<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE 33 ACT OF 1934
For the fiscal year ended December 31, 1999
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OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-7183
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TEJON RANCH CO.
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(Exact name of Registrant as specified in its Charter)
Delaware 77-0196136
- ---------------------------- ----------------------------
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
P.O. Box 1000, Lebec, California 93243
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(Address of principal executive office)
Registrant's telephone number, including area code: (661) 248-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- --------------------------- -------------------------
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
----
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
----- -----
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of Registrant's Common Stock, $.50 par value per
share, held by persons other than those who may be deemed to be affiliates of
Registrant on March 23, 2000 was $296,796,559 based on the closing price on that
date on the New York Stock Exchange.
The number of Registrant's outstanding shares of Common Stock on
March 23, 2000 was 12,697,179 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 2, 2000 relating to the directors and executive officers of
Registrant are incorporated by reference into Part III.
Total Pages - 71
Exhibit Index - Page 34
<PAGE>
PART I
ITEM 1. BUSINESS
Throughout Item 1 - "Business," Item 2 - "Properties," Item 3 - "Legal
Proceedings," Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," Registrant has made forward-looking
statements regarding future developments in the cattle industry, in Registrant's
strategic alliances and the almond industry, Registrant's plans for future
plantings of permanent crops, future yields, prices and water availability for
Registrant's crops, future prices, production and demand for oil and other
minerals, future development of Registrant's property, future revenue and income
of Registrant's jointly-owned travel plaza, potential losses to Registrant as a
result of pending environmental proceedings and market value risks associated
with investment and risk management activities and with respect to inventory,
accounts receivable and Registrant's own outstanding indebtedness. These
forward-looking statements are subject to factors beyond the control of
Registrant (such as weather, market and economic forces) and, with respect to
Registrant's future development of its land, the availability of financing and
the ability to obtain various governmental entitlements. No assurance can be
given that the actual future results will not differ materially from those in
the forward-looking statements.
Tejon Ranch Co. ("Registrant") is a diversified, growth oriented land
development and agribusiness company whose purpose is to increase the value of
its real estate and resource holdings and maximize its market value for its
shareholders.
Over the last three years, Registrant has been implementing a new strategic plan
that sets out a broad strategy for enhancing shareholder value. Specifically,
the plan focuses on planning and development and making more productive use of
Registrant's largest and most valuable asset, its 270,000-acre land holding, and
increasing revenue and net income in its three core businesses of real estate,
livestock, and farming.
Registrant intends to continue focussing on increasing revenues and net income
by continuing to develop its significant land holding and by expanding its core
business lines. Currently, Registrant is working to take maximum advantage of
existing resources and market conditions as well as to anticipate and create
future market trends and demand. Part of this effort includes evaluating
Registrant's land and water resources to ensure that the resources essential for
growing the core businesses are available when and where needed. In the future,
Registrant will continue to assess the feasibility of entering into
complementary new related lines of business and refining or reconfiguring
current core businesses to take advantage of opportunities presented and
changing market conditions. In implementing the new strategic plan, Registrant
has:
. Increased revenues from operations over the last three years,
. Purchased a feedlot in Texas to further enhance and expand livestock
operations,
. Increased the cattle herd by over 20,000 head, in order to expand market
opportunities,
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. Sold $4.25 million of non-strategic real estate assets, using the proceeds to
purchase commercial and industrial buildings for current and future revenue
sources,
. Developed the Tejon Industrial Complex, with the first occupant the 51-acre
Petro Travel Plaza opening for business in 1999,
. Sold rights to Qwest Communications for routing of Qwest's fiber optic
network through Tejon Ranch,
. Signed an agreement with Enron North America Corp. for the development of a
power plant by Enron on Registrant's lands,
. Signed a joint venture agreement with three well-known home builders for the
creation of a 4,000-acre masterplanned community on Registrant's land in Los
Angeles County,
. Began trading on the New York Stock Exchange on July 28, 1999.
. Purchased an almond hulling and processing plant to enhance and expand
Registrant's farming operations.
The following table shows the revenues, operating profits and identifiable
assets of each of Registrant's industry segments for the last three years:
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
---------------------------------------------
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
Revenues
- --------
<S> <C> <C> <C>
Livestock Operations $38,940 $30,077 $21,798
Farming 7,433 8,671 9,173
Resource Management 3,726 2,597 2,696
Real Estate 5,178 5,742 3,403
------- ------- -------
Segment Revenues 55,277 47,087 37,070
Interest Income 639 1,001 1,159
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Total Revenues $55,916 $48,088 $38,229
======= ======= =======
Segment Profits and Income Before Income Taxes
- ----------------------------------------------
Livestock Operations $ 1,861 $ 1,094 $ 1,499
Farming 1,148 2,269 2,627
Resource Management 1,845 961 1,328
Real Estate 473 2,943 1,003
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Segment Profits (1) 5,327 7,267 6,457
Interest Income 639 1,001 1,159
Corporate Expense (3,198) (2,581) (2,346)
Interest Expense (863) (1,065) (747)
------- ------- -------
Income Before Income Taxes $ 1,905 $ 4,622 $ 4,523
Identifiable Assets by Segment (2)
- ----------------------------------
Livestock Operations $27,661 $29,101 $24,215
Farming 13,574 12,890 10,176
Resource Management 1,492 1,338 363
Real Estate 30,483 8,726 5,933
Corporate 18,309 20,959 23,006
------- ------- -------
Total Assets $91,519 $73,014 $63,693
======= ======= =======
</TABLE>
(1) Segment Profits are revenues less operating expenses, excluding interest
income and expense and corporate expenses.
(2) Identifiable assets by segment include both assets directly identified with
those operations and an allocable share of jointly-used assets. Corporate
assets consist primarily of cash and cash equivalents, refundable and
deferred income taxes and buildings and improvements.
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Real Estate Operations
- ----------------------
Registrant's real estate operations consist of four principal activities: land
planning and entitlement, real estate development, commercial sales and leasing,
and income portfolio management. Registrant's 270,000-acre land holding offers
significant real estate development opportunities. Registrant's land is
characterized by diverse topography, scenic vistas, and is conveniently served
by three inter-regional highways. Interstate 5, one of the nation's most
heavily traveled freeways, brings in excess of 50,000 vehicles a day through
Registrant's lands, which includes 16 miles of Interstate 5 frontage and the
commercial land surrounding four interchanges. The strategic plan for real
estate focuses on development opportunities along the Interstate 5 corridor as
well as laying the necessary groundwork for moving forward with potential
destination uses, including residential and resort projects.
During 1999 development activity was principally focused on the 351-acre Tejon
Industrial Complex at the Interstate 5/Laval Road interchange. The activity at
the industrial complex included the completion of infrastructure construction
for the first phase of the complex as well as infrastructure construction for
Petro Travel Plaza, a joint venture with Petro Stopping Centers located on
approximately 51 acres in the complex. Petro Travel Plaza opened at the end of
June and has seen increasing sales and traffic through the site each month it
has been open for business. Interest in developing industrial, warehouse, and
distribution facilities on the remaining 300 acres is being expressed by
developers and end users. Registrant has begun marketing building sites at the
industrial complex to these groups. Registrant will be in direct competition
for customers with other industrial sites in Southern California including the
inland empire region of Southern California, and Central California.
Registrant continues to engage in land planning activities and feasibility
analysis related to future real estate uses of its lands. The Grapevine Center
has been identified as an area that would be good for destination attraction
projects, and the Laval Road interchange has been identified for highway
commercial and industrial uses. Evaluations and planning of residential
development planning are also being conducted with various development groups to
determine the potential of a ranch estate residential program and or resort
development in the central canyon areas near Tejon Lake. Since the prospects
and timing of residential and recreational projects are dependent on market
demand, the timing of any such residential and/or recreational development is
still uncertain. Registrant is evaluating the environmental and regulatory
factors that might affect its ability to secure value-enhancing entitlements for
potential land development of this type. The results of this evaluation will
help Registrant in formulating long-range entitlement strategies.
During 1999, Registrant signed a letter of intent with three well-known
homebuilders for a joint project to develop a 4,000-acre masterplanned community
on Registrant's land in Los Angeles County. In March 2000, Registrant formed a
limited liability company with the homebuilders (Lewis Investment Company, LLC,
and Pardee Construction Company, both of which signed the letter of intent, and
Standard Pacific Corporation, which replaced a company that had pulled out of
the project) to pursue this project. The homebuilders and Registrant have
invested significant funds to perform planning and feasibility work and to
prepare applications for entitlements for the project, which they hope to file
with Los Angeles County by the end of 2000. The timing of
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any extensive development of Registrant's property and its nature and extent
will also be dependent upon the availability of adequate development capital and
the obtaining of appropriate governmental permits and approvals.
Registrant leases to various tenants lands which are used for a full-service
truck stop facility, a truck wash, three auto service stations with convenience
stores, four full-service restaurants, five fast-food operations, a motel, two
antique shops, and a United States Postal Service facility. In addition,
several microwave repeater locations and radio and cellular transmitters relay
sites are also leased. Within the commercial sales and leasing area, Registrant
is in direct competition with other landowners which have highway interchange
locations along Interstate 5 in the southern San Joaquin Valley.
Livestock Operations
Registrant conducts a beef cattle operation upon those portions of its ranch
which are not devoted to farming, commercial and real estate development, or
other purposes. The beef cattle activities include both commercial cow-calf
operations (the maintenance of a cattle herd whose offspring are used to
replenish the herd, with excess numbers being sold commercially) and the use of
stocker cattle (cattle purchased at light weights for growing on available range
forage before being resold). At December 31, 1999, Registrant's cattle herd
numbered approximately 45,000 head of which approximately 40,128 head were
stockers and the remainder were in the breeding herd. At December 31, 1998,
Registrant's cattle herd numbered approximately 36,700 head of which
approximately 31,499 head were stockers and the remainder were breeding herd.
Registrant's cattle are either sold to stocker and feedlot operators or fed at
Champion Feeders, Registrant's feedlot in Texas, and then sold to packers. As
to the sale of cattle, Registrant is in direct competition with other commercial
cattle operations throughout the United States. The prices received for
Registrant's cattle are primarily dependent upon the commodity market's
perception of supply and demand at the time cattle are sold. In an attempt to
reduce the market risks of its livestock activities, Registrant usually hedges
future sales of cattle in the futures and options markets or obtains fixed
prices for future delivery through contracts with cattle buyers, feedlots, or
packing houses. Registrant purchased Champion Feeders, a feedlot in Texas, in
1997 in order to further vertically integrate its beef operations. Champion
Feedlot custom feeds cattle for outside customers as well as Registrants' own
cattle prior to sale to packers. The feedlot is in direct competition for
customers with feedlots in west Texas and Kansas.
During the last few years, a number of companies in the cattle industry began to
explore in depth various forms of strategic alliances within the production,
feeding and meat-packing segments of the cattle business. Registrant believes
there will be dramatic shifts in the form of cattle marketing in the United
States. To be successful in the cattle industry in the future Registrant
believes that the producers of beef must become more consumer-oriented. To
achieve this goal Registrant began a program in 1997 to vertically integrate its
cattle operations. Registrant believes that vertical integration will allow
Registrant to control the quality of the product through the production process
to the end users. To vertically integrate, Registrant must control the feeding
of cattle and create strategic alliances with other producers to supply beef
products to end users. To begin the process of vertical integration within the
beef industry, Registrant purchased the assets of a cattle feedlot and entered
into a strategic alliance (Ranchers
5
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Renaissance) with several other cattle producers to sell high quality source-
verified beef to end users such as restaurants and grocery stores. The strategic
alliance with other cattle producers has grown to a size that will support a
source-verified branded beef product. Registrant expects the Ranchers
Renaissance strategic alliance to have a branded beef product commercially
available during late summer of 2000. A branded product will help provide
Registrant with additional returns on cattle placed into the program.
Cattle prices strengthened during the last half of 1999 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 in
the first quarter of 2000 as cattle feeders have placed additional cattle on
feed in response to the improved market and the early drought conditions in
certain areas of the southwestern United States. Registrant believes that
overall cattle prices should continue to improve during 2000 due to increases in
demand for product and to increased export demand because of the improving
economies in Asia.
Farming Operations
In the San Joaquin Valley, Registrant farms permanent crops including the
following acreage: wine grapes-1,555, almonds-1,985, pistachios-738 and
walnuts-295. Included in these acreage figures are 300 acres of almonds which
were planted in 1998 and 300 acres of almonds which were planted early in 1999.
These new almond developments will have their first harvestable crops in 2001
and 2002. Registrant's objective in planting new trees is to offset the normal
yield decline as its older plantings reach productive maturity and to improve
revenues from farming operations in future years. As certain of Registrant's
permanent plantings age to the point of declining yields, Registrant will
evaluate the advisability of replanting such crops or replacing them with
different plantings, depending upon market conditions. Registrant also leases
approximately 1,000 acres for the farming of row crops.
Registrant sells its farm commodities to several commercial buyers. As a
producer of these commodities, Registrant is in direct competition with other
producers within the United States and throughout the world. Prices received by
Registrant for its commodities are determined by total industry production and
demand levels. Registrant attempts to improve price margins by producing high
quality crops through cultural practices and by obtaining better prices through
marketing arrangements with handlers. During January 2000, Registrant purchased
an almond hulling, shelling and processing plant in order to control the quality
of its almond product through the processing phase and to reduce future
processing costs. Registrant will also hull, shell and process outside grower
almonds through its plant.
In 1999 almonds produced were primarily sold to two domestic commercial buyers,
with one of the buyers receiving approximately 52% of the crop.
