FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
For Quarter Ended Commission File Number
September 30, 1998 1-7183
TEJON RANCH CO.
(Exact name of Registrant as specified in its charter)
Delaware 77-0196136
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
P.O. Box 1000, Lebec, California 93243
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code...(805) 248-6774
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Total Shares of Common Stock issued and outstanding on September
30,1998, were 12,691,253.
TEJON RANCH CO.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of 3
Operations for the Three Months and Nine Months
Ended September 30, 1998 and September 30, 1997
Unaudited Consolidated Condensed Balance Sheets 4
as of and September 30, 1998 and December 31, 1997
Unaudited Consolidated Condensed Statements of 5
Cash Flows for the Nine Months Ended
September 30, 1998 and 1997
Notes to Unaudited Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitive and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
PART III EXHIBIT INDEX 20
PART I FINANCIAL INFORMATION
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
1998 1997 1998 1997
Revenues:
Livestock $11,342 $9,779 $24,835 $15,677
Farming 3,784 4,982 4,055 5,663
Resource management 972 706 1,929 2,074
Real Estate 378 331 1,042 1,015
Interest Income 227 364 744 1,036
16,703 16,162 32,605 25,465
Costs and Expenses:
Livestock 9,707 8,818 23,602 14,673
Farming 1,634 3,231 2,255 3,774
Resource Management 390 354 1,276 1,082
Real Estate 874 560 2,437 1,910
Corporate Expense 619 649 1,832 1,693
Interest Expense 276 247 780 510
13,500 13,859 32,182 23,642
Operating Income 3,203 2,303 423 1,823
Income Tax Expense 1,217 871 161 683
Net Income $1,986 1,432 262 1,140
Net Income Per Share, basic $ 0.16 $ 0.11 $ 0.02 $ 0.09
Net Income Per Share, diluted $ 0.16 $ 0.11 $ 0.02 $ 0.09
Cash Dividends Paid $ - $ - $ 0.025 $ 0.025
See Notes to Consolidated Condensed Financial Statements.
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
September 30, 1998 December 31, 1997
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents
$ 1,468
$ 976
Marketable Securities
13,965
17,189
Accounts & Notes Receivable
6,897
8,448
Inventories:
Cattle
14,536
11,737
Farming
2,568
00
Other
422
485
Prepaid Expenses and Other
1,476
1,659
Total Current Assets
41,285
40,494
PROPERTY AND EQUIPMENT-NET
23,985
21,778
OTHER ASSETS
1,786
1,421
TOTAL ASSETS
$ 67,056
$63,693
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILTIES
Trade Accounts Payable
$ 1,943
$ 2,889
Other Accrued Liabilities
0
390
Short-term Borrowings
16,601
11,955
Other Current Liabilities
955
742
Total Current Liabilities
19,499
15,976
LONG-TERM DEBT
3,800
3,925
DEFERRED INCOME TAXES
3,321
3,304
Total Liabilities
26,620
23,205
STOCKHOLDERS' EQUITY
Common Stock
6,346
6,343
Additional Paid-In Capital
382
385
Retained Earnings
33,596
33,651
Marketable Securities-
Unrealized Gains-Net
112
109
Total Stockholders'Equity
40,436
40,488
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$ 67,056
$63,693
See Notes to Consolidated Condensed Financial Statements.
*The Balance Sheet at December 31, 1997 has been derived from the
audited financial statements at that date.
EJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
NINE MONTHS ENDED
September 30
1998 1997
OPERATING ACTIVITIES
Net Income
$
262
$
1,140
Items Not Affecting Cash and Cash
Equivalents:
Depreciation and Amortization
1,478
1,022
Deferred Income Taxes
17
15
Gain on Sale of Investments
(34)
(4)
Changes in Operating Assets and
Liabilities:
Receivables, Inventories and
Other Assets, Net
(3,523)
(11,607)
Current Liabilities, Net
(1,123)
1,126
NET CASH USED IN
OPERATING ACTIVITIES
(2,923)
(8,308)
INVESTING ACTIVITIES
Acquisition of Champion Feeders
(3,874)
Maturities and Sales of Marketable
Securities
5,084
5,336
Funds Invested in Marketable
Securities
(1,821)
(2,192)
Property and Equipment
Expenditures
(3,616)
(2,188)
Change in Breeding Herds
(69)
70
Other
(367)
(33)
NET CASH USED IN
INVESTING ACTIVITIES
(789)
(2,881)
FINANCING ACTIVITIES
Proceeds From Revolving Line
of Credit
15,930
22,188
Payments of Revolving Line
Of Credit
(11,284)
(13,813)
Payments on Long-Term Debt
(125)
-
Borrowings of Long-Term Debt
-
2,500
Cash Dividends Paid
(317)
(317)
NET CASH PROVIDED BY FINANCING
ACTIVITIES
4,204
10,558
INCREASE(DECREASE) IN CASH AND
CASH EQUIVALENTS
492
(631)
Cash and Cash Equivalents at
Beginning of Period
976
693
CASH AND CASH EQUIVALENTS AT
END OF PERIOD
$
1,468
$
62
See Notes to Consolidated Condensed Financial Statements.
TEJON RANCH CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
NOTE A - BASIS OF PRESENTATION
The summarized information furnished by Registrant pursuant to the
instructions to Part I of Form 10-Q is unaudited and reflects all
adjustments which are, in the opinion of Registrant's Management,
necessary for a fair statement of the results of operations for the
interim period. All such adjustments are of a normal recurring nature.
The results of the period reported herein are not indicative of the
results to be expected for the full year due to the seasonal nature of
Registrant's agricultural activities. Historically, the largest
percentage of revenues are recognized during the third and fourth
quarters.
For further information, refer to the Consolidated Financial
Statements and footnotes thereto included in Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated condensed financial
statements include the accounts of Registrant and its wholly-owned
subsidiaries. All intercompany transactions have been eliminated in
consolidation.
Cash Equivalents -- Registrant 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 - Registrant considers those investments not
qualifying as cash equivalents, but which are readily marketable, to
be marketable securities. The Registrant classifies all marketable
securities as available-for-sale. Such securities are stated at fair
value with the unrealized gains (losses), net of tax, reported in a
separate component of stockholders' equity and comprehensive income.
Credit Risk -- Registrant grants credit to customers, principally
large cattle purchasers, feedlot customers, co-ops, wineries, nut
marketing companies, and lessees of Registrant facilities located in
California. Registrant performs periodic credit evaluations of its
customers' financial condition and generally does not require
collateral.
Farm Inventories -- Costs of bringing crops to harvest are capitalized
when incurred. Such costs are expensed when the crops are sold. Farm
inventories held for sale are valued at the lower of cost (first-in,
first-out method) or market.
Cattle Inventories and Breeding Herd -- Cattle raised on the Ranch are
stated at the accumulated cost of developing such animals until they
are sold or are added to the breeding herd, and purchased cattle are
stated at cost plus development costs. All cattle held for sale are
valued at the lower of cost (first-in, first-out method) or market and
are included in the caption inventories. Purchased bulls and cows
included in the breeding herd and used for breeding are depreciated
using the straight-line method over five to seven years.
Commodity Contracts Used to Hedge Price Fluctuations -- Registrant
enters into futures and option contracts to hedge its exposure to
price fluctuations on its stocker cattle and its cattle feed costs.
The goal of Registrant is to protect or create a future price for its
cattle and feed that will provide a profit once the cattle are sold
and all costs are deducted. Realized gains, losses, and costs
associated with closed contracts are included in prepaid assets and
are recognized in cost of sales expense at the time the hedged cattle
are sold or feed is used.
