
Customers
During 2001, no single customer accounted for more than 10% of our revenues from
continuing operations. During 2000 and 1999 the following customers accounted
for more than 10% of our consolidated revenues from continuing operations:
Golden State Vintners, a purchaser of grapes, (10% in 2000 and 25% in 1999); and
IKEA, an international home furnishing retailer (11% in 2000).
Organization
Tejon Ranch Co. is a Delaware corporation incorporated in 1987 to succeed the
business operated as a California corporation since 1936.
Employees
At December 31, 2001, we had 102 full-time employees. None of our employees is
covered by a collective bargaining agreement.
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Executive Officers of Registrant
--------------------------------
The following table shows, as to each executive officer of ours, the offices
held as of March 25, 2002, the period the offices have been held, and the age of
the executive officer. All of such officers serve at the pleasure of the board
of directors.
Name Office Held Since Age
- ---------------------------------------------------------------------------
Robert A. Stine President and Chief 1996 55
Executive Officer, Director
Jeffrey H. Warren Vice President, Property Management 2000 49
and Ranch Operations
Allen E. Lyda Vice President, 1990 44
Chief Financial Officer,
Treasurer and Assistant Secretary
Dennis F. Mullins Vice President, 1993 49
General Counsel and Secretary
Dennis J. Atkinson Vice President, Agriculture 1998 51
Joseph E. Drew Vice President, Commercial and 2001 59
Industrial Development
Dana C. Severy Senior Vice President, 2001 48
Residential and Resort Properties
- ---------------------------------------------------------------------------
A description of present and prior positions with us, and business experience
for the past five years is given below.
Mr. Stine has been employed by us since May 1996, serving as President and Chief
Executive Officer and as a Director. Mr. Stine served as the Chief Executive
Officer of the Collins Companies, a real estate development company from 1986 to
April 1995.
Mr. Warren has been employed by us since December 2000, serving as Vice
President, Property Management and Ranch Operations. From March 1999 to November
2000, he was a Director and Chief Financial Officer of BB Energy, an independent
oil and gas exploration and production company headquartered in Bakersfield, CA.
From December 1997 to February 1998, before joining BB Energy, Mr. Warren served
as General Manager and Chief Financial Officer of West Coast Quartz Corporation
of Fremont, CA (a manufacturer of parts for semiconductor production equipment)
and from August 1994 to November 1997, he was Vice President and Director of
Petsec Energy of Lafayette, LA (an oil and gas exploration and production
company operating in the Gulf of Mexico).
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Mr. Lyda has been employed by us since 1990, serving as Vice President, Finance
and Treasurer. He was elected Assistant Secretary in 1995 and Chief Financial
Officer in 1999.
Mr. Mullins has been employed by us since 1993, serving as Vice President,
General Counsel and Secretary.
Mr. Atkinson has been employed by us since July 1998, serving as Vice President,
Agriculture. From 1995 to 1998, he was a farm manager with Wilson Ag, an
agricultural company in Kern County. Prior to this he was a farm manager with
Tejon Farming Company, a subsidiary of the Company.
Mr. Drew has been employed by us since March 2001, serving as Vice President,
Commercial and Industrial Development. From 1997 to 2001, he served as President
of the International Trade and Transportation Center, a 700+ acre commercial and
industrial development of The Allen Group.
Mr. Severy has been employed by us since September 2001, serving as Senior Vice
President, Residential and Resort Properties. From 1995 to 2001, he served as
the Vice President of Resort Development for Intrawest Corporation, a leading
resort developer in North America.
ITEM 2. PROPERTIES
Our 270,000 acres include portions of the San Joaquin Valley, foothills,
portions of the Tehachapi Mountains and portions of the western end of the
Antelope Valley. A number of key transportation and utility facilities cross our
land, including Interstate 5, California Highways 58, 138 and 223, the
California Aqueduct (which brings water from Northern California), and various
transmission lines for electricity, oil, natural gas and communication systems.
Approximately 250,000 acres of our land are located in Kern County, California.
The Kern County General Plan for this land contemplates continued commercial,
resource utilization, farming, grazing and other agricultural uses, as well as
certain new developments and uses, including residential and recreational
facilities. While the County General Plan is intended to provide general
guidelines for land use and development, it is subject to amendment to
accommodate changing circumstances and needs. In addition to the General Plan,
much of our land will require specific zoning and site plan approvals prior to
actual development. We have not yet made specific proposals to the County to
implement any part of our proposed land use concepts, except at the Laval Road
Interchange on Interstate 5 where the Tejon Industrial Complex is located.
The remainder of our land, approximately 20,000 acres, is in Los Angeles County.
This area is accessible from Interstate 5 via Highway 138. Los Angeles County
has adopted general plan policies which contemplate future limited residential
development of portions of this land, subject to further assessments of
environmental and infrastructure constraints. In March 2000 we formed a limited
liability company with three major Southern California homebuilders to pursue a
master planned community on our Los Angeles County land. See "Business--Real
Estate Operations."
11
Portions of our land consist of mountainous terrain, and much of the land is not
presently served by developed roads or by utility or water lines. Any
significant development of the land would involve the construction of roads,
utilities and other expensive infrastructure and would have to be done in a
manner which accommodates a number of environmental concerns, including
endangered species and wetlands issues, that may limit development of portions
of the land or result in substantial delays in getting governmental approval.
Due to our location and the undeveloped state of our property, from time to time
unsolicited proposals are made for governmental or quasi-public uses of portions
of the property or neighboring lands by entities, some of which may have the
power of eminent domain. For the most part, we make a determined effort to
ensure that any such proposals are implemented in a manner that is
environmentally sound and that will maintain our flexibility to develop our
adjoining lands. Our lands are also being evaluated as a possible route for a
high-speed rail system between Los Angeles and San Francisco.
Water Rights
Existing long-term contracts with the Wheeler Ridge-Maricopa Water Storage
District, which we call the "Wheeler Ridge Water District," provide for water
deliveries from the California State Water Project to portions of our land in
the San Joaquin Valley. The terms of these contracts extend to 2035. Under the
contracts we are entitled to annual water for 5,496 acres of land, which is
adequate for our present farming operations. The long-term water supply picture
in the state is uncertain, however, not only due to recurring droughts, but also
because of existing and likely additional restrictions placed on water exported
from the Sacramento-San Joaquin River Delta. The impact of these restrictions
could adversely affect our business.
The years 1995 through 2000 were excellent water years with 100% of our water
entitlement being available from the State Water Project in each of 1995 - 1999,
and 90% in 2000. While the year 2001 Project allocation was only 39%, the
Wheeler Ridge Water District was able to supply us with 100% of our farming
demands. In addition, in each of these years, there was sufficient runoff from
local mountain streams to allow us to capture this water in reservoirs and
utilize it to offset some of the higher priced State Water Project water. Both
the Wheeler Ridge Water District and we are able to bank (percolate into
underground aquifers) some of our excess supplies for future use. The Wheeler
Ridge Water District expects to be able to deliver our entire contract water
entitlement in any year that the State Water Project deliveries exceed 30-50% by
drawing on its ground water wells and water banking assets. Based on historical
records of water availability, we do not believe we have material problems with
our water supply. However, if State Water Project deliveries are less than
30-50% of our entitlement in any year, or if less severe shortages continue for
a sustained period of several years, then the Wheeler Ridge Water District may
not be able to deliver 100% of our entitlement and we will have to rely on our
own ground water sources, mountain stream runoff, water transfers from the
Tejon-Castac Water District and water banking assets. Water from these sources
may be more expensive because of pumping costs and transfer costs. Also, as we
develop our real estate for residential, commercial and industrial uses, there
will be less water available for agriculture from the Tejon-Castac Water
District. A 45% allocation has been made by the State Water Project for 2002.
With this allocation, along with the Wheeler Ridge Water District's additional
supplies, we believe that we will have adequate water supplies for farming in
2002.
12
The water contracts with the Wheeler Ridge Water District require annual
payments related to the fixed costs of the California State Water Project and
the Wheeler Ridge Water District, whether or not water is used or available. The
contracts also establish a lien on benefited land. Payments made under these
contracts by us for the three years ended December 31, 2001, 2000, and 1999 were
$1,183,000, $793,000, and $1,300,000, respectively.
Land benefiting from the Wheeler Ridge Water District is subject to contingent
assessment liens that are senior in priority to any mortgages on the property.
The liens secure bonds issued by the Wheeler Ridge Water District to finance
construction of water distribution facilities. Lien enforcement of assessments
and contracts can involve foreclosure of the liens and the resulting loss of the
land subject to the liens. The Wheeler Ridge Water District will impose
contingent assessments (over and above our normal costs for water entitlement)
only if the District's revenues from water contracts and other regular revenue
sources are not sufficient to meet its obligations. Lien assessments are levied
by the District based on estimated benefits to each parcel of land from the
water project serving the land. The Company is presently subject to such
contingent liens totaling approximately $784,000. Since commencement of
operations in 1971, the District has had sufficient revenues from water contract
payments and other service charges to cover its obligations without calls on
assessment liens and has advised that it does not presently anticipate the need
to make any calls on assessment liens.
Under California law, lands located in a water storage district may be
reassessed at the request of the district board of directors or at the request
of 10% or more of the district landholders. As a result of any reassessment,
which is based upon the valuation of each land parcel according to a statutory
formula, the lien assessments may be redistributed and may increase or decrease
for any particular parcel. Additional projects undertaken by the water district,
if any, which might result in new assessment liens must be approved by
landowners of more than one-half of the land (based on valuation) in the
district.
In addition to our agricultural contract water entitlements, we have an
additional entitlement to obtain from the California State Water Project
sufficient water to service a substantial amount of future residential and/or
commercial development in Kern County. The Tejon-Castac Water District, a local
water district serving only our land and land we have sold in the Tejon
Industrial Complex, has 5,278 acre feet of State Water Project entitlement, or
enough to supply over 10,000 average families assuming 100% delivery. In
addition, Tejon-Castac has over 17,000 acre feet of water stored in Kern County
water banks. Both the entitlement and the banked water are the subject of
long-term water supply contracts extending to 2035 between Tejon-Castac and our
Company. Tejon-Castac would be the principal water supplier for any significant
residential and recreational development in Tejon Mountain Village and is
regarded as an alternative supply for the Tejon Industrial Complex. Tejon
Industrial Complex's primary source of water is a well on ranch lands.
The water agency serving the Los Angeles County portion of our land, the
Antelope Valley-East Kern Water Agency, has significant surplus entitlement and,
although no assurance has been given, it has indicated that it would be able to
provide a significant portion of the water needed for a major development like
Centennial.
Portions of our property also have available groundwater. That source would be
sufficient to support low-density residential development in Tejon Mountain
Village, supply significant
13
commercial development in the Interstate 5 corridor and provide a significant
portion of the water needed for development in Los Angeles County, including
Centennial.
Historic State Water Project restrictions on the right to use agricultural water
entitlement for municipal and industrial purposes were removed in 1995, although
a lawsuit challenging such removal is still working its way through the courts.
For this purpose "municipal" use includes residential and industrial use.
Therefore, although only 2,000 of Tejon-Castac's 5,278 acre feet of entitlement
are labeled for municipal use, there is no practical restriction on
Tejon-Castac's ability to deliver that water to residential or industrial
developments. However, for political and regulatory reasons, it is unlikely that
we would be able to direct any of our Wheeler Ridge Water District agricultural
entitlement to municipal or industrial uses.
ITEM 3. LEGAL PROCEEDINGS
We lease land to National Cement Company of California, Inc. ("National") for
the purpose of manufacturing Portland cement from limestone deposits found on
the leased acreage. See "Business - Real Estate Operations." In August 1997
National ceased burning hazardous waste as supplemental fuel in the cement plant
located on the land leased from us. The fuel was obtained, transported, stored
and processed by National's subtenant, Systech Environmental Corporation
("Systech"). Systech has removed the above ground improvements from its former
sublease premises and its formal closure plan under the Resource Conservation
and Recovery Act and the California Hazardous Waste Control Act has been
approved by the California Department of Toxic Substances Control. Systech has
begun the site investigation work specified in the closure plan, and has
undertaken to perform any required cleanup work.
In September 1994, the California Regional Water Quality Control Board ("RWQCB")
for the Lahontan Region issued a cleanup and abatement order with respect to an
underground plume of chlorinated hydrocarbon compounds on certain property we
lease to National for cement plant and related purposes. This order, as amended
on September 22, 2000, directs Lafarge Corporation ("Lafarge"), the successor to
the previous tenant, National and us to, among other things, investigate the
source and extent of the contamination and initiate soil and ground water
cleanup. We were ordered to complete the required investigation and cleanup only
if Lafarge and National fail to do so. We are advised that Lafarge and National
have completed their investigation, and have submitted a technical report
recommending the installation of a groundwater pump and treatment system and a
dual phase extraction system to clean up the soil and groundwater. These systems
are scheduled to be installed in 2002. Lafarge and National previously removed
certain soils, which were the principal source of the contamination, from the
property.