The California almond industry is subject to a federal marketing order which
empowers the Secretary of Agriculture to set the percentage of almonds which can
be sold during any crop year and the percentage of almonds to be held in reserve
in order to assist in the orderly marketing of the crop. During 1999, the State
of California had a record almond crop that led the Almond Board of California
to request an almond marketing reserve that was approved by the Secretary
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of Agriculture. The marketing reserve allows Registrant to sell only 77% of the
1999 crop. The remaining 23% is held in inventory and cannot be sold until the
marketing order is lifted. Historically, marketing orders have been lifted in
the following year after the crop for that year is determined. During 1998 and
1997 the saleable percentage was set at 100% of the total almond crop.
In 1999, the majority of Registrant's pistachios were sold to one customer.
Registrant's 1999 walnuts were sold to two customers, each receiving
approximately 50% of the crop. During 1999 the majority of wine grapes were
sold to one winery.
Overall crop production from Registrant's farming operation was greater than
1998 levels primarily due to a significant increase in almond production.
Registrant's almond production increased 75% in 1999 due to excellent growing
weather and to the growth in production from new almond plantings. Prices for
almonds, however, decreased approximately 52% when compared to year-end 1998
levels. The increase in production could not offset the decline in prices, and
combined with the almond marketing order, revenues declined approximately 39%
when compared to 1998.
Grape yields and revenues for 1999 were comparable to 1998 levels with no
significant differences. Pistachio production fell approximately 30% due to the
alternate bearing cycle of pistachios. Due to the decline in production,
pistachio revenues fell approximately 20% as improved prices helped to partially
offset the reduced production. Walnut production increased approximately 28%
when compared to 1998, and revenues from walnuts increased 15% when compared to
1998.
Overall 1999 crop revenues were less than expected due mainly to the decrease in
almond prices and the almond marketing order. See "Management's Discussion and
Analysis of Financial Statements and Results of Operations". Demand for
Registrant's crops is expected to remain good throughout 2000. Management
expects further price pressure on both nuts and grapes as new production within
California comes online. Nut and grape crop markets are particularly sensitive
to the size of each year's world crop. Large crops in California and abroad can
rapidly depress prices.
1999 was an excellent water year with 100% of Registrant's water entitlement
being available from the State Water Project. In addition, there was sufficient
runoff from local mountain streams allowing Registrant to capture this water in
reservoirs and utilize it to offset some of the higher priced State Water
Project water. Because of the abundant water, Registrant was able to bank
(percolate into underground acquifers) some of its excess supply for future use.
The State Department of Water Resources has announced its 2000 water supply at
100% of full entitlement. Combined with other water supplies the water district
will be able to make available to its farmers, this level of supply will cover
all the Registrant's farming needs. If in any year the entire entitlement is
not available, Registrant will have to rely on ground water sources, water
transfers from the Tejon-Castac Water District and water banking arrangements
that Registrant has entered into. Water from these sources may be more
expensive because of pumping costs and transfer costs.
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See discussion of water contract entitlement and long-term outlook for water
supply under Part I, Item 2, "Properties - Farmland".
Resource Management
The Resource Management Division is made up of Registrant's oil and mineral
leases, game management program, film location activities, and the quarter horse
breeding program. These are all lines of business which are based on the use of
ranch lands and resources but are not of the size to warrant separate divisions
such as livestock, farming and real estate.
Registrant leases certain portions of its land to oil companies for the
exploration for, and production of, oil and gas but does not itself engage in
any such exploratory or extractive activities.
As of December 31, 1999, approximately 9,645 acres were committed to producing
oil and gas leases from which the operators produced an average of approximately
142,000 barrels of oil, 54,682 MCF of dry gas, and 3,000 gallons of wet gas per
day during 1999. Registrant's share of production based upon its average
royalty rate during the last three years has been 49, 32, and 49 barrels of oil
per day for 1999, 1998, and 1997, respectively. Approximately 405 producing oil
wells were located on the leased land as of December 31, 1999. No additional
wells were shut-in during 1999. Shut-in wells occur as oil revenues received by
the operators lag behind the cost of keeping the wells in production. Low
prices in the oil market during 1998 and early 1999 have been a disincentive to
exploratory leasing and drilling on Registrant's lands. No new wells were
drilled on Registrant's lands during 1999.
Prices for Kern County's heavy crude oil improved throughout 1999, hitting
approximately $20.00 per barrel during December 1999. The price per barrel of
oil produced from Registrant's lands was $21.90 at year-end 1999 due to its
lighter grade. These improving prices increased Registrant's royalties from the
producing wells. Registrant believes that revenue from oil and gas will be flat
during 2000 due to the improved prices being somewhat offset by lower
production. Registrant attempts to require lessees to honor their lease
obligations to legally and properly abandon non-producing wells in an
environmentally sound manner.
Estimates of oil and gas reserves on Registrant's properties are unknown to
Registrant. Registrant does not make such estimates and does not file reports
as to reserve estimates with governmental agencies. Registrant's lessees do not
make information concerning reserves available to Registrant.
Registrant has approximately 2,440 acres under lease to National Cement Company
of California, Inc. ("National") for the purpose of manufacturing portland
cement from limestone deposits found on the leased acreage. National owns and
operates on the property a cement manufacturing plant having a design capacity
of 600,000 tons of cement per year. The manufacturing plant is currently under
construction to increase production capacity to 1,000,000 tons. The amount of
payment that Registrant receives under the lease is based upon shipments from
the cement plant. The term of this lease expires in 2007, but National has
remaining
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options to extend the term for two additional successive increments of 20 years
each and one final increment of 19 years. For information as to proceedings
under environmental laws relating to the cement plant, see Item 3-"Legal
Proceedings".
Approximately 433 acres of Registrant's land are leased to owners and operators
of sand and gravel screening and rock crushing plants under two leases with
rental payments based on the amount of sand and gravel removed and sold.
Registrant is actively seeking a new lessee for a third area of the ranch where
rock aggregate deposits have been extracted in the past.
The quarter horse program consists of the breeding of quality blood line quarter
horses, the sale of horses, the boarding and training of horses, and the
management of horse events. The quarter horse program will continue to direct
its efforts to the improvement of Registrant's breeding mares and the hosting of
competitive events to enhance the revenues of the operation.
Registrant also provides filming location services and a game management
program, which is a hunting program that is managed in close cooperation with
California Department of Fish and Game.
Customers
- ---------
During 1999, 1998 and 1997 the following customers accounted for more than 10%
of Registrant's consolidated revenues: Excel Meat Packing, a purchaser of
cattle, (39% in 1999 and 22% in 1998) and Golden State Vintners, a purchaser of
grapes (15% in 1997).
Organization
Registrant is a Delaware corporation incorporated in 1987 to succeed the
business operated as a California corporation since 1936.
Employees
At December 31, 1999, Registrant had 148 full-time employees.
Executive Officers of Registrant
--------------------------------
The following table shows, as to each executive officer of Registrant, the
offices held as of March 25, 2000, the period the offices have been held, and
the age of the executive officers. All of such officers serve at the pleasure
of the board of directors.
<TABLE>
<CAPTION>
Name Offices Held Since Age
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert A. Stine President and Chief 1996 53
Executive Officer, Director
Matt J. Echeverria Senior Vice President, 1987 49
Livestock and Ranch Operations
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Douglas M. Ford Senior Vice President, 1999 54
Real Estate
Allen E. Lyda Vice President, 1990 42
Chief Financial Officer,
Treasurer, and Assistant Secretary
Dennis F. Mullins Vice President, 1993 47
General Counsel
and Secretary
Dennis J. Atkinson Vice President, Farm Management 1998 49
- ------------------------------------------------------------------------------
</TABLE>
A description of present and prior positions with Registrant, and business
experience for the past five years is given below.
Mr. Stine has been employed by Registrant since May 1996, serving as President
and Chief Executive Officer and as a Director. Mr. Stine served as the Chief
Executive Officer of the Collins Companies, a real estate development company,
from 1986 to April 1995.
Mr. Echeverria has served as Vice President since 1987 and was elected Senior
Vice President in 1995. He also served as acting Chief Executive Officer of
Registrant from May 1995 to May 1, 1996.
Mr. Ford has been employed by Registrant since December 1998 serving as Senior
Vice President, Real Estate. Mr. Ford served as Vice President of Alper
Development Inc., a real estate development company, from 1993 through 1998.
Mr. Lyda has been employed by Registrant since 1990, serving as Vice President,
Finance and Treasurer. He was elected Assistant Secretary in 1995 and Chief
Financial Officer in 1999.
Mr. Mullins has been employed by Registrant since 1993, serving as Vice
President, General Counsel and Secretary.
Mr. Atkinson has been employed by Registrant since July 1998, serving as Vice
President, Agriculture. From 1995 to 1998, he was a farm manager with Wilson
Ag, an agricultural company in Kern County. Prior to this he was a farm manager
with Tejon Farming Company, a subsidiary of Registrant.
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ITEM 2. PROPERTIES
Registrant owns approximately 270,000 acres of contiguous land located
approximately 60 miles north of Los Angeles and approximately 15 miles east of
Bakersfield. The land is undeveloped, except for certain limited farming and
commercial uses. Included in the land are portions of the San Joaquin Valley,
foothills, portions of the Tehachapi Mountains and portions of the western end
of the Antelope Valley. A number of key transportation and utility facilities,
including Interstate 5 (a major north-south federal highway in California),
California Highways 58, 138 and 223, the California Aqueduct, and various
transmission lines for electricity, oil, natural gas and communication systems
cross Registrant's lands.
For information as to Registrant's livestock, farming, resource management and
real estate operations on the land, see Part I, Item 1 - "Livestock Operations,"
"Farming Operations," "Oil and Minerals," and "Real Estate."
Approximately 250,000 acres of Registrant's land are located in Kern County,
California. The Kern County General Plan for this land contemplates continued
commercial, resource utilization, farming, grazing and other agricultural uses,
as well as certain new developments and uses, including residential and
recreational facilities. While the County General Plan is intended to provide
general guidelines for land use and development, it is subject to amendment to
accommodate changing circumstances and needs. In addition to the General Plan,
ranch lands will require specific zoning and site plan approvals prior to actual
development.
Registrant has not yet made specific proposals to the County to implement any
part of its proposed land use concept, except at the Grapevine and Laval Road
Interchanges on Interstate 5. Along the Interstate 5 corridor, Registrant is
aggressively pursuing additional commercial activity in order to meet the needs
of the 50,000 vehicles per day that travel through the ranch. To meet this
built-in customer base, Registrant is investigating several potential
opportunities that can expand current commercial activities.
The remainder of Registrant's land, approximately 20,000 acres, is in Los
Angeles County. This area of the ranch is accessible from Interstate 5 via
Highway 138 and lies 30 miles west of the Antelope Valley communities of
Palmdale and Lancaster. Los Angeles County has adopted general plan policies
which contemplate future limited residential development of portions of this
land, subject to further assessments of environmental and infrastructure
constraints. In March 2000, Registrant formed a limited liability company with
three major Southern California homebuilders to pursue a master planned
community on Registrant's Los Angeles County land. See "Business - Real Estate
Operations".
Portions of Registrant's property consist of mountainous terrain, and much of
the property is not presently served by developed roads or by utility or water
lines. Any significant development of the property would involve the
construction of roads, utilities and other expensive infrastructure and would
have to be done in a manner which accommodates a number of environmental
concerns, including endangered species and wetlands issues, that may limit
development of portions of the property.
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During 1999, Registrant completed the purchase of three industrial and
commercial buildings in Phoenix, Arizona and a commercial office building in
Rancho Santa Fe, California for a combined price of $10,550,000. 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 Rancho Santa Fe property is located within the village of Rancho
Santa Fe. The buildings were acquired to complete a tax deferred exchange of
real property in which $4,250,000 in proceeds from the sale of land in December
1998, $1,750,000 in proceeds from the sale of an easement in 1999 and $4,800,000
in bank borrowings were used to pay for the properties and all closing costs.
The bank borrowings are secured by the Phoenix properties.
Due to Registrant's location and the undeveloped state of its property, from
time to time unsolicited proposals are made for governmental or quasi-public
uses of portions of the property or neighboring lands by entities, some of which
may have the power of eminent domain. For the most part, Registrant makes a
determined effort to ensure that any such proposals are implemented in a manner
that is environmentally sound and that will maintain Registrant's flexibility to
develop its adjoining lands. The construction of a major oil pipeline over the
Ranch was completed in February 1999. The pipeline follows the alignment of
other oil pipelines along the Interstate 5 corridor. The pipeline company
purchased its easement from Registrant in November 1997 for $2,050,000, and it
purchased a one-acre parcel for a pump station in 1998 for $150,000. In January
1999, Qwest Communications Corporation, an affiliate of the pipeline company,
purchased an easement in the same location for fiber optic cable uses for
$1,750,000. Registrant's lands are also being evaluated as a possible route for
a high speed rail system between Los Angeles and San Francisco.
Farmland
Although changing crop market conditions and the cost and availability of
irrigation water bear on the economic feasibility of farming on Registrant's
lands, portions of the land located in the San Joaquin Valley are suitable for
farming a wide variety of tree, vine and row crops.
Existing long-term contracts with the Wheeler Ridge-Maricopa Water Storage
District ("Wheeler Ridge") provide for water deliveries from the California
State Water Project ("Project") to certain farmland in the San Joaquin Valley
belonging to Registrant. The long-term water supply picture in the state is
uncertain, however, not only due to recurring droughts, but also because of
existing and likely additional restrictions placed on water exported from the
Sacramento-San Joaquin River Delta ("Delta") to protect allegedly endangered
species and improve water quality in the Delta. Reserving water flowing into
the Delta for environmental purposes has been required. The reserved water then
flows into the San Francisco Bay and is unavailable for beneficial use. The
impact of these regulations could be severe during drought years when the supply
of water for all uses is limited. Pursuant to an interim agreement among the
federal agencies, the concerned state agencies, environmental groups, and water
users, a maximum of 1.1 million acre feet of water has been reserved for such
environmental uses, although the federal agencies have taken from time to time
in excess of that amount allegedly to protect endangered fish species. This
water would otherwise be available for beneficial use by state and federal water
project participants. However, there is no assurance that this interim
agreement will be
12
<PAGE>
made permanent or that the final agreement will limit water used for
environmental purposes to a comparable amount.
