<PAGE>
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, 1999
------------------
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, 1999 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...(661) 248-3000
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
---
Total Shares of Common Stock issued and outstanding on September 30, 1999, were
12,695,540.
<PAGE>
TEJON RANCH CO.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Operations 1
for the Three Months and Nine Months
Ended September 30, 1999 and September 30, 1998
Unaudited Consolidated Balance Sheets 2
As of December 31, 1998 and September 30, 1999
Unaudited Consolidated Statements of Cash 3
Flows for the Three Months and Nine Months
Ended September 30, 1999 and 1998
Consolidated Condensed Statements of Stockholders' 4
Equity
Notes to Unaudited Consolidated Financial 5
Statements
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
<PAGE>
PART I FINANCIAL INFORMATION
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Livestock $ 12,576 $ 11,342 $ 25,957 $ 24,835
Farming 4,495 3,784 4,778 4,055
Resource Management 1,131 1,077 2,875 2,246
Real Estate 810 273 3,961 725
Interest Income 150 227 481 744
------------ ------------ ------------ ------------
19,162 16,703 38,052 32,605
Costs and Expenses:
Livestock 11,691 9,707 24,905 23,602
Farming 2,690 1,634 3,390 2,255
Resource Management 581 395 1,478 1,286
Real Estate 1,253 869 3,754 2,427
Corporate Expense 1,158 619 2,646 1,832
Interest Expense 488 276 909 780
------------ ------------ ------------ ------------
17,861 13,500 37,082 32,182
------------ ------------ ------------ ------------
Operating Profit 1,301 3,203 970 423
Income Tax Expense 495 1,217 370 161
------------ ------------ ------------ ------------
Net Income $ 806 $ 1,986 $ 600 $ 262
============ ============ ============ ============
Net Income Per Share, diluted $ 0.06 $ 0.16 $ 0.05 $ 0.02
Cash Dividends Paid $ --- $ --- $ 0.025 $ 0.025
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
1
<PAGE>
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998*
------------------ ------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 554 $ 743
Cash in Escrow --- 4,200
Marketable Securities 10,197 13,294
Accounts & Notes Receivable 11,392 7,359
Inventories:
Cattle 19,283 16,577
Farming 2,247 326
Other 429 513
Prepaid Expenses and Other 1,270 996
------------------ ------------------
Total Current Assets 45,372 44,008
PROPERTY AND EQUIPMENT - NET 48,197 27,553
OTHER ASSETS 842 1,453
------------------ ------------------
TOTAL ASSETS $ 94,411 $ 73,014
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Accounts Payable $ 7,894 $ 3,235
Other Accrued Liabilities 177 502
Short-term Borrowings 32,254 20,249
Other Current Liabilities 660 254
------------------ ------------------
Total Current Liabilities 40,985 24,240
LONG-TERM DEBT 6,524 1,875
DEFERRED INCOME TAXES 4,044 4,194
------------------ ------------------
Total Liabilities 51,553 30,309
STOCKHOLDERS' EQUITY
Common Stock 6,348 6,346
Additional Paid-In Capital 380 382
Retained Earnings 36,439 36,156
Accumulated Other Comprehensive Income (309) (179)
------------------ ------------------
Total Stockholders' Equity 42,858 42,705
------------------ ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 94,411 $ 73,014
================== ==================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
* The Balance Sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
2
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TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 600 $ 262
Items Not Affecting Cash:
Depreciation and Amortization 1,829 1,478
Deferred Income Taxes (150) 17
Gain on Sale of Investments --- (34)
Changes in Operating Assets and Liabilities:
Receivables, Inventories and other Assets, Net (8,807) (3,523)
Current liabilities, Net 4,741 (1,123)
-------- --------
NET CASH USED IN
OPERATING ACTIVITIES (1,787) (2,923)
INVESTING ACTIVITIES
Cash in Escrow 4,200 ---
Maturities of Marketable Securities 9,514 5,084
Funds Invested in Marketable Securities (6,547) (1,821)
Property and Equipment Expenditures (22,473) (3,616)
Change in Breeding Herds (110) (69)
Other 677 (367)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (14,739) (789)
-------- --------
FINANCING ACTIVITIES
Proceeds From Revolving Line of Credit 26,996 15,930