On October 9, 1997, the RWQCB issued waste discharge requirements and a cease
and desist order to National and us. The order required National and us to cease
the disposal of cement kiln dust at the cement plant by the end of 1999 and
control discharges from cement kiln dust piles already in existence. We were
ordered to undertake these activities if National failed to do so. In late 2000,
the RWQCB rescinded the cease and desist order, as disposal of cement kiln dust
had ceased at the cement plant by the end of 1999. Also in late 2000, the RWQCB
issued waste discharge requirements requiring National, Lafarge and us to
consolidate, close and cap the existing cement kiln dust piles, and maintain and
monitor the effectiveness of the cap. We were ordered to undertake these
activities only if National and Lafarge fail to do so. We are advised
14
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.
In October 1990, the RWQCB issued a cleanup and abatement order with respect to
an industrial waste landfill on the property. This order, as amended on
September 22, 2000, requires Lafarge and us to complete the cleanup of
groundwater associated with the landfill. We were ordered to undertake these
activities only if Lafarge fails to do so. Lafarge has submitted a technical
report to the RWQCB recommending that the low-level groundwater contamination at
the landfill be addressed by natural attenuation. Groundwater monitoring will
remain as an ongoing activity at the landfill. Lafarge previously removed all
waste historically disposed of in the landfill and transported that waste
off-site for disposal.
On September 22, 2000, the RWQCB ordered Lafarge, National and us to investigate
the extent of contamination resulting from a diesel fuel tank and pipeline and
initiate cleanup activities. We were ordered to undertake these activities only
if Lafarge and National fail to do so. We were advised that Lafarge and National
have completed their investigation and have submitted a technical report,
recommending installation of an air sparging system to clean up the soil and
ground water. This system is scheduled to be installed in 2002.
To date, we are not aware of any failure by Lafarge or National to comply with
the orders of the Regional Water Board or to pursue the cleanup and
investigation actions as informally instructed by Regional Water Board staff. We
have not been ordered by the Regional Water Board to perform any of the
investigative, characterization, remediation or removal activities.
Under the lease between National and us, the tenant is obligated to indemnify us
for costs and liabilities arising directly or indirectly out of the use of the
leased premises by the tenant. All obligations under this indemnity provision
arising after the assignment of the lease to National (which occurred in
November 1987) were assumed by National, and Lafarge has liability for all
obligations under the indemnity provisions arising before the assignment.
National's obligation is guaranteed by its parent, National Cement Company, Inc.
We believe that all of the matters described above in this Item 3 are included
within the scope of the National or Lafarge indemnity obligations.
The Company believes that Lafarge and National have sufficient resources to
perform any reasonably possible or reasonably likely obligations relating to
these matters. Publicly available financial information with respect to Lafarge
indicates that it had a net worth of approximately $1.9 billion as of September
30, 2001. National and its parent/guarantor are subsidiaries of a large French
company, and, so far as we are aware, no separate financial statements are
publicly available with respect to either company. However, we have held
discussions with National which indicate sufficient resources are available to
satisfy any reasonably likely obligations relating to the above matters. Thus,
Lafarge and National have not been charged with violating any Regional Water
Board orders and appear to have the financial strength to carry out any future
orders that may be approved by the Regional Water Board. Therefore, we believe
that it is remote that any cleanup orders issued by the Regional Water Board
will have a material effect on us. If, however, National and Lafarge do not
fulfill their cleanup responsibilities and we are required at our own cost to
perform the remedial work likely to be mandated by the regulatory agencies on
the sites described above, the amount of any such expenditure by us could be
material.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table shows the high and low sale prices for our Common Stock on
the New York Stock Exchange for each calendar quarter during the last two years.
2001 2000
-------------------------------------------
Quarter High Low High Low
------- ----- ----- ----- -----
First 25.85 19.00 28.00 21.00
Second 28.50 22.81 24.31 20.50
Third 28.49 20.05 29.81 21.88
Fourth 24.73 21.00 25.75 19.05
As of March 20, 2002, there were 580 owners of record of our Common Stock.
No dividends were paid in 2001 or 2000. In May 2000 the Board of Directors
decided to discontinue payment of dividends in order to conserve cash for the
operations of the Company. Any future determination to pay dividends will be
made at the discretion of the Board of Directors and will depend on a number of
factors, including our future earnings, capital requirements, financial
condition, future prospects and other factors as the Board of Directors may deem
relevant.
16
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31
(in thousands of dollars, except
per share amounts)
2001 2000 1999 1998 1997
------- -------- ------- ------- -------
Consolidated operating revenues
from continuing operations,
including interest income $19,312 $18,804 $16,978(2) $18,011(3) $16,431(4)
Income (loss) from continuing
operations 52 (970) 1,041(2) 2,818(3) 2,423(4)
Income from discontinued
operations 242 425 140 191 609
Cumulative effect of change in an
accounting principle, net -- -- -- 130 --
------- ------- ------- ------- -------
Net income (loss) $ 294 $ (545) $ 1,181(2) $ 3,139(3) $ 3,032(4)
======= ======= ======= ======= =======
Total assets $99,148 $98,287 $91,519 $73,014 $69,693
Long-term debt, less current portion $14,563 $19,323 $18,981 $ 0 $ 1,613
Stockholders' equity $72,129(1) $42,489 $43,160 $42,705 $40,488
Income (loss) per share, diluted $ 0.02 $ (0.04) $ 0.09(2) $ 0.25(3) $ 0.24(4)
Cash dividends declared and paid
per share $ 0.00 $ .00 $ 0.05 $ 0.05 $ 0.05
(1) Includes net proceeds from a rights offering made to our stockholders
with respect to our common stock completed in January 2001, and
resulting in net proceeds to the Company of approximately $29,600,000.
(2) Includes receipt of one time payment of $1,750,000 ($1,085,000 net of
tax or $.09 per share) from a fiber optic easement sale.
(3) Includes receipt of one time payment of $4,250,000 ($2,569,000 net of
tax, or $0.20 per share) from the sale of land to Northrop Grumman
Corp. This land was previously leased to Northrop.
(4) Includes receipt of one time payment of $2,050,000 ($1,353,000 net of
tax, or $.11 per share) from a pipeline company for the acquisition of
easement rights.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Throughout Item I - "Business," Item 2 - "Properties," Item 3 - "Legal
Proceedings," Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," management has made forward-looking
statements, including statements regarding the Company's strategic alliances,
the almond industry, our plans for future plantings of permanent crops, future
yields, prices and water availability for the Company's crops, future prices,
production and demand for oil and other minerals, future development of our
property, future revenue and income of our jointly owned travel plaza, almond
plant, and industrial building, the adequacy of future cash flow to fund our
operations, 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, our own
outstanding indebtedness, and future developments regarding discontinued
operations and other future events and conditions. These forward-looking
statements are subject to factors beyond the control of the Company (such as
weather and market and economic forces) and, with respect to the Company's
future development of our 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.
Overview
We intend to continue focusing on increasing revenues and improving net income
by expanding our real estate development activities. We are currently working to
take advantage of existing resources and market conditions as well as to
anticipate and create future market trends and demand. Part of this effort
includes evaluating our land and water resources and planning our real estate
development activities based upon the evaluation. . In the future, we will
continue to assess the feasibility of entering into complementary, new, related
lines of business and refining or reconfiguring current core businesses to take
advantage of opportunities presented and changing market conditions.
Results of Operations
As reflected in the accompanying financial statements, we had net income of
$294,000 in 2001, a net loss of $545,000 in 2000, and net income of $1,181,000
in 1999.
Net income for 2001 improved when compared to 2000 due primarily to higher
operating profits within the real estate division, increased interest income,
and lower interest expenses.
Net income for 2000 declined when compared to 1999 due primarily to reduced
operating profits from farming, increased real estate expenses and higher
interest expenses.
Net income for 2001 consists of income from continuing operations of $52,000 and
income from discontinued operations of $242,000. Net income for 2000 consisted
of a loss from continuing operations of $970,000 and income from discontinued
operations of $425,000. A significant portion of the income from discontinued
operations resulted from the sale of assets.
18
Real Estate. Real Estate segment operating profits of $3,762,000 in 2001 are
$1,396,000, or 59% higher than 2000 segment profits. The improvement in 2001
segment profits is due to a slight increase in revenues and to lower expenses.
The slight improvement in revenues is due to an increase in oil and mineral
income of $194,000, equity in earnings from our investment in Petro Travel Plaza
LLC of $183,000, increased lease income from our portfolio of properties of
$1,190,000, and additional milestone payments for use of land, easements, and
services provided related to the Calpine power plant project of $1,500,000.
These gains in real estate revenue were partially offset by the sale of land for
$2,000,000 and the settlement of an easement payment for $801,000 during 2000.
Expenses declined $1,353,000 in 2001 due to no cost of sales and commissions
associated with the sale of land and to lower indirect real estate project
expenses. These improvements were partially offset by higher staffing costs and
marketing costs during 2001.
The equity in earnings from our investment in Petro Travel Plaza for 2001 is due
to a continued increase in customers, improved margins on diesel and gasoline
sales as our cost of sales declined throughout the year, and improved cost
controls. Cash flows continued to improve during 2001 and expectations are for
continued growth in the future as the Tejon Industrial Complex continues to grow
and as more travelers and trucking professionals place Petro on their refueling
schedules.
In future years, the Real Estate Division will continue to see increases in
costs, net of amounts capitalized, 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. The actual
timing and completion of entitlement and development related activities is
difficult to predict due to the unpredictability of the approval process and
market factors. These types of real estate development activities and costs
could continue over several years as we develop our land holdings. 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.
Real Estate segment profit of $2,366,000 in 2000 is $938,000 less than 1999
segment profit. The decline in segment profit was due to increased revenues
being more than offset by higher real estate expenses. Revenues grew $2,041,000
when compared to 1999. This growth was due to higher oil and mineral revenues of
$402,000, the sale of land to IKEA for $2,000,000, an increase in revenues from
the power plant project of $549,000, settlement of an easement transaction for
$801,000, and an improvement in leasing revenues. These revenue improvements
were partially offset by revenues in 1999 of $1,750,000 related to the sale of a
fiber optic communications easement. Real Estate expenses increased $2,979,000
during 2000 when compared to 1999. The increase in expenses were due to higher
professional service fees of $764,000, an increase in fixed water costs of
$183,000, and commissions and cost of sales totaling $2,000,000 related to the
IKEA land sale. These costs were partially offset by a $360,000 improvement in
our share of the net loss at the Petro Travel Plaza joint venture. The increase
in professional service fees continued to be related to our increased real
estate development and entitlement activities.
The equity in earnings from our investment in the Petro Travel Plaza joint
venture improved during 2000 due to higher fuel sales, increased volume at its
convenience store, and higher
19
restaurant revenues. These improvements, however, could not offset the higher
cost of sales during the year due to the significant increase in oil and gas
prices.
See Part I, Item 1 - "Business - Real Estate Operations" for a further
discussion of 2001 and future planning activities.
Farming. During 2001, the Farming Division sustained a loss of $1,343,000, a
decrease of $1,414,000 when compared to 2000 segment profits. The decline during
2001 is due to a decrease in grape revenues of $815,000, lower almond revenues
of $900,000, reduced rental revenues of $381,000 and increased fixed water costs
of $390,000. These unfavorable variances were partially offset by increased
pistachio revenues of $873,000, and walnut revenues increasing $165,000.
Grape revenues continued to decline during 2001 due to lower prices and to
reduced production. Grape prices declined approximately 27% when compared to
2000 prices. Grape production declined due primarily to the removal of 247 acres
of unprofitable cabernet sauvignon grapes. The overall decline in grape prices
is directly related to the growth in production throughout California. The
growth in grape production within California could continue to impact grape
prices well into the future. Improved prices will be realized only if there is
increased demand for wine and grape products and/or there is a significant
reduction in the number of acres used for grape production in California. We
have been in discussions with several wineries regarding production contracts
for 2002 and future years, but due to the pricing pressure on grapes, the
wineries are currently not interested in long-term contracts for all of our
grapes. We have, however, contracted our French Colombard grape production for a
two-year period beginning with the 2002 crop and signed a multi-year contract
beginning in 2002 for our ruby cabernet grape production.
If we have no grape contracts in 2002, for our remaining grape varieties, we
will market our grapes to various wineries and the prices received will be
driven by the wineries' expectations regarding demand for their products and
grape production. During 2001, based on discussions with the wineries, we
learned that there was little interest in purchasing the cabernet grapes that we
grew at that time. Based on that information, we removed 247 acres of fully
depreciated cabernet grape acreage in order to save the cultural costs
associated with growing the grapes. In place of the cabernet grapes, we planted
247 acres of pistachio trees to take advantage of the irrigation systems in
place, and provide for future revenue sources for our Farming Division.