Registrant's total water entitlement substantially exceeds its permanent crop
needs. A 100% allocation has been made by the Project to the Kern County Water
Agency, of which Wheeler Ridge is a sub-unit; therefore, deliveries from Wheeler
Ridge will be sufficient for Registrant's 2000 crops. Even at a lower
percentage, deliveries from Wheeler Ridge would be sufficient for all of
Registrant's permanent crops; Wheeler Ridge has programs in place to rely on
water banking project deliveries and pumping of district-owned wells to make up
any shortfall in Project deliveries. In addition, Registrant has the capability
to make up any shortfall in Wheeler Ridge deliveries, and to provide water to
its farming tenants, by using water from the Tejon-Castac Water District
("TCWD"), which lies entirely within Registrant's lands.
Registrant's contracts with Wheeler Ridge provide for annual water entitlement
to approximately 5,488 acres of Registrant's lands. Existing Wheeler Ridge
water delivery facilities are capable of delivering the contract water
entitlement amounts to all of that acreage. The water contracts require annual
payments related to the Project and Wheeler Ridge fixed costs, whether or not
water is used or available, and establish a lien on benefited land. Payments
made under these contracts in 1999 by Registrant totaled approximately
$1,300,000.
Lands benefiting from Wheeler Ridge are subject to contingent assessment liens
under the California Water Storage District Law and the liens established under
the water service contracts. These liens are senior in priority to any mortgages
on the property. The liens secure Wheeler Ridge bonds issued to finance
construction of water distribution facilities. Lien enforcement of Wheeler
Ridge assessments and contracts can involve foreclosure of the liens and the
resulting loss of the lands subject to the liens. Wheeler Ridge will impose
contingent assessments (over and above Registrant's normal costs for its water
entitlement) only if Wheeler Ridge revenues from water contracts and other
regular revenue sources are not sufficient to meet Wheeler Ridge obligations.
Lien assessments are levied by Wheeler Ridge based on estimated benefits to each
parcel of land from the water project serving the land. Approximately 4,600
acres of Registrant's land are presently subject to such contingent liens
totaling approximately $792,000. Since commencement of operations in 1971,
Wheeler Ridge has had sufficient revenues from water contract payments and other
service charges to cover its obligations without calls on assessment liens, and
Wheeler Ridge has advised Registrant that it does not anticipate the need to
make any calls on assessment liens.
Under California law, lands located in a water storage district may be
reassessed at the request of the district board of directors or at the request
of 10% or more of the district landholders. As a result of any reassessment,
which is based upon relative benefits from district facilities to each land
parcel, the lien assessments may be redistributed and may increase or decrease
for any particular parcel. Additional Wheeler Ridge projects, if any, which
might result in new assessment liens must be approved by landowners of more than
one-half of the land (based on valuation) in the district as well as by the
California Department of Water Resources.
13
<PAGE>
The financial strength of Wheeler Ridge improved materially with the sale in
early 1999 of approximately 41,000 acre feet of entitlement to the Castaic Lake
Water Agency, which serves the Santa Clarita area. This sale brought total
district entitlement more closely in line with long term demand by successful
farming operations and produced approximately $7.3 million in revenues that has
been retained by the district for investments in improving the reliability of
its water deliveries.
In addition to its agricultural contract water entitlements, Registrant, through
the Tejon-Castac Water District has an entitlement to obtain from the Project
sufficient water to service a substantial amount of future residential and/or
commercial development in Kern County. The water agency serving the Los Angeles
County portion of the Ranch, the Antelope Valley-East Kern Water Agency, has
significant surplus entitlement and has indicated that it would be able to
provide the water needed for a major development in the Los Angeles County
portion of the Ranch. Portions of the property also have available ground
water; this would be sufficient to support low density residential development
in the Tejon Lake area, significant commercial development in the Interstate 5
corridor, and provide a significant back-up supply for development in Los
Angeles County.
ITEM 3. LEGAL PROCEEDINGS
Registrant leases land to National Cement Company of California, Inc.
("National") for the purpose of manufacturing Portland cement from limestone
deposits found on the leased acreage. See "Business - Resource Management." In
August 1997 National ceased burning hazardous waste as supplemental fuel in the
cement plant located on the land leased from Registrant. The fuel was obtained,
transported, stored and processed by National's subtenant, Systech Environmental
Corporation ("Systech"). Systech has removed most of the above-ground
improvements from its former sublease premises and has submitted a formal
closure plan under the Resource Conservation and Recovery Act and the California
Hazardous Waste Control Act. After this closure plan is approved by the
California Department of Toxic Substances Control, Systech is expected to
undertake the site investigation and (if needed) cleanup work specified in the
closure plan.
A number of contaminated sites have been discovered on the land leased to
National, including several landfills containing industrial waste, a storage
area for drums containing lubricants and solvents, an underground storage tank
for waste oil and solvents, an underground plume of chlorinated hydrocarbons,
and diesel fuel which leaked from a pipeline. Because the waste in some or all
of the sites has contaminated groundwater, the California Regional Water Quality
Control Board for the Lahontan Region (the "Regional Water Board") has issued
investigation and cleanup orders with respect to certain of the sites. These
orders, which have different provisions depending on the site involved,
generally require National, Lafarge Corporation ("Lafarge"), the predecessor in
interest to National under the existing lease, and Registrant to investigate and
clean up soil and groundwater contamination in the vicinity of the sites.
Although Registrant did not deposit any of the contaminants, the orders state
that Registrant, as a landowner, will be responsible for complying with the
orders if Lafarge and National fail to perform the necessary work. Civil fines
for violations of a Regional Water Board order can be as
14
<PAGE>
high as $10,000 per day for each day the violation occurs and as high as $15,000
per day for each day a discharge of pollutants and a violation of the order
occurs.
Lafarge has undertaken the investigation and remediation of the landfills and
has completed the removal of contaminated soils above the groundwater level from
the landfills. Additional work may be required to alleviate groundwater
contamination resulting from the landfills. Lafarge has completed a substantial
amount of the site investigation with respect to the chlorinated hydrocarbon
plume, which was released at the drum storage area and by the underground waste
oil tank and is undertaking additional investigation work under the oversight of
the Regional Water Board. The plume of chlorinated hydrocarbons covers an
extensive area and has migrated off of the leased premises in one direction,
where it has been found to be leaking into a small, local creek. With respect
to the diesel pipe leak, Lafarge has performed some site investigation and there
appears to be significant contamination along the length of the pipeline. The
leak produced an extensive plume of diesel contamination which has migrated
under the cement plant itself. At this time, Registrant is negotiating with
Lafarge respecting the steps Lafarge and National will take to stop contaminants
from leaking into the surface water, to clean up the principal source of
contaminants under the former drum storage area, to address the other
contaminated sites, and to reimburse Tejon for the costs it has incurred to
monitor the site investigations and defend itself in Regional Water Board
proceedings. If these negotiations are not successful, it is likely that
litigation against Lafarge and National will be initiated by Registrant before
the end of 2000.
In 1997, the Regional Water Board named National and Lafarge as primarily
responsible parties in a cleanup and abatement order relating to cement kiln
dust on the cement plant site and named National as the primarily responsible
party in a cease and desist order and waste discharge requirements. Those
orders require investigation and certain remedial activities related to the
cement kiln dust piles on the premises but do not require the removal or
disposal of the piles. The Regional Water Board named Registrant secondarily
responsible on these three orders relating to the kiln dust piles, which means
that Registrant could be ordered to perform the obligations of National or
Lafarge under the orders if either of them should fail to do so. Registrant has
appealed these orders, but the appeals are currently stayed pending Lafarge's
and National's compliance. Regional Water Board approval of the final kiln dust
management plan is expected in 2000, after which it is expected to be
implemented by Lafarge and National.
The United States Environmental Protection Agency ("USEPA") has proposed to
regulate all kiln dust nationwide under the hazardous waste program, but with a
tailored set of standards. The proposed rules would mostly involve careful
groundwater monitoring and possibly covering dust piles so they do not blow in
the wind. Measures of this type are already being taken by National on the
cement plant site, and other measures will be undertaken pursuant to the
Regional Water Board orders described above. Kiln dust from cement plants that
used supplemental fuels like the plant operated by National will not be treated
any differently under this program. The cement industry filed comments opposing
the proposed rules for kiln dust and is engaged in a legislative effort to
secure the management of kiln dust as a non-hazardous waste. The industry has
also proposed an enforceable agreement between the cement manufacturers and
USEPA with respect to the management of kiln dust in lieu of regulations. USEPA
is considering this approach. In 1995, the California Legislature enacted
legislation classifying kiln
15
<PAGE>
dust as a non-hazardous waste if it is managed on-site under regulations
administered by a regional water quality control board and would otherwise be
classified as hazardous solely because of its extreme pH content. Registrant
believes this legislative reclassification will apply to the kiln dust pile used
by National until 1999, but not to older piles created by Lafarge and its
predecessors, which are believed to contain bricks contaminated with chromium.
If the chromium bricks are present, that could provide an independent basis for
classifying the kiln dust as a hazardous waste.
To date, Registrant is not aware of any failure by Lafarge or National to comply
with the orders of the Regional Water Board or to pursue the cleanup of certain
landfills as informally instructed by Regional Water Board staff. Registrant
has not been ordered by the Regional Water Board to perform any of the
investigative, characterization, remediation or removal activities. However,
Registrant has been compelled to become involved in reviewing the investigative
reports and cleanup recommendations made by Lafarge and its consultants and in
monitoring the Regional Water Board proceedings and Lafarge's activities.
Under the lease between Registrant and National, the tenant is obligated to
indemnify Registrant for costs and liabilities arising directly or indirectly
out of the use of the leased premises by the tenant. All obligations under this
indemnity provision arising after the assignment of the lease to National (which
occurred in November 1987) were assumed by National, and Lafarge has liability
for all obligations under the indemnity provisions arising before the
assignment. National's obligation is guaranteed by its parent, National Cement
Company, Inc. Registrant believes that all of the matters described above in
this Item 3 are included within the scope of the National and Lafarge indemnity
obligations. Until recently, National has generally honored its indemnity
obligations. However, since 1997, National has refused to reimburse Registrant
for the costs and expenses incurred by Registrant to monitor clean-up activities
and defend itself in Regional Water Board proceedings. While Lafarge has
recently reaffirmed its indemnity obligations, it too disputes its liability for
Registrant's defense costs. This matter is being negotiated by the parties. To
date Registrant's defense costs have not been material.
Registrant believes that Lafarge and National have sufficient resources to
perform any reasonably possible or reasonably likely obligations relating to
these matters. Publicly available financial information with respect to Lafarge
indicates that it had a net worth of approximately $1.6 billion as of September
30, 1999. National and its parent/guarantor are subsidiaries of a large French
company, and, so far as Registrant is aware, no separate financial statements
are publicly available with respect to either company. However, Registrant has
held discussions with National which indicate sufficient resources are available
to satisfy any reasonably likely obligations relating to the above matters.
Thus, Lafarge and National have not been charged with violating any Regional
Water Board orders and appear to have the financial strength to carry out any
future orders that may be approved by the Regional Water Board. Therefore,
Registrant believes that it is remote that any cleanup orders issued by the
Regional Water Board will have a material effect on Registrant. If, however,
National and Lafarge do not fulfill their cleanup responsibilities and
Registrant is required at its own cost to perform the landfill, kiln dust,
diesel release and/or underground plume remedial work likely to be mandated by
the regulatory agencies, the amount of any such expenditure by Registrant could
be material.
16
<PAGE>
As an unrelated matter, Registrant became aware that soils contaminated by
leaking gasoline and diesel fuel tanks are present on the premises along the
Interstate 5 corridor leased by Travel Centers of America for a truck stop and
gas station. The Kern County Environmental Health Services Department has named
Registrant as a secondarily responsible party with respect to the underground
diesel storage tanks that have leaked. The Central Valley Regional Water
Quality Control Board has assumed jurisdiction over a contaminated storm water
pond, which was cleaned up in 1998 by the tenant by removing contaminated soils.
Registrant would be required to clean up this contamination only if the tenant
and the guarantors refused to respond to agency orders, and those parties have
to date fully complied with all agency orders. Because of the financial
strength of the lease guarantors, Registrant believes that it is remote that
complying with agency clean-up orders will have a material effect on Registrant.
Registrant has reached a settlement agreement with the current tenant (the
company that owns all Travel Centers of America truck stops nationally), the
former tenant, and the guarantors of the lease, Standard Oil Company of Ohio and
BP Oil & Exploration, Inc. Under this settlement, the current tenant and BP Oil
have agreed to respond to all government agency orders respecting site cleanup,
to conduct cleanup to certain agreed-upon standards upon the expiration of the
truck stop lease in 2008, to indemnify Registrant from any and all losses
suffered by Registrant respecting re-use of the property, and to reimburse
Registrant $361,000 for all of its legal and consultant expenses in pursuing the
agreement and attendant litigation. The reimbursement was received in 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Registrant's Common Stock began trading in July 1999 on the New York Stock
Exchange. The following table shows the high and low sale prices for
Registrant's Common Stock on the New York Stock Exchange and the American Stock
Exchange for each period during the last two years, as reported by both
exchanges.
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First 22-5/8 16-1/2 32-3/4 22-7/16
Second 31-1/8 16-1/8 31-1/8 24-3/4
Third 33-3/4 24 26-3/8 19-1/2
Fourth 29-5/8 19-13/16 25-1/2 18-1/4
</TABLE>
As of March 15, 2000, there were 694 owners of record of Registrant's Common
Stock.
