<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 March 31, 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
March 31, 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 March 31, 1999, were
12,691,253.
<PAGE>
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
Ended March 31, 1999 and March 31, 1998
Unaudited Consolidated Condensed Balance Sheets 4
As of December 31, 1998 and March 31, 1999
Unaudited Consolidated Condensed Statements of 5
Cash Flows for the Three Months Ended
March 31, 1999 and 1998
Notes to Unaudited Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
PART I FINANCIAL INFORMATION
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------------
1999 1998
------------ --------------
<S> <C> <C>
Revenues:
Livestock $ 9,200 $ 7,111
Farming 276 265
Resource Management 585 348
Real Estate 1,965 324
Interest Income 151 273
------------ --------------
12,177 8,321
Costs and Expenses:
Livestock 9,036 7,334
Farming 365 390
Resource Management 355 336
Real Estate 965 777
Corporate Expense 706 543
Interest Expense 155 202
------------ --------------
11,582 9,582
------------ --------------
Operating Income (Loss) 595 (1,261)
Provision for Income Tax 226 (480)
------------ --------------
Net Income (Loss) $369 $(781)
============ ==============
Net Income (Loss) Per Share, basic $ 0.03 $ (0.06)
Net Income (Loss) Per Share, diluted $ 0.03 $ (0.06)
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
1
<PAGE>
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998*
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 253 $ 743
Cash in Escrow --- 4,200
Marketable Securities 11,706 13,294
Accounts & Notes Receivable 6,340 7,359
Inventories:
Cattle 13,932 16,577
Farming 1,871 326
Other 413 513
Prepaid Expenses and Other 2,044 996
---------------- ----------------
Total Current Assets 36,559 44,008
PROPERTY AND EQUIPMENT NET 39,074 27,553
OTHER ASSETS 1,734 1,453
---------------- ----------------
TOTAL ASSETS 77,367 73,014
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Accounts Payable $ 4,396 $ 3,235
Other Accrued Liabilities 121 502
Short-term Borrowings 18,445 20,249
Other Current Liabilities 563 254
---------------- ----------------
Total Current Liabilities 23,525 24,240
LONG-TERM DEBT 6,675 1,875
DEFERRED INCOME TAXES 4,115 4,194
---------------- ----------------
Total Liabilities 34,315 30,309
STOCKHOLDERS' EQUITY
Common Stock 6,346 6,346
Additional Paid-In Capital 382 382
Retained Earnings 36,525 36,156
Defined Benefit Plan Funding
Adjustment, Net of Taxes (216) (216)
Unrealized Gain on Available for
Sale Securities, Net of Taxes 15 37
---------------- ----------------
Total Stockholders' Equity 43,052 42,705
---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 77,367 $ 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
<PAGE>
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
----------------------------------------------
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
1999 1998
------------ ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $ 369 $ (781)
Items Not Affecting Cash:
Depreciation and Amortization 542 470
Deferred Income Taxes (64) 45
Changes in Operating Assets and Liabilities:
Receivables, Inventories and other Assets, Net 1,171 (941)
Current liabilities, Net 1,089 (1,459)
------------ ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,107 (2,666)
INVESTING ACTIVITIES
Cash in Escrow 4,200 --
Maturities and Sales of Marketable Securities 2,709 1,316
Funds Invested in Marketable Securities (1,158) (271)
Property and Equipment Expenditures (12,063) (1,250)
Change in Breeding Herds (260) (26)
Other (21) (317)
------------ ----------
NET CASH USED IN INVESTING ACTIVITIES (6,593) (548)
------------ ----------
FINANCING ACTIVITIES
Proceeds From Revolving Line of Credit 5,698 5,253
Payments of Revolving Line of Credit (7,502) (2,434)
Borrowing of Long-term Debt 4,800 ---
------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,996 2,819
------------ ----------
DECREASE IN CASH AND CASH EQUIVALENTS (490) (395)
Cash and Cash Equivalents at Beginning of Year 743 976
------------ ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 253 $ 581
============ ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
<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 --- --- (72) --- (72)
$49,000
--------
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 369 369
Changes in Unrealized
Losses on Available-For-Sale
Securities, net of taxes of $15 (22) (22)
---------
Comprehensive Income 347
---------------------------------------------------------------------------
Balance, March 31, 1999 $6,346 $382 $(201) $36,525 $43,052
===========================================================================
</TABLE>
4
<PAGE>
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
----------------------------------------------
(Unaudited)
March 31, 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 during the year, which at March 31, 1999 was
12,691,253 and at March 31, 1998 was 12,685,994. Diluted net income per share
is based upon the weighted average number of shares of common stock outstanding,
and the weighted average number of shares outstanding assuming the issuance of
common stock for stock options using the treasury stock method (12,712,655 at
March 31, 1999 and 12,758,599 at March 31, 1998). The weighted average of
dilutive stock options were 21,402 in 1999 and 72,605 in 1998.