Almond revenues during 2001 declined due to a large drop in production. The
decline in production is due to storms that impacted the pollination period and
to storm damage to trees. The damaged trees were ultimately removed due to the
damage sustained in the storms and to the age of the damaged trees. We currently
plan to plant 300 acres of new almonds during 2003 to help offset the loss of
future production from the removed trees. Pistachio revenues increased in 2001
due to production doubling when compared to 2000 production. A large part of the
increase in production was due to 300 acres of young pistachio trees producing
their first full crop. The improvement in walnut revenues is due primarily to
increased production.
Industry expectations are that statewide nut crop yields should continue to
improve, which may negatively impact prices. 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 due to
20
the current low prices for almonds. This potential increase in overall almond
production will positively impact our almond processing operation because of
more almonds being available to process. 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.
Segment profits within the Farming Division during 2000 were $71,000, a decrease
of $1,077,000 when compared to 1999 segment profits. The decrease in 2000
segment profits was due primarily to lower grape revenues of $2,307,000, lower
walnut revenues of $549,000, and higher cultural costs of $532,000. These
unfavorable variances were partially offset by the net profits from the almond
processing plant of $371,000, increased almond revenues of $988,000, higher
pistachio revenues of $78,000, and lower fixed water costs of $529,000.
The decrease in grape revenues was due to receiving lower prices for grapes than
in 1999. Prices for our grapes declined approximately 55% during 2000 when
compared to 1999. This decline in prices was due to increased grape production
within California.
Almond revenues in 2000 increased due to a 20% increase in prices resulting from
lower crop production within California. Pistachio revenues were higher due to
an 18% increase in production as prices remained comparable to the prior year.
Walnut revenues declined due to a 55% decrease in production and the reversal of
revenue associated with the 1999 crop because estimated prices for 1999 were
greater than what we were actually paid.
Farming segment profits included results from our almond processing plant that
we purchased in January 2000. This plant processes, hulls, and shells almonds
for ourselves and outside customers. Cultural costs grew during 2000 when
compared to 1999 due to new acreage coming into production, to costs no longer
being capitalized, and fewer costs being inventoried that are related to the
2001 crop year.
For a further discussion of the 2001 farming year refer to part I, Item I -
"Business - Farming Operations".
Interest. Interest and investment income for 2001 increased $1,265,000 to
$1,897,000 when compared to 2000 interest income. The receipt of funds
associated with the rights offering, which was completed during January 2001,
primarily drove the increase. The increase in income from additional funds
invested was partially offset by lower interest rates during the year.
Interest income for 2000 was $632,000 or $7,000 less than 1999 interest income.
Income remained stable due to the average funds being invested remaining fairly
flat when compared to 1999.
Interest expense for 2001 was $1,136,000, of which $441,000 is included in
discontinued operations, compared to interest expense of $2,701,000 in 2000, of
which $1,275,000 is included in discontinued operations. The decrease in
interest expense is due to liquidation of debt throughout the year. Debt
declined due to the disposal of our livestock operations throughout the year and
to using cash from the rights offering to reduce debt. Interest incurred and
paid in 2001 was $2,602,000 compared to $3,590,000 in 2000, of which $1,466,000
and $1,174,000 were
21
capitalized, respectively. Interest capitalized increased during 2001 due to the
growth in our real estate development activities.
Interest expense during 2000 was $2,701,000 compared to $1,174,000 during 1999.
Of this $2,701,000 of expense in 2000, $1,275,000 was included in discontinued
operations. This growth in interest expense was due to an increase in borrowings
related to livestock operations and real estate entitlement and infrastructure
costs. Total interest incurred and paid in 2000 was $3,590,000 compared to
$2,367,000 in 1999, of which $1,174,000 and $1,193,000 were capitalized,
respectively. Interest incurred and expensed continued to grow during 2000 due
to increased borrowing used to fund the growth of livestock operations,
infrastructure development costs, the purchase of an almond processing plant,
and real estate planning and entitlement activities.
Corporate Expenses. Corporate expenses in 2001 were $3,347,000, an increase of
$318,000 when compared to 2000 corporate expenses. The increase during 2001 is
due to higher professional service fees related to accounting and legal costs
($76,000), higher staffing costs related to deferred stock compensation costs
and employee benefits ($180,000), and to higher depreciation expense ($66,000).
Corporate expenses during 2000 were $3,029,000, a decline of $169,000 when
compared to 1999 corporate expenses. When compared to 1999, reductions in
insurance, director's fees and shareholder expenses were partially offset by
increased staffing costs ($246,000). Staffing costs increased primarily due to
deferred stock compensation costs and to Management Information Systems ("MIS")
personnel being hired for all of 2000 compared to a partial year in 1999.
Discontinued Operations. During April 2001, we finalized a plan for the sale of
our cattle and feedlot division. Since then, we have been disposing of our
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 the loss
of significant revenues even after taking into account the revenue stream from
the grazing leases we entered into in connection with the sale of the breeding
herd. Over the last three years the livestock division accounted for 71% to 75%
of our total revenues. While the operations of the livestock division created
significant revenues they also used large amounts of debt and working capital.
We believe our working capital and debt facilities would be better allocated to
potentially higher returning and value enhancing real estate development
activities, which led to our decision to dispose of the livestock division
assets.
The process of selling a major portion of our breeding herd was completed in
June 2001, and the sale of the feedlot was completed during July 2001. During
June 2001, we sold our remaining breeding herd for $2.6 million to Centennial
Livestock, a California agricultural company. The transaction with Centennial
Livestock also included a grazing lease for approximately 195,000 acres. This
lease has a term of up to ten years and provides for rent at the rate of
$680,000 per year and is subject to adjustment based upon rainfall and the
extent to which we exercise our right to use portions of the land for other
purposes. In July we completed the sale of our feedlot in Texas for $3.2
million. The combined gain on sale, net of applicable income taxes, was
$700,000.
22
We started 2001 with approximately 40,000 head of cattle and ended the year with
4,300 head of cattle. These remaining head of stocker cattle are expected to be
sold by the end of April 2002. We also expect that these cattle will be sold for
at least their current book value.
Income from discontinued operations, net of taxes, of $242,000 during 2001 was
$183,000 less than the $425,000 of income from discontinued operations, net of
taxes, in 2000. The decline in income is largely due to revenues from
discontinued operations of $48,426,000 decreasing $1,593,000 when compared to
the $50,019,000 of revenues for 2000. This reduction in revenues is primarily
due to fewer cattle being sold when compared to 2000 and to lower prices on
cattle during the fourth quarter of 2001. During 2001, approximately 8,200 fewer
head of cattle were sold. This reduction in cattle sold is due to replacement
cattle not being purchased throughout the year that possibly could have been
sold because of the decision to dispose of our livestock and feedlot assets.
Partially offsetting this decline in revenues was a corresponding decline in
expense due to fewer cattle being sold and to cattle inventory numbers declining
throughout the year. These changes partially offset the gain described above.
During 2001, we continued to use the futures and options markets to protect the
future selling prices of cattle and purchase prices of feed. During 2001, due to
an improvement in prices during the first half of the year, we recognized
approximately $316,000 in losses on closed hedge positions. Our goal in managing
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. The risk in managing cattle prices is that
in those years that prices increase the hedge may limit or cap potential gains
from the increase in price, and the risk in managing feed costs is that it can
add additional costs for feed if grain prices fall dramatically. At year-end
2001 we had no futures or options contracts outstanding.
Cattle prices strengthened during the first half of 2001 due to improved demand
for beef products. The increase in prices and demand faded during the fourth
quarter of the year. Thus far in 2002 prices have improved during February and
March due to demand for beef products improving and inventories being lower.
Income from discontinued operations, net of taxes, of $425,000 in 2000 was a
$285,000 increase when compared to 1999 income from discontinued operations, net
of taxes. The improvement in profits was primarily due to an increase in cattle
sales of $9,800,000 and increased feedlot revenue of $1,200,000. Cattle sales
grew due to 5,433 additional head of cattle being sold at higher average prices
than in 1999. Feedlot revenues increased due to an increase in the average
occupancy rate of outside customers during 2000. These improvements in revenues
were partially offset by higher cost of sales on cattle sold of approximately
$9,700,000 due to more cattle being sold and increases in feed cost of
approximately $840,000 at the feedlot and due to year-end drought conditions on
the ranch.
On December 27, 2000 we sold a portion of our cattle assets to Echeverria Cattle
Company, LLC, which is owned by Matthew J. Echeverria, our former Senior Vice
President, Livestock and Ranch Operations. The transaction involved the sale of
approximately 1,000 cows, 50 bulls and certain personal property for a purchase
price of $893,000, as well as a grazing lease over approximately 55,000 acres of
our land. The lease has a term of ten years with two five-year options to extend
the term and provides for rent at the rate of $200,000 per year, subject to
adjustment based upon rainfall and the extent to which we exercise our right to
use portions of the land for other purposes. The rent would also be subject to
adjustment for the two five-year
23
extension periods based upon changes in the price of calves between the date the
lease commences and the date any such extension term commences. The sale
involved approximately 22% of our breeding herd and approximately 3% of the
total amount of our cattle. In a separate transaction we also sold an additional
1,000 head of stocker cattle to Echeverria Cattle Company in the normal course
of our sales of stocker cattle.
For a further discussion of discontinued operations, see Part I, Item 1 -
"Business - Discontinued Operations".
Inflation, Risks, and Related Factors Affecting Forward-Looking Information. The
risks and uncertainties described below are not the only ones facing our
company. If any of the following risks actually occurs, our business, financial
condition, results of operations or future prospects could be materially
adversely affected. Our strategy, focused on more aggressive development of our
land, involves risk and could, at times, result in operating losses.
Cyclical Industry. The real estate development industry is cyclical and is
significantly affected by changes in general and local economic conditions,
including:
. Employment levels
. Availability of financing
. Interest rates
. Consumer confidence
. Demand for the developed product, whether residential or
industrial
The process of development of a project begins, and financial and other
resources are committed, long before a real estate project comes to market,
which could occur at a time when the real estate market is depressed. It is
also possible in a rural area like ours that no market for the project will
develop as projected.
Interest Rates. Higher interest rates generally impact the real estate
industry by making it harder for buyers to qualify for financing, and that
can lead to a decrease in the demand for residential, commercial or
industrial sites. Any decrease in demand will negatively impact our
proposed developments. Any downturn in the economy or consumer confidence
can also be expected to result in reduced housing demand and slower
industrial development, which would negatively impact the demand for land
in our development process.
Government Regulation. In planning and developing our land, we are subject
to various local, state, and federal statutes, ordinances, rules and
regulations concerning zoning, infrastructure design, and construction
guidelines. These requirements can possibly include restrictive zoning and
density provisions that limit the number of homes that can be built within
the boundaries of a particular area, which may impact the financial returns
from a given project. In addition, we are subject to statutes and
regulations concerning the protection of the environment. Environmental
laws that apply to a given site can vary greatly according to the site's
location, condition, present and former uses of the site, and the presence
or absence of sensitive elements like wetlands and endangered species.
Environmental laws and conditions may result in delays and/or cause us to
incur additional costs for compliance, mitigation and processing land use
applications. In addition, many states, cities and counties have in the
past approved various "slow
24
growth" measures. If that were to occur in our region, our future real
estate development activities could be significantly adversely affected.
Litigation. The land use approval processes we must follow to ultimately
develop our projects have become increasingly complex. Moreover, the
statutes, regulations and ordinances governing the approval processes
provide third parties the opportunity to challenge the proposed plans and
approvals. As a result, the prospect of third-party challenges to planned
real estate developments provides additional uncertainties in real estate
development planning and entitlements. Third-party challenges in the form
of litigation would, by their nature, adversely affect the length of time
required to obtain the necessary approvals. In addition, adverse decisions
arising from any litigation would increase the costs and could adversely
affect the design, scope, plans and profitability of a project.
Real Estate Inventory Risk. Our three principal real estate projects, the
Tejon Industrial Complex, Centennial and the Tejon Mountain Village
concept, all involve obtaining governmental entitlements and improving lots
for sale to developers or, in the case of Tejon Industrial Complex, end
users. The value of these lots can fluctuate significantly as a result of
changing economic and market conditions.
Competition. Within our real estate activities, we are in direct
competition for customers with other industrial sites in Northern, Central,
and Southern California. We are also in competition with other highway
interchange locations using Interstate 5 and State Route 99 for commercial
leasing opportunities.
Geographic Concentration. All of our developable land is in California. Any
adverse change in the economic climate of California, or our region of that
state, could adversely affect our real estate development activities.
Ultimately our ability to sell or lease lots may decline as a result of
weak economic conditions.
Financing. Our proposed new real estate development will require additional
financing. It is uncertain whether the required financing will be
available, and if so, whether it will be available on favorable terms.
Inflation. Inflation can have a major impact on our farming operations. The
farming operations are most affected by escalating costs and unpredictable
revenues (due to an oversupply of certain crops) and very high irrigation
water costs. High fixed water costs related to our farm lands will continue
to adversely affect earnings. Prices received for many of our products are
dependent upon prevailing market conditions and commodity prices.
Therefore, it is difficult for us to accurately predict revenue, just as we
cannot pass on cost increases caused by general inflation, except to the
extent reflected in market conditions and commodity prices.