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
Registrant's 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 and equipment is depreciated over a three
year to 10 year life depending on the type of equipment. 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, so 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. Revenue from crops earned during the development stage
are credited against development costs. Depreciation commences when
the crops become commercially productive.
At the time crops are harvested and delivered to buyers and revenues
are estimable, 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
Registrant's fiscal year due to supply and demand fluctuations within
the orchard crop markets. Adjustments for differences between
original estimated and actual revenues received are recorded during
the period in which such amounts become known.
Net Income Per Share -- Effective December 31, 1997, Registrant
adopted SFAS No. 128, "Earnings Per Share" which replaced primary and
fully diluted earnings per share with basic and diluted earnings per
share. Basic net income per share is based upon the weighted average
number of shares of common stock outstanding, which for the three
months ended September 30,1998 and 1997 was 12,691,253 and 12,685,994.
For the nine months ended September 30, 1998 and 1997 the weighted
average common shares outstanding were 12,687,747 and 12,685,994
respectively. Diluted net income per share is based upon the weighted
average number of shares of common stock outstanding and the average
shares outstanding assuming the issuance of common stock for stock
options using the treasury stock method. For the three months ended
September 30, 1998 and 1997 diluted common shares outstanding were
12,731,216 and 12,761,345. For the nine months ended September 30,
1998 and 1997 diluted common shares outstanding were 12,759,562 and
12,714,286.
In March 1992, Registrant's Board of Directors adopted the 1992 Stock
Option Plan providing for the granting of options to purchase a
maximum of 230,000 shares of the Registrant's common stock to
employees, advisors, and consultants of the Registrant. Since the
adoption of the Plan, Registrant has granted options to purchase
179,000 shares at a price equal to fair market value at date of grant.
At September 30, 1998, options to purchase 158,453 shares were
outstanding.
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 Registrant with respect to
800,000 shares of common stock. Since the adoption of the Incentive
Plan, Registrant has granted options to purchase 100,000 shares at a
price equal to the fair market value at date of grant, all of which
are outstanding at September 30, 1998.
Also, on January 26, 1998, the Board of Directors adopted the Non-
Employee Director Stock Incentive Plan. This plan is intended to
enable Registrant to attract, retain, and motivate its non-employee
directors by providing for or increasing the proprietary interests of
such persons by Registrant. The plan provides for making of awards to
non-employee directors with respect to an aggregated 200,000 shares of
common stock. Since the adoption of the plan, Registrant has granted
options under the plan to purchase 21,727 shares at a price equal to
the fair market value at date of grant.
The 1998 Stock Incentive Plan and the Non-Employee Director Stock
Incentive Plan were approved by stockholders at Registrant's Annual
Meeting on May 11, 1998.
Long-Lived Assets -- In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
Registrant 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. SFAS No. 121 had no impact
on Registrant's consolidated financial position and results of
operations in the current year.
Environmental -- 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 Registrant's commitment to a
formal plan of action. No liabilities for environmental costs have
been recorded at September 30, 1998 or 1997.
Use of Estimates -- The financial statements have been prepared in
conformity with generally accepted accounting principles and, as such,
include amounts based on informed estimates and judgments of
management. Actual results could differ from these estimates.
New Accounting Pronouncements -- In February 1998 the FASB issued SFAS
No. 132 "Employers' Disclosures about Pensions and other
Postretirement Benefits" which is effective for fiscal years beginning
after December 15, 1997. SFAS No. 132 revises year-end disclosures
about pension and other postretirement benefit plans. SFAS # 132 will
not have any impact on the financial results or financial condition of
Registrant.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which is effective
for financial years beginning after June 1999. SFAS 133 requires all
derivatives to be recorded at fair value and establishes unique
accounting for fair value hedges, cash flow hedges and foreign
currency net investment hedges. The Company expects to adopt the new
statement effective January 1, 2000. The statement will require the
Registrant to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The Company has not
yet determined what the effect of Statement 133 will be on earnings
and financial position of the Company.
NOTE C - MARKETABLE SECURITIES
Statement of Financial Accounting Standard ("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 Registrant 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
September 30, 1998 and December 31, 1997:
September 30 December 31
1998
1997
Market
Market
Cost
Value
Cost
Value
Marketable securities:
(in thousands)
U.S. Treasury and
agency notes
$ 7,582
$7,724
$ 9,770
$ 9,947
Corporate notes
6,199
6,241
7,237
7,242
$13,781
$13,965
$17,007
$17,189
As of September 30, 1998, the cumulative fair value adjustment is a
$185,000 unrealized gain. The cumulative fair value adjustment to
stockholders' equity, net of a deferred tax of $73,000, is an
unrealized gain of $112,000. Registrant's gross unrealized holding
gains equal $190,000, while gross unrealized holding losses equal
$5,000. On September 30, 1998, the average maturity of U.S. Treasury
and agency securities was 1.2 years and the average maturity corporate
notes was 2 years. Currently, Registrant has no securities with a
remaining term to maturity of greater than five years.
Market value equals quoted market price, if available. If a quoted
market price is not available, market value is estimated using quoted
market prices for similar securities. Registrant's investments in
corporate notes are with companies with a credit rating of A or
better.
NOTE D - COMMODITY CONTRACTS USED TO HEDGE PRICE FLUCTUATIONS
Registrant used commodity derivatives to hedge its exposure to price
fluctuations 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 protect the Registrant
against a further cattle market decline. To help achieve this
objective the Registrant used 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.
Registrant continually monitors any open futures and options contracts
to determine the appropriate hedge based on market movement of the
underlying asset. The options and futures contracts used typically
expire on a quarterly or semi-annual basis and are structured to
expire close to or during the month the stocker cattle and feed are
scheduled to be sold or purchased. The risk associated with hedging
for the Registrant is that hedging limits or caps the potential
profits if cattle or feed prices begin to increase or add additional
costs if cattle or grain prices fall dramatically. The derivatives
used in Registrant's hedging program fluctuate in price as the cash
market for cattle moves up or down. The cattle market is influenced
by total supply, future demand, weather, and import/export activities.
Payments received and paid related to outstanding options contracts
are deferred in prepaid and other current assets and were
approximately $89,000 at September 30, 1998. Futures contracts are
carried off-balance sheet until the contracts are settled. Realized
gains, losses, and costs associated with closed contracts are included
in prepaid and other assets and will be recognized in cost of sales
expense at the time the hedged stocker cattle are sold. At September
30, 1998 there was $83,000 of hedging costs associated with closed
contracts included in prepaid and other assets.
The following table identifies the cattle futures and options contract
amounts outstanding at September 30, 1998. The table also includes
the expiration dates of the contracts, the aggregate weighted average
value of the futures contracts bought or sold and the aggregate cash
paid or received on options, excluding transaction fees. The amounts
in the table are in thousands except for the number of contracts
Cattle Hedging
Activity Commodity
Future/Option
Description
No.
Contracts
Contract
Expiration
Date
Original
Contract
(Bought
Sold
Market
Fair Value
At
Sept 30,1998
(Buy) Sell
Gain (Loss)
At
Sept 30,1998
Cattle futures
sold
20
Dec. 98
$ 539
$ (490)
$ 49
Cattle options
bought
195
Dec. 98
$ (59)
$ 299
$ 240
Cattle options
bought
100
Feb. 99
$ (54)
$ 61
$ 7
Cattle options
sold
55
Oct 98
$ 8
$ (5)
$ 3
Cattle options
sold
100
Feb. 99
$ 32
$ 21
$ 11
Market value is based upon quoted market prices at September 30, 1998.