Registrant paid cash dividends of $.05 per share in each of the years 1999 and
1998. Two and one-half cents per share was paid in June and December of each
year.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31
(In thousands of dollars, except
per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated
Operating Revenues,
Including Interest
Income $55,916 (1) $48,088 (2) $38,229 (3) $18,960 $19,554
Net Income 1,181 (1) 3,139 (2) 3,032 (3) 1,685 434 (4)
Total Assets 91,519 73,014 63,693 47,369 45,203
Long-term Debt 20,606 1,875 3,925 1,800 1,800
Stockholder's Equity 43,160 42,705 40,488 37,732 36,969
Income Per Share,
Diluted 0.09 0.25 (1) 0.24 (2) 0.13 0.03 (4)
Cash Dividends
Declared and Paid
Per Share 0.05 0.05 0.05 0.05 0.05
</TABLE>
18
<PAGE>
(1) Includes receipt of one time payment of $1,750,000 ($1,085,000 net of
tax or $.09 per share) from a fiber optic easement sale.
(2) Includes receipt of one time payment of $4,250,000 ($2,569,000 net of
tax, or $0.20 per share) from the sale of land to Northrop Grumman
Corp. This land was previously leased to Northrop.
(3) Includes receipt of one time payment of $2,050,000 ($1,353,000 net of
tax, or $.11 per share) from a pipeline company for the acquisition of
easement rights.
(4) Net income from continuing operations was reduced by $400,000
($240,000 after tax or $.02 per share) due to the charge-off of almond
trees destroyed by 1995 winter storms.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Throughout Item I - "Business," Item 2 - "Properties," Item 3 - "Legal
Proceedings," Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," Registrant has made forward-looking
statements regarding future developments in the cattle industry, in Registrant's
strategic alliances and the almond industry, Registrant's plans for future
plantings of permanent crops, future yields, prices and water availability for
Registrant's crops, future prices, production and demand for oil and other
minerals, future development of Registrant's property, future revenue and income
of Registrant's jointly owned travel plaza, potential losses to the Company as a
result of pending environmental proceedings and market value risks associated
with investment and risk management activities and with respect to inventory,
accounts receivable and Registrant's own outstanding indebtedness. These
forward-looking statements are subject to factors beyond the control of
Registrant (such as weather and market and economic forces) and, with respect to
Registrant's future development of its land, the availability of financing and
the ability to obtain various governmental entitlements. No assurance can be
given that the actual future results will not differ materially from those in
the forward-looking statements.
Overview
Registrant intends to continue focusing on increasing revenues and improving net
income by continuing to develop its significant land holding and by expanding
its core business lines. Currently, Registrant is working to take advantage of
existing resources and market conditions as well as to anticipate and create
future market trends and demand. Part of this effort includes evaluating
Registrant's land and water resources to ensure that the resources essential for
growing the core businesses are available when and where needed. In the future,
Registrant will continue to assess the feasibility of entering into
complementary new related lines of business and refining or reconfiguring
current core businesses to take advantage of opportunities presented and
changing market conditions.
19
<PAGE>
Results of Operations
As reflected in the accompanying financial statements, net income was $1,181,000
in 1999, $3,139,000 in 1998, and $3,032,000 in 1997.
Net income for 1999 declined when compared to 1998 due primarily to lower
farming revenues and increased real estate expenses.
Net income for 1998 increased when compared to 1997 due to increased sales
within the Livestock Division and the Real Estate Division. Changes in revenues
and expenses of Registrant's industry segments for years 1999 and 1998 are
summarized below.
Real Estate. Real Estate operating profits of $473,000 in 1999 are $2,470,000
less than 1998 operating profits. This decrease in operating profits during
1999 was due to increases in staffing costs ($422,000), professional service
fees ($252,000), increased depreciation costs ($365,000), and losses related to
the start-up, training, opening, and first year operations of the Petro Travel
Plaza joint venture ($889,000). In addition to these increases in costs,
revenues declined in comparison to 1998 due to the Qwest easement sale proceeds
of $1,750,000, payments from Enron of $1,551,000 related to an option to lease,
and a net increase in leasing income of $247,000 during 1999 being more than
offset by the sale of land in 1998 for a gain of $4,250,000.
The increases in staffing costs and professional service fees are directly
related to the increased real estate development activities of Registrant. The
increase in depreciation is primarily related to the purchase of four commercial
office buildings during 1999, which were purchased through a like-kind property
exchange to defer taxes on gains from the sale of land in 1998. Activities at
the Petro Travel Plaza are very promising as sales of fuel continue to increase
and restaurant and merchant transactions grow. Even though the first six months
of operations of the Petro Travel Plaza have shown losses due to some of the
items mentioned above, the operations have begun to provide positive cash flows.
The expectations for 2000 are for continued growth of fuel sales as more and
more travelers and trucking professionals become aware of the site and place
Petro on their refueling schedules.
In future years the Real Estate Division will continue to see an increase in
costs primarily related to professional service fees, planning costs,
entitlement costs, and staffing costs as Registrant continues to increase its
real estate activities and pursue development opportunities. These types of
real estate development activities and costs could continue over several years
as Registrant develops its land holdings. Registrant will also continue to
evaluate land resources to determine the highest and best uses for its land
holdings. Future sales of land, as in 1998, are dependent on market
circumstances and specific opportunities. Registrant's goal in the future is to
increase land value and create future revenue growth through planning and
development of commercial, industrial, and residential programs.
See Part I, Item 1 - "Business - Commercial and Land Use" for a further
discussion of 1999 and future planning activities.
20
<PAGE>
Real Estate net operating income of $2,943,000 in 1998 was $1,940,000 greater
than 1997 net operating income. This increase in net operating income during
1998 was due primarily to the sale of 1,400 acres of previously leased land to
Northrop Grumman Corp., which resulted in a gain of $4,250,000 ($2,569,000 net
of tax). In addition to the sale of land, real estate revenues increased
approximately $250,000 due to increased lease revenues and the sale of land for
a pipeline pump station. These increases in revenue were partially offset by
higher fixed water costs and the recording in 1997 of a one-time payment of
$2,050,000 related to the acquisition of easement rights by a pipeline company.
Fixed water costs increased due to the cost of additional water entitlement and
water banking charges.
Livestock. Livestock operating profits of $1,861,000 in 1999 are an increase of
$767,000 when compared to 1998 operating profits. This increase in operating
profits is primarily due to an increase in cattle sales revenues and the
continuing profits of its feedlot operations. Cattle sales revenues increased
approximately $15.4 million during 1999 due to 26,000 additional head of cattle
being sold during 1999. This increase in cattle sold is the result of
Registrant increasing its cattle herd throughout the last three years.
Registrant's cattle herd at the end of 1999 was approximately 45,000 head
compared to approximately 36,700 at the end of 1998. This increase in cattle
sales revenues was partially offset by a corresponding increase in costs of
sales on cattle sold of approximately $14.6 million due to the increase in
cattle sold.
The increase in combined livestock and feedlot revenues of $8.9 million is due
to the increase in cattle sales described above and to a decrease in revenues of
$6.5 million at Registrant's feedlot in Texas. This significant reduction in
feedlot revenues is primarily attributable to the fact that Registrant elected
to have a substantial number of its own cattle fed at the feedlot during 1999,
which resulted in a significant portion of the feedlot's revenues, when compared
to 1998, being eliminated as an intercompany transaction. Feedlot operations
were also impacted, but to a lesser degree, by lower outside customer occupancy
levels during the summer months and to lower prices charged to outside
customers. The decrease in revenues at the feedlot was more than offset by
lower costs of sales due to lower prices for feed ingredients such as corn and
milo when compared to the prior year. Overall for 1999, Registrant's feedlot
produced $1.07 million in net operating profits, which is comparable to the
prior year.
Registrant continued to use the futures and options markets to protect the
future selling price of cattle and purchase prices of feed throughout 1999.
Without the ability to manage cattle and feed positions during 1998,
Registrant's net operating income from livestock would have been $485,000 less
due to the declines in cattle prices. However, during 1999, due to the increase
in cattle prices throughout the last four months of the year, Registrant
recognized approximately $256,000 in losses on hedge positions. Registrant's
goal in managing its cattle and feed costs is to protect or create a range of
selling prices and feed prices that allows Registrant to recognize a profit or
minimize a loss on the sale of cattle once all costs are deducted. The risk in
managing cattle prices is that in those years that prices increase the hedge may
limit or cap potential gains from the increase in price, and the risk in
managing feed costs is that it can add additional costs for feed if grain prices
fall dramatically.
21
<PAGE>
Cattle prices strengthened during late 1999 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 in the first
quarter of 2000 as cattle feeders have placed additional cattle on feed in
response to the improved market. Registrant believes that overall for 2000,
cattle prices should continue to improve due to increases in demand for product
and to increased export demand because of the improving economies in Asia.
Livestock net operating profits of $1,094,000 in 1998 were $405,000 less than
1997 net operating income. The decrease when compared to 1997 was primarily
attributable to reduced cattle prices throughout 1998 that reduced the net
margins on cattle sold. Net margins at Champion Feeders, Registrant's feedlot,
were also reduced due to increased feed inventory costs. Cattle sales revenue
increased approximately $4,000,000 during 1998 due to 7,560 additional head of
cattle being sold. On a comparable basis with 1997 sales, the increase in 1998
cattle sales revenues was less than it should have been due to lower cattle
prices throughout 1998 and the moving of sales scheduled for November and
December 1998 to February 1999 to take advantage of improving market conditions.
Revenues at the feedlot increased approximately $6,200,000 in 1998 when compared
to 1997 due to owning Champion Feeders for the entire year of 1998, increased
average occupancy in the feedlot during July and August 1998, and the sale of
cattle as to which the feedlot was in partnership with customers of the feedlot.
Champion Feeders was purchased March 10, 1997. These increases in revenues were
more than offset by an increase in the cost of sales on cattle sold and by
increased feedlot expenses. Cost of sales of cattle increased primarily due to
the increase in the number of cattle sold and to a slight increase in costs due
to owning the cattle for longer periods of time. Feedlot expenses increased
approximately $6,500,000 when compared to 1997 due to the timing of the purchase
of the feedlot during 1997, increased feed inventory costs and to cost of sales
related to cattle sold as described above.
See Part I, Item 1 - "Business - Livestock Operations" for a further discussion
of Registrant's livestock operations for 1999 and future expectations.
Farming. Farming operating profits of $1,148,000 in 1999 are $1,121,000 less
than 1998 operating profits. The decrease in 1999 operating profits is
primarily due to reduced almond revenues ($1,354,000) and reduced revenues from
pistachios ($194,000). These unfavorable variances were partially offset by
increased walnut revenues ($94,000) and lower cultural costs ($297,000).
The decrease in almond revenues during 1999 was due primarily to lower sales
prices for almonds during 1999. The price of almonds declined approximately 52%
during 1999 when compared to 1998. The decline in prices was due to a record
state wide crop for almonds. Registrant's production increased nearly 1.0
million pounds when compared to 1998 due to improved weather conditions and to
an increase in production from young almond orchards. The significant increase
in almond production across the state of California led the Almond Board of
California to request an almond marketing reserve that was approved by the
Secretary of Agriculture for approximately 23% of the state's almond crop. This
means that only 77% of Registrant's 1999 almond crop can be sold until the
almond marketing order is lifted. The combination of lower prices, which also
impacted payments received in 1999 related to the 1998
22
<PAGE>
almond crop, and the impact of the almond marketing order resulted in almond
revenues declining as shown above. The decline in pistachio revenues during 1999
is due to a 30% fall in production because of the alternate bearing cycle of
pistachios. The increase in walnut revenues is due to an increase in production
that was partially offset by a $0.05 reduction in walnut prices. There was no
significant variance in revenues related to grapes during 1999 as compared to
1998 due to production and pricing levels remaining constant between the years.
Industry expectations are that statewide nut crop yields should continue to
improve, which may negatively impact prices. In addition, industry projections
show a continuation of new almond and pistachio plantings that could also impact
prices once full production begins. Within the grape industry there continues
to be new land developed, which could begin to depress prices in the future once
all new developments are in full production. Pricing pressure on grapes did
begin during 1998 and 1999 due to increased production and is expected to
continue through 2000 and possibly beyond. Registrant is currently in the last
year of grape sales contracts and must renew the contracts during 2000 for 2001.
Due to pricing pressure on grapes this could be difficult. If Registrant has no
grape contracts for 2001 and beyond, Registrant will market its grapes to
various wineries and the prices received will be driven more by the wineries'
expectations regarding demand for their products and grape production. All of
Registrant's crops are particularly sensitive to the size of each year's world
crop. Large crops in California and abroad can rapidly depress prices. For a
further discussion of the 1999 farming year refer to Part I, Item 1 - "Business
- - Farming Operations".
Net operating income within the Farming Division in 1998 was $2,269,000, a
decrease of $358,000 when compared to 1997 net operating income. The decrease
in 1998 net operating income was due to lower grape revenues ($1,086,000) and
pistachio revenues ($641,000), and higher fixed water costs ($337,000). These
unfavorable variances were partially offset by higher almond revenues
($641,000), an increase in farming lease payments ($429,000), and lower cultural
costs ($261,000).
Registrant's 1998 almond production increased 33% despite poor weather during
the spring, due primarily to the increase in production from newer almond
plantings. Revenues from almonds also reflected higher prices than the prior
year due to the lower statewide crop and a minimal inventory carryover from the
prior year. The combination of increased production and higher prices led to
almond revenues increasing approximately 49% in 1998. Grape yields in 1998
declined 17% when compared to 1997, which caused grape revenues to decline 16%
when compared to 1997. Pistachio production fell 27% during 1998 due to weather
related factors during the spring. Due to the reduction in yield, pistachio
revenues fell 26% when compared to 1997. Walnut production increased during
1998 but revenues remained flat when compared to 1997 due to lower prices on
walnuts. Walnut prices declined due to the high inventory levels at the
beginning of 1998.