Within our real estate operations, our lease portfolio is protected to some
extent from inflation since percentage rent clauses and Consumer Price
Index increases in our leases tend to adjust rental receipts for inflation.
Other Risks. We may also encounter other difficulties in developing our
land, including:
25
. Natural risks, such as geological and soils problems,
earthquakes, heavy rains and flooding and heavy winds;
. Shortages of qualified tradespeople;
. Reliance on local contractors, who may be inadequately
capitalized;
. Shortages of materials; and
. Increases in the cost of certain materials.
New Accounting Pronouncements. Financial Accounting Standards Board Statement
("FASB") No. 142, Goodwill and Other Intangible Assets, was approved and issued
in June 2001 and addresses amortization on Intangible Assets. Statement 142
supercedes APB Opinion No. 17, which required amortization of goodwill and
intangible assets. The presumption that goodwill and intangible assets were
wasting assets and should be amortized over a period of not more than 40 years
has been altered, and now such assets are deemed to have an indefinite life and
are no longer amortized. The value of the intangible assets must be assessed
annually for impairment. This statement will have a minimal impact on our
financial position or results of operations as the amount of goodwill and other
intangible assets are insignificant. The Statement will be adopted for the 2002
financial year.
In June 2001 FASB Statement No. 143 was issued addressing Accounting for Asset
Retirement Obligations (AROs). 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 financial position or results of operations when it
becomes effective for the 2003 financial year.
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued in August 2001. The pronouncement issues guidance on
distinguishing between assets held and used, held for sale, and held for
disposal other than sale. It also addresses the classification and valuation of
such assets. The pronouncement is effective for the 2002 fiscal year. We do not
anticipate this pronouncement having a significant impact on our financial
position or results of operations.
FASB Statement No. 141, Business Combinations, eliminates the
pooling-of-interests method of accounting for business combinations. This
Statement is not anticipated to have an effect on our financial position or
results of operations.
Financial Condition. Our cash, cash equivalents and short-term marketable
securities totaled approximately $23,463,000 at December 31, 2001, an increase
of $10,122,000 from the corresponding amount at the end of 2000. Working capital
at the end of 2001 was $31,447,000, which is $11,458,000 greater than working
capital at the end of 2000. We have a revolving line of credit of $15,000,000
that, as of December 31, 2001, had no outstanding balance. This line of credit
bears interest at a rate which floats with changes in the lending bank's prime
interest rate. At our option the interest rate on this line of credit can be
fixed for a period of time at 1.50% over a selected LIBOR rate or float at .50%
less than the bank's prime lending rate. During 2001 short-term debt was reduced
due to the disposition of livestock assets and to the use of proceeds from the
rights offering that was completed earlier in 2001. In past years, the use of
short-term credit grew due to increases in inventories as a result of the growth
of our business lines and to the funding of infrastructure construction costs on
a short-term basis.
26
Our outstanding long-term debt, less current portion of $1,726,000, declined
$4,760,000 to $14,563,000 at the end of 2001 when compared to 2000. Long-term
debt is being used to fund real estate development infrastructure and farming
assets on our land, commercial buildings in Phoenix, Arizona that were purchased
in 1999, and the almond processing plant purchased in January 2000. 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
$15,000,000, has a current balance of $10,000,000, and is secured by farmland.
This note comes due in 2004. The second note obligation was used to purchase the
buildings in Phoenix, is secured by mortgages on the buildings, and has a
balance of $4,669,000. The last note is for a loan used to purchase the almond
processing plant in 2000 and has a balance of $1,620,000.
The following table shows our long-term obligations and commitments over the
next five years:
PAYMENTS DUE BY PERIOD
----------------------
One Year After 5
Total or Less Years 2-3 Years 4-5 Years
----------- ---------- ---------- --------- ----------
CONTRACTUAL OBLIGATIONS:
Long-term debt $16,289,000 $1,726,000 $9,000,000 $482,000 $5,081,000
----------- ---------- ---------- -------- ----------
Total contractual cash obligations $16,289,000 $1,726,000 $9,000,000 $482,000 $5,081,000
=========== ========== ========== ======== ==========
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------
One Year After 5
Total or Less Years 2-3 Years 4-5 Years
----------- -------- ----------- --------- ---------
OTHER COMMERCIAL
COMMITMENTS:
Standby letter of credit $ 1,324,000 $-- $ 1,324,000 $-- $--
Guarantees 9,050,000 -- 9,050,000 -- --
----------- --- ----------- --- ---
Total commercial commitments $10,374,000 $-- $10,374,000 $-- $--
=========== === =========== === ===
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-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 consist of a $3,800,000 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. Total debt in the venture is
approximately $12,500,000 and is related to the construction of the facility.
During 2003 this note is scheduled to be refinanced with a permanent mortgage
loan, and our guarantee will no longer be needed. The remaining
27
$5,250,000 of guarantees relate to debt within 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 $10,500,000 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. During
March 2002, a lease was signed for one half of the building and the lease
payments from this lease will cover future debt service requirements under the
current loan agreement. At this time we believe that neither of the guarantees
nor the standby letter of credit will ever be called upon.
During 2001 the principal uses of cash and cash equivalents consisted of capital
expenditures related to real estate development activities, financing of
receivables and inventories, and the reduction in both short-term and long-term
debt.
The principal uses of cash and cash equivalents during 2000 and 1999 consisted
of capital expenditures, expansion of the cattle herd, purchase of land,
purchases of commercial buildings, purchase of an almond processing plant,
payments of long-term debt, the payment of dividends and the financing of higher
receivables and inventories.
The accurate forecasting of cash flows is made difficult due to the fact that
commodity markets set the prices for the majority of our farming products and
the fact that the cost of water changes significantly from year to year as a
result of changes in its availability. Based on our past experience, we believe
we will have adequate cash flows over the next twelve months to fund internal
operations.
During 2002, $14,910,000 has been budgeted for capital expenditures, which
includes nearly $8,100,000 for infrastructure at the Tejon Industrial Complex
and $5,100,000 for real estate projects in the mountain/lake area of our lands
and Los Angeles County. Other items included in the capital expenditure budget
are equipment and improvements to existing facilities.
One of the sources of funding capital expenditures and debt repayment during
2001 was proceeds from the $30 million rights offering that was completed on
January 16, 2001. In addition to these funds, proceeds were received throughout
the year related to the disposition of our livestock operations. Proceeds from
the rights offering are going to be used to further develop the Tejon Industrial
Complex and for costs related to constraints and feasibility analyses, early
phase and detailed planning, and preparing applications for entitlements in the
mountain/lake area of our land.
During 2002, additional funds for capital expenditures and operations are
expected to come from lines of credit with banks, further use of the proceeds
from the rights offering, reimbursement of infrastructure costs related to the
Tejon Industrial Complex through bond proceeds from a local government agency,
proceeds from discontinued operations, and from operating cash flows. We
continue to expect that substantial investments will need to be made in future
years in our land assets to secure entitlements and develop the land. In order
to fund this growth, we expect to use various financing alternatives such as
joint ventures with financial partners, increases in lines of credit with banks,
sales of assets, and the issuance of common stock. We cannot provide any
assurances that these sources of financing will be available.
28
ITEM 7A. 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 is exposed to financial market risks, including changes to interest
rates and credit risks 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 and
prudently manage risk while at the same time maximizing yields. To achieve this
objective and limit interest rate exposure, we limit our investments to
securities with a maturity of less than five years with an investment grade of A
or better from Moody's or Standard and Poors. See Note 3, Marketable Securities,
of 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 ($4,669,000) has a fixed interest rate, and the fair value of
this long-term debt will change based on interest rate movements in the market.
The remaining long-term debt ($11,620,000) can either be fixed for periods of
time to a LIBOR rate or float with the lending bank's prime rate. The floating
rate obligations expose us to variability in interest payments due to changes in
interest rates. If interest rates increase, interest expense increases.
Conversely, if interest rates decrease, interest expense also decreases.
We believe it is prudent to limit the variability of a portion of our interest
payments. It is our objective to hedge between 25% and 50% of the variable-rate
interest payments.
To meet this objective we entered into an interest rate swap to manage the
potential fluctuations in cash flows resulting from interest rate risk. See Note
9, Interest Rate Risk Management, of Notes to Consolidated Financial Statements.
Market risks related to our inventories ultimately depend on the value of the
cattle, 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.
29
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 2001
(Dollars in Thousands)
Fair Value
----------
2002 2003 2004 2005 2006 Thereafter Total 12/31/01
------ ------- ------ ------ ----- ---------- ------- ----------
Assets:
Marketable
securities $2,787 $ 3,911 $2,817 $2,615 $ 273 $ -- $12,403 $12,574
Weighted
Average interest
rate 5.37% 6.43% 6.40% 5.42% 5.11% --% 5.87% --%
Liabilities:
Short-term debt $ 127 $ -- $ -- $ -- $ -- $ -- $ 127 $ 127
Weighted average
interest rate 5.00% --% --% --% --% --% 5.00% --%
Long-term debt $1,726 $ 1,770 $7,230 $ 239 $ 243 $5,081 $16,289 $16,289
Weighted average
interest rate 8.18% 8.18% 8.18% 7.82% 7.82% 7.82% 8.00% --%
Variable-to-fixed swap
amount 3-yr swap $ -- $11,620 $ -- $ -- $ -- $ -- $11,620 $10,986
Weighted average
pay fixed-rate
contract rate --% 6.91% --% --% --% --% 6.91% --%
Weighted average
receivable variable rate,
current rate, adjusts monthly,
based on LIBOR 1.95% --% --% --% --% --% 1.95% --%
Debt figures above include debt related to discontinued operations.
30
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 2000
(Dollars in Thousands)
Fair Value
2001 2002 2003 2004 2005 Thereafter 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-yr swap $ -- $ -- $11,800 $ -- $ -- $ -- $11,800 $11,596
Weighted average
Pay fixed-rate contract rate --% --% 6.91% --% --% --% 6.91% --%
Weighted average
receivable variable rate,
current rate, adjust monthly
based on LIBOR 6.71% --% --% --% --% --% 6.71% --%
Debt figures above include debt related to discontinued operations.
In comparison to the prior year our risk in regard to fluctuations in interest
rates has decreased due to the reduction in the use of both short-term and
long-term lines of credit that fluctuate with the 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 in our discontinued operations and Farming Division. 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
31
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.
Our goal in managing our cattle and feed costs has been 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 8,
Commodity Contracts Used to Manage Risk, of 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 December 31, 2001 were $316,000 as compared to the
approximately $966,000 in losses at December 31, 2000. The decrease in hedge
losses is primarily due to a decrease in the number of cattle owned and a drop
in prices during the fourth quarter of 2001. These losses are recorded in
discontinued operations. Since we had only 4,300 head of cattle remaining at
December 31, 2001, we do not intend to enter into any futures or option
contracts in the future.
Inventories consist of almonds related to the 2001 crop and farming costs
related to 2002 crop production. Within our discontinued operations, inventory
consists of cattle for sale, and price fluctuations historically were managed
with futures and options contracts. The 2001 almond inventory is recorded at
$1.00 per pound, which is the current price of almonds. The farming costs
inventoried that are related to the 2002 crop are recorded at actual costs
incurred. Historically, these costs have been recovered each year when that
year's crop harvest has been sold. The table below shows futures and option
contracts outstanding at year-end 2000; there were no contracts outstanding at
December 31, 2001. 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 December 31, 2001 approximately 100% of the cattle held in
inventory, or 4,300 head of cattle, were not protected by futures and options
for price movement. This compares to 31,317 head of cattle at December 31, 2000.
The 2001 number of head of cattle equates to approximately 5.1 million pounds of
beef. For each $.01 per pound change in price, we have a potential exposure of
$51,000 in future value. Although the price at 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 March 25, 2002
was $.69 per pound for April 2002 delivery.
32
At December 31, 2001, we had no futures contracts or option contracts
outstanding. The following table identifies the futures contract amounts and
options contract costs outstanding at December 31, 2000:
Original Estimated
Commodity Future/Option No. Contract/Cost Fair Value
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 is generally not
known until the third or fourth quarter of the following year. Of the accounts
receivable outstanding at December 31, 2001, only $2,114,000 is at risk to
changing prices. Of the amount at risk to changing prices, $609,000 is
attributable to almonds, $1,335,000 to pistachios, $138,000 to walnuts, and
$32,000 to grapes. The comparable amounts of accounts receivable at December 31,
2000 were $1,051,000 related to almonds and $213,000 related to pistachios,
$53,000 to walnuts, and $35,000 to grapes. The price estimated for recording
accounts receivable at December 31, 2001 was $1.00 per pound for almonds. For
every $.01 change in the price of almonds our receivable for almonds increases
or decreases by $6,000. 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 $1.40. With respect to pistachios, the price
estimated for recording the receivable was $1.05 per pound, each $.01 change in
the price increases or decreases the receivable by $13,000 and the range of
final prices over the last three years for pistachios has been $1.07 to $1.35.