Actual gains or losses from futures and options contracts will depend
upon cattle prices at expiration date of the contracts. All of the
above futures and options contract are based upon each contracts being
equal to 40,000 pounds.
NOTE E - COMPREHENSIVE INCOME
As of January 1, 1998, Registrant adopted SFAS No.130, Reporting
Comprehensive Income. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on Registrant's
net income or shareholders' equity. SFAS No. 130 requires unrealized
gains or losses on Registrant's available-for-sale securities equity,
to be disclosed as a component of and included in other comprehensive
income.
The components of comprehensive income, net of related tax, for the
nine-month periods ended September 30, 1998 and 1997 are as follows:
1998
1997
Net income, after tax
$ 262
$1,140
Unrealized gain on securities,
after tax
112
109
Comprehensive income, after tax
$ 374
$1,249
NOTE F - CONTINGENCIES
Registrant 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 and Lafarge
Corporation (the previous operator and referred to herein as
"Lafarge") have been ordered to clean up and abate certain hazardous
waste sites on the leased premises. Under existing lease agreements
either National or Lafarge is required to indemnify Registrant for
costs and liabilities incurred in connection with the orders,
depending on when the obligation arises. Due to the financial
strength of National and its parent company, which guaranteed
National's obligations, and the financial strength of Lafarge,
Registrant believes that it is remote there will be a material effect
on Registrant.
For a further discussion refer to Registrant's 1997 Form 10-K, Part I,
Item 3, - "Legal Proceedings". There have been no changes since the
filing of the 1997 Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Results of Operations
This Management's discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements that are
subject to many uncertainties and may turn out not to be accurate.
Many of these forward looking statements are subject to factors beyond
the control of Registrant (such as weather and market forces) and,
with respect to Registrant's future development of its land and other
land transactions, the availability of financing and the ability to
obtain various governmental entitlements. No assurance can be given
that any such projections will turn out to be accurate.
Total revenues, including interest income for the first nine months of
1998, were $32,605,000 compared to $25,465,000 for the first nine
months of 1997. The growth in revenues during 1998 is primarily
attributable to increases in livestock division revenues. This
increase in revenues was partially offset by reduced resource
management division revenues and reduced farming revenues. When
compared to the same period of 1997, livestock revenues grew due to
increases in livestock sales of $4,841,000 and to an increase in
feedlot revenues of $4,112,000. Livestock sales increased due to
approximately 5,000 additional head of cattle being sold during the
first nine months of 1998 than during the same period of 1997. The
increase in cattle sold is the result of Registrant increasing its
cattle herd throughout 1997. Registrant's cattle herd at the end of
the third quarter of 1998 was approximately 37,000 head compared to
approximately 24,000 head at September 30 1997. Feedlot revenues
increased when compared to 1997 due to owning the feedlot for the
entire first quarter of 1998 and to increased average occupancy in the
feedlot during July and August 1998. The feedlot was purchased March
10, 1997. Resource management revenues declined $145,000 in 1998 due
to reduced oil and mineral royalties. Oil and mineral royalties
declined due to lower prices for Kern County crude oil and lower
cement production. The lower oil prices have also caused a decline in
oil production. It is believed that the decrease in oil prices will
continue to have a negative impact on Registrant's revenues throughout
1998. Farming revenues declined $1,608,000 during 1998 due primarily
to the timing of the start of 1998 crop harvests when compared to
1997. The late harvest has caused third quarter and year-to-date
revenues to be reduced $1,862,000 compared to 1997. As of September
30,1997, the grape, almond, and pistachio harvests were completed.
During the third quarter of 1998 50% of the grape harvest was
completed, approximately 75% of the almond harvest was completed, and
the pistachio harvest did not begin until early October. This decline
in revenues is primarily a timing variance and the remainder of the
revenues associated with the 1998 crop will be recognized during the
fourth quarter. Thus far, crop production for all of Registrant's
crops is less than in 1997 due to winter and spring storms during the
pollination and bloom period of the crops. Statewide production
estimates for grapes, almonds, and pistachios are below last year's
levels. This anticipated drop in production is keeping prices for
Registrant's crops higher than might have been expected in a normal
production year. Overall crop revenues for 1998 could be slightly
less than in 1997 due to lower production. Partially offsetting this
difference in crop revenues is an increase in lease payments on new
farmland leases during 1998 of approximately $300,000.
Operating activities during the nine months of 1998 resulted in net
income of $262,000, or $0.02 per share diluted, compared to a net
income of $1,114,000, or $0.09 per share diluted, for the same period
of 1997. The decrease when compared to 1997 is primarily attributable
to an increase in costs within the livestock division which exceeded
the rate of increased revenues, reduced farming revenues, and to
increases in real estate expense and resource management expense.
Cost of sales on cattle increased $5,068,000 when compared to 1997 due
to the sale of additional cattle as described above. Also, during the
first nine months of 1998, Registrant's net margin from the sale of
cattle was reduced due to the dramatic drop in market prices because
of the Asian economic crisis and to the large number of cattle in
feedlots during the first quarter of 1998 and increased feedlot
expenses. Feedlot expenses also increased $4,062,000 when compared to
1997 due to the timing of purchasing the feedlot during 1997 and to
increased feed inventory costs. Real estate expense increased due to
higher staffing costs and fixed water costs. Resource management
expense increased due to an increase in professional service fees
related to the monitoring of activities at the National Cement lease
site.
Total revenues for the third quarter of 1998, including interest
income, were $16,703,000 compared to $16,162,000 for the third quarter
of 1997. The growth in third quarter revenues when compared to 1997
is due primarily to an increase in cattle sales of $600,000 and an
increase in feedlot revenues of $1,314,000 due to higher occupancy
rates. This increase was partially offset by third quarter farming
revenues being $1,200,000 below last year for reasons described above.
During the third quarter of 1998, Registrant had net income of
$1,986,000, or $.16 per share, compared to net income of $1,432,000 or
$.11 per share for the same period of 1997. The increase in net
income compared to the third quarter of 1997 is due to the net
increase in revenues described above and to lower expenses within the
farming division. Farming expenses as compared to 1997 were
$1,597,000 lower due to the timing of the 1998 harvest as explained
above. Partially offsetting these favorable variances was the reduced
margins on cattle sales and an increase in real estate expenses of
$314,000 due to increased professional service fees related to
development projects.
Cattle prices during 1998 continue to be depressed due to the supply
of cattle held in feedlots and to lower export sales during 1998.
Prices are remaining below normal levels due to the continuing impact
of the Asian economic crisis on the beef market and the summer drought
in Texas that caused additional animals to be brought to market
earlier than normal. Of the United States' trading partners, Asia is
the largest importer of U.S. beef, so any continuing decline in
purchasing power within that region could hold down prices within the
beef market.
Registrant continues to be involved in various environmental
proceedings related to leased acreage. For a further discussion,
refer to Note F - Contingencies.
Prices received by Registrant for many of its products are dependent
upon prevailing market conditions and commodity prices. Therefore,
Registrant is unable to accurately predict revenue, just as it cannot
pass on any cost increases caused by general inflation, except to the
extent reflected in market conditions and commodity prices. The
operations of the Registrant are seasonal and results of operations
cannot be predicted based on quarterly results.