Resource Management. Resource Management operating profits of $1,845,000 during
1999 are $884,0000 greater than 1998 operating profits. The increase in
operating profits during 1999 was due to an increase in oil and mineral
royalties of $248,000, increased revenues from the game management program of
$220,000, increased filming revenues of $95,000, and a reallocation of
communication leasing revenues to resource management from the real estate
23
<PAGE>
division. These favorable variances were partially offset by increased staffing
costs and professional service costs. Mineral royalties increased due to the
continued growth of construction in California which led to increased cement
production and sand/rock aggregate production. Registrant expects cement and
sand/rock aggregate royalties to remain strong over the next year due to the
ongoing construction activity within California and to the cement manufacturing
plant being renovated and production capacity being increased. Oil royalties
increased during 1999 due to increasing prices for oil. Registrant expects oil
and gas royalties to continue to be affected over the next few years by the fact
that little or no new oil and gas exploration is taking place on Registrant's
lands. Other than possible increases in oil prices as occurred during 1999,
Registrant expects oil royalties to be flat over the next year. See Part I,
Item 1 - "Business - Resource Management", for a further discussion of 1998
activities and future expectations.
Resource Management operating profits of $961,000 in 1998 were $367,000, or 28%
below 1997 operating profits. The decrease in operating profits during 1999 was
due to lower revenues from oil and gas royalties, increased staffing costs and
to increases in the costs related to the annual quarter horse events. These
unfavorable variances were partially offset by an increase in revenues from the
equestrian program.
Interest. Interest income declined to $639,000 during 1999 from $1,001,000 in
1998 due primarily to a $3,300,000 reduction in average funds invested.
Invested funds continued to decline during 1999 due to the growth of the cattle
herd, capital expenditures, payment of dividends, and the financing of higher
inventory balances.
Interest income of $1,001,000 in 1998 fell $158,000 when compared to 1997
interest income. The decrease in interest income was due to lower interest
rates and the continuing growth of Registrant that resulted in a $3,895,000
decrease in funds invested. Invested funds declined due to the continued growth
of the cattle herd, capital expenditures, payment of dividends and the financing
of greater receivables and inventories.
Interest expense paid in 1999 was $1,199,000, an increase of $14,000 when
compared to 1998 interest expense. The growth in interest cost is due to an
increase in borrowings related to livestock operations and to increased real
estate infrastructure costs. Total interest paid including capitalized interest
in 1999 was $2,367,000 which was an increase of $1,080,000 over 1998. Total
interest continues to increase due to the funding of the growth in the cattle
herd, infrastructure development and costs related to the development of the
Tejon Industrial Complex, to an increase in capital expenditures related to the
purchase of commercial buildings, and to the real estate planning and
entitlement activities. See Note 5 to the Audited Consolidated Financial
Statements for a further description of short-term and long-term debt.
Interest expense during 1998 was $1,065,000, an increase of $318,000 over
interest expense in 1997. The increase in interest expense is due to the short-
term funding of the cattle inventory as well as funding the continuing growth in
the cattle herd and to infrastructure and construction costs related to
development at the Tejon Industrial Complex.
24
<PAGE>
Corporate Expenses. Corporate expenses for 1999 were $3,198,000, an increase of
$617,000 when compared to 1998 corporate expenses. The increase during 1999 is
due to higher staffing costs, increased director and shareholder expense, and to
increases in donations. The increase in staffing costs ($335,000) is due to
increases in the accounting and MIS departments, increased incentive
compensation accruals, and increases in retirement plan costs. Higher director
and shareholder expense ($185,000) is primarily due to costs associated with the
transfer of the trading of Registrant's stock from the American Stock Exchange
to the New York Stock Exchange. Donations increased approximately $97,000
primarily due to Registrant committing to donate funds to help a local
university build a new building for its business school.
Corporate expenses during 1998 were $2,581,000, an increase of $235,000 when
compared to 1997 corporate expenses. The increase in 1998 was due primarily to
an increase in staffing costs. This increase in staffing costs is tied
primarily to a change in Registrant's short-term incentive compensation program.
Partially offsetting this increase in staffing costs was a reduction in
professional service fees.
Inflation. Inflation can have a major impact on Registrant's operations. The
farming operations are most affected by escalating costs and unpredictable
revenues (due to an oversupply of certain crops) and very high irrigation water
costs. High fixed water costs related to Registrant's farm lands will continue
to adversely affect earnings.
Prices received by Registrant for many of its products are dependent upon
prevailing market conditions and commodity prices. Therefore, it is difficult
for Registrant to accurately predict revenue, just as it cannot pass on cost
increases caused by general inflation, except to the extent reflected in market
conditions and commodity prices.
Impact of Accounting Change. Effective October 1, 1998, Registrant adopted
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 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 consolidated statements
of income. For the year-ended December 31, 1999, Registrant recognized losses
of $256,000 related to SFAS 133 and recognized $200,000 in gains during 1998
related to SFAS 133.
Management has elected to not designate its futures and option contracts as
hedges. Accordingly, during 1998 Registrant reported a $130,000, net of tax of
$70,000, resulting from the cumulative effect of a change in an accounting
principle in the consolidated statements of income.
25
<PAGE>
Impact of Year 2000. Registrant completed all Year 2000 remediation work prior
to the end of 1999. Total costs related to Year 2000 work, including a new
hardware and software conversion in 1997, were approximately $320,000. As of
this date Registrant has had no Year 2000 problems that have impacted its
operations. Registrant also believes that any potential future problems related
to Year 2000 issues will be immaterial to its operations and anticipates no
further costs related to this issue in the future.
Financial Condition. Registrant's cash, cash equivalents and short-term
investments totaled approximately $10,365,000 at December 31, 1999, a decrease
of $7,872,000 from the corresponding amount at the end of 1998. Working capital
at the end of 1999 was $16,278,000, which is approximately $3,490,000 less than
working capital at the end of 1998. Registrant has a revolving line of credit
of $25,000,000 that, as of December 31, 1999, had an outstanding balance of
$15,026,000 bearing interest at the rate of 8.00%, which floats with changes in
the lending bank's prime interest rate. At Registrant's option the interest
rate on this line of credit can be fixed at 1.50% over a selected LIBOR rate or
float at .50% less than the bank's prime lending rate. Registrant's feedlot
also has a short-term revolving line of credit for the feedlot with a local bank
for $6,800,000 with an outstanding balance at December 31, 1999 of $3,421,000,
with an interest rate approximating the bank's prime lending rate of 8.50%,
which floats with changes in the lending bank's prime interest rate. The
revolving lines of credit are used as short-term cash management tools and for
the financing of customer cattle and feed receivables at the feedlot. The use
of short-term credit has grown due to increases in inventories as a result of
the growth of Registrant's core business lines and to the funding of
infrastructure construction costs on a short-term basis.
Registrant's use of long-term debt also increased $18,731,000 at the end of 1999
when compared to 1998 due to the purchase of three commercial buildings in
Phoenix, Arizona and to a new long-term line of credit that is used in funding
longer term types of assets such as real estate development infrastructure on
Registrant's land and farming assets. The three buildings that were purchased
in Phoenix, Arizona and portions of Registrant's farmlands secure these loans.
The principal uses of cash and cash equivalents during 1999, 1998, and 1997
consisted of capital expenditures, expansion of the cattle herd, purchase of the
cattle feedlot, purchase of land, purchases of commercial buildings, payments of
long-term debt, the payment of dividends and the financing of greater
receivables and inventories.
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, based on its past
experience, believes it will have adequate cash flows over the next twelve
months to fund internal operations.
During 2000, $9,470,000 has been budgeted for capital expenditures, which
includes nearly $7,000,000 for infrastructure at the Tejon Industrial Complex
and for real estate projects in Los Angeles County and the mountain/lake area of
Registrant's land. Other items included in the capital expenditure budget are
equipment and improvements to existing facilities.
26
<PAGE>
Funding of the above capital expenditures and ongoing operations during 2000 are
expected to come from increased borrowing from banks, reimbursement of
infrastructure costs related to the Tejon Industrial Complex through bond
proceeds from a local government agency, and from operating cash flows. In
future years, Registrant expects that substantial investments will need to be
made in its land assets to secure entitlements and begin development of the
land. In order to fund this growth, Registrant will use various financing
alternatives such as joint ventures with financial partners, increases in lines
of credit with banks, sales of assets, possible elimination of the dividend,
and/or the issuance of common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Market risk represents the risk of loss that may impact the financial position,
results of operations, or cash flows of 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
rate 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 credit risk. See Note 2, Marketable
Securities, of Notes to Consolidated Financial Statements.
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 can be tied to the lending bank's prime rate
and would change when that rate changes, or the debt can be tied to a LIBOR rate
on a fixed basis and change only at maturity of the fixed rate feature. A
portion of the long-term debt ($4,770,000) has a fixed interest rate, and the
fair value of this long-term debt will change based on interest rate movements
in the market. The remaining long-term debt ($16,875,000) can either be fixed
for periods of time to a LIBOR rate or float with the lending bank's prime rate.
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 the terms.
27
<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
the Registrant's debt obligations, principal cash flows and related weighted-
average interest rates by expected maturity dates.
28
<PAGE>
Interest Rate Sensitivity
Financial Market Risks
Principal Amount by Expected Maturity
<TABLE>
<CAPTION>
Fair
There- Value
2000 2001 2002 2003 2004 after Total 12/31/99
---- ---- ---- ---- ---- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Marketable
Securities $ 3,303,000 $2,477,000 $1,915,000 $2,351,000 $ 346,000 --- $10,392,000 $ 9,942,000
Weighted
Average
Interest 6.13%
Rate 6.31% 5.66% 6.49% 6.70% 6.16%
Liabilities
Short-term
Debt $18,447,000 --- --- --- --- --- $18,447,000 $18,447,000
Weighted
Average
Interest
Rate 8.00% --- --- --- --- --- 8.00%
Long-term
Debt $ 1,039,000 $1,793,000 $1,797,000 $2,675,000 $9,803,000 $4,538,000 $21,645,000 $21,645,000
Weighted
Average
Interest
Rate 7.96% 7.96% 7.96% 7.96% 7.91% 7.61% 7.86%
</TABLE>
In comparison to the prior year, Registrant's risks in regards to fluctuations
in interest rates has remained fairly static overall due to comparable balances
between years in short-term debt that fluctuate with the lending bank's prime
lending rate. Changes in interest rates in 1999 had the same effect under the
terms of the debt instruments outstanding as they had in 1998.
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 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 its 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.
29
<PAGE>
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 7, Commodity Contracts Used to Manage Risk of Notes to Consolidated
Financial Statements. Losses on futures contracts and options as of December
31, 1999 were $256,000 as compared to the approximately $485,000 in gains at
December 31, 1998. The change is primarily due to an increase in cattle prices
during 1999, which caused futures contracts and options to be repriced, creating
losses on the derivative positions. These losses will be offset by the increase
in prices received on the sale of cattle.
Inventories consist primarily of cattle for sale, and price fluctuations are
managed with futures and options contracts. See the table below for contracts
outstanding at year-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 December 31, 1999 approximately 50% of the
cattle held in inventory or 22,500 head of cattle were not protected by futures
and options for price movement. This compares to 19,228 head of cattle at
December 31, 1998. The 1999 number of head of cattle equates to approximately
22.5 million pounds of beef. For each $.01 per pound change in price,
Registrant has a potential exposure of $225,000 in future value. Although the
price which the cattle will ultimately be sold is unknown, over the last three
years the market price has ranged from $.50 per pound to $.72 per pound and the
current market price at March 16, 2000 was $.72 per pound.
The following table identifies the futures contract amounts and options contract
costs outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Original Estimated
Commodity Future/Option No. Contract/Cost Fair Value
Description Contracts (Bought) Sold (Bought) Sold
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cattle futures sold
40,000 lbs. per contract 142 $ 3,897,000 $(3,985,000)
Cattle futures bought
50,000 lbs. per contract 280 $(3,035,000) $ 2,960,000
Cattle options bought
40,000 lbs. per contract 50 $ (20,000) $ 8,000
Cattle options sold
40,000 lbs. per contract 50 $ 20,000 $ (18,000)
</TABLE>
The above futures contracts and options contracts expire between February 2000
and September 2000. Estimated fair value at settlement is based upon quoted
market prices at December 31, 1999.
30
<PAGE>
The following table identifies the futures contract amounts and options contract
costs outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Original Estimated
Commodity Future/Option No. Contract/Cost Fair Value
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 above futures contracts and options contracts expired between January 1999
and April 1999. Estimated fair value at settlement is based upon quoted market
prices at December 31, 1998.
With respect to accounts receivable, the amount at risk relates primarily to
farm crops. These receivables are recorded at estimates of the prices that
ultimately will be received for the crops. The final price is generally not
known until the third or fourth quarter of the following year. Of the accounts
receivable outstanding at December 31, 1999, only $1,800,000 is at risk to
changing prices. Of the amount at risk to changing prices, $661,000 is
attributable to almonds, $430,000 to pistachios, $285,000 to walnuts, and
$424,000 to grapes. The comparable amounts of accounts receivable at December
31, 1998 were $1,236,000 related to almonds and $122,000 related to pistachios.
The price estimated for recording accounts receivable at December 31, 1999 was
$.89 per pound for almonds. For every $.01 change in the price of almonds
Registrant's receivable for almonds increases or decreases by $24,000. 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
$1.32 to $2.26. With respect to pistachios, the price estimated for recording
the receivable was $1.35 per pound, each $.01 change in the price increases or
decreases the receivable by $6,000 and the range of final prices over the last
three years for pistachios has been $.92 to $1.17.
The price estimated for recording accounts receivable for walnuts was $.45 per
pound. For every $.01 change in the price of walnuts, Registrant's receivable
increases or decreases by $16,000. The final price for walnuts has averaged
from $.45 to $.60 over the last three years. The prices used to estimate
accounts receivable related to grapes is based on the variety of wine grape and
the market for that grape. At year-end the average price used for recording the
accounts receivable was $292.00 per ton. For every $1.00 change in the price,
Registrant's receivables related to grapes can increase or decrease
approximately $14,000. The average price for grapes has averaged between
$250.00 per ton to $375.00 per ton over the last three years.