The price estimated for recording accounts receivable for walnuts was $.45 per
pound. For every $.01 change in the price of walnuts, our receivable increases
or decreases by $3,000. The final price for walnuts has averaged from $.45 to
$.66 over the last three years. The prices used to estimate accounts receivable
related to grapes is based on the variety of wine grape and the market for that
grape. At year-end the average price used for recording the accounts receivable
was $95.00 per ton. For every $1.00 change in the price, our receivables related
to grapes can increase or decrease approximately $400. The average price for
grapes has averaged between $95.00 per ton to $307.00 per ton over the last
three years.
33
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.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors is incorporated by reference from the
definitive proxy statement to be filed with the Securities and Exchange
Commission with respect to its 2002 Annual Meeting of Stockholders. Information
as to our Executive Officers is set forth in Part I, Item 1 under "Executive
Officers of Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
definitive proxy statement to be filed by us with the Securities and Exchange
Commission with respect to its 2002 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference from the
definitive proxy statement to be filed by us with the Securities and Exchange
Commission with respect to its 2002 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference from the
definitive proxy statement to be filed by us with the Securities and Exchange
Commission with respect to its 2002 Annual Meeting of Stockholders.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report: Page Number
----------------------------------------------------- -----------
1. Consolidated Financial Statements:
---------------------------------
1.1 Report of Independent Auditors 42
1.2 Consolidated Balance Sheets -
December 31, 2001 and 2000 43
1.3 Consolidated Statements of Operations -
Years Ended December 31, 2001, 2000
and 1999 44
1.4 Consolidated Statements of Stockholders'
Equity - Three Years Ended
December 31, 2001 45
1.5 Consolidated Statements of Cash Flows -
Years Ended December 31, 2001, 2000
and 1999 46
1.6 Notes to Consolidated Financial
Statements 47
2. Supplemental Financial Statement Schedules:
------------------------------------------
None.
3. Exhibits:
--------
3.1 Restated Certificate of Incorporation *
3.2 By-Laws *
10.1 Water Service Contract with Wheeler
Ridge-Maricopa Water Storage District
(without exhibits), amendments originally
filed under Item 11 to Registrant's
Annual Report on Form 10-K **
10.4 Asset Purchase Agreement dated
March 10, 1997 for purchase of feedlot assets ***
36
10.5 Petro Travel Plaza Operating Agreement ****
10.6 Amended and Restated Stock Option Agreement
Pursuant to the 1992 Employee Stock Incentive
Plan ****
10.7 Severance Agreement ****
10.8 Director Compensation Plan ****
10.9 Non-Employee Director Stock Incentive Plan ****
10.9(1) Stock Option Agreement Pursuant to the
Non-Employee Director Stock Incentive Plan ****
10.10 1998 Stock Incentive Plan ****
10.10 Stock Option Agreement Pursuant to the 1998
Stock Incentive Plan ****
10.11 Employment Contract - Robert L. Stine ****
10.14 Restricted Stock Grant Agreement ******
10.15 Amendment to 1998 Stock Incentive Plan ******
10.16 Lease Agreement with Calpine Corp. 68
10.17 Tejon/DP Partners Operating Agreement 105
21 List of Subsidiaries of Registrant 154
23 Consent of Ernst & Young 155
(b) Report on Form 8-K filed during the last quarter of the period covered
------------------
by this report:
None.
(c) Exhibits
* This document, filed with the Securities Exchange Commission in
Washington D.C. (file Number 1-7183) under Item 14 to our 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 our Annual
Report on Form 10-K for year ended December 31, 1994, is incorporated
herein by reference.
37
*** This document, filed with the Securities Exchange Commission in
Washington D.C. (file Number 1-7183) under Item 14 to our Annual
Report on Form 10-K for year ended December 31, 1996, 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 our Annual
Report on Form 10-K for year ended December 31, 1997, is incorporated
herein by reference.
***** This document, filed with the Securities Exchange Commission in
Washington D.C. (file Number 1-7183) under Item 6 to our 10-Q, for the
period ending June 30, 1999, 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 our Annual
Report on Form 10-K for the year ended December 31, 2000, is
incorporated herein by reference.
Financial Statement Schedules -- The response to this portion of Item 14 is
submitted as a separate section of this report.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
DATED: March 28, 2002 BY: /s/ Robert A. Stine
-------------- -------------------------------------
Robert A. Stine
President and Chief Executive Officer
(Principal Executive Officer)
DATED: March 28, 2002 BY: /s/ Allen E. Lyda
-------------- --------------------------------------
Allen E. Lyda
Vice President, Chief Financial Officer &
Treasurer
(Principal Financial and
Accounting Officer)
39
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date indicated.
Name Capacity Date
- -------------------------------------------------------------------------------
/s/ Otis Booth Jr. Director March 5, 2002
- ------------------------------
Otis Booth, Jr.
/s/ Craig Cadwalader Director March 5, 2002
- ------------------------------
Craig Cadwalader
/s/ Dan T. Daniels Director March 5, 2002
- ------------------------------
Dan T. Daniels
/s/ Rayburn S. Dezember Director March 5, 2002
- ------------------------------
Rayburn S. Dezember
/s/ John L. Goolsby Director March 5, 2002
- ------------------------------
John L. Goolsby
/s/ Norman Metcalfe Director March 5, 2002
- ------------------------------
Norman Metcalfe
/s/ George G.C. Parker Director March 5, 2002
- ------------------------------
George G.C. Parker
/s/ Robert Ruocco Director March 5, 2002
- ------------------------------
Robert Ruocco
/s/ Kent Snyder Director March 5, 2002
- ------------------------------
Kent Snyder
/s/ Geoffrey Stack Director March 5, 2002
- ------------------------------
Geoffrey Stack
/s/ Robert A. Stine Director March 5, 2002
- ------------------------------
Robert A. Stine
/s/ Michael H. Winer Director March 5, 2002
- ------------------------------
Michael H. Winer
40
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2),(c) and (d)
List of Financial Statements and Financial Statement Schedules
Financial Statements
Certain Exhibits
Year Ended December 31, 2001
Tejon Ranch Co.
Lebec, California
41
Form 10-K - Item 14(a)(1) and (2)
Tejon Ranch Co. and Subsidiaries
Index to Financial Statements and Financial Statement Schedules
ITEM 14(a)(1) - FINANCIAL STATEMENTS
- ------------------------------------
The following consolidated financial statements of Tejon Ranch Co. and
subsidiaries are included in Item 8:
Page
----
Report of Independent Auditors 43
Consolidated Balance Sheets -
December 31, 2001 and 2000 44
Consolidated Statements of Operations -
Years Ended December 31, 2001, 2000 and 1999 45
Consolidated Statements of Stockholders' Equity -
Three Years Ended December 31, 2001 46
Consolidated Statements of Cash Flows -
Years Ended December 31, 2001, 2000 and 1999 47
Notes to Consolidated Financial Statements 48
ITEMS 14(a)(2) - FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------------
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
42
Report of Independent Auditors
Stockholders and Board of Directors
Tejon Ranch Co.
We have audited the consolidated balance sheets of Tejon Ranch Co. and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tejon Ranch Co.
and subsidiaries at December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Los Angeles, California
February 20, 2002
43
Tejon Ranch Co. and Subsidiaries
Consolidated Balance Sheets
December 31
2001 2000
----------- -----------
Assets
Current assets:
Cash and cash equivalents $10,889,000 $ 2,286,000
Marketable securities 12,574,000 11,055,000
Accounts receivable 5,850,000 4,542,000
Inventories 1,230,000 1,100,000
Prepaid expenses and other current assets 1,614,000 1,106,000
Assets of discontinued operations 5,847,000 31,489,000
----------- -----------
Total current assets 38,004,000 51,578,000
Property and equipment, net 61,016,000 46,526,000
Other assets 128,000 183,000
----------- -----------
Total Assets $99,148,000 $98,287,000
=========== ===========
Liabilities and stockholders' equity Current liabilities:
Trade accounts payable $ 3,332,000 $ 1,969,000
Other acrued liabilities 294,000 1,150,000
Current deferred income 410,000 321,000
Income taxes payable 522,000 --
Short-term debt 80,000 1,069,000
Current portion of long-term debt 1,726,000 1,741,000
Borrowings of discontinued operations 47,000 21,893,000
Current liabilities of discontinued operations 146,000 3,446,000
----------- -----------
Total current liabilities 6,557,000 31,589,000
Long-term debt, less current portion 14,563,000 19,323,000
Deferred income taxes 3,619,000 4,287,000
Minimum pension liability 1,606,000 114,000
Minority interest in equity of consolidated joint venture 674,000 485,000
Commitments and contingencies
Stockholders' equity
Common Stock, $.50 par value per share:
Authorized shares - 30,000,000
Issued and outstanding shares - 14,323,546 in 2001
and 12,712,236 in 2000 7,163,000 6,356,000
Additional paid-in capital 30,056,000 683,000
Deferred compensation -- (43,000)
Accumulated other comprehensive income (1,540,000) (663,000)
Retained Earnings 36,450,000 36,156,000
----------- -----------
Total stockholders' equity 72,129,000 42,489,000
----------- -----------
Total liabilities and stockholders' equity $99,148,000 $98,287,000
=========== ===========
See accompanying notes
44
Tejon Ranch Co. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31
2001 2000 1999
----------- ----------- -----------
Revenues:
Real estate $10,990,000 $10,947,000 $ 8,906,000
Farming 6,425,000 7,225,000 7,433,000
Interest income 1,897,000 632,000 639,000
----------- ----------- -----------
19,312,000 18,804,000 16,978,000
Costs and expenses:
Real estate 7,228,000 8,581,000 5,602,000
Farming 7,768,000 7,154,000 6,285,000
Corporate expenses 3,347,000 3,029,000 3,198,000
Interest expense 695,000 1,426,000 214,000
----------- ----------- -----------
19,038,000 20,190,000 15,299,000
----------- ----------- -----------
Income (loss) from continuing
operations before minority interest 274,000 (1,386,000) 1,679,000
Minority interest in consolidated joint venture (189,000) (185,000) --
----------- ----------- -----------
Income from continuing operations
before income tax provision 85,000 (1,571,000) 1,679,000
Income tax provision (benefit) 33,000 (601,000) 638,000
-----------------------------------------
Income (loss) from continuing operations 52,000 (970,000) 1,041,000
Income from discontinued
operations, net of applicable income taxes 242,000 425,000 140,000
-----------------------------------------
Net income (loss) $ 294,000 $ (545,000) $ 1,181,000
=========== =========== ===========
Income (loss) from continuing operations
per share, basic $ -- $ (0.08) $ 0.08
Income from discontinued operations
per share, basic 0.02 0.04 0.01
----------- ----------- -----------
Net income (loss) per share, basic $ 0.02 $ (0.04) $ 0.09
=========== =========== ===========
Income (loss) from continuing operations
per share, diluted $ -- $ (0.08) $ 0.08
Income from discontinued operations
per share, diluted 0.02 0.04 0.01
----------- ----------- -----------
Net income (loss) per share, diluted $ 0.02 $ (0.04) $ 0.09
=========== =========== ===========
45
Tejon Ranch Co. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Three years ended December 31, 2001
Common
Stock Shares Common Additional Paid Deferred
Outstanding Stock In Capital Compensation
----------------------------------------------------------
Balance, December 31, 1998 12,691,253 $6,346,000 $ 382,000 $ --
Net income -- -- -- --
Defined benefit plan
funding adjustments, net of taxes of
$133,000 -- -- -- --
Changes in unrealized
losses on available-for-sale
securities, net of taxes of
$205,000 -- -- -- --
Comprehensive income
Exercise of stock options 5,926 3,000 (3,000) --
Cash dividends paid - $.05 per
share -- -- -- --
--------------------------------------------------------
Balance, December 31, 1999 12,697,179 6,349,000 379,000 --
Net loss -- -- -- --
Defined benefit plan funding
adjustments, net of taxes of
$234,000 -- -- -- --
Changes in unrealized gains
on available-for-sale securities
net of taxes of $106,000 -- -- -- --
Interest rate swap adjustment -- -- -- --
Comprehensive loss
Restricted stock issuance 9,057 4,000 211,000 (215,000)
Exercise of stock options 6,000 3,000 93,000 --
Amortization of deferred
compensation -- -- -- 172,000
--------------------------------------------------------
Balance, December 31, 2000 12,712,236 6,356,000 683,000 (43,000)
Net income -- -- -- --
Changes in unrealized gains
on available-for-sale securities,
net of taxes of $142,000 -- -- -- --
Defined benefit plan funding
adjustments, net of taxes of
$599,000 -- -- -- --
Interest rate swap adjustment, net
of taxes of $233,000 -- -- -- --
Comprehensive loss
Net proceeds from rights offering 1,578,947 790,000 28,776,000 --
Restricted stock issuance 5,363 3,000 73,000 (76,000)
Exercise of stock options 27,000 14,000 524,000 --
Amortization of deferred
compensation -- -- -- 119,000
--------------------------------------------------------
Balance, December 31, 2001 14,323,546 7,163,000 $30,056,000 $ --
========================================================
Accumulated
Other
Comprehensive Retained
Income Earnings Total
-------------------------------------------
Balance, December 31, 1998 ($179,000) $36,156,000 $ 42,705,000
Net income -- 1,181,000 1,181,000
Defined benefit plan
funding adjustments, net of taxes of
$133,000 216,000 -- 216,000
Changes in unrealized
losses on available-for-sale
securities, net of taxes of
$205,000 (306,000) -- (306,000)
------------
Comprehensive income 1,091,000
------------
Exercise of stock options -- -- --
Cash dividends paid - $.05 per
share -- (636,000) (636,000)
------------------------------------------
Balance, December 31, 1999 (269,000) 36,701,000 43,160,000
Net loss -- (545,000) (545,000)
Defined benefit plan funding
adjustments, net of taxes of
$234,000 (350,000) -- (350,000)
Changes in unrealized gains
on available-for-sale securities
net of taxes of $106,000 160,000 -- 160,000
Interest rate swap adjustment (204,000) -- (204,000)
------------
Comprehensive loss (939,000)
------------
Restricted stock issuance -- -- --