Liquidity and Capital Resources
Registrant's cash, cash equivalents and short-term investments totaled
approximately $15,433,000 at September 30, 1998, compared to
$18,165,000 on December 31, 1997, a decrease of 15%. Working capital
as of September 30, 1998 was $21,786,000 compared to $24,518,000 on
December 31,1997. The decrease in working capital during 1998 is due
primarily to capital expenditures, the payment of dividends, and long
term debt payments. The use of short-term credit has grown when
compared to 1997 due to increases in accounts receivable and
inventories as a result of the growth of Registrant's core business
lines, especially livestock. The timing of short-term credit needs
has also changed due to the majority of Registrant's cattle sales and
revenues from crop harvests all coming during the second half of the
year. In past years cattle sales were primarily during the first half
of each year.
Registrant has revolving lines of credit of $13,000,000 that as of
June 30, 1998 had a balance outstanding of $10,612,000 at an interest
rate of 8.25%. Registrant also has a short-term line of credit
outstanding of $5,989,000 from an investment banking firm at an
interest rate of 5.85%. The lines of credit are expected to be paid
down from the proceeds of cattle and crop sales during the fourth
quarter. The revolving lines of credit are used as a short-term cash
management tool.
The accurate forecasting of cash flows by Registrant is made difficult
due to the fact that commodity markets set the prices for the majority
of Registrant's products and the fact that the cost of water changes
significantly from year-to-year as a result of changes in its
availability.
Registrant is currently evaluating the possibility of new farming
developments, continued expansion of the cattle herd, and additional
commercial development along the Interstate 5 corridor. These
potential new projects would be funded from current cash resources,
from additional borrowings, and possibly funds provided by joint
venture partners involved in particular projects.
Registrant has traditionally funded its growth and capital additions
from internally generated funds. Management believes that the
combination of net earnings, short-term investments and borrowing
capacity will be sufficient for its near term operations.
Year 2000 Problem
Many older computer hardware, software and imbedded micro controllers
are designed to read and store dates using only the last two digits of
the year. As a result they cannot correctly interpret dates beyond
the year 2000. If not corrected, this problem could cause processing
errors or computer system failures that materially adversely affect
Registrant.
During early 1997 Registrant initiated a review of all its financial
and accounting systems and implemented a conversion plan involving the
acquisition of new hardware and software that read and store dates in
four digits. This conversion was completed in 1997 at a cost of
approximately $200,000, of which approximately $90,000 was for the
purchase of new hardware and approximately $110,000 was for the
purchase of new software and consulting services relating to the
conversion. These expenditures were capitalized and are being
depreciated over a three year useful life. The funds were provided by
operations, including use of Registrant's short-term line of credit.
Registrant has conducted limited testing of the new system and
believes that it will function effectively when the dates beyond the
year 1999 are processed.
While Registrant believes that its financial and accounting systems
are its principal exposure to the Year 2000 problem, Registrant
intends to undertake a review of the balance of its operations to
determine the extent to which other computer programs and imbedded
micro controllers are utilized. Registrant will then undertake to
modify or replace any such programs or devices in advance of the end
of 1999.
Registrant has begun the process of communicating with all significant
suppliers, customers, financial institutions, utilities, and other
third parties upon which it is dependent to determine the extent to
which Registrant's business operations are vulnerable to the failure
of those parties to correct their own Year 2000 problems. Although
all responses received to date have been satisfactory, Registrant has
not completed this phase of its Year 2000 readiness program.
Registrant does not intend to independently test or verify to which
third parties correct their Year 2000 problems.
Registrant also intends to develop contingency plans to handle its
most likely worst case scenarios with respect to the Year 2000
problem. Registrant intends to complete its determination of worst
case scenarios after it has received and analyzed responses to
substantially all of the inquiries made of third parties. The
contingency plans are expected to include methods of dealing with
third parties that are not dependent upon computer or micro controller
technology. The Registrant estimates that it will complete its
inquiry of third parties and development of contingency plans well in
advance of the end of 1999.
Registrant believes that substantially all of the costs of completing
its efforts to be Year 2000 ready will consist of the compensation
expense allocable to employees who work on the project. Registrant
does not separately track these costs related to the Year 2000 project
but does not expect them to be material.
All statements in this Report regarding the Year 2000 problem involve
forward-looking information as to which there is a great uncertainty.
The actual results of the Registrant's program to deal with the Year
2000 problem could differ materially from what Registrant plans and
anticipates because of the lack of experience of Registrant and others
with problems of this kind, the extent to which computer and other
systems of business and other entities are inter-related and the lack
of control over, and access to information of third parties upon whom
Registrant's business is dependent. The failure of the Registrant to
correctly analyze and anticipate Year 2000 problems in its own
operations or those of third parties or the failure or inability to
develop effective contingency plans could have a material adverse
effect on the Registrant's business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Registrant uses the commodity futures and options markets to protect
the future selling price of cattle and purchase price of feed.
Registrant's goal in hedging its cattle and feed costs is to protect
or create a range of selling prices and feed prices that allow
Registrant to recognize a profit on the sale of cattle once all costs
are deducted. See Note D of Notes to the Consolidated Condensed
Financial Statements for information with respect to market risk
related to derivatives. Estimated gains on future contracts and
options as of September 30,1998 were $310,000 as compared to the
$265,000 estimated loss at December 31,1997. The change is primarily
due to a decline in cattle prices during 1998, which caused future
contracts and options to be repriced which created gains on the
derivative positions. These gains partially offset the decline in
prices received on the sale of cattle.
At September 30,1998 Registrant had cattle inventory of $14.5 million,
farming inventories of $2.6 million, and farming receivables of $1.8
million whose value will ultimately depend on the value of the cattle,
almonds, and grapes at the time of payment or sale. See Note A of
Notes to the Consolidated Condensed Financial Statements for
information regarding the use of estimates in recognizing receivables
and revenues.
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.
Impact of Accounting Change
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Registrant announced during the third quarter that an agreement was
reached with Northrop Grumman Corp. to sell to Northrop the 1,415-acre
Radar Test Facility that Northrop has been leasing from Registrant
since 1980. The sale is scheduled to close during the fourth quarter
of 1998 for a price of $4,250,000. The after tax gain from of the
sale is estimated to be $2,550,000, or $.20 per share diluted.
Registrant is also in negotiations with several telecommunication
companies regarding easements for fiber optic cable. If any of these
transactions are concluded, the payments could be material to net
income. No agreements have been entered into, and there is
substantial uncertainty as to whether any of these transactions will
be concluded.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
3.1 Restated Certificate of Incorporation *
3.2 Bylaws **
27.1 Financial Data Schedule (Edgar),
September 30, 1998
(b) Reports - None
* This document, filed with the Securities Exchange Commission in
Washington D.C. (file number 1-7183) under Item 14 to
Registrant's Annual Report on Form 10-K for year ended December
31, 1987, is incorporated herein by reference.
** This document, filed with the Securities Exchange Commission in
Washington D.C. (file number 1-7183) under Item 14 to
Registrant's Annual Report on Form 10-K for year ended December
31, 1994, is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
TEJON RANCH CO.
(Registrant)
Date BY
Allen E. Lyda
Vice President, Finance
& Treasurer (Principal Financial
Officer
EXHIBIT INDEX
Exhibit No. Exhibit Description
3.1 Restated Certificate of Incorporation *
3.2 By-Laws **
27.1 Financial Data Schedule (Edgar), 19
September 30, 1998
* This document, filed with the Securities Exchange Commission in
Washington D.C. (file number 1-7183) under Item 14 to
Registrant's Annual Report on Form 10-K for year ended December
31, 1987, is incorporated herein by reference.
** This document, filed with the Securities Exchange Commission in
Washington D.C. (file number 1-7183) under Item 14 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1994, is incorporated herein by reference.