Payments of Revolving Line of Credit (14,991) (11,284)
Payments of Long-term Debt (151) (125)
Borrowing of Long-term Debt 4,800 ---
Cash Dividend Paid (317) (317)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,337 4,204
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (189) 492
Cash and Cash Equivalents at Beginning of Year 743 976
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 554 $ 1,468
======== ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Comprehensive Retained
Stock Capital Income Earnings Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1998 $ 6,343 $ 385 $ 109 $ 33,651 $ 40,488
Net Income --- --- --- 3,139 3,139
Defined Benefit Plan
Funding Adjustments,
Net of taxes of $133,000 --- --- (216) --- (216)
Changes in Unrealized
Losses on Available-For-Sale
Securities, net of taxes of $49,000 --- --- (72) --- (72)
--------
Comprehensive Income --- --- --- --- 2,851
--------
Exercise of Stock Options 3 (3) --- --- ---
Cash Dividends Paid -
$.05 per share --- --- --- (634) (634)
----------------------------------------------------------------------
Balance, December 31, 1998 $ 6,346 $ 382 $ (179) $ 36,156 $ 42,705
Net Income First Nine Months 1999 600 600
Changes in Unrealized
Losses on Available-For-Sale
Securities, net of taxes of $87 (130) (130)
--------
Comprehensive Loss 470
--------
Exercise of Stock Options 2 (2) --- --- ---
Cash Dividends Paid -
$.025 per share --- --- --- (317) (317)
----------------------------------------------------------------------
Balance, September 30, 1999 $ 6,348 $ 380 $ (309) $ 36,439 $ 42,858
======================================================================
</TABLE>
4
<PAGE>
TEJON RANCH CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
September 30, 1999
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 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 percentages of revenues are
recognized during the third and fourth quarters.
For further information, refer to the Consolidated Financial Statements and
footnotes thereto included in Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
NOTE B - NET INCOME 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, 1999
and 1998 was 12,695,540 and 12,691,253, respectively. For the nine months ended
September 30, 1999 and 1998 the weighted average common shares outstanding were
12,694,515 and 12,687,747 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 pursuant to
stock options using the treasury stock method. For the three months ended
September 30, 1999 and 1998 diluted common shares outstanding were 12,870,046
and 12,731,216. For the nine months ended September 30, 1999 and 1998 diluted
common shares outstanding were 12,790,386 and 12,759,562.
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.
5
<PAGE>
The following is a summary of available-for-sale securities at September 1999
and December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Estimated Estimated
Cost Fair Value Cost Fair Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Marketable Securities:
(in thousands)
U.S. Treasury and agency notes $ 5,604 $ 5,501 $ 6,905 $ 6,961
Corporate notes 4,749 4,696 6,328 6,333
-------------------------------------------------------
$10,353 $10,197 $13,233 $13,294
=======================================================
</TABLE>
Based on available-for-sale securities as of September 30, 1999, the fair value
adjustment is a $156,000 unrealized loss. The cumulative fair value adjustment
to stockholders' equity to reflect the change in fair value from December 31,
1998, net of a deferred tax of $87,000, is an unrealized loss of $130,000.
Registrant's gross unrealized holding gains at September 30, 1999 equal $9,000,
while gross unrealized holding losses equal $165,000. On September 30, 1999,
the average maturity of U.S. Treasury and agency securities was 1.5 years and
corporate notes was 1.8 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 MANAGE RISK
- ------------------------------------------------
Registrant uses commodity derivatives to manage 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 disastrous cattle market decline
or feed cost increase. 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 risk exposure 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
dramatically or can add additional costs if cattle or grain prices fall
dramatically.