Exercise of stock options -- -- 96,000
Amortization of deferred
compensation -- -- 172,000
------------------------------------------
Balance, December 31, 2000 (663,000) 36,156,000 42,489,000
Net income -- 294,000 294,000
Changes in unrealized gains
on available-for-sale securities,
net of taxes of $142,000 213,000 -- 213,000
Defined benefit plan funding
adjustments, net of taxes of
$599,000 (893,000) -- (893,000)
Interest rate swap adjustment, net
of taxes of $233,000 (197,000) (197,000)
------------
Comprehensive loss (583,000)
------------
Net proceeds from rights offering 29,566,000
Restricted stock issuance -- -- --
Exercise of stock options -- -- 538,000
Amortization of deferred
compensation -- -- 119,000
-------------------------------------------
Balance, December 31, 2001 $(1,540,000) $36,450,000 $ 72,129,000
===========================================
46
Tejon Ranch Co. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31
2001 2000 1999
--------------------------------------------
Operating Activities
Net income (loss) $ 294,000 $ (545,000) $ 1,181,000
Items not affecting cash:
Depreciation and amortization 2,846,000 3,024,000 2,494,000
Deferred income taxes 352,000 (557,000) 539,000
Gain from sale of land -- -- (1,747,000)
Minority interest in consolidated joint ventures 189,000 185,000 --
Losses on sales of investments -- -- 17,000
Gain on sales of assets (56,000) (254,000) --
Equity in (income) loss of unconsolidated joint ventures (191,000) 642,000 889,000
Changes in certain current assets and current liabilities:
Accounts receivable (1,308,000) (1,648,000) 173,000
Inventories (130,000) 897,000 (2,105,000)
Prepaid expenses and other current assets (823,000) (43,000) (28,000)
Trade accounts payable and other accrued liabilities (90,000) 1,198,000 1,894,000
Current deferred income 89,000 318,000 55,000
Income taxes payable 522,000 -- (192,000)
--------------------------------------------
Net cash provided by operating activities of continuing operations 1,694,000 3,217,000 3,170,000
Investing Activities
Maturities of marketable securities 35,189,000 2,989,000 9,987,000
Funds invested in marketable securities (36,353,000) (3,830,000) (7,162,000)
Reimbursement proceeds from community facilities district -- 8,065,000 --
Proceeds from sale of land -- 2,000,000 1,747,000
Cash in escrow -- -- 4,200,000
Property and equipment disposals 161,000 442,000 --
Funds to purchase almond processing plant -- (2,700,000) --
Property and equipment expenditures (17,441,000) (9,917,000) (25,819,000)
Investment in unconsolidated joint ventures (51,000) (1,066,000) --
Other 673,000 153,000 (649,000)
--------------------------------------------
Net cash used in investing activities of continuing operations (17,822,000) (3,864,000) (17,696,000)
Financing Activities
Proceeds from issuance of common stock 29,566,000 -- --
Proceeds from short-term debt 15,883,000 51,470,000 32,874,000
Payments on short-term debt (16,886,000) (53,427,000) (35,312,000)
Borrowing of long-term debt 1,845,000 3,642,000 19,800,000
Repayment of long-term debt (6,605,000) (2,348,000) (30,000)
Cash contribution from investor in consolidated joint venture -- 300,000 --
Exercise of stock options 432,000 96,000 --
Cash dividends paid -- -- (636,000)
--------------------------------------------
Net cash provided by (used in) financing activities of continuing operations 24,235,000 (267,000) 16,696,000
--------------------------------------------
Net change in discontinued operations 496,000 2,777,000 (2,491,000)
Increase (decrease) in cash and cash equivalents 8,603,000 1,863,000 (320,000)
Cash and cash equivalents at beginning of year 2,286,000 423,000 743,000
--------------------------------------------
Cash and cash equivalents at end of year $ 10,889,000 $ 2,286,000 $ 423,000
============================================
Supplemental Cash Flow Information
Interest paid (net of amounts capitalized) $ 1,136,000 $ 2,416,000 $ 1,174,000
============================================
Income taxes paid $ -- $ 166,000 $ 123,000
============================================
See accompanying notes
47
Notes to Consolidated Financial Statements
December 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Tejon Ranch Co.,
the accounts of all controlled subsidiaries, and Tejon Almond Growers LLC, a
joint venture that owns an almond processing plant, in which a controlling
interest is held (collectively, the "Company"). All significant intercompany
transactions have been eliminated in consolidation. Investments in
unconsolidated joint ventures in which we have less than a controlling interest
are accounted for under the equity method of accounting and, accordingly, we
reflect our investment as adjusted for capital contributions, distributions, and
our equity in net income or loss of the respective joint venture.
Reclassification
Certain amounts included in the 2000 and 1999 financial statements have been
reclassified to conform to the current year presentation.
Cash Equivalents
The Company considers all highly liquid investments, with a maturity of three
months or less when purchased, to be cash equivalents. The carrying amount for
cash equivalents approximates fair value.
Marketable Securities
The Company considers those investments not qualifying as cash equivalents, but
which are readily marketable, to be marketable securities. We classify all
marketable securities as available-for-sale. These are stated at fair value with
the unrealized gains (losses), net of tax, reported as a component of
accumulated other comprehensive income in the consolidated statements of
stockholders' equity.
Credit Risk
We grant credit to customers in the course of our continuing operations to
co-ops, wineries, nut marketing companies, and lessees of our facilities. Our
discontinued operations also granted credit to large cattle purchasers and
feedlot customers. We perform periodic credit evaluations of our customers'
financial condition and generally do not require collateral.
During 2001, no single customer accounted for more than 10% of our revenues from
continuing operations. During 2000 and 1999 the following customers accounted
for more than 10% of our consolidated revenues from continuing operations:
Golden State Vintners, a purchaser of grapes (10% in 2000 and 25% in 1999); and
IKEA, an international home furnishing retailer (11% in 2000).
48
The Company maintains its cash and cash equivalents in federally insured
financial institutions. The account balances at these institutions periodically
exceed FDIC insurance coverage, and, as a result, there is a concentration of
credit risk related to amounts on deposit in excess of FDIC insurance coverage.
We believe that the risk is not significant.
Farm Inventories
Costs of bringing crops to harvest are capitalized when incurred. Such costs are
expensed when the crops are sold. Costs during the current year related to the
next year's crop are capitalized and carried in inventory until the matching
crop is harvested and sold. Farm inventories held for sale are valued at the
lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are stated on the basis of cost, except for land acquired
upon organization in 1936, which is stated on the basis (presumed to be at cost)
carried by our predecessor. Depreciation is computed using the straight-line
method over the estimated useful lives of the various assets. Buildings and
improvements are depreciated over a 10-year to 27.5-year life. Machinery, water
pipelines, furniture, fixtures, and other equipment are depreciated over a
3-year to 10-year life depending on the type of asset. Vineyards and orchards
are generally depreciated over a 20-year life with irrigation systems over a
10-year life. Oil, gas and mineral reserves have not been appraised, and
accordingly no value has been assigned to them.
Vineyards and Orchards
Costs of planting and developing vineyards and orchards are capitalized until
the crops become commercially productive. Interest costs and depreciation of
irrigation systems and trellis installations during the development stage are
also capitalized. Revenues from crops earned during the development stage are
netted against development costs. Depreciation commences when the crops become
commercially productive.
At the time crops are harvested and delivered to buyers and revenues are
estimatable, revenues and related costs are recognized, which traditionally
occurs during the third and fourth quarters of each year. Orchard revenues are
based upon estimated selling prices, whereas vineyard revenues are recognized at
the contracted selling price. Estimated prices for orchard crops are based upon
the quoted estimate of what the final market price will be by marketers and
handlers of the orchard crops. Actual final orchard crop selling prices are not
determined for several months following the close of our fiscal year due to
supply and demand fluctuations within the orchard crop markets. Adjustments for
differences between original estimates and actual revenues received are recorded
during the period in which such amounts become known. The net effect of these
adjustments decreased farming revenue $100,000 in 2001, $231,000 in 2000, and
$541,000 in 1999.
The Almond Board of California has the authority to require producers of almonds
to withhold a portion of their annual production from the marketplace through a
Secretary of Agriculture approved marketing order. At December 31, 1999,
producers were required to withhold 22.36% of their 1999 almond crop production
from the marketplace. At December 31, 1999, we
49
recognized $427,000 into inventory related to this withholding. The marketing
order was lifted during 2000 and all of the inventory was subsequently sold. At
December 31, 2001 and 2000, no such withholding was mandated.
Common Stock Options
The Company has elected to follow Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employees', advisors', and consultants' stock options
because, as discussed in Note 7, the alternative fair value accounting provided
for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of stock options granted
by us equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Net Income Per Share
Basic net income (loss) per share is based upon the weighted average number of
shares of common stock outstanding during the year (14,237,035 in 2001,
12,707,027 in 2000, and 12,694,216 in 1999). Diluted net income (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 using the treasury stock method
(14,346,369 in 2001, 12,792,486 in 2000, and 12,796,485 in 1999). The weighted
average additional number of shares relating to dilutive stock options was
109,334 in 2001, 85,459 in 2000, and 102,269 in 1999. For 2000, 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.
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", the Company records
impairment losses on long-lived assets held and used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than their related carrying amounts. In
addition, the Company accounts for long-lived assets to be disposed of at the
lower of their carrying amounts or fair value less selling and disposal costs.
At December 31, 2001, management of the Company believes that none of its assets
are impaired.
Sales of Real Estate
Revenues are recorded and profit is recognized when title has passed to the
buyer and a minimum down payment has been received.
Rental Income
Minimum rent revenues are recognized on a straight-line basis over the
respective lease term.
50
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and which do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated. Generally, the timing of these accruals coincides with the completion
of a feasibility study or our commitment to a formal plan of action. No
liabilities for environmental costs have been recorded at December 31, 2001,
2000 or 1999.
Use of Estimates
The preparation of the Company's financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the financial statement dates and the reported amounts of revenue and expenses
during the reporting period. Due to uncertainties inherent in the estimation
process, it is reasonably possible that actual results could differ from these
estimates.
New Accounting Pronouncements
Financial Accounting Standards Board Statement ("FASB") No. 142, Goodwill and
Other Intangible Assets, was approved and issued in June 2001 and addresses
amortization on Intangible Assets. Statement 142 supercedes APB Opinion No. 17,
which required amortization of goodwill and intangible assets. The presumption
that goodwill and intangible assets were wasting assets and should be amortized
over a period of not more than 40 years has been altered, and now such assets
are deemed to have an indefinite life and are no longer amortized. The value of
the intangible assets must be assessed annually for impairment. This statement
will have a minimal impact on our financial position or results of operations as
the amount of goodwill and other intangible assets are insignificant. The
Statement will be adopted for the 2002 financial year.
In June 2001 FASB Statement No. 143 was issued addressing Accounting for Asset
Retirement Obligations (AROs). 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 financial position or results of operations when it
becomes effective for the 2003 financial year.
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued in August 2001. The pronouncement issues guidance on
distinguishing between assets held and used, held for sale, and held for
disposal other than sale. It also addresses the classification and valuation of
such assets. The pronouncement is effective for the 2002 fiscal year. We do not
anticipate this pronouncement having a significant impact on our financial
position or results of operations.
FASB Statement No. 141, Business Combinations, eliminates the pooling-of-
interests method of accounting for business combinations. This Statement is not
anticipated to have an effect on our financial position or results of
operations.
51
2. 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.
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 sell the remaining inventory for at least its current book value.
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. These amounts are included in revenues and the cost of
sales related to these dispositions is included in expenses in the table below.
The combined gain on sale, net of applicable income taxes, for both the sale
that occurred in June 2001 and the sale that occurred in July 2001, was
approximately $700,000. The results of the cattle and feedlot division had
previously been included within the livestock segment. Previously reported
financial statements have been reclassified to reflect the discontinuance of
this business.