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 December 31, 1998
and March 31, 1999:
<TABLE>
<CAPTION>
March 31, 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 $ 6,050 $ 6,099 $ 6,905 $ 6,961
Corporate notes 5,634 5,607 6,328 6,333
-----------------------------------------------------------------
$11,684 $11,706 $13,233 $13,294
====================================================================
</TABLE>
As of March 31, 1999, the fair value adjustment is a $22,000 unrealized gain.
The cumulative fair value adjustment to stockholders' equity, net of a deferred
tax of $9,000, is an unrealized gain of $13,000. Registrant's gross unrealized
holding gains equal $143,000, while gross unrealized holding losses equal
$121,000. On March 31, 1999, the average maturity of U.S. Treasury and agency
securities was one year and corporate notes was 1.6 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 March 31, 1999 there were $26,000
of losses 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 March 31, 1999 (in thousands, except number of contracts):
<TABLE>
<CAPTION>
Cattle Future / Option No. Original Contract Estimated Fair Value
Description Contracts (Bought) Sold (Bought) Sold
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cattle futures bought,
40,000 lbs. per contract 15 $(398) $388
Cattle futures bought,
50,000 lbs. per contract 40 (1,513) 1,503
Cattle options sold,
40,000 lbs. per contract 30 10 0
</TABLE>
Estimated fair value at settlement is based upon quoted market prices at March
31, 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 to cleanup and abate an old
industrial waste landfill site 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 both 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 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 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
7
<PAGE>
requirements can be designated as hedges and the special accounting of SFAS 133
applied. Unrealized gains and losses on derivatives not designated as hedges are
reported in the statement of income.
NOTE G - PAYMENT OF DIVIDEND
- ----------------------------
On March 23, 1999, the Board of Directors voted to declare a cash dividend of
two and one-half cents ($0.025) per share. The dividend will apply to
stockholders of record as of the close of business on May 14, 1999, with payment
to be made on June 18, 1999.
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 that
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 material 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 regards 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 quarter of 1999 were
$12,177,000 compared to $8,321,000 for the first quarter of 1998. The growth in
revenues during the first quarter of 1999 is primarily attributable to increases
in livestock division revenues of $2,089,000 and real estate division revenues
of $1,641,000. The increase in real estate revenues when compared to 1998 is
due to the sale of a fiber optic communications easement for $1,750,000. When
compared to the same period of 1998, livestock division revenues grew due to
increases in livestock sales of $2,333,000, which were partially offset by
reduced feedlot sales due to lower occupancy totals during the first quarter of
1999. Livestock sales grew due to an increase in the number of cattle being
sold during the first quarter of 1999 when compared to the first quarter of
1998. The increase in cattle sold during the first quarter of 1998 is the
result of Registrant delaying the sale of cattle in 1998 due to low prices and
selling the cattle in 1999.
Operating activities during the first quarter of 1999 resulted in net income of
$369,000, or $0.03 per share diluted, compared to a net loss of $781,000, or
$0.06 per share diluted, for the same period of 1998. The increase in earnings
when compared to 1998 is primarily attributable to the increase in revenues as
described above. The increase in revenues was partially offset by increased
costs of sales on cattle sold and to higher real estate division and general and
administrative costs. Cost of sales on cattle increased approximately
$1,000,000 when compared to 1998 due to the sale of additional cattle as
described above.
Cattle prices during 1999 strengthened when compared to 1998 due to lower
supplies of cattle in feedlots during the first quarter of 1999. The rally in
cattle prices may not continue as cattle feeders
8
<PAGE>
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 continuing
impact of the Asian economic crisis on the beef market. Of the United States'
trading partners, Asia is the largest importer of U.S. beef, so any reduction in
purchasing power within that region can hold down prices within the beef market.