Realized gains, losses, and costs associated with both open and closed contracts
are recognized in costs of sales expense. At September 30, 1999 there were
$120,000 of gains associated with futures and option contracts included in cost
of sales expense.
6
<PAGE>
The following table identifies the cattle futures contract amounts outstanding
at September 30, 1999 (in thousands, except number of contracts) and sets forth
the purchase or sale price of the cattle under the contracts, the estimated fair
market value of the cattle at September 30, 1999 and the estimated gain or loss
on the contracts as of that date:
<TABLE>
<CAPTION>
Cattle Future / Option No. Original Contract Estimated Estimated
Description Contracts (Bought) Sold Fair Value Gain (Loss)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cattle futures sold,
40,000 lbs. per contract 659 $17,887 $18,314 $(427)
Cattle futures bought,
50,000 lbs. per contract 15 $ (579) $ 608 $ 29
</TABLE>
The September 30, 1999 futures contracts and options expire between October 1999
and April 2000. Estimated fair value at settlement is based upon quoted market
prices at September 30, 1999.
NOTE E - 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, Lafarge Corporation (the parent company of the
previous operator) and Registrant have been ordered by the California Regional
Water Quality Control Board to clean up and abate an old industrial waste
landfill site, a spill of chlorinated hydrocarbons, diesel fuel which leaked
from a pipeline, and the cement kiln dust piles on the leased premises. Lafarge
has undertaken the investigation and remediation of landfills and has completed
the removal of contaminated soils above the groundwater level from the
landfills. Lafarge has also completed a substantial amount of the site
investigation with respect to chlorinated hydrocarbons. The plume of
chlorinated hydrocarbons covers an extensive area and has migrated off of the
leased premises in one direction. Lafarge is undertaking additional
investigation work as directed by the Regional Water Board and is developing a
feasibility study evaluating different remediation options. The cleanup 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 off-site. Under these orders, Registrant 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, both companies are
required to indemnify Registrant for any costs and liabilities incurred in
connection with the cleanup order. Due to the reported financial strength of
National and Lafarge, Registrant believes that a material effect on the company
is remote at this time.
For further discussion refer to Registrant's 1998 Form 10-K, Part I, Item 3, -
"Legal Proceedings". There have been no significant changes since the filing of
the 1998 Form 10-K.
NOTE F - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
Effective October 1, 1998 Registrant adopted the provisions of Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities (SFAS 133)". SFAS 133
7
<PAGE>
standardizes accounting for all derivative contracts and requires that all
derivative contracts be reported in the consolidated balance sheet at fair
value. Derivatives meeting certain specific requirements can be designated as
hedges and the special accounting of SFAS 133 applied. Registrant has elected to
recognize all derivative gains and losses whether or not the derivatives are
classified as hedges in the statement of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
Results on Operations
- ---------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements that are subject to many
uncertainties that could cause the actual results to differ materially from
those in the forward-looking statements. The forward-looking statements include
comments on future cattle prices and demand, crop yields and demands, the effect
of pending environmental proceedings, the source and adequacy of Registrant's
future cash resources and financial market and commodity risks. These forward-
looking statements are subject to factors beyond the control of Registrant (such
as weather and market forces), the outcome of pending administrative proceedings
and the fulfillment of mitigation obligations of third parties with regard to
environmental matters and the availability of financing. No assurance can be
given that any such forward-looking statements will turn out to be accurate.