The financial statements reflect the operating results and balance sheet items
of the discontinued operations separately from the continuing operations.
Operating results of the discontinued operations were as follows:
For the Years Ended December 31
2001 2000 1999
----------- ----------- -----------
Revenues $48,426,000 $50,019,000 $38,938,000
Expenses 47,593,000 48,059,000 37,752,000
Interest Expense 441,000 1,275,000 960,000
----------- ----------- -----------
Income from discontinued operations
before taxes 392,000 685,000 226,000
Income Tax provision 150,000 260,000 86,000
----------- ----------- -----------
Income from discontinued operations,
net of taxes $ 242,000 $ 425,000 $ 140,000
=========== =========== ===========
52
Net assets of the discontinued operations at December 31, 2001 and 2000 were as
follows:
December 31
2001 2000
----------- -----------
Current assets $ 5,822,000 $26,522,000
Current liabilities 193,000 25,339,000
----------- -----------
Net current assets 5,629,000 1,183,000
Property and equipment -- 4,143,000
Other noncurrent assets 25,000 824,000
----------- -----------
Net noncurrent assets 25,000 4,967,000
----------- -----------
Net assets $ 5,654,000 $ 6,150,000
=========== ===========
All cattle held for sale are valued at the lower of cost (first-in, first-out
method) or market and are included in the results of the discontinued
operations.
We enter into futures and option contracts to manage our exposure to price
fluctuations on our stocker cattle and our cattle feed costs. Our goal is to
protect or create a future price for our cattle and feed that will provide a
profit once the cattle are sold and all costs are deducted. Futures and options
contracts are carried at market value and included in the results of
discontinued operations. At December 31, 2001 there were no contracts
outstanding.
3. 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.
The following is a summary of available-for-sale securities at December 31:
2001 2000
-----------------------------------------------------------
Estimated Fair Estimated Fair
Cost Value Cost Value
-----------------------------------------------------------
Marketable Securities:
U.S. Treasury
and agency notes $ 5,681,000 $ 5,698,000 $ 5,987,000 $ 5,258,000
Corporate notes 6,722,000 6,876,000 5,252,000 5,797,000
-----------------------------------------------------------
$12,403,000 $12,574,000 $11,239,000 $11,055,000
===========================================================
As of December 31, 2001, the adjustment to accumulated other comprehensive
income in consolidated stockholders' equity is an unrealized gain on
available-for-sale securities of $213,000, which is net of a tax expense of
$142,000. This adjustment reflects the improvement in the fair value of
investments when compared to the prior year. As of December 31, 2001, the
53
Company's gross unrealized holding gains equal $379,000 and gross unrealized
holding losses equal $208,000. On December 31, 2001, the average maturity of
U.S. Treasury and agency securities was 2.5 years and corporate notes was 2.5
years. Currently the Company has no securities with a weighted average life 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. Our investments in corporate notes are with companies with a
credit rating of A or better.
4. INVENTORIES
Inventories consist of the following at December 31:
2001 2000
----------- ----------
Farming inventories $1,121,000 $ 739,000
Other 109,000 361,000
----------- ----------
$1,230,000 $1,100,000
=========== ==========
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2001 2000
---------------------------
Land and land improvements $ 6,832,000 $ 5,542,000
Buildings and improvements 22,104,000 22,259,000
Machinery, water pipelines, furniture
fixtures and other equipment 8,790,000 6,937,000
Vineyards and orchards 18,625,000 16,281,000
Development in process 27,733,000 16,203,000
------------ ------------
84,084,000 67,222,000
Less allowance for depreciation (23,068,000) (20,696,000)
------------ ------------
$ 61,016,000 $ 46,526,000
============ ============
During the year ended December 31, 2000, the Company received $8,065,000 of
reimbursement proceeds related to a community facilities district bond issuance.
These proceeds were for public infrastructure improvements the Company had
constructed related to the Tejon Industrial Complex and were reflected as a
reduction to land improvements.
54
6. SHORT-TERM AND LONG-TERM DEBT
We may borrow up to $15,000,000 on a secured revolving line of credit at
interest rates .50% less than the bank's prime rate (5.0% at December 31, 2001)
or at a fixed rate of 1.50% greater than LIBOR. The revolving line expires in
September 2003. At December 31, 2001, there was no outstanding debt under the
line of credit agreement. On all short-term debt arrangements interest is
payable monthly and principal is paid or borrowed on a daily basis as needed.
The weighted average interest rate on short-term debt was 6.75% for 2001.
Long-term debt consists of the following at December 31:
2001 2000
-------------------------
Notes payable to a bank $16,289,000 $ 21,064000
Less current portion (1,726,000) (1,741,000)
-------------------------
$14,563,000 $19,323,000
=========================
At December 31, 2001 the long-term debt balance included a $10,000,000 note used
in funding long-term assets that is secured by farm acreage. Principal is
payable in quarterly payments of $375,000 with remaining principal due June
2004. Interest is at .50% less than the bank's prime rate, which was 5.0% at
December 31, 2001, or a fixed rate of 1.50% greater than the specified LIBOR
rate. Long-term debt also consists of debt related to the purchase of
commercial/industrial buildings totaling $4,669,000 at December 31, 2001. The
interest rate is fixed at 7.61% with monthly principal and interest payments.
The annual principal payments total $46,000 and the final due date is April
2009. The remaining long-term note payable of $1,620,000 provides for interest
at 1.00% less than the bank's prime rate, which was 5.0% at December 31, 2001,
payable quarterly on any amounts outstanding. Principal is payable annually in
the amount of $180,000 with the final payment due February 1, 2010.
The amount of the line of credit, short-term, and long-term debt instruments
listed above approximate the fair value of the instruments.
The Company's capitalized interest costs were $1,466,000, $1,174,000, and
$1,193,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
Maturities of long-term debt at December 31, 2001 are $1,726,000 in 2002,
$1,770,000 in 2003, $7,230,000 in 2004, $239,000 in 2005, $243,000 in 2006, and
$5,081,000 thereafter. This maturity schedule reflects the payments related to
both the long-term debt and the current portion of long-term debt.
7. COMMON STOCK AND STOCK OPTION INFORMATION
The 1992 Stock Option Plan provides 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 compensation committee of the Board of Directors administers the
plan. Since adoption of the plan in March 1992, options have been
55
granted under the 1992 Stock Option Plan with respect to 159,000 shares at an
exercise price of $16 per share and 20,000 shares at an exercise price of $15
per share.
On January 26, 1998, the Board of Directors adopted the 1998 Stock Incentive
Plan. The Incentive Plan provides 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 to December 31, 2001, the Company
has granted options to purchase 906,091 shares at a price equal to the fair
market value at date of grant, all of which were outstanding at December 31,
2001.
Also, on January 26, 1998, the Board of Directors adopted the Non-Employee
Director Stock Incentive Plan. This plan is intended to enable us to attract,
retain, and motivate its 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 to December 31, 2001, the Company has granted options under
the plan to purchase 62,761 shares at a price equal to the fair market value at
date of grant.
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.
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 2001: risk-free interest rate of 5.00%; dividend rate of 0.0%;
volatility factor of the expected market price of our common stock of 0.34; and
a weighted average expected life of the options of five years from the option
grant date. During 2001, 2000, and 1999, no compensation expense was recorded
related to the granting of stock options.
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, option valuation models require 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
models do not necessarily provide a reliable single measure of the fair value of
stock options outstanding under the Company's stock option plans.
56
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information follows for the year ended December 31:
2001 2000
-----------------------
Pro forma net loss $(555,000) $(1,223,000)
Pro forma net loss per share, diluted $ (0.04) $ (0.10)
A summary of the Company's stock option activity and related information for the
years ended December 31, follows:
2001 2000
----------------------------------------------------------
Weighted-Average Weighted-Average
Exercise Prices Exercise Prices
Options Per Share Options Per Share
----------------------------------------------------------
Outstanding
beginning of year 807,078 $20.93 99,390 $20.88
Granted 405,080 22.22 13,688 22.13
Exercised (27,000) 16.00 (6,000) 16.00
Forfeited/Cancelled (104,996) 21.50 0 0.00
----------------------------------------------------------
Outstanding end of year 1,080,162 $21.48 807,078 $20.93
Options exercisable
end of year 352,105 $20.17 204,527 $19.14
Weighted-average fair
value per share of
options granted $ 8.67 $10.52
Exercise prices for options outstanding as of December 31, 2001 ranged from
$15.00 to $26.38. The weighted-average remaining contractual life of those
options is approximately six years.
8. COMMODITY CONTRACTS USED TO MANAGE RISK
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 by the end of April 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
57
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 market value adjustments associated with both closed
and open contracts are recognized in discontinued operations. During 2001, we
recognized $316,000 in net losses from hedging and derivative activity as an
increase in cost of sales. In 2000 and 1999, we recognized approximately
$966,000 and $256,000, respectively, in losses from hedging and derivative
activity as an increase in cost of sales. At December 31, 2001, the Company had
no futures or options contracts outstanding.
The following table identifies the futures contract amounts and options contract
costs outstanding at December 31, 2000:
Original Estimated
Commodity Future/Option No. Contract/Cost Fair Value
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.
9. INTEREST RATE RISK MANAGEMENT
During 2000, the Company entered into interest rate swap agreements with
notional amounts totaling $11.6 million to manage interest rate risk by
converting floating interest rate debt to fixed rate debt. These swap
agreements, which have maturities ranging from 1 to 3 years, 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 recorded in interest
expense in the period in which they are incurred.
As of December 31, 2001 and 2000, the cumulative decrease in the fair value of
the interest rate swaps was $634,000 and $204,000, respectively. Changes in the
fair value of the interest rate swaps are reported in accumulated other
comprehensive income, net of applicable income taxes. These amounts are
subsequently reclassified into interest expense as yield adjustment in the same
period in which the related interest on the floating rate obligations affects
earnings. No such amounts were reclassified to interest expense during 2001.
Estimated fair value of the swaps was determined by market price quotes as of
December 31, 2001 and 2000, received from our bank.
58
10. INCOME TAXES
The Company accounts for income taxes using SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized differently in the financial
statements and the tax returns. The provision (benefit) for income taxes
consists of the following at December 31:
2001 2000 1999
--------- --------- --------
Total provision (benefit):
Continuing operations $ 33,000 $(601,000) $638,000
Discontinued operations 150,000 260,000 86,000
--------- --------- --------
183,000 (341,000) 724,000
========= ========= ========
Federal:
Current 455,000 (31,000) --
Deferred (293,000) (204,000) 556,000
--------- --------- --------
162,000 (235,000) 556,000
State:
Current 67,000 (38,000) --
Deferred (46,000) (68,000) 168,000
--------- --------- --------
21,000 (106,000) 168,000
--------- --------- --------
$ 183,000 $(341,000) $724,000
========= ========= ========
The reasons for the difference between total income tax expense and the amount
computed by applying the statutory Federal income tax rate (34%) to income
before taxes are as follows at December 31:
2001 2000 1999
-------- --------- --------
Income tax (benefit) at the statutory rate $162,000 $(301,000) $648,000
State income taxes, net of Federal benefit 14,000 (52,000) 109,000
Other, net 7,000 12,000 (33,000)
-------- --------- --------
$183,000 $(341,000) $724,000
======== ========= ========
Deferred income taxes result from temporary differences in the financial and tax
bases of assets and liabilities. The total current deferred tax asset is
included with prepaid expenses and other current assets on the consolidated
balance sheets. Significant components of the Company's deferred tax liabilities
and assets are as follows at December 31:
59
2001 2000
---------- ----------
Deferred income tax assets:
Accrued expenses $ 155,000 $ 147,000
Prepaid revenues 139,000 102,000
Other 30,000 45,000
---------- ----------
Total deferred income tax assets $ 324,000 $ 294,000
Deferred income tax liabilities:
Depreciation and amortization 400,000 305,000
Involuntary conversion, tax exchange-land 2,367,000 3,115,000
Other 852,000 867,000
---------- ----------
Total deferred income tax liabilities $3,619,000 $4,287,000
---------- ----------
Net deferred income tax liabilities $3,295,000 $3,993,000
========== ==========
The Company made net payments of income taxes of $0, $166,000, and $123,000
during 2001, 2000 and 1999, respectively.
11. OPERATING LEASES
The Company is a lessor of certain property pursuant to various commercial lease
agreements having terms ranging up to 65 years. The cost and accumulated
depreciation of buildings and improvements subject to such leases were
$14,174,000 and $2,586,000, respectively, at December 31, 2001. Income from
commercial rents, excluding percentage rents based on sales revenues, included
in real estate revenue was $2,035,000 in 2001, $1,857,000 in 2000, and
$1,609,000 in 1999. Future minimum rental income on noncancelable operating
leases as of December 31, 2001 is: $2,113,000 in 2002, $2,079,000 in 2003,
$2,075,000 in 2004, $1,769,000 in 2005, and $1,728,000 in 2006, and $10,430,000
for years thereafter.