- - 1 -
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
For Quarter Ended Commission File Number
September 30, 1998 1-7183
TEJON RANCH CO.
(Exact name of Registrant as specified in its charter)
Delaware 77-0196136
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
P.O. Box 1000, Lebec, California 93243
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code...(805) 248-6774
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Total Shares of Common Stock issued and outstanding on September
30,1998, were 12,691,253.
TEJON RANCH CO.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of 3
Operations for the Three Months and Nine Months
Ended September 30, 1998 and September 30, 1997
Unaudited Consolidated Condensed Balance Sheets 4
as of and September 30, 1998 and December 31, 1997
Unaudited Consolidated Condensed Statements of 5
Cash Flows for the Nine Months Ended
September 30, 1998 and 1997
Notes to Unaudited Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitive and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
PART III EXHIBIT INDEX 20
PART I FINANCIAL INFORMATION
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
1998 1997 1998 1997
Revenues:
Livestock $11,342 $9,779 $24,835 $15,677
Farming 3,784 4,982 4,055 5,663
Resource management 972 706 1,929 2,074
Real Estate 378 331 1,042 1,015
Interest Income 227 364 744 1,036
16,703 16,162 32,605 25,465
Costs and Expenses:
Livestock 9,707 8,818 23,602 14,673
Farming 1,634 3,231 2,255 3,774
Resource Management 390 354 1,276 1,082
Real Estate 874 560 2,437 1,910
Corporate Expense 619 649 1,832 1,693
Interest Expense 276 247 780 510
13,500 13,859 32,182 23,642
Operating Income 3,203 2,303 423 1,823
Income Tax Expense 1,217 871 161 683
Net Income $1,986 1,432 262 1,140
Net Income Per Share, basic $ 0.16 $ 0.11 $ 0.02 $ 0.09
Net Income Per Share, diluted $ 0.16 $ 0.11 $ 0.02 $ 0.09
Cash Dividends Paid $ - $ - $ 0.025 $ 0.025
See Notes to Consolidated Condensed Financial Statements.
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
September 30, 1998 December 31, 1997
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents
$ 1,468
$ 976
Marketable Securities
13,965
17,189
Accounts & Notes Receivable
6,897
8,448
Inventories:
Cattle
14,536
11,737
Farming
2,568
00
Other
422
485
Prepaid Expenses and Other
1,476
1,659
Total Current Assets
41,285
40,494
PROPERTY AND EQUIPMENT-NET
23,985
21,778
OTHER ASSETS
1,786
1,421
TOTAL ASSETS
$ 67,056
$63,693
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILTIES
Trade Accounts Payable
$ 1,943
$ 2,889
Other Accrued Liabilities
0
390
Short-term Borrowings
16,601
11,955
Other Current Liabilities
955
742
Total Current Liabilities
19,499
15,976
LONG-TERM DEBT
3,800
3,925
DEFERRED INCOME TAXES
3,321
3,304
Total Liabilities
26,620
23,205
STOCKHOLDERS' EQUITY
Common Stock
6,346
6,343
Additional Paid-In Capital
382
385
Retained Earnings
33,596
33,651
Marketable Securities-
Unrealized Gains-Net
112
109
Total Stockholders'Equity
40,436
40,488
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$ 67,056
$63,693
See Notes to Consolidated Condensed Financial Statements.
*The Balance Sheet at December 31, 1997 has been derived from the
audited financial statements at that date.
EJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
NINE MONTHS ENDED
September 30
1998 1997
OPERATING ACTIVITIES
Net Income
$
262
$
1,140
Items Not Affecting Cash and Cash
Equivalents:
Depreciation and Amortization
1,478
1,022
Deferred Income Taxes
17
15
Gain on Sale of Investments
(34)
(4)
Changes in Operating Assets and
Liabilities:
Receivables, Inventories and
Other Assets, Net
(3,523)
(11,607)
Current Liabilities, Net
(1,123)
1,126
NET CASH USED IN
OPERATING ACTIVITIES
(2,923)
(8,308)
INVESTING ACTIVITIES
Acquisition of Champion Feeders
(3,874)
Maturities and Sales of Marketable
Securities
5,084
5,336
Funds Invested in Marketable
Securities
(1,821)
(2,192)
Property and Equipment
Expenditures
(3,616)
(2,188)
Change in Breeding Herds
(69)
70
Other
(367)
(33)
NET CASH USED IN
INVESTING ACTIVITIES
(789)
(2,881)
FINANCING ACTIVITIES
Proceeds From Revolving Line
of Credit
15,930
22,188
Payments of Revolving Line
Of Credit
(11,284)
(13,813)
Payments on Long-Term Debt
(125)
-
Borrowings of Long-Term Debt
-
2,500
Cash Dividends Paid
(317)
(317)
NET CASH PROVIDED BY FINANCING
ACTIVITIES
4,204
10,558
INCREASE(DECREASE) IN CASH AND
CASH EQUIVALENTS
492
(631)
Cash and Cash Equivalents at
Beginning of Period
976
693
CASH AND CASH EQUIVALENTS AT
END OF PERIOD
$
1,468
$
62
See Notes to Consolidated Condensed Financial Statements.
TEJON RANCH CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
NOTE A - BASIS OF PRESENTATION
The summarized information furnished by Registrant pursuant to the
instructions to Part I of Form 10-Q is unaudited and reflects all
adjustments which are, in the opinion of Registrant's Management,
necessary for a fair statement of the results of operations for the
interim period. All such adjustments are of a normal recurring nature.
The results of the period reported herein are not indicative of the
results to be expected for the full year due to the seasonal nature of
Registrant's agricultural activities. Historically, the largest
percentage of revenues are recognized during the third and fourth
quarters.
For further information, refer to the Consolidated Financial
Statements and footnotes thereto included in Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated condensed financial
statements include the accounts of Registrant and its wholly-owned
subsidiaries. All intercompany transactions have been eliminated in
consolidation.
Cash Equivalents -- Registrant 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 - Registrant considers those investments not
qualifying as cash equivalents, but which are readily marketable, to
be marketable securities. The Registrant classifies all marketable
securities as available-for-sale. Such securities are stated at fair
value with the unrealized gains (losses), net of tax, reported in a
separate component of stockholders' equity and comprehensive income.
Credit Risk -- Registrant grants credit to customers, principally
large cattle purchasers, feedlot customers, co-ops, wineries, nut
marketing companies, and lessees of Registrant facilities located in
California. Registrant performs periodic credit evaluations of its
customers' financial condition and generally does not require
collateral.
Farm Inventories -- Costs of bringing crops to harvest are capitalized
when incurred. Such costs are expensed when the crops are sold. Farm
inventories held for sale are valued at the lower of cost (first-in,
first-out method) or market.
Cattle Inventories and Breeding Herd -- Cattle raised on the Ranch are
stated at the accumulated cost of developing such animals until they
are sold or are added to the breeding herd, and purchased cattle are
stated at cost plus development costs. All cattle held for sale are
valued at the lower of cost (first-in, first-out method) or market and
are included in the caption inventories. Purchased bulls and cows
included in the breeding herd and used for breeding are depreciated
using the straight-line method over five to seven years.
Commodity Contracts Used to Hedge Price Fluctuations -- Registrant
enters into futures and option contracts to hedge its exposure to
price fluctuations on its stocker cattle and its cattle feed costs.
The goal of Registrant is to protect or create a future price for its
cattle and feed that will provide a profit once the cattle are sold
and all costs are deducted. Realized gains, losses, and costs
associated with closed contracts are included in prepaid assets and
are recognized in cost of sales expense at the time the hedged cattle
are sold or feed is used.