Total revenues, including interest income for the first nine months of 1999 were
$38,052,000 compared to $32,605,000 for the same period in 1998. The growth in
revenues during the first nine months of 1999 is primarily attributable to
increases in real estate division revenues of $3,236,000, livestock division
revenues of $1,122,000, farming division revenues of $723,000, and resource
management division revenues of $946,000. The increase in real estate revenues
when compared to 1998 is primarily attributed to the sale of a fiber optic
communications easement for $1,750,000. Additionally, Registrant entered into
an option with Enron Capital & Trade Resources Corp. (see discussion in Item 5)
for a land lease for the construction and operation of a power plant. Revenues
received pursuant to this agreement in 1999 total $900,000 as of September 30,
1999. Finally, Registrant purchased four industrial and commercial buildings in
Phoenix, Arizona and Rancho Santa Fe, California (see discussion in the
"Liquidity and Capital Resources" below), which increased revenue approximately
$637,000 in 1999.
When compared to the same period in 1998, livestock revenues grew due to
increases in livestock sales of $4,188,000. This increase is due to
approximately 12,700 additional head of cattle being sold during the first nine
months of 1999 than during the same period of 1998. The increase in the cattle
sold is the result of Registrant increasing its cattle herd throughout 1997 and
1998. Registrant's cattle herd at the end of the third quarter of 1999 was
approximately 44,000 head compared to approximately 37,000 and 24,000 head at
September 30, 1998 and 1997, respectively. The increase in livestock sales was
offset by a decrease in feedlot revenues of $2,713,000 as of September 30, 1999
when compared to the same period in 1998. This decrease in revenues is due to a
decrease in the average occupancy in the feedlot throughout the summer months
and to a decrease in feed prices of approximately $13.00 per ton as of September
30, 1999 when compared to the same period in 1998.
8
<PAGE>
Farming revenues increased when compared to 1998 due primarily to the timing of
the 1999 crop harvest and the type of crops being harvested. As of September
30, 1999, Registrant had completed the crop harvest for pistachios, three
varieties of grapes, and was 50% completed for almonds and walnuts. During 1998
only 50% of the grape harvest was completed, approximately 75% of the almond
harvest was completed and the pistachio and walnut harvests had not started.
The timing of the harvest and the types of crop being harvested led to income
from crops being $872,000 greater than in 1998. This increase in crop revenue
was partially offset by lower farm rental revenues.
The increase in resource management division revenues of is due primarily to an
increase in hunting program sales and increased royalties from sand and rock
aggregate production and cement production.
Operating activities during the first nine months of 1999 resulted in net income
of $600,000, or $0.05 per share diluted, compared to a net income of $262,000,
or $0.02 per share diluted, for the same period of 1998. Higher livestock
division, real estate division, farming division, and general and administrative
costs partially offset the increase in revenues described above. The increase
in livestock costs was a result of the additional head of cattle sold as
discussed above. This increase in livestock cost of sales was partially offset
by a decrease in expenses at the feedlot attributable to lower occupancy and
cost of feed per ton in 1999 when compared to 1998. The increases in real
estate expenses were attributable to additional costs related to the planning
and development of Registrant's land holding. These costs included increases in
professional service fees, staffing costs, and advertising costs. In addition
to these real estate operating costs, Registrant recognized its portion (60%) of
the start-up, training, and pre-opening costs related to the June 30, 1999
opening of the Petro Travel Plaza, which were approximately $677,000. The
increase in farming costs is primarily related to the timing of the 1999 crop
harvest. As crops are harvested and revenues recognized, inventory costs
associated with that crop are also recognized. General and administrative costs
were also higher primarily due to higher professional service fees and staffing
costs.
Cattle prices during 1999 have continued to strengthen when compared to 1998 due
primarily to increases in demand for beef products and the anticipation of lower
future supplies of cattle. This improvement in cattle prices may slow as cattle
feeders have placed additional cattle on feed in response to the improved
market. However, prices are still below what they may have been due to the
impact of the Asian economic crises on the beef market, but this is improving as
the economy in Asia improves. Registrant is still continuing to harvest grapes,
almonds, and walnuts, which means that 1999 production numbers are currently not
finalized. The Almond Board of California is estimating that the 1999 statewide
almond harvest will be the largest in history. Due to these estimates the USDA
has approved a federal marketing order placing in reserve approximately 22% of
the 1999 harvest. Registrant will not be able to recognize any revenues on the
almonds in reserve until the Almond Board releases them for sale. In response
to the anticipated large crop and the almond reserve, almond prices have
declined to approximately $.80 per pound. For comparison purposes almond prices
over the last three years have ranged from $1.30 to $2.26 per pound. Based on
the anticipated price for almonds, 1999 crop revenues are expected to be less
than 1998 crop revenues. An actual projection cannot be made at this time due
to final production numbers not being known.