12. COMMITMENTS AND CONTINGENCIES
A total of 5,488 acres of our land is subject to water contracts requiring
minimum future annual payments for as long as we own such land. The estimated
minimum payments for 2002 are $1,084,000, whether or not water is available or
is used. Minimum payments made under these contracts were approximately
$1,183,000 in 2001, $793,000 in 2000, and $1,300,000 in 1999. Approximately
4,600 acres of this land are subject to contingent assessments of approximately
$776,000 to service water district bonded indebtedness, if water district
revenues are insufficient to cover bond interest and redemptions when due.
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
60
Complex development. The amount reimbursed in 2000 was $8,065,000. In 2001, the
Company paid approximately $300,000 in special taxes related to the CFD. 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 is reduced. It
is expected that the Company will have no additional special tax payments due in
2002, but this could change in the future based on the amount of bonds
outstanding within the CFD. As development and values increase around the Tejon
Industrial Complex, the Company may be able to remove approximately 1,400 acres
from the CFD.
At December 31, 2001, the Company was guaranteeing the repayment of $3.8 million
of debt of the Petro Travel Plaza LLC, an unconsolidated joint venture. Total
debt outstanding at December 31, 2001 for Petro Travel Plaza LLC is $12.5
million and is related to the construction of the travel plaza. This loan has a
maturity date of July 2003. 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 $10.5 million. The maturity date of this loan is July 2003. The
Company does not expect either of these guarantees to ever be enforced due to
the positive cash flow provided by the operations of the Petro Travel Plaza, and
to cash flows from a lease on the Tejon/Dermody building.
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. 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 undertook
additional investigation work as directed by the Regional Water Board and
developed a feasibility study evaluating different long-term remediation
options. Lafarge has also removed high concentrations 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
orders. Due to the financial strength of National and Lafarge, the Company
believes that a material effect on the Company is remote at this time.
13. RETIREMENT PLAN
The Company has a retirement plan which covers substantially all employees. The
benefits are based on years of service and the employee's five-year final
average salary. Contributions are intended to provide for benefits attributable
to service both to date and expected to be provided
61
in the future. The Company funds the plan in accordance with the Employee
Retirement Income Security Act of 1974 (ERISA).
The following accumulated benefit information is as of December 31:
2001 2000
----------- ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 3,233,000 $2,840,000
Service cost 192,000 184,000
Interest cost 194,000 182,000
Actuarial gain (loss) 1,148,000 148,000
Benefits/expenses paid (489,000) (121,000)
----------- ----------
Benefit obligation at end of year $ 4,278,000 $3,233,000
=========== ==========
Change in Plan Assets
Fair value of plan assets at beginning of year $ 3,119,000 $3,126,000
Actual return on plan assets (186,000) (63,000)
Employer contribution 228,000 177,000
Benefits/expenses paid (489,000) (121,000)
----------- ----------
Fair value of plan assets at end of year $ 2,672,000 $3,119,000
=========== ==========
Funded status $(1,606,000) $ (114,000)
Unrecognized net actuarial gain 2,075,000 529,000
Unrecognized net transition asset (38,000) (58,000)
Adjustments related to minimum liability (2,037,000) (471,000)
----------- ----------
Minimum penion liability $(1,606,000) $ (114,000)
=========== ==========
In accordance with the provisions of SFAS No. 87, the Company recorded a minimum
pension liability in 2001 representing the excess of the benefit obligation,
$4,278,000, over the fair value of plan assets, $2,672,000. The liability has
been offset by intangible assets to the extent possible. Because the asset
recognized may not exceed the amount of unrecognized past service cost, the
balance of the liability at the end of 2001 is reported in accumulated other
comprehensive income (loss), net of applicable deferred income taxes. The
Company also had a minimum pension liability at the end of 2000.
Plan assets consist of equity, debt and short-term money market investment
funds. The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of projected
benefits obligation was 6.5% in 2001 and 2000. The expected long-term rate of
return on plan assets was 7.5% in 2001 and 2000.
62
Total pension and retirement expense was as follows for each of the years ended
December 31:
2001 2000 1999
--------- --------- ---------
Cost components:
Service cost-benefits earned during the period $(192,000) $(184,000) $(190,000)
Interest cost on projected benefit obligation (194,000) (182,000) (223,000)
Expected return on plan assets 212,000 257,000 207,000
Net amortization and deferral 20,000 20,000 (42,000)
--------- --------- ---------
Total net periodic pension cost $(154,000) $ (89,000) $(248,000)
========= ========= =========
The Company has a Supplemental Executive Retirement Plan (the "SERP") to restore
to executives designated by the Compensation Committee of the Board of Directors
the full benefits under the pension plan which would otherwise be restricted by
certain limitations now imposed under the Internal Revenue Code. The SERP is
currently unfunded, but an associated accrued liability of $390,000 is reflected
in the Company's financial statements.
14. BUSINESS SEGMENTS
The Company operates principally in the farming and real estate industries. The
farming segment involves those operations related to permanent crops, leasing
farmland, and the supervision of farming activities. The real estate segment
involves rents and royalties from lessees of Company-owned properties, and real
estate development activities.
Information pertaining to the Company's business segments follows for each of
the years ended December 31:
2001 2000 1999
---------------------------------------
Segment profits from continuing operations:
Real Estate $ 3,762,000 $ 2,366,000 $ 3,304,000
Farming (1,343,000) 71,000 1,148,000
---------------------------------------
Segment profits from continuing operations 2,419,000 2,437,000 4,452,000
Interest income 1,897,000 632,000 639,000
Corporate expenses (3,347,000) (3,029,000) (3,198,000)
Interest expense (695,000) (1,426,000) (214,000)
---------------------------------------
Income (loss) from continuing operations before
minority interest 274,000 (1,386,000) 1,679,000
Minority Interest (189,000) (185,000) --
---------------------------------------
Income (loss) from continuing operations before
income tax provision $ 85,000 $(1,571,000) $ 1,679,000
=======================================
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Depreciation
Identifiable and Capital
Assets Amortization Expenditures
------------------------------------------
2001
Farming 18,912,000 1,168,000 884,000
Real Estate 44,523,000 1,148,000 16,413,000
Corporate 35,713,000 530,000 144,000
------------------------------------------
Total $99,148,000 $2,846,000 $17,441,000
==========================================
2000
Farming 17,698,000 981,000 4,046,000
Real Estate 31,197,000 1,072,000 7,224,000
Corporate 49,392,000 971,000 1,093,000
------------------------------------------
Total $98,287,000 $3,024,000 $12,363,000
==========================================
1999
Farming 13,574,000 811,000 2,086,000
Real Estate 31,975,000 906,000 22,722,000
Corporate 45,970,000 777,000 603,000
------------------------------------------
Total $91,519,000 $2,494,000 $25,678,000
==========================================
Segment profits are total revenues less operating expenses, excluding interest
and corporate expenses. Identifiable assets by segment include both assets
directly identified with those operations and an allocable share of jointly used
assets. Corporate assets consist primarily of cash and cash equivalents,
deferred income taxes, land and buildings. Land is valued at cost for
acquisitions since 1936. Land acquired in 1936, upon organization of the
Company, is stated on the basis (presumed to be at cost) carried by our
predecessor.
The financial statements for prior periods have been reclassified to reflect the
segregation of continuing and discontinued operations. The information presented
above for 2001, 2000 and 1999 reflects the removal of the livestock segment of
the business. The identifiable assets of that segment which were not
discontinued have been included in the real estate segment of continuing
operations. The net assets of discontinued operations are included in the
Corporate Identifiable Assets for each year presented.
15. UNAUDITED QUARTERLY OPERATING RESULTS
The following is a tabulation of unaudited quarterly operating results for the
years indicated (in thousands of dollars, except per share amounts):
64
------------------------------------------------------------------
Total Segment Income Net Income (Loss)
Revenue(1) Profit (Loss) (Loss) Per Share(2)
------------------------------------------------------------------
2001
First quarter $ 2,021,000 $ (832,000) $(798,000) $(0.06)
Second quarter 3,663,000 711,000 916,000 0.06
Third quarter 5,863,000 1,517,000 290,000 0.02
Fourth quarter 7,765,000 1,023,000 (114,000) (0.00)
------------------------------------------------------------------
$19,312,000 $2,419,000 $ 294,000 $ 0.02
==================================================================
2000
First quarter $ 1,640,000 $ (492,000) $(571,000) $(0.04)
Second quarter 2,387,000 192,000 (215,000) (0.02)
Third quarter 7,617,000 2,083,000 29,000 0.00
Fourth quarter 7,160,000 654,000 212,000 0.02
------------------------------------------------------------------
$18,804,000 $2,437,000 $(545,000) $(0.04)
==================================================================
(1) Includes interest income.
(2) Earnings per share on a diluted basis.
16. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company maintains investments in unconsolidated joint ventures. The Company
accounts for these investments in these unconsolidated joint ventures using the
equity method of accounting. The Company's investment deficit in its
unconsolidated joint ventures at December 31, 2001 is $163,000. The equity in
the net income of the unconsolidated joint ventures is $191,000 for the twelve
months ended December 31, 2001, which is included in Real Estate operations in
the accompanying consolidated financial statements. The Company's current
unconsolidated joint ventures are as follows:
. Petro Travel Plaza LLC is a joint venture with Petro Stopping Centers, L.P.
for the development and management of the Petro Travel Plaza. This is a 60%
owned venture which owns and operates a travel plaza/commercial highway
operation in the Tejon Industrial Complex. It houses multiple commercial
eating establishments as well as diesel and gasoline operations.
. RM Development Associates LLC is an unconsolidated joint venture in which
the Company has a 50% ownership interest. This is a venture with three home
builders and community developers (Pardee Construction Company, Lewis
Investment Company, and Standard Pacific Corp.), which is pursuing the
entitlement and development of land that the Company owns in Los Angeles
County.
65
. Tejon Dermody Industrial LLC is a joint venture between the Company and DP
Partners for the development and ownership of a 651,000 square foot
industrial building in the Tejon Industrial Complex. The Company owns a 50%
interest in this venture.
Condensed financial information of the Company's unconsolidated joint ventures
as of and for the year ended December 31 is as follows:
Condensed Combined Statement of Operations Information
2001 2000
----------- -----------
Net sales $36,489,000 $44,918,000
=========== ===========
Net income (loss) 321,000 (1,049,000)
Partner's share of net income (loss) 130,000 (407,000)
----------- -----------
Equity in net income (loss) of unconsolidated
joint ventures $ 191,000 $ (642,000)
=========== ===========
Condensed Combined Balance Sheet Information
2001 2000
----------- -----------
Current assets $ 2,507,000 $ 2,589,000
Property and equipment, net 33,938,000 20,406,000
Long-term debt (12,513,000) (13,039,000)
Other liabilities (11,062,000) (1,628,000)
----------- -----------
Net assets $12,870,000 $ 8,328,000
=========== ===========
The Company's investment deficit balance in its unconsolidated joint ventures
differs from its respective 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.
17. RELATED PARTY TRANSACTIONS
During December 2000, the Company sold certain cows, bulls, stocker cattle, and
equipment, with a carrying value of $302,000, to a limited liability company
owned by an officer of the Company for $1,328,000. The Company recognized a gain
on sale of these assets of $1,026,000, which is included in discontinued
operations the accompanying consolidated statement of operations for the year
ended December 31, 2000. In addition, the Company entered into an agreement to
lease certain land to the purchaser for livestock grazing purposes.
66
In December 2000 the Company offered to its stockholders the right to purchase
1,578,947 additional shares of its Common Stock for a purchase price of $19 per
share or an aggregate of $30 million. In connection with that offering the
Company entered into an agreement with Third Avenue Trust (acting on behalf of
Third Avenue Value Fund, Third Avenue Small-Cap Value Fund and Third Avenue Real
Estate Value Fund) and a private investment fund managed by Carl Marks
Management Company, L.P. to purchase any of the shares offered to the extent
that the gross proceeds to the Company from the offering to its stockholders
were less than $30 million. The price payable per share under the agreement was
the same as the price in the offering to the stockholders, $19 per share. In
addition, the purchasers committed to exercise their own pro rata rights to
purchase shares in the offering as stockholders but not to exercise their rights
to purchase additional shares in the offering which other stockholders declined
to purchase. Because the offering to the stockholders was oversubscribed, none
of the purchasers purchased any shares pursuant to this agreement, but the
company reimbursed the Carl Marks Management Company, L.P. investment fund
$45,000 for its Hart-Scott-Rodino filing fees incurred in connection with the
offering.
18. SUBSCRIPTION RIGHTS OFFERING
On January 16, 2001, the Company consummated a Subscription Rights Offering (the
"Offering") whereby it distributed to stockholders of record at the close of
business on December 11, 2000 transferable subscription rights to purchase
additional shares of its common stock at a price of $19 per share. The Company
used the net proceeds from the Offering, $29.6 million, to pay down debt and to
provide additional working capital to enable it to pursue opportunities to
develop its real estate holdings, including Tejon Industrial Complex and Tejon
Mountain Village.
67