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
Registrant's 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 and equipment is depreciated over a three
year to 10 year life depending on the type of equipment. 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, so 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. Revenue from crops earned during the development stage
are credited against development costs. Depreciation commences when
the crops become commercially productive.
At the time crops are harvested and delivered to buyers and revenues
are estimable, 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
Registrant's fiscal year due to supply and demand fluctuations within
the orchard crop markets. Adjustments for differences between
original estimated and actual revenues received are recorded during
the period in which such amounts become known.
Net Income Per Share -- Effective December 31, 1997, Registrant
adopted SFAS No. 128, "Earnings Per Share" which replaced primary and
fully diluted earnings per share with basic and diluted earnings per
share. Basic net income per share is based upon the weighted average
number of shares of common stock outstanding, which for the three
months ended September 30,1998 and 1997 was 12,691,253 and 12,685,994.
For the nine months ended September 30, 1998 and 1997 the weighted
average common shares outstanding were 12,687,747 and 12,685,994
respectively. Diluted net income per share is based upon the weighted
average number of shares of common stock outstanding and the average
shares outstanding assuming the issuance of common stock for stock
options using the treasury stock method. For the three months ended
September 30, 1998 and 1997 diluted common shares outstanding were
12,731,216 and 12,761,345. For the nine months ended September 30,
1998 and 1997 diluted common shares outstanding were 12,759,562 and
12,714,286.
In March 1992, Registrant's Board of Directors adopted the 1992 Stock
Option Plan providing for the granting of options to purchase a
maximum of 230,000 shares of the Registrant's common stock to
employees, advisors, and consultants of the Registrant. Since the
adoption of the Plan, Registrant has granted options to purchase
179,000 shares at a price equal to fair market value at date of grant.
At September 30, 1998, options to purchase 158,453 shares were
outstanding.
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 Registrant with respect to
800,000 shares of common stock. Since the adoption of the Incentive
Plan, Registrant has granted options to purchase 100,000 shares at a
price equal to the fair market value at date of grant, all of which
are outstanding at September 30, 1998.
Also, on January 26, 1998, the Board of Directors adopted the Non-
Employee Director Stock Incentive Plan. This plan is intended to
enable Registrant to attract, retain, and motivate its non-employee
directors by providing for or increasing the proprietary interests of
such persons by Registrant. The plan provides for making of awards to
non-employee directors with respect to an aggregated 200,000 shares of
common stock. Since the adoption of the plan, Registrant has granted
options under the plan to purchase 21,727 shares at a price equal to
the fair market value at date of grant.
The 1998 Stock Incentive Plan and the Non-Employee Director Stock
Incentive Plan were approved by stockholders at Registrant's Annual
Meeting on May 11, 1998.
Long-Lived Assets -- In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
Registrant 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. SFAS No. 121 had no impact
on Registrant's consolidated financial position and results of
operations in the current year.
Environmental -- 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 Registrant's commitment to a
formal plan of action. No liabilities for environmental costs have
been recorded at September 30, 1998 or 1997.
Use of Estimates -- The financial statements have been prepared in
conformity with generally accepted accounting principles and, as such,
include amounts based on informed estimates and judgments of
management. Actual results could differ from these estimates.
New Accounting Pronouncements -- In February 1998 the FASB issued SFAS
No. 132 "Employers' Disclosures about Pensions and other
Postretirement Benefits" which is effective for fiscal years beginning
after December 15, 1997. SFAS No. 132 revises year-end disclosures
about pension and other postretirement benefit plans. SFAS # 132 will
not have any impact on the financial results or financial condition of
Registrant.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which is effective
for financial years beginning after June 1999. SFAS 133 requires all
derivatives to be recorded at fair value and establishes unique
accounting for fair value hedges, cash flow hedges and foreign
currency net investment hedges. The Company expects to adopt the new
statement effective January 1, 2000. The statement will require the
Registrant to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The Company has not
yet determined what the effect of Statement 133 will be on earnings
and financial position of the Company.
NOTE C - MARKETABLE SECURITIES
Statement of Financial Accounting Standard ("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 Registrant 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
September 30, 1998 and December 31, 1997:
September 30 December 31
1998
1997
Market
Market
Cost
Value
Cost
Value
Marketable securities:
(in thousands)
U.S. Treasury and
agency notes
$ 7,582
$7,724
$ 9,770
$ 9,947
Corporate notes
6,199
6,241
7,237
7,242
$13,781
$13,965
$17,007
$17,189
As of September 30, 1998, the cumulative fair value adjustment is a
$185,000 unrealized gain. The cumulative fair value adjustment to
stockholders' equity, net of a deferred tax of $73,000, is an
unrealized gain of $112,000. Registrant's gross unrealized holding
gains equal $190,000, while gross unrealized holding losses equal
$5,000. On September 30, 1998, the average maturity of U.S. Treasury
and agency securities was 1.2 years and the average maturity corporate
notes was 2 years. Currently, Registrant has no securities with a
remaining term to maturity of greater than five years.
Market value equals quoted market price, if available. If a quoted
market price is not available, market value is estimated using quoted
market prices for similar securities. Registrant's investments in
corporate notes are with companies with a credit rating of A or
better.
NOTE D - COMMODITY CONTRACTS USED TO HEDGE PRICE FLUCTUATIONS
Registrant used commodity derivatives to hedge its exposure to price
fluctuations 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 protect the Registrant
against a further cattle market decline. To help achieve this
objective the Registrant used 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.
Registrant continually monitors any open futures and options contracts
to determine the appropriate hedge based on market movement of the
underlying asset. The options and futures contracts used typically
expire on a quarterly or semi-annual basis and are structured to
expire close to or during the month the stocker cattle and feed are
scheduled to be sold or purchased. The risk associated with hedging
for the Registrant is that hedging limits or caps the potential
profits if cattle or feed prices begin to increase or add additional
costs if cattle or grain prices fall dramatically. The derivatives
used in Registrant's hedging program fluctuate in price as the cash
market for cattle moves up or down. The cattle market is influenced
by total supply, future demand, weather, and import/export activities.
Payments received and paid related to outstanding options contracts
are deferred in prepaid and other current assets and were
approximately $89,000 at September 30, 1998. Futures contracts are
carried off-balance sheet until the contracts are settled. Realized
gains, losses, and costs associated with closed contracts are included
in prepaid and other assets and will be recognized in cost of sales
expense at the time the hedged stocker cattle are sold. At September
30, 1998 there was $83,000 of hedging costs associated with closed
contracts included in prepaid and other assets.
The following table identifies the cattle futures and options contract
amounts outstanding at September 30, 1998. The table also includes
the expiration dates of the contracts, the aggregate weighted average
value of the futures contracts bought or sold and the aggregate cash
paid or received on options, excluding transaction fees. The amounts
in the table are in thousands except for the number of contracts
Cattle Hedging
Activity Commodity
Future/Option
Description
No.
Contracts
Contract
Expiration
Date
Original
Contract
(Bought
Sold
Market
Fair Value
At
Sept 30,1998
(Buy) Sell
Gain (Loss)
At
Sept 30,1998
Cattle futures
sold
20
Dec. 98
$ 539
$ (490)
$ 49
Cattle options
bought
195
Dec. 98
$ (59)
$ 299
$ 240
Cattle options
bought
100
Feb. 99
$ (54)
$ 61
$ 7
Cattle options
sold
55
Oct 98
$ 8
$ (5)
$ 3
Cattle options
sold
100
Feb. 99
$ 32
$ 21
$ 11
Market value is based upon quoted market prices at September 30, 1998.