Total revenues for the third quarter of 1999, including interest income, were
$19,162,000 compared to $16,703,000 for the third quarter of 1998. The growth
in revenue is primarily attributable to increases in livestock division revenues
of $1,234,000, farming division revenues of $711,000, and real estate division
revenues of $537,000. The increase in livestock revenues is due to an increase
in cattle sales. Approximately 7,800 additional head of cattle were sold during
the third quarter than during the same period
9
<PAGE>
of 1998. This increase in livestock revenue was partially offset by a decrease
in feedlot revenues due to lower occupancy and feed prices as discussed above.
Farming revenues as compared to 1998 were $711,000 higher due to the timing of
the 1999 harvest as explained above. The increase in real estate revenues is
primarily due to the revenue received from Enron and the income producing
properties in Phoenix and Rancho Santa Fe, all as discussed above.
During the third quarter of 1999 Registrant had net income of $806,000, or $0.06
per share, compared to net income of $1,986,000, or $0.16 per share for the same
period of 1998. The decrease in net income compared to the third quarter of
1999 is due to the net increase in revenues described above being more than
offset by an increase in livestock, farming, real estate, and general and
administrative expenses. Livestock expenses were higher due to an increase in
cost of sales as a result of the timing of the sale of cattle as discussed
above. Farming expenses as compared to 1998 were $1,056,000 higher due to the
timing of the 1999 harvest as explained above. Real estate expenses were higher
due to Registrant's recognition of the start-up costs, training, and pre-opening
costs of the Petro Travel Plaza as discussed above. This unfavorable variance
in real estate costs was offset by a decrease in overall real estate operating
expenses. Real estate expenses decreased due to more expenses being capitalized
during the third quarter of 1999 when compared to the same period of 1998
because more real estate projects were in the development stage of their cycle.
General and administrative costs were higher due to higher professional service
fees and staffing costs.
Registrant continues to be involved in various environmental proceedings related
to leased acreage. For a further discussion, refer to Note E - 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 $10,751,000 at September 30, 1999, compared to $18,237,000 on
December 31, 1998 a decrease of 41%. Working capital as of September 30, 1999
was $4,387,000 compared to $19,768,000 on December 31, 1998. The decrease in
working capital during the first nine months of 1999 is due primarily to capital
expenditures related to real estate infrastructure and farming developments and
the purchase of revenue producing properties in Phoenix, Arizona and Rancho
Santa Fe, California. Also working capital decreased due to an increase in the
use of short-term debt financing.
During February 1999 Registrant completed the purchase of three industrial and
commercial buildings in Phoenix, Arizona having aggregate rentable square feet
of 101,482. The Phoenix property is a cluster of three buildings in a master
planned industrial park located near Sky Harbor International Airport and
adjacent to the Interstate 10 Freeway. Annualized rentals under the leases
currently aggregate $845,000. The leases provide for built in rental
escalations which approximate current inflation factors based on the CPI index.
During April 1999, Registrant completed the purchase of a building in Rancho
Santa Fe, California for $1,250,000. Annualized rents under lease in the
building currently total $126,000. The buildings were acquired to complete a
tax deferred exchange of real property in which $6,000,000 in
10
<PAGE>
proceeds from the sale of land in December 1998 and easements in 1999 were used
together with $4,800,000 borrowed from a bank, with the loan secured by the
property acquired. The use of short-term credit has grown when compared to 1998
due to the funding of inventories and receivables attributable to the growth of
Registrant's core business lines and to the short-term financing of real estate
infrastructure costs associated with Registrant's development of an industrial
complex in the Southern San Joaquin Valley.