31
<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.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information as to the directors of Registrant is incorporated by reference from
the definitive proxy statement to be filed by Registrant with the Securities and
Exchange Commission with respect to its 2000 Annual Meeting of Stockholders.
Information as to the Executive Officers of Registrant is set forth in Part I,
Item 1 under "Executive Officers of Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item is incorporated by reference from the
definitive proxy statement to be filed by Registrant with the Securities and
Exchange Commission with respect to its 2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item is incorporated by reference from the
definitive proxy statement to be filed by Registrant with the Securities and
Exchange Commission with respect to its 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item is incorporated by reference from the
definitive proxy statement to be filed by Registrant with the Securities and
Exchange Commission with respect to its 2000 Annual Meeting of Stockholders.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
<TABLE>
<CAPTION>
(a) Documents filed as part of this report: Page Number
--------------------------------------- ----------
1. Consolidated Financial Statements:
----------------------------------
<S> <C> <C>
1.1 Report of Independent Auditors 41
1.2 Consolidated Balance Sheets -
December 31, 1999 and 1998 42
1.3 Consolidated Statements of Income -
Years Ended December 31, 1999, 1998
and 1997 44
1.4 Consolidated Statements of Stockholders'
Equity - Three Years Ended
December 31, 1999 45
1.5 Consolidated Statements of Cash Flows -
Years Ended December 31, 1999, 1998
and 1997 46
1.6 Notes to Consolidated Financial
Statements 47
2. Supplemental Financial Statement Schedules:
------------------------------------------
None.
3. Exhibits:
--------
3.1 Restated Certificate of Incorporation *
3.2 By-Laws *
10.1 Water Service Contract with Wheeler
Ridge-Maricopa Water Storage District
(without exhibits), amendments originally
filed under Item 11 to Registrant's
Annual Report on Form 10-K **
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C>
10.3 Lease Agreement for Mr. San Olen **
10.4 Asset Purchase Agreement dated
March 10, 1997 for purchase of feedlot assets ***
10.5 Petro Travel Plaza Operating Agreement ****
10.6 Amended and Restated Stock Option Agreement
Pursuant to the 1992 Employee Stock Incentive Plan ****
10.7 Severance Agreement ****
10.8 Director Compensation Plan ****
10.9 Non-Employee Director Stock Incentive Plan ****
10.9(1) Stock Option Agreement Pursuant to the
Non-Employee Director Stock Incentive Plan ****
10.10 1998 Stock Incentive Plan ****
10.10(1) Stock Option Agreement Pursuant to the 1998
Stock Incentive Plan ****
Employment Contract - Robert L. Stine ****
10.12 Transaction and Option Agreement with Enron *****
North America
10.13 Option Agreement with Enron North America *****
10.14 Restricted Stock Grant Agreement 65
21 List of Subsidiaries of Registrant 69
23 Consent of Ernst & Young LLP 70
27 Financial Data Schedule (Edgar) 71
[B</TABLE>
(b) Report on Form 8-K filed during the last quarter of the period covered
------------------
by this report:
None.
(c) Exhibits
--------
35
<PAGE>
* 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.
*** 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, 1996, is
incorporated herein by reference.
**** This document, filed with the Securities Exchange Commission in
Washington D.C. (file Number 1-7183) under Item 14 to Registrant's
Annual Report on Form 10-K for year ended December 31, 1997, is
incorporated herein by reference.
***** This document, filed with the Securities Exchange Commission in
Washington D.C. (file Number 1-7183) under Item 6 to Registrant's
10-Q, for the period ending June 30, 1999, is incorporated herein by
reference.
Financial Statement Schedules -- The response to this portion of Item 14 is
submitted as a separate section of this report.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
DATED: March 25, 2000 BY:__________________________________
Robert A. Stine
President and Chief Executive Officer
(Principal Executive Officer)
DATED: March 25, 2000 BY:___________________________________
Allen E. Lyda Vice President, Chief
Financial Officer & Treasurer
(Principal Financial and Accounting Officer)
37
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
Director March 7, 2000
_______________________
Otis Booth, Jr.
Director March 7, 2000
_______________________
Craig Cadwalader
Director March 7, 2000
_______________________
Dan T. Daniels
Director March 7, 2000
_______________________
Rayburn S. Dezember
Director March 7, 2000
_______________________
John L. Goolsby
Director March 7, 2000
_______________________
Norman Metcalfe
Director March 7, 2000
_______________________
George G.C. Parker
Director March 7, 2000
_______________________
Robert Ruocco
Director March 7, 2000
_______________________
Kent Snyder
Director March 7, 2000
_______________________
Geoffrey Stack
Director March 7, 2000
_______________________
Robert A. Stine
Director March 7, 2000
_______________________
Martin Whitman
</TABLE>
38
<PAGE>
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2),(c) and (d)
List of Financial Statements and Financial Statement Schedules
Financial Statements
Certain Exhibits
Year Ended December 31, 1999
Tejon Ranch Co.
Lebec, California
39
<PAGE>
Form 10-K - Item 14(a)(1) and (2)
Tejon Ranch Co. and Subsidiaries
Index to Financial Statements and Financial Statement Schedules
ITEM 14(a)(1) - FINANCIAL STATEMENTS
- ------------------------------------
The following consolidated financial statements of Tejon Ranch Co. and
subsidiaries are included in Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 41
Consolidated Balance Sheets -
December 31, 1999 and 1998 42
Consolidated Statements of Income -
Years Ended December 31, 1999, 1998 and 1997 44
Consolidated Statements of Stockholders' Equity -
Three Years Ended December 31, 1999 45
Consolidated Statements of Cash Flows -
Years Ended December 31, 1999, 1998 and 1997 46
Notes to Consolidated Financial Statements 47
</TABLE>
ITEMS 14(a)(2) - FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------------
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
40
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
Tejon Ranch Co.
We have audited the consolidated balance sheets of Tejon Ranch Co. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of Registrant's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tejon Ranch Co.
and subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1, Registrant adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" effective October 1, 1998.
ERNST & YOUNG LLP
Los Angeles, California
February 11, 2000
41
<PAGE>
Tejon Ranch Co. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1999 1998
--------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 423,000 $ 743,000
Cash in escrow --- 4,200,000
Marketable securities 9,942,000 13,294,000
Accounts receivable 5,019,000 7,359,000
Inventories 22,808,000 17,416,000
Prepaid expenses and other current assets 1,101,000 996,000
--------------------------------
Total current assets 39,293,000 44,008,000
Property and equipment, net 50,737,000 27,553,000
Other assets:
Breeding herd, net of accumulated depreciation of $191,000
in 1999 and $155,000 in 1998 1,259,000 1,133,000
Other assets 230,000 320,000
--------------------------------
1,489,000 1,453,000
--------------------------------
Total assets $91,519,000 $73,014,000
================================
</TABLE>
See accompanying notes.
42
<PAGE>
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------------
Liabilities and stockholders' equity
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 3,315,000 $ 3,235,000
Other accrued liabilities 97,000 502,000
Current deferred income 117,000 62,000
Income taxes payable --- 192,000
Short-term debt 18,447,000 19,999,000
Current portion of long-term debt 1,039,000 250,000
------------------------------------
Total current liabilities 23,015,000 24,240,000
Long-term debt, less current portion 20,606,000 1,875,000
Deferred income taxes 4,738,000 4,194,000
Commitments and contingencies
Stockholders' equity:
Common Stock, $.50 par value per share:
Authorized shares - 30,000,000
Issued and outstanding shares - 12,697,179 in 1999
and 12,691,253 in 1998 6,349,000 6,346,000
Additional paid-in capital 379,000 382,000
Accumulated other comprehensive income (269,000) (179,000)
Retained earnings 36,701,000 36,156,000
------------------------------------
Total stockholders' equity 43,160,000 42,705,000
------------------------------------
Total liabilities and stockholders' equity $91,519,000 $73,014,000
====================================
</TABLE>
See accompanying notes.
43
<PAGE>
Tejon Ranch Co. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Real estate $ 5,178,000 $ 5,742,000 $ 3,403,000
Livestock 38,940,000 30,077,000 21,798,000
Farming 7,433,000 8,671,000 9,173,000
Resource management 3,726,000 2,597,000 2,696,000
Interest income 639,000 1,001,000 1,159,000
------------------------------------------------------
55,916,000 48,088,000 38,229,000
Costs and expenses:
Real estate 4,705,000 2,799,000 2,400,000
Livestock 37,079,000 28,983,000 20,299,000
Farming 6,285,000 6,402,000 6,546,000
Resource management 1,881,000 1,636,000 1,368,000
Corporate expenses 3,198,000 2,581,000 2,346,000
Interest expense 863,000 1,065,000 747,000
------------------------------------------------------
54,011,000 43,466,000 33,706,000
------------------------------------------------------
Income before income taxes 1,905,000 4,622,000 4,523,000
Income taxes 724,000 1,613,000 1,491,000
------------------------------------------------------
Income before cumulative effect of
a change in an accounting principle 1,181,000 3,009,000 3,032,000
Cumulative effect of a change in an
accounting principle (net of taxes of
$70,000) --- 130,000 ---
------------------------------------------------------
Net income $ 1,181,000 $ 3,139,000 $ 3,032,000
======================================================
Income per share before cumulative effect
of a change in an accounting principle,
basic $ 0.09 $ 0.24 $ 0.24
======================================================
Income per share before cumulative effect
of a change in an accounting principle, $ 0.09 $ 0.24 $ 0.24
diluted
======================================================
Net income per share, basic $ 0.09 $ 0.25 $ 0.24
======================================================
Net income per share, diluted $ 0.09 $ 0.25 $ 0.24
======================================================
See accompanying notes.
</TABLE>
44
<PAGE>
Tejon Ranch Co. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Three years ended December 31, 1999
<TABLE>
<CAPTION>
Common Accumulated
Stock Additional Other
Shares Common Paid-In Comprehensive Retained
Outstanding Stock Capital Income Earnings Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1997 12,682,244 $6,341,000 $387,000 ($ 249,000) $31,253,000 $37,732,000
Net income --- --- --- 3,032,000 3,032,000
Defined benefit plan funding
adjustments, net of
taxes of $170,000 --- --- 256,000 --- 256,000
Changes in unrealized gains
on available-for-sale securities, --- --- 102,000 --- 102,000
net of taxes of $73,000
---------------
Comprehensive income --- --- --- --- 3,390,000
---------------
Exercise of stock options 3,750 2,000 (2,000) --- --- ---
Cash dividends paid-
$.05 per share --- --- --- (634,000) (634,000)
----------------------------------------------------------------------------------------------
Balance December 31, 1997 12,685,994 6,343,000 385,000 109,000 33,651,000 40,488,000
Net Income --- --- --- 3,139,000 3,139,000
Defined benefit plan funding
adjustments, net of taxes of --- --- (216,000) --- (216,000)
$133,000
Changes in unrealized losses
On available-for-sale
securities, --- --- (72,000) --- (72,000)
---------------
net of taxes of $49,000
Comprehensive income --- --- --- --- 2,851,000
---------------
Exercise of stock options 5,259 3,000 (3,000) --- --- ---
Cash dividends paid-
$.05 per share --- --- --- (634,000) (634,000)
----------------------------------------------------------------------------------------------
Balance, December 31, 1998 12,691,253 6,346,000 382,000 (179,000) 36,156,000 42,705,000
Net Income --- --- --- 1,181,000 1,181,000
Defined benefit plan funding
adjustments, net of taxes
of $133,000 --- --- 216,000 --- 216,000
Changes in unrealized
losses on available-for-sale
securities, net of taxes of --- --- (306,000) --- (306,000)
$205,000
--------------
Comprehensive income --- --- --- --- 1,091,000
---------------
Exercise of stock options 5,926 3,000 (3,000) --- --- ---
Cash dividends paid -
$.05 per share --- --- --- (636,000) (636,000)
----------------------------------------------------------------------------------------------
Balance, December 31, 1999 12,697,179 $6,349,000 $379,000 ($269,000) $36,701,000 $43,160,000
</TABLE>
See accompanying notes.
45
<PAGE>
Tejon Ranch Co. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Operating Activities
- --------------------
Net Income $ 1,181,000 $ 3,139,000 $ 3,032,000
Items not affecting cash:
Depreciation and amortization 2,494,000 1,998,000 1,729,000
Deferred income taxes 539,000 1,049,000 585,000
Gain from sale of land (1,747,000) (4,231,000) ---
Losses on sales of investments 17,000 --- 3,000
Equity in loss from unconsolidated joint venture 889,000 --- ---
Changes in certain current assets and current liabilities:
Accounts receivable 2,340,000 1,089,000 (4,145,000)
Inventories (5,392,000) (5,194,000) (8,434,000)
Prepaid expenses and other current assets (28,000) 685,000 (100,000)
Trade accounts payable and other accrued liabilities (299,000) 432,000 2,222,000
Current deferred income 55,000 (230,000) 27,000
Income taxes payable (192,000) 192,000 (856,000)
-----------------------------------------------
Net cash used in operating activities (143,000) (1,071,000) (5,937,000)
Investing Activities
- --------------------
Acquisition of Champion Feeders --- --- (3,874,000)
Maturities of marketable securities 9,987,000 6,644,000 8,415,000
Funds invested in marketable securities (7,162,000) (2,870,000) (5,310,000)
Net change in breeding herd (126,000) (77,000) (174,000)
Funds from sale of land 1,747,000 4,250,000 ---
Cash in escrow 4,200,000 (4,200,000) ---
Property and equipment expenditures (25,678,000) (7,700,000) (3,600,000)
Other (477,000) (369,000) (125,000)
-----------------------------------------------
Net cash used in investing activities (17,509,000) (4,322,000) (4,668,000)
Financing Activities
- --------------------
Proceeds from revolving line of credit 33,760,000 26,929,000 30,435,000
Payments on revolving line of credit (35,312,000) (18,885,000) (21,288,000)
Borrowing of long-term debt 19,800,000 --- 2,500,000
Repayment of long-term debt (280,000) (2,250,000) (125,000)
Cash dividends paid (636,000) (634,000) (634,000)
-----------------------------------------------
Net cash provided by financing activities 17,332,000 5,160,000 10,888,000
-----------------------------------------------
Increase (decrease) in cash and cash equivalents (320,000) (233,000) 283,000
Cash and cash equivalents at beginning of year 743,000 976,000 693,000
-----------------------------------------------
Cash and cash equivalents at end of year $ 423,000 $ 743,000 $ 976,000
===============================================
Supplemental Cash Flow Information
Interest Paid (net of amounts capitalized) $ 1,199,000 $ 1,185,000 $ 750,000
===============================================
Income taxes paid $ 123,000 $ 232,000 $ 1,317,000
===============================================
</TABLE>
See accompanying notes.