Actual gains or losses from futures and options contracts will depend
upon cattle prices at expiration date of the contracts. All of the
above futures and options contract are based upon each contracts being
equal to 40,000 pounds.
NOTE E - COMPREHENSIVE INCOME
As of January 1, 1998, Registrant adopted SFAS No.130, Reporting
Comprehensive Income. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on Registrant's
net income or shareholders' equity. SFAS No. 130 requires unrealized
gains or losses on Registrant's available-for-sale securities equity,
to be disclosed as a component of and included in other comprehensive
income.
The components of comprehensive income, net of related tax, for the
nine-month periods ended September 30, 1998 and 1997 are as follows:
1998
1997
Net income, after tax
$ 262
$1,140
Unrealized gain on securities,
after tax
112
109
Comprehensive income, after tax
$ 374
$1,249
NOTE F - CONTINGENCIES
Registrant 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 and Lafarge
Corporation (the previous operator and referred to herein as
"Lafarge") have been ordered to clean up and abate certain hazardous
waste sites on the leased premises. Under existing lease agreements
either National or Lafarge is required to indemnify Registrant for
costs and liabilities incurred in connection with the orders,
depending on when the obligation arises. Due to the financial
strength of National and its parent company, which guaranteed
National's obligations, and the financial strength of Lafarge,
Registrant believes that it is remote there will be a material effect
on Registrant.
For a further discussion refer to Registrant's 1997 Form 10-K, Part I,
Item 3, - "Legal Proceedings". There have been no changes since the
filing of the 1997 Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Results of Operations
This Management's discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements that are
subject to many uncertainties and may turn out not to be accurate.
Many of these forward looking statements are subject to factors beyond
the control of Registrant (such as weather and market forces) and,
with respect to Registrant's future development of its land and other
land transactions, the availability of financing and the ability to
obtain various governmental entitlements. No assurance can be given
that any such projections will turn out to be accurate.
Total revenues, including interest income for the first nine months of
1998, were $32,605,000 compared to $25,465,000 for the first nine
months of 1997. The growth in revenues during 1998 is primarily
attributable to increases in livestock division revenues. This
increase in revenues was partially offset by reduced resource
management division revenues and reduced farming revenues. When
compared to the same period of 1997, livestock revenues grew due to
increases in livestock sales of $4,841,000 and to an increase in
feedlot revenues of $4,112,000. Livestock sales increased due to
approximately 5,000 additional head of cattle being sold during the
first nine months of 1998 than during the same period of 1997. The
increase in cattle sold is the result of Registrant increasing its
cattle herd throughout 1997. Registrant's cattle herd at the end of
the third quarter of 1998 was approximately 37,000 head compared to
approximately 24,000 head at September 30 1997. Feedlot revenues
increased when compared to 1997 due to owning the feedlot for the
entire first quarter of 1998 and to increased average occupancy in the
feedlot during July and August 1998. The feedlot was purchased March
10, 1997. Resource management revenues declined $145,000 in 1998 due
to reduced oil and mineral royalties. Oil and mineral royalties
declined due to lower prices for Kern County crude oil and lower
cement production. The lower oil prices have also caused a decline in
oil production. It is believed that the decrease in oil prices will
continue to have a negative impact on Registrant's revenues throughout
1998. Farming revenues declined $1,608,000 during 1998 due primarily
to the timing of the start of 1998 crop harvests when compared to
1997. The late harvest has caused third quarter and year-to-date
revenues to be reduced $1,862,000 compared to 1997. As of September
30,1997, the grape, almond, and pistachio harvests were completed.
During the third quarter of 1998 50% of the grape harvest was
completed, approximately 75% of the almond harvest was completed, and
the pistachio harvest did not begin until early October. This decline
in revenues is primarily a timing variance and the remainder of the
revenues associated with the 1998 crop will be recognized during the
fourth quarter. Thus far, crop production for all of Registrant's
crops is less than in 1997 due to winter and spring storms during the
pollination and bloom period of the crops. Statewide production
estimates for grapes, almonds, and pistachios are below last year's
levels. This anticipated drop in production is keeping prices for
Registrant's crops higher than might have been expected in a normal
production year. Overall crop revenues for 1998 could be slightly
less than in 1997 due to lower production. Partially offsetting this
difference in crop revenues is an increase in lease payments on new
farmland leases during 1998 of approximately $300,000.
Operating activities during the nine months of 1998 resulted in net
income of $262,000, or $0.02 per share diluted, compared to a net
income of $1,114,000, or $0.09 per share diluted, for the same period
of 1997. The decrease when compared to 1997 is primarily attributable
to an increase in costs within the livestock division which exceeded
the rate of increased revenues, reduced farming revenues, and to
increases in real estate expense and resource management expense.
Cost of sales on cattle increased $5,068,000 when compared to 1997 due
to the sale of additional cattle as described above. Also, during the
first nine months of 1998, Registrant's net margin from the sale of
cattle was reduced due to the dramatic drop in market prices because
of the Asian economic crisis and to the large number of cattle in
feedlots during the first quarter of 1998 and increased feedlot
expenses. Feedlot expenses also increased $4,062,000 when compared to
1997 due to the timing of purchasing the feedlot during 1997 and to
increased feed inventory costs. Real estate expense increased due to
higher staffing costs and fixed water costs. Resource management
expense increased due to an increase in professional service fees
related to the monitoring of activities at the National Cement lease
site.
Total revenues for the third quarter of 1998, including interest
income, were $16,703,000 compared to $16,162,000 for the third quarter
of 1997. The growth in third quarter revenues when compared to 1997
is due primarily to an increase in cattle sales of $600,000 and an
increase in feedlot revenues of $1,314,000 due to higher occupancy
rates. This increase was partially offset by third quarter farming
revenues being $1,200,000 below last year for reasons described above.
During the third quarter of 1998, Registrant had net income of
$1,986,000, or $.16 per share, compared to net income of $1,432,000 or
$.11 per share for the same period of 1997. The increase in net
income compared to the third quarter of 1997 is due to the net
increase in revenues described above and to lower expenses within the
farming division. Farming expenses as compared to 1997 were
$1,597,000 lower due to the timing of the 1998 harvest as explained
above. Partially offsetting these favorable variances was the reduced
margins on cattle sales and an increase in real estate expenses of
$314,000 due to increased professional service fees related to
development projects.
Cattle prices during 1998 continue to be depressed due to the supply
of cattle held in feedlots and to lower export sales during 1998.
Prices are remaining below normal levels due to the continuing impact
of the Asian economic crisis on the beef market and the summer drought
in Texas that caused additional animals to be brought to market
earlier than normal. Of the United States' trading partners, Asia is
the largest importer of U.S. beef, so any continuing decline in
purchasing power within that region could hold down prices within the
beef market.
Registrant continues to be involved in various environmental
proceedings related to leased acreage. For a further discussion,
refer to Note F - Contingencies.
Prices received by Registrant for many of its products are dependent
upon prevailing market conditions and commodity prices. Therefore,
Registrant is unable to accurately predict revenue, just as it cannot
pass on any cost increases caused by general inflation, except to the
extent reflected in market conditions and commodity prices. The
operations of the Registrant are seasonal and results of operations
cannot be predicted based on quarterly results.