Registrant has a revolving line of credit of $28,000,000 that as of September
30, 1999 had a balance outstanding of $28,000,000 at an interest rate of 7.50%.
Registrant also maintains a short-term line of credit for its feedlot operations
of $6,500,000. The outstanding balance at September 30, 1999 was $4,000,000
with the interest rate approximating the bank's prime lending rate of 7.50%.
The outstanding line of credit balances will change throughout the year based on
the timing of proceeds from cattle and crop sales. 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, additional commercial development along
the Interstate 5 corridor, and residential real estate development. 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 and from borrowing. Management believes that the
combination of net earnings, short-term investments and borrowing capacity will
be sufficient for its near term operations.
Impact of Year 2000
- -------------------
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 1999. 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 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.
Registrant has communicated 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
the failure of those parties to correct their own Year 2000 problems. Although
all responses received to date have been satisfactory, Registrant is still in
the process of verifying the information in the responses received.
11
<PAGE>
Based on systems tests, discussions with Registrant's primary business partners,
and the timing of business activities during the first quarter of 2000
Registrant believes that any year 2000 problem it will encounter will be
immaterial to its overall operations. Registrant is however, in the process of
finalizing contingency plans to handle its most likely worst case scenario with
respect to potential year 2000 problems. As an example Registrant has procedures
in place to inspect and manually activate non-financial systems that are
operated off of timers or computers such as crop irrigation systems if a systems
problem were to occur.
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.
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 Registrant due to adverse changes in
financial or commodity market prices or rates. Registrant is exposed to market
risk in the areas of interest rates and commodity prices.
Financial Market Risks
- ----------------------
Registrant is exposed to financial market risks, including changes to interest
rates and credit risk related to marketable securities, interest rates related
to its own outstanding indebtedness and trade receivables.
The primary objective of Registrant's investment activities is to preserve
principal while at the same time maximizing yields consistent with prudently
managing risk. To achieve this objective and limit interest rate exposure,
Registrant limits its investments to securities with a maturity of less than
five years to limit interest rate exposure and with an investment rating of A or
better from Moody's or Standard and Poors to minimize risk. In addition, market
value changes due to interest rate changes are reduced because a portion of the
portfolio has interest rates that float and are reset on a quarterly basis. See
Note C, Marketable Securities.
Registrant is exposed to interest rate exposure on its short-term working
capital line of credit and the long-term debt currently outstanding. The short-
term line of credit interest rate is tied to the lending bank's prime interest
rate and changes when that rate changes. The long-term debt has a fixed interest
rate, and the fair value of the long-term debt will change based on interest
rate movements in the market. Registrant typically does not attempt to reduce or
eliminate its exposure on this debt through the use of any financial instrument
derivatives. Registrant manages its interest rate exposure through negotiation
of terms.
12
<PAGE>
Registrant's credit and market risk related to its inventories and receivables
ultimately depends on the value of the cattle, almonds, grapes, pistachios, and
walnuts at the time of payment or sale. Based on historical experience with
current customers and periodic credit evaluations of its customers' financial
condition, Registrant believes its credit risk is minimal. Market risk is
discussed below in commodity price exposure.