46
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Registrant and all
significant subsidiaries in which a controlling interest is held. All
significant intercompany transactions have been eliminated in consolidation.
Investments in unconsolidated joint ventures in which Registrant has less than a
controlling interest are accounted for under the equity method of accounting
primarily since Registrant does not exercise managerial control over its
investment and, accordingly, Registrant reflects its investment as adjusted for
capital contributions, distributions, and Registrant's equity in net income or
loss of the respective joint venture.
Reclassification
Certain amounts included in the 1998 and 1997 financial statements have been
reclassified to conform to the current year presentation.
Cash Equivalents
Registrant considers all highly liquid investments, with a maturity of three
months or less when purchased, to be cash equivalents. The carrying amount for
cash equivalents approximates fair value.
Marketable Securities
Registrant considers those investments not qualifying as cash equivalents, but
which are readily marketable, to be marketable securities. Registrant
classifies all marketable securities as available-for-sale, which are stated at
fair value with the unrealized gains (losses), net of tax, reported as a
component of comprehensive income in the consolidated statements of
stockholders' equity.
Credit Risk
Registrant grants credit to customers, principally large cattle purchasers,
feedlot customers, co-ops, wineries, nut marketing companies, and lessees of
Registrant facilities. Registrant performs periodic credit evaluations of its
customer's financial condition and generally does not require collateral.
During 1999, 1998 and 1997 the following customers accounted for more than 10%
of Registrant's consolidated revenues, Excel Meat Packing, a purchaser of
cattle, (39% in 1999 and 22% in 1998) and Golden State Vintners (15% in 1997).
47
<PAGE>
Registrant maintains its cash and cash equivalents in federally insured
financial institutions. The account balances at these institutions periodically
exceeds FDIC insurance coverage, and, as a result, there is a concentration of
credit risk related to amounts on deposit in excess of FDIC insurance coverage.
Registrant believes that the risk is not significant.
Farm Inventories
Costs of bringing crops to harvest are capitalized when incurred. Such costs
are expensed when the crops are sold. Costs during the current year related to
the next year's crop are capitalized and carried in inventory until the matching
crop is harvested and sold. Farm inventories held for sale are valued at the
lower of cost (first-in, first-out method) or market.
Cattle Inventories and Breeding Herd
Cattle raised on the Ranch are stated at the accumulated cost of developing such
animals for sale or transfer to a productive function, and purchased cattle are
stated at cost plus development costs. All cattle held for sale are valued at
the lower of cost (first-in, first-out method) or market and are included in the
caption inventories. Purchased bulls and cows included in the breeding herd and
used for breeding are depreciated using the straight-line method over five to
seven years.
Commodity Contracts Used to Manage Price Fluctuations
Registrant enters into futures and option contracts to manage its exposure to
price fluctuations on its stocker cattle and its cattle feed costs. The goal of
Registrant is to protect or create a future price for its cattle and feed that
will provide a profit once the cattle are sold and all costs are deducted.
Futures and options contracts are carried at market value and included in other
current assets in the consolidated balance sheets with unrealized gains and
losses recognized in the consolidated statements of income.
Property and Equipment
Property and equipment are stated on the basis of cost, except for land acquired
upon organization in 1936, which is stated on the basis (presumed to be at cost)
carried by Registrant's predecessor. Depreciation is computed using the
straight-line method over the estimated useful lives of the various assets.
Buildings and improvements are depreciated over a 10 year to 27.5 year life.
Machinery, water pipelines, furniture, fixtures, and other equipment are
depreciated over a 3 year to 10 year life depending on the type of asset.
Vineyards and orchards are generally depreciated over a 20 year life with
irrigation systems over a 10 year life. Oil, gas and mineral reserves have not
been appraised, and accordingly no value has been assigned to them.
48
<PAGE>
Vineyards and Orchards
Costs of planting and developing vineyards and orchards are capitalized until
the crops become commercially productive. Interest costs and depreciation of
irrigation systems and trellis installations during the development stage are
also capitalized. Revenues from crops earned during the development stage are
netted against development costs. Depreciation commences when the crops become
commercially productive.
At the time crops are harvested and delivered to buyers and revenues are
estimatable, revenues and related costs are recognized, which traditionally
occurs during the third and fourth quarters of each year. Orchard revenues are
based upon estimated selling prices, whereas vineyard revenues are recognized at
the contracted selling price. Estimated prices for orchard crops are based upon
the quoted estimate of what the final market price will be by marketers and
handlers of the orchard crops. Actual final orchard crop selling prices are not
determined for several months following the close of Registrant's fiscal year
due to supply and demand fluctuations within the orchard crop markets.
Adjustments for differences between original estimates and actual revenues
received are recorded during the period in which such amounts become known. The
net effect of these adjustments decreased farming revenue $541,000 in 1999,
decreased farming revenue $168,000 in 1998, and increased farming revenue
$693,000 in 1997.
The Almond Board of California has the authority to require producers of almonds
to withhold a portion of their annual production from the marketplace through a
Secretary of Agriculture approved marketing order. At December 31, 1999,
producers were required to withhold 22.36% of their 1999 almond crop production
from the marketplace. Registrant has recognized $427,000 into inventory related
to this withholding. At December 31, 1998 and 1997, no such withholding was
mandated.
Common Stock Options
Registrant has elected to follow Accounting Principles Board Opinion No 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employees', advisors', and consultants' stock options
because, as discussed in Note 6, the alternative fair value accounting provided
for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of stock options
granted by Registrant equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Net Income Per Share
Basic net income per share is based upon the weighted average number of shares
of common stock outstanding during the year (12,697,179 in 1999, 12,691,253 in
1998, and 12,683,497 in 1997). 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 (12,796,485 in
49
<PAGE>
1999, 12,752,967 in 1998, and 12,726,729 in 1997). The weighted average
additional number of shares relating to dilutive stock options were 100,945 in
1999, 61,714 in 1998, and 43,232 in 1997.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", Registrant records impairment losses on long-lived assets held
and used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
their related carrying amounts. In addition, Registrant accounts for its long-
lived assets to be disposed of at the lower of their carrying amounts or fair
value less selling and disposal costs. At December 31, 1999, Management of
Registrant believes that none of its assets are impaired.
Sales of Real Estate
Revenues are recorded and profit is recognized when title has passed to the
buyer and a minimum down payment has been received.
Rental Income
Minimum rent revenues are recognized on a straight-line basis over the
respective lease term.
Environmental
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and which do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated. Generally, the timing of these accruals coincides with the
completion of a feasibility study or Registrant's commitment to a formal plan of
action. No liabilities for environmental costs have been recorded at December
31, 1999, 1998 or 1997.
Use of Estimates
The preparation of Registrant's financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the financial
statement dates and the reported amounts of revenue and expenses during the
reporting period. Due to uncertainties inherent in the estimation process, it
is reasonably possible that actual results could differ from these estimates.
50
<PAGE>
New Accounting Pronouncements
Effective October 1, 1998, Registrant adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133 ("Accounting for Derivative
Instruments and Hedging Activities". 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 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 consolidated statement of income. For the year-ended
December 31, 1999, Registrant recognized loses of $256,000 related to SFAS 133
and recognized $200,000 in gains during 1998 related to SFAS 133.
Management has elected to not designate its futures and option contracts as
hedges. Accordingly, in 1998 Registrant reported a gain of $130,000, net of tax
of $70,000, resulting from the cumulative effect of a change in an accounting
principle on the consolidated statements of income.
2. 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. Registrant has elected to classify its securities as available-for-
sale and, therefore, is required to adjust securities to fair value at each
reporting date.
The following is a summary of available-for-sale securities at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------
Estimated Fair Estimated Fair
Cost Value Cost Value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marketable Securities:
U.S. Treasury
and agency notes $ 5,191,000 $4,824,000 $ 6,905,000 $ 6,961,000
Corporate notes 5,201,000 5,118,000 6,328,000 6,333,000
---------------------------------------------------------------------------------------------
$10,392,000 $9,942,000 $13,233,000 $13,294,000
============================================================================================
</TABLE>
As of December 31, 1999, the fair value adjustment to consolidated stockholders'
equity is an unrealized loss on available-for-sale securities of $306,000, net
of a tax expense of $205,000. Registrant's gross unrealized holding losses
equal $450,000. On December 31, 1999, the average maturity of U.S. Treasury and
agency securities was 2.8 years and corporate notes was 1.8 years. Currently
Registrant has no securities with a weighted average life of greater than five
years. During 1999 and 1997 Registrant recognized losses of $17,000 and $3,000
on the sale of $2.4
51
<PAGE>
and $2.0 million, respectively of securities, carried at historical costs
adjusted for amortization and accretion.
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.
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------
<S> <C> <C>
Cattle held for sale $21,172,000 $16,577,000
Farming inventories 1,077,000 326,000
Feed inventories 559,000 513,000
-------------------------------------------
$22,808,000 $17,416,000
===========================================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------
<S> <C> <C>
Land and land improvements $ 6,841,000 $ 4,311,000
Buildings and improvements 35,313,000 17,287,000
Machinery, water pipelines, furniture, fixtures, and other equipment 8,357,000 6,455,000
Vineyards and orchards 19,267,000 17,339,000
----------------------------------------
69,778,000 45,392,000
Less allowance for depreciation (19,041,000) (17,839,000)
-----------------------------------------
$ 50,737,000 $ 27,553,000
=========================================
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT
Registrant may borrow up to $25,000,000 on a secured revolving line of credit at
interest rates .50% less than the bank's prime rate (8.00% at December 31, 1999)
or at a fixed rate of 1.50% greater than LIBOR. The revolving line expires in
June 2004. At December 31, 1999, there was $15,026,000 of outstanding debt
under the line of credit agreement. Registrant's feedlot also has a short-term
revolving line of credit with a local bank for $6,800,000. The outstanding
balance at December 31, 1999 was $3,421,000, with the interest rate
approximating the bank's prime lending rate of 8.50%. The above borrowings are
secured by Registrant's livestock inventory
52
<PAGE>
and farm acreage. On all short-term debt arrangements interest is payable
monthly and principal is paid or borrowed on a daily basis as needed. The
weighted average interest rate on short-term debt was 7.28% for 1999.
During 1998 Registrant could borrow up to $13,700,000 on a short-term unsecured
revolving line of credit at interest rates approximating the bank's prime rate
(7.75% at December 31, 1998). At December 31, 1998, there was $13,155,000 of
outstanding debt under the line of credit agreement. Registrant also had an
outstanding short-term borrowing with an investment banking company, with an
outstanding balance of $5,308,000 at December 31, 1998, at an interest rate of
5.75%. Registrant's feedlot also had a short-term revolving line of credit with
a local bank for $4,000,000. The outstanding balance at December 31, 1998 was
$1,536,000, with the interest rate approximating the bank's prime lending rate
of 7.75%. On all short-term debt arrangements interest was payable monthly and
principal was paid or borrowed on a daily basis as needed. The weighted average
interest rate on short-term debt was 7.38 % for 1998.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
<S> <C> <C>
Notes payable to a bank $21,645,000 $2,125,000
Less current portion (1,039,000) (250,000)
-------------------------------------
$20,606,000 $1,875,000
=====================================
</TABLE>
At December 31, 1999 the long-term note payable balance included a $15,000,000
note used in funding long-term assets that is secured by farm acreage.
Principal is payable in quarterly payments of $375,000 beginning June 2000 with
remaining principal due June 2004. Interest is at .50% less than the bank's
prime rate or a fixed rate of 1.50% greater than the specified LIBOR rate. This
amount was reclassified from short-term debt to long-term debt due to new loan
agreements being effective February 9, 2000, which were in process at year-end
1999. Long-term notes payable also consist of debt related to the purchase of
commercial/industrial buildings totaling $4,770,000 at December 31, 1999. The
interest rate is fixed at 7.61% with monthly principal and interest payments.
The annual principal payments total $39,000 and the final due date is April
2009. The remaining long-term note payable of $1,875,000 provides for interest
at 8.63% per annum, payable monthly on any amounts outstanding. Principal is
payable quarterly in amounts of $62,500, with the remaining balance due December
31, 2003. This note is secured by land and assets of Registrant's feedlot.
The long-term note payable in 1998 provided for interest at an average rate of
8.57% per annum, payable monthly, on amounts outstanding. Principal was payable
quarterly in amounts of $62,500, with the remaining balance due December 31,
2003. Amounts borrowed were secured by land and assets of Registrant's feedlot.
The amount of the line of credit, short-term, and long-term debt instruments
listed above approximate the fair value of the instruments.
53
<PAGE>
Registrant capitalized interest costs of $1,168,000, $102,000, and $0 for the
years ended December 31, 1999, 1998, and 1997, respectively.
Interest paid net of amounts capitalized approximated interest expense incurred
for each of the three years in the period ended December 31, 1999.