Liquidity and Capital Resources
Registrant's cash, cash equivalents and short-term investments totaled
approximately $15,433,000 at September 30, 1998, compared to
$18,165,000 on December 31, 1997, a decrease of 15%. Working capital
as of September 30, 1998 was $21,786,000 compared to $24,518,000 on
December 31,1997. The decrease in working capital during 1998 is due
primarily to capital expenditures, the payment of dividends, and long
term debt payments. The use of short-term credit has grown when
compared to 1997 due to increases in accounts receivable and
inventories as a result of the growth of Registrant's core business
lines, especially livestock. The timing of short-term credit needs
has also changed due to the majority of Registrant's cattle sales and
revenues from crop harvests all coming during the second half of the
year. In past years cattle sales were primarily during the first half
of each year.
Registrant has revolving lines of credit of $13,000,000 that as of
June 30, 1998 had a balance outstanding of $10,612,000 at an interest
rate of 8.25%. Registrant also has a short-term line of credit
outstanding of $5,989,000 from an investment banking firm at an
interest rate of 5.85%. The lines of credit are expected to be paid
down from the proceeds of cattle and crop sales during the fourth
quarter. The revolving lines of credit are used as a short-term cash
management tool.
The accurate forecasting of cash flows by Registrant is made difficult
due to the fact that commodity markets set the prices for the majority
of Registrant's products and the fact that the cost of water changes
significantly from year-to-year as a result of changes in its
availability.
Registrant is currently evaluating the possibility of new farming
developments, continued expansion of the cattle herd, and additional
commercial development along the Interstate 5 corridor. These
potential new projects would be funded from current cash resources,
from additional borrowings, and possibly funds provided by joint
venture partners involved in particular projects.
Registrant has traditionally funded its growth and capital additions
from internally generated funds. Management believes that the
combination of net earnings, short-term investments and borrowing
capacity will be sufficient for its near term operations.
Year 2000 Problem
Many older computer hardware, software and imbedded micro controllers
are designed to read and store dates using only the last two digits of
the year. As a result they cannot correctly interpret dates beyond
the year 2000. If not corrected, this problem could cause processing
errors or computer system failures that materially adversely affect
Registrant.
During early 1997 Registrant initiated a review of all its financial
and accounting systems and implemented a conversion plan involving the
acquisition of new hardware and software that read and store dates in
four digits. This conversion was completed in 1997 at a cost of
approximately $200,000, of which approximately $90,000 was for the
purchase of new hardware and approximately $110,000 was for the
purchase of new software and consulting services relating to the
conversion. These expenditures were capitalized and are being
depreciated over a three year useful life. The funds were provided by
operations, including use of Registrant's short-term line of credit.
Registrant has conducted limited testing of the new system and
believes that it will function effectively when the dates beyond the
year 1999 are processed.
While Registrant believes that its financial and accounting systems
are its principal exposure to the Year 2000 problem, Registrant
intends to undertake a review of the balance of its operations to
determine the extent to which other computer programs and imbedded
micro controllers are utilized. Registrant will then undertake to
modify or replace any such programs or devices in advance of the end
of 1999.
Registrant has begun the process of communicating with all significant
suppliers, customers, financial institutions, utilities, and other
third parties upon which it is dependent to determine the extent to
which Registrant's business operations are vulnerable to the failure
of those parties to correct their own Year 2000 problems. Although
all responses received to date have been satisfactory, Registrant has
not completed this phase of its Year 2000 readiness program.
Registrant does not intend to independently test or verify to which
third parties correct their Year 2000 problems.
Registrant also intends to develop contingency plans to handle its
most likely worst case scenarios with respect to the Year 2000
problem. Registrant intends to complete its determination of worst
case scenarios after it has received and analyzed responses to
substantially all of the inquiries made of third parties. The
contingency plans are expected to include methods of dealing with
third parties that are not dependent upon computer or micro controller
technology. The Registrant estimates that it will complete its
inquiry of third parties and development of contingency plans well in
advance of the end of 1999.
Registrant believes that substantially all of the costs of completing
its efforts to be Year 2000 ready will consist of the compensation
expense allocable to employees who work on the project. Registrant
does not separately track these costs related to the Year 2000 project
but does not expect them to be material.
All statements in this Report regarding the Year 2000 problem involve
forward-looking information as to which there is a great uncertainty.
The actual results of the Registrant's program to deal with the Year
2000 problem could differ materially from what Registrant plans and
anticipates because of the lack of experience of Registrant and others
with problems of this kind, the extent to which computer and other
systems of business and other entities are inter-related and the lack
of control over, and access to information of third parties upon whom
Registrant's business is dependent. The failure of the Registrant to
correctly analyze and anticipate Year 2000 problems in its own
operations or those of third parties or the failure or inability to
develop effective contingency plans could have a material adverse
effect on the Registrant's business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Registrant uses the commodity futures and options markets to protect
the future selling price of cattle and purchase price of feed.
Registrant's goal in hedging its cattle and feed costs is to protect
or create a range of selling prices and feed prices that allow
Registrant to recognize a profit on the sale of cattle once all costs
are deducted. See Note D of Notes to the Consolidated Condensed
Financial Statements for information with respect to market risk
related to derivatives. Estimated gains on future contracts and
options as of September 30,1998 were $310,000 as compared to the
$265,000 estimated loss at December 31,1997. The change is primarily
due to a decline in cattle prices during 1998, which caused future
contracts and options to be repriced which created gains on the
derivative positions. These gains partially offset the decline in
prices received on the sale of cattle.
At September 30,1998 Registrant had cattle inventory of $14.5 million,
farming inventories of $2.6 million, and farming receivables of $1.8
million whose value will ultimately depend on the value of the cattle,
almonds, and grapes at the time of payment or sale. See Note A of
Notes to the Consolidated Condensed Financial Statements for
information regarding the use of estimates in recognizing receivables
and revenues.
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.
Impact of Accounting Change
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Registrant announced during the third quarter that an agreement was
reached with Northrop Grumman Corp. to sell to Northrop the 1,415-acre
Radar Test Facility that Northrop has been leasing from Registrant
since 1980. The sale is scheduled to close during the fourth quarter
of 1998 for a price of $4,250,000. The after tax gain from of the
sale is estimated to be $2,550,000, or $.20 per share diluted.
Registrant is also in negotiations with several telecommunication
companies regarding easements for fiber optic cable. If any of these
transactions are concluded, the payments could be material to net
income. No agreements have been entered into, and there is
substantial uncertainty as to whether any of these transactions will
be concluded.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
3.1 Restated Certificate of Incorporation *
3.2 Bylaws **
27.1 Financial Data Schedule (Edgar),
September 30, 1998
(b) Reports - None
* This document, filed with the Securities Exchange Commission in
Washington D.C. (file number 1-7183) under Item 14 to
Registrant's Annual Report on Form 10-K for year ended December
31, 1987, is incorporated herein by reference.
** This document, filed with the Securities Exchange Commission in
Washington D.C. (file number 1-7183) under Item 14 to
Registrant's Annual Report on Form 10-K for year ended December
31, 1994, is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
TEJON RANCH CO.
(Registrant)
Date BY
Allen E. Lyda
Vice President, Finance
& Treasurer (Principal Financial
Officer
EXHIBIT INDEX
Exhibit No. Exhibit Description
3.1 Restated Certificate of Incorporation *
3.2 By-Laws **
27.1 Financial Data Schedule (Edgar), 19
September 30, 1998
* This document, filed with the Securities Exchange Commission in
Washington D.C. (file number 1-7183) under Item 14 to
Registrant's Annual Report on Form 10-K for year ended December
31, 1987, is incorporated herein by reference.
** This document, filed with the Securities Exchange Commission in
Washington D.C. (file number 1-7183) under Item 14 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1994, is incorporated herein by reference.
- - 1 -
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