The following table provides information about Registrant's financial
instruments that are sensitive to changes in interest rates. The table presents
Registrant's marketable securities, debt obligations, principal cash flows and
related weighted-average interest rates by expected maturity dates as of
September 30, 1999 and December 1998.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At September 30, 1999
(Dollars in thousands)
----------------------------------------------------------------------------------------
Total Fair
--------
There Weighted Value
1999 2000 2001 2002 2003 -after Average 06/30/99
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Marketable
Securities $ 730 $ 2,725 $ 2,708 $ 1,605 $ 2,585 --- $ 10,353 $ 10,197
Average
Interest Rate 7.95% 5.85% 5.69% 6.06% 5.88% 6.00%
Liabilities:
Short-term
Debt $ 32,254 --- --- --- --- --- $ 32,254 $ 32,254
Average
Interest Rate 7.509% --- --- --- --- --- 7.50%
Long-term
Debt $ 168 $ 490 $ 490 $ 490 $ 1,365 $ 3,521 $ 6,524 $ 6,524
Average
Interest Rate 7.88% 7.88% 7.88% 7.88% 7.88% 7.88% 7.88%
========================================================================================
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 1998
(Dollars in thousands)
----------------------------------------------------------------------------------------
Total Fair
There Weighted Value
1999 2000 2001 2002 2003 -after Average 12/31/98
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Marketable
Securities $ 5,885 $ 2,939 $ 2,662 $ 1,747 --- --- $ 13,233 $ 13,294
Average
Interest Rate 6.92% 5.93% 5.81% 6.40% 6.41%
Liabilities:
Short-term
Debt $ 19,999 --- --- --- --- --- $ 19,999 $ 19,999
Average
Interest Rate 7.38% --- --- --- --- --- 7.38%
Long-term
Debt $ 250 $ 250 $ 250 $ 250 $ 1,125 --- $ 2,125 $ 2,125
Average
Interest Rate 8.57% 8.57% 8.57% 8.57% 8.57% --- 8.57%
========================================================================================
</TABLE>
In comparison to the prior year Registrant's risks in regard to fluctuations in
interest rates has increased overall due to the growth in the use of short-term
lines of credit that fluctuate with the bank's prime lending rate.
Commodity Price Exposure
- ------------------------
Registrant has exposure to adverse price fluctuations associated with certain
inventories, gross margins, accounts receivable and certain anticipated
transactions in its Livestock and Farming Divisions. Commodities such as feed
and cattle are purchased and sold at market prices that are subject to
volatility. In order to manage the risk of market price fluctuations, Registrant
enters into various exchange-traded futures and option contracts. Registrant
closely monitors and manages it 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.
Registrant's goal in managing 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 or minimize a loss on the sale of cattle once all costs are deducted. See
Note D, Commodity Contracts Used to Manage Risk. Gains on futures contracts and
options as of September 30, 1999 were $120,000 as compared to gains on future
contracts and options as of December 31, 1998 of $485,000. The gains thus far in
1999 are due to the volatility of the cattle prices during the second quarter of
1999.
Inventories consist primarily of cattle for sale, and price fluctuations are
managed with futures and options contracts. See table below for contracts
outstanding at quarter-end. Registrant is at risk with respect to changes in
market prices with respect to cattle held for sale that are not protected by
futures and options contracts. At September 30, 1999 approximately 26% of the
cattle held in inventory or 11,454 head of cattle were not protected by futures
and options for price movement. This compares to 19,980 head of cattle at
14
<PAGE>
September 30, 1998. The 1999 number of head of cattle equates to approximately
11.5 million pounds of beef. For each $.10 per pound change in price, Registrant
has a potential exposure or benefit of $1,150,000 in future value. Although the
prices 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 $.79 per pound
and the current market price is $.79 per pound.