It is a little early in the crop year for Registrant to make production
estimates for its grapes and nuts, however, California statewide estimates for
almonds and grapes are estimating crop yields that may be greater than 1998
crop. If crop yields are higher in 1999 than 1998 crop prices may decline.
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 $11,959,000 at March 31, 1999, compared to $16,643,000 on March
31, 1998 a decrease of 28%. Working capital as of March 31, 1999 was
$13,034,000 compared to $19,768,000 on December 31, 1998. The decrease in
working capital during the first quarter of 1999 is due primarily to capital
expenditures and the purchase of revenue producing properties in Phoenix,
Arizona. On February 26, 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. The buildings were built in 1996 and
are 100% leased to three tenants under triple net leases expiring in 2002 to
2005. 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. The buildings were acquired to
complete a tax deferred exchange of real property in which $4,500,000 in
proceeds from the sale of land in December 1998 were used together with
$4,800,000 borrowed from First Union 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 the inventories attributed 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 $13,600,000 that as of March 31,
1999 had a balance outstanding of $13,600,000 at an interest rate of 7.75%.
Registrant also has a short-term line of credit outstanding of $3,783,000 from
an investment banking firm at an interest rate of 5.35%. Registrant also
maintains a short-term line of credit for its feedlot operations for $4,000,000.
The outstanding balance at March 31, 1999 was $812,000 with the interest rate
approximating the bank's prime lending rate of 7.75%. 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.
9
<PAGE>
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 and from its excess borrowing capacity. 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.
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 communicated with and is 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 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 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.
10
<PAGE>
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 the company 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 rate 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 while 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 grade 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 large 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.
11
<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 tables
presents Registrant's debt obligations, principle cash flows and related
weighted-average interest rates by expected maturity dates as of March 31, 1999
and December 1998.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At March 31, 1999
(Dollars in thousands)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fair
There Value
1999 2000 2001 2002 2003 -after Total 12/31/99
- -----------------------------------------------------------------------------------------------
Assets:
Marketable
Securities 4,102 3,092 2,690 1,521 279 --- 11,684 11,706
Average
Interest Rate 6.92% 5.93% 5.81% 6.40% 5.68% 6.29%
Liabilities:
Short-term
Debt 18,445 --- --- --- --- --- 18,445 18,445
Average
Interest Rate 7.19% --- --- --- --- --- 7.19%
Long-term
Debt 388 490 490 490 1,365 3,452 6,675 6,675
Average
Interest Rate 7.88% 7.88% 7.88% 7.88% 7.88% 7.88% 7.88%
==============================================================================
</TABLE>
12
<PAGE>
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Fair
There Value
1999 2000 2001 2002 2003 -after Total 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 regards 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 receivables and certain anticipated
transactions in its Livestock and Farming Divisions. Commodities such as corn
and cattle are purchased and sold at market prices that are subject to
volatility. In order to manage the risk of market price fluctuations,
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 the company 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. Losses on future contracts
and options as of March 31, 1999 were $26,000 as compared to gains on future
contracts and options as of December 31, 1998 of $485,000. The loss thus far in
1999 is due to an increase in cattle prices.
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 March 31, 1999 approximately 75% of the
cattle held in inventory or 20,506
13
<PAGE>
head of cattle were not protected by futures and options for price movement.
This compares to 18,257 head of cattle at March 31, 1998. The 1999 number of
head of cattle equates to approximately 20.5 million pounds of beef. For each
$.10 per pound changed in price, Registrant has a potential exposure of
$2,050,000 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 $.68 per pound and the current market price is
$.66 per pound.
With respect to accounts receivables, the amount at risk relates to almonds and
pistachios. These receivables are recorded at estimates of the prices that
ultimately will be received for the crops. The final price will not be known
until the third or fourth quarter of 1999. Of the accounts receivables
outstanding at March 31, 1999, $1,127,000 is at risk to changing prices of
almonds and $122,000 is at risk to changing prices of pistachios. The
comparable amounts of accounts receivables at December 31, 1998 were $1,236,000
and $122,000, respectively. The price estimated for recording accounts
receivables at March 31, 1999 was $1.85 per pound for almonds. For every $.25
change in the price of almonds Registrant's receivable for almonds increases or
decreases by $350,000. Although the final price of almonds (and therefore the
extent of the risk) is not presently known, over the last three years the final
prices have ranged from $1.54 to $2.26. With respect to pistachios, the price
estimated for recording the receivable was $1.17 per pound, each $.15 change in
the price increases or decreased the receivable by $120,000 and the range of
final prices over the last three years has been $.92 to $1.17.
The following tables identify the future contract amounts and options contract
costs outstanding at March 31, 1999 and December 1998.
<TABLE>
<CAPTION>
Original Estimated
March 31, 1999 No. Contract/Cost Fair Value
Commodity Future / Option Description Contracts (Bought) Sold (Bought) Sold
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cattle futures bought, 40,000 lbs. per contract 15 $ (398) $ 388
Cattle futures bought, 50,000 lbs. per contract 40 $(1,513) $1,503
Cattle options sold, 40,000 lbs. per contract 30 $ 10 $ 0
</TABLE>
<TABLE>
<CAPTION>
Original Estimated
December 31, 1998 No. Contract/Cost Fair Value
Commodity Future / Option Description Contracts (Bought) Sold (Bought) Sold
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cattle futures bought 50,000 lbs. per contract 20 $(710,000) $694,000
Cattle options bought, 40,000 lbs. per contract 130 $ (72,000) $ 89,000
Cattle options sold 40,000 lbs. per contract 130 $ 42,000 $ (6,000)
</TABLE>
The March 31, 1999 futures contracts and options expire between August 1999 and
October 1999. Estimated fair value at settlement is based upon quoted market
prices at March 31, 1999.
14
<PAGE>
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
- --------------------------
Effective April 30, 1999 Registrant entered into an option with Enron Capital &
Trade Resources Corp., a wholly-owned subsidiary of Enron Corporation, and an
affiliated company (collectively "Enron") to lease to Enron up to 35 acres of
undeveloped land at the southern end of the San Joaquin Valley for the
construction and operation of a power plant having a capacity anticipated to be
between 750 and 1,000 megawatts of electricity. The project would be powered by
natural gas turbines and would be subject to environmental requirements. The
transaction is subject to a number of contingencies, and Enron has the right to
terminate the arrangement unilaterally at any time before the lease becomes
effective.
The amounts payable to Registrant under the arrangement are subject to a number
of contingencies, but
15
<PAGE>
scheduled payments would aggregate $1,450,000 in 1999 if the arrangement is not
terminated by Enron. Thereafter, $100,000 would be payable monthly until rental
under the lease commences or the payments reach an agreed maximum amount,
although such payments could be significantly higher and could be paid earlier
under certain circumstances. If Enron exercises its right to terminate the
arrangement, Registrant would be entitled to retain the payments made to the
date of termination, but Enron would have no obligation to make any further
payments. Payments under the lease, which include both rent and compensation for
significant easement rights over other Registrant land, would be $2,600,000 per
year (subject to certain adjustments which could be material), would commence
when the plant becomes operational or earlier under certain circumstances and
would be subject to escalation based upon changes in a designated consumer price
index. Registrant would also be entitled to receive additional rent after
commercial operation of the plant, based upon production output at the plant and
energy prices. The term of the lease would be 25 years from the date the plant
becomes operational (or earlier under certain circumstances), and Enron would
have three five-year options to extend the term.
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),
March 31, 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 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.
16
<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)
MAY 14, 1999 BY /s/ Allen E. Lyda
- ------------------------- ------------------------------
DATE Allen E. Lyda
Vice President, Finance
& Treasurer
17
<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>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 253
<SECURITIES> 11,706
<RECEIVABLES> 6,340
<ALLOWANCES> 0
<INVENTORY> 16,216
<CURRENT-ASSETS> 36,559
<PP&E> 57,295
<DEPRECIATION> (18,221)
<TOTAL-ASSETS> 77,367
<CURRENT-LIABILITIES> 23,525
<BONDS> 0
<COMMON> 6,346
0
0
<OTHER-SE> 36,706
<TOTAL-LIABILITY-AND-EQUITY> 77,367
<SALES> 12,177
<TOTAL-REVENUES> 12,177
<CGS> 10,721
<TOTAL-COSTS> 10,721
<OTHER-EXPENSES> 706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155
<INCOME-PRETAX> 595
<INCOME-TAX> 226
<INCOME-CONTINUING> 369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 369
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