Maturities of long-term debt at December 31, 1999 are $1,039,000 in 2000,
$1,793,000 in 2001, $1,797,000 in 2002, $2,675,000 in 2003, $9,803,000 in 2004,
and $4,538,000 thereafter. This maturity schedule reflects the payments related
to the above long-term debt reclassified from short-term debt.
6. COMMON STOCK AND STOCK OPTION INFORMATION
The 1992 Stock Option Plan provides for the granting of options to purchase a
maximum of 230,000 shares of Registrant's common stock to employees, advisors,
and consultants of Registrant at 100% of the fair market value as of the date of
grant. The compensation committee of the board of directors administers the
plan. Since adoption of the plan in March 1992, options have been granted under
the 1992 Stock Option Plan with respect to 159,000 shares at an exercise price
of $16 per share and 20,000 shares at an exercise price of $15 per share.
On April 7, 1997 options to purchase 159,000 shares were amended to lower the
previously existing exercise price to $16.00 per share, which was the market
price at the date of the amendment. These options have a ten-year term and vest
over a one-to-five-year periods from the grant date. The grant date for options
to purchase 59,000 shares is 1992, the grant date to purchase 20,000 shares was
1993, and the grant date for options to purchase 100,000 shares is May 1, 1996.
On January 26, 1998, the Board of Directors adopted the 1998 Stock Incentive
Plan. The Incentive Plan provides for the making of awards to employees,
consultants, and advisors of Registrant with respect to 800,000 shares of common
stock. From the adoption of the Incentive Plan to December 31, 1999, Registrant
has granted options to purchase 623,587 shares at a price equal to the fair
market value at date of grant, all of which were outstanding at December 31,
1999.
Also, on January 26, 1998, the Board of Directors adopted the Non-Employee
Director Stock Incentive Plan. This plan is intended to enable Registrant to
attract, retain, and motivate its non-employee directors by providing for or
increasing the proprietary interests of such persons in Registrant. The plan
provides for making of awards to non-employee directors with respect to an
aggregate of 200,000 shares of common stock. Since the adoption of the plan to
December 31, 1999, Registrant has granted options under the plan to purchase
34,039 shares at a price equal to the fair market value at date of grant.
The 1998 Stock Incentive Plan and the Non-Employee Director Stock Incentive Plan
were approved by stockholders at Registrant's Annual Meeting on May 11, 1998.
54
<PAGE>
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if Registrant had accounted for its
stock options under the fair value method of the statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1999: Risk-
free interest rate of 6.50%; dividend rate of .21%; volatility factor of the
expected market price of Registrant's common stock of .44; and a weighted
average expected life of the options of five years from the option grant date.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
Registrant's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock option plan.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. Registrant's pro
forma information follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
<S> <C> <C>
Pro forma net income $506,446 $2,965,000
Pro forma net income per share, diluted $ 0.04 $ 0.23
</TABLE>
A summary of Registrant's stock option activity and related information for the
years ended December 31, follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------------
Weighted- Weighted-Average
Average Exercise Exercise Prices
Options Prices Per Share Options Per Share
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding
beginning of year 546,441 $19.73 172,178 $15.91
Granted 283,092 23.02 390,534 21.29
Exercised (14,143) 15.71 (13,725) 16.00
Forfeited/Cancelled (16,000) 23.88 (2,546) 24.50
----------------------------------------------------------------------------------------------
Outstanding end of year 799,390 $20.88 546,441 $19.73
Options exercisable
end of year 115,803 $17.63 83,453 $15.91
Weighted-average fair value
per share of options granted
$10.70 $10.05
</TABLE>
55
<PAGE>
Exercise prices for options outstanding as of December 31, 1999 ranged from
$15.00 to $26.38. The weighted-average remaining contractual life of those
options is approximately six years.
7. COMMODITY CONTRACTS USED TO MANAGE RISK
Registrant uses commodity derivatives to manage risk on its purchased stocker
cattle and its cattle feed costs. The objective is to protect or create a
future price for stocker cattle that will protect a profit or minimize a loss
once the cattle are sold and all costs are deducted and to protect Registrant
against a significant cattle market decline or feed cost increase. To help
achieve this objective Registrant uses 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 on a daily basis in
accordance with formal policies to determine the appropriate hedge based on
market movement of the underlying asset. The options and futures contracts used
typically expire on a quarterly or semi-annual basis and are structured to
expire close to or during the month the stocker cattle and feed are scheduled to
be sold or purchased. The risk associated with this strategy for Registrant is
that it limits or caps the potential profits if cattle prices begin to increase
or can add additional costs for feed if grain prices fall.
Realized gains, losses, and market value adjustments associated with both closed
and open contracts are recognized in cost of sales expense. During 1999,
Registrant recognized approximately $256,000 in net losses from hedging and
derivative activity as an increase in cost of sales. In 1998 and 1997,
Registrant recognized approximately $485,000 in gains and $360,000, in losses,
respectively, from derivative activity.
The following table identifies the futures contract amounts and options contract
costs outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Original Estimated
Commodity Future/Option No. Contract/Cost Fair Value
Description Contracts (Bought) Sold (Bought) Sold
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cattle futures sold
40,000 lbs. per contract 142 $ 3,897,000 $(3,985,000)
Cattle futures bought
50,000 lbs. per contract 280 $(3,035,000) $ 2,960,000
Cattle options bought
40,000 lbs. per contract 50 $ (20,000) $ 8,000
Cattle options sold
40,000 lbs. per contract 50 $ 20,000 $ (18,000)
</TABLE>
56
<PAGE>
The above futures contracts and options contracts expire between February 2000
and September 2000. Estimated fair value at settlement is based upon quoted
market prices at December 31, 1999.
8. INCOME TAXES
Registrant accounts for income taxes using SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in Registrant's financial
statements or tax returns.
The provision for income taxes consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
-----------------------------------------------
Federal:
Current $ --- $ 132,000 $ 691,000
Deferred 556,000 1,164,000 486,000
-------------------------------------------------
556,000 1,296,000 1,177,000
State:
Current --- 60,000 182,000
Deferred 168,000 327,000 132,000
--------------------------------------------------
168,000 387,000 314,000
--------------------------------------------------
$724,000 $1,683,000 $1,491,000
==================================================
</TABLE>
The reasons for the difference between total income tax expense and the amount
computed by applying the statutory Federal income tax rate (34%) to income
before taxes are as follows at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Income tax at the statutory rate $648,000 $1,639,000 $1,538,000
State income taxes, net of Federal benefit 109,000 255,000 123,000
Other, net (33,000) (211,000) (170,000)
--------------------------------------------------
$724,000 $1,683,000 $1,491,000
==================================================
</TABLE>
57
<PAGE>
Deferred income taxes result from temporary differences in the financial and tax
bases of assets and liabilities. The total current deferred tax asset is
included with prepaid expenses and other current assets on the consolidated
balance sheets. Significant components of Registrant's deferred tax liabilities
and assets are as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
<S> <C> <C>
Deferred income tax assets:
Accrued expenses $ 33,000 $ 171,000
Prepaid revenues 31,000 21,000
Other 13,000 65,000
-------------------- -------------------
====================================================
Total deferred income tax assets 77,000 257,000
Deferred income tax liabilities:
Depreciation and amortization 666,000 919,000
Involuntary conversion, tax exchange-land 3,115,000 2,520,000
Other 957,000 755,000
--------------------
Total deferred income tax liabilities 4,738,000 4,194,000
-------------------- --------------------
Net deferred income tax liabilities $4,661,000 $3,937,000
==================== ====================
</TABLE>
Registrant made net payments of income taxes of $123,000, $232,000, and
$1,317,000 during 1999, 1998 and 1997, respectively.
9. OPERATING LEASES
Registrant is lessor of certain property pursuant to various commercial lease
agreements having terms ranging up to 60 years. The cost and accumulated
depreciation of buildings and improvements subject to such leases were
$13,832,000 and $1,430,000, respectively, at December 31, 1999. Income from
commercial rents, included in real estate revenue was $1,609,000 in 1999,
$975,000 in 1998, and $985,000 in 1997. Future minimum rental income on
noncancelable operating leases as of December 31, 1999 is: $2,026,000 in 2000,
$2,064,000 in 2001, $1,712,000 in 2002, $1,263,000 in 2003, $1,002,000 in 2004,
and $5,814,000 for years thereafter.
10. COMMITMENTS AND CONTINGENCIES
A total of 5,488 acres of Registrant's land is subject to water contracts
requiring minimum future annual payments for as long as Registrant owns such
land. The estimated minimum payments for 2000 are $1,300,000, whether or not
water is available or is used. Minimum payments made under these contracts were
approximately $1,322,000 in 1999, $1,200,000 in 1998, and $1,215,000 in 1997.
Approximately 4,600 acres of this land are subject to contingent
58
<PAGE>
assessments of approximately $792,000 to service water district bonded
indebtedness, if water district revenues are insufficient to cover bond interest
and redemptions when due.
At December 31, 1999, Registrant was guaranteeing the repayment of $3.8 million
of debt of the Petro Travel Plaza, LLC. Total debt at Petro Travel Plaza LLC is
$13.0 million and is related to the construction of the travel plaza.
Registrant does not expect the guarantee to ever be used due to the cash flow
provided by the operations of the Petro Travel Plaza, LLC.
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 clean up and abate an old
industrial waste landfill site, a storage area for drums containing lubricants
and solvents, an underground storage tank for waste oil and solvents, an
underground plume of hydrocarbons, diesel fuel which leaked from a pipeline, and
the cement kiln dust piles on the leased premises. Lafarge has undertaken the
investigation and remediation of landfills and has completed the removal of
contaminated soils above the groundwater level from the landfills. Lafarge has
also completed a substantial amount of the site investigation with respect to
chlorinated hydrocarbons. The plume of chlorinated hydrocarbons covers an
extensive area and has migrated off of the leased premises in one direction
where it has been found to be leaking into a local creek. Lafarge 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 offsite. Under the 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, each of the companies is required to indemnify Registrant for its
designated portion of 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 Registrant is remote at this time.
11. RETIREMENT PLAN
Registrant has a retirement plan which covers substantially all employees. The
benefits are based on years of service and the employee's five year final
average salary. Contributions are intended to provide for benefits attributable
to service both to date and expected to be provided in the future. Registrant
funds the plan in accordance with the Employee Retirement Income Security Act of
1974 (ERISA).
The following accumulated benefit information is as of December 31:
59
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits
---------------------------------------
1999 1998
<S> <C> <C>
Change In Benefit Obligation
Benefit Obligation At Beginning Of Year $3,530,000 $2,820,000
Service Cost 190,000 170,000
Interest Cost 223,000 179,000
Actuarial Gain (Loss) (803,000) 483,000
Benefits Paid (300,000) (122,000)
---------- ----------
Benefit Obligation At End of Year $2,840,000 $3,530,000
========== ==========
Change In Plan Assets
Fair value of plan assets at beginning of year $2,783,000 $2,323,000
Actual Return On Plan Assets 487,000 447,000
Employer Contribution 156,000 135,000
Benefits Paid (300,000) (122,000)
---------- ----------
Fair Value Of Plan Assets At End Of Year $3,126,000 $2,783,000
========== ==========
Funded Status $ 286,000 $ (747,000)
Unrecognized net actuarial gain 60,000 1,206,000
Unrecognized net transition asset (78,000) (98,000)
Adjustments related to minimum liability 257,000 (387,000)
---------- ----------
Prepaid (accrued) benefit costs $ 525,000 $ (26,000)
========== ==========
</TABLE>
In accordance with the provisions of Financial Accounting Standard No. 87,
Registrant recorded a minimum pension liability in 1998 representing the excess
of the accumulated benefit obligation, $2,820,000, over the fair value of plan
assets, $2,784,000. The liability has been offset by intangible assets to the
extent possible. Because the asset recognized may not exceed the amount of
unrecognized past service cost, the balance of the liability at the end of 1998
is reported in accumulated other comprehensive income (loss), net of applicable
deferred income taxes.
Plan assets consist of equity, debt, and short-term money market investment
funds. The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of projected
benefits obligation was 6.5% and 6.0% in 1999 and 1998. The expected long-term
rate of return on plan assets was 7.5% in 1999 and 1998.
60
<PAGE>
Total pension and retirement expense was as follows for each of the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------
Cost components:
<S> <C> <C> <C>
Service cost-benefits earned during the period $(190,000) $(170,000) $ (81,000)
Interest cost on projected benefit obligation (223,000) (179,000) (155,000)
Expected return on plan assets 207,000 174,000 144,000
Net amortization and deferral (42,000) (20,000) (23,000)
----------------------------------------------------
Total net periodic pension cost $(248,000) $(195,000) $(115,000)
====================================================
</TABLE>
12. BUSINESS SEGMENTS
Registrant operates principally in four industries: livestock, farming, resource
management, and real estate. The livestock segment includes the production and
sale of beef cattle and the operation of a cattle feedlot. The farming segment
involves those operations related to permanent crops, leasing farmland, and the
supervision of farming activities. The resource management and the real estate
segments collect rents and royalties from lessees of Registrant-owned
properties, and the real estate segment obtains entitlements for and develops
Registrant-owned properties.
Information pertaining to Registrant's business segments follows for each of the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------
Segment profits:
<S> <C> <C> <C>
Livestock $ 1,861,000 $ 1,094,000 $ 1,499,000
Farming 1,148,000 2,269,000 2,627,000
Resource management 1,845,000 961,000 1,328,000
Real Estate 473,000 2,943,000 1,003,000
-----------------------------------------------------------
Segment profits 5,327,000 7,267,000 6,457,000
Interest income 639,000 1,001,000 1,159,000
Corporate expenses (3,198,000) (2,581,000) (2,346,000)
Interest expense (863,000) (1,065,000) (747,000)
-----------------------------------------------------------
Income Before Income Taxes $ 1,905,000 $ 4,622,000 $ 4,523,000
===========================================================
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Depreciation