With respect to accounts receivable at September 30, 1999, the amount at risk
relates to almonds, pistachios, and walnuts. These receivables are recorded at
estimates of the prices that ultimately will be received for the crops. The
final price for the nut crops will not be known until the third or fourth
quarter of 2000, with the exception of the price for walnuts, which will be paid
by January 2000. Of the accounts receivable outstanding at September 30, 1999
$942,000 is at risk to changing almond prices, $768,000 is at risk to changing
pistachio prices, and $300,000 is at risk to changing walnut prices. The
comparable amounts of accounts receivable at December 31, 1998 were $1,236,000
for almonds and $122,000 for pistachios. The prices estimated for recording the
1999 crop accounts receivable at September 30, 1999 were $.80 per pound for
almonds, $1.35 per pound for pistachios, and $.45 per pound for walnuts. Based
on 1999 almond production to date, for every $.10 change in the price of almonds
Registrant's receivable for almonds increases or decreases by $144,000. Although
the final price of almonds and the final production figures (and therefore the
extent of the risk) is not presently known, over the last three years the final
prices have ranged from $1.30 to $2.26. For pistachios the price estimated for
recording the receivable was $1.35 per pound based on preliminary estimates from
the buyer, each $.10 change in the price increases or decreases the receivable
by $57,000 and the range of final prices over the last three years has been $.92
to $1.17 per pound. With respect to walnuts, the price estimated for recording
the receivable was $.45 per pound, each $.10 change in the price increases or
decreases the receivable by $67,000 and the range of prices over the last three
years has been $.45 to $.65 per pound.
The following tables identify the future contract amounts and option contract
costs outstanding at September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Original Estimated
September 30, 1999 No. Contract/Cost Estimated Gain
Commodity Future / Option Description Contracts (Bought) Sold Fair Value (Loss)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cattle futures sold, 40,000 lbs. per contract 659 $ 17,887 $ 18,314 $ (427)
Cattle futures bought, 50,000 lbs. per contract 15 $ (579) $ 608 $ 29
</TABLE>
<TABLE>
<CAPTION>
Original Estimated
December 31, 1998 No. Contract/Cost Estimated Gain
Commodity Future / Option Description Contracts (Bought) Sold Fair Value (Loss)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cattle futures bought 50,000 lbs. per contract 20 $ (710,000) $ 694,000 $ (16)
Cattle options bought, 40,000 lbs. per contract 130 $ (72,000) $ 89,000 $ 17
Cattle options sold 40,000 lbs. per contract 130 $ 42,000 $ (6,000) $ 36
</TABLE>
15
<PAGE>
The September 30, 1999 futures contracts and options expire between October 1999
and April 2000. Estimated fair value at settlement is based upon quoted market
prices at September 30, 1999.
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
- ------------------------------------------------------------
None
Item 5. Other Information
- --------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits -
3.1 Restated Certificate of Incorporation *
3.2 Bylaws **
27.1 Financial Data Schedule (Edgar),
September 30, 1999
(b) Reports - on Form 8-K
On March 12, 1999, Registrant filed a Current Report on Form 8-K (Item 2),
announcing the purchase of commercial industrial buildings in Phoenix,
Arizona.
On May 11, 1999, Registrant filed a Current Report on Form 8-K/A (Item 2),
amending the Current Report on Form 8-K filed on March 12, 1999 which
reported the acquisition of buildings. This filing
16
<PAGE>
includes the Statement of Revenue and Certain Expenses for the properties
purchased and pro forma financial statements and related notes.
* 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.
17
<PAGE>
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)
November 12, 1999 /s/ ALLEN E. LYDA
__________________________ BY __________________________________________
DATE Allen E. Lyda
Vice President, Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet, income statement, and footnotes and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 554
<SECURITIES> 10,197
<RECEIVABLES> 11,392
<ALLOWANCES> 0
<INVENTORY> 21,959
<CURRENT-ASSETS> 45,372
<PP&E> 67,524
<DEPRECIATION> (19,327)
<TOTAL-ASSETS> 94,411
<CURRENT-LIABILITIES> 40,985
<BONDS> 0
6,348
0
<COMMON> 0
<OTHER-SE> 36,510
<TOTAL-LIABILITY-AND-EQUITY> 94,411
<SALES> 38,052
<TOTAL-REVENUES> 38,052
<CGS> 33,527
<TOTAL-COSTS> 33,527
<OTHER-EXPENSES> 2,646
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 909
<INCOME-PRETAX> 970
<INCOME-TAX> 370
<INCOME-CONTINUING> 600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 600
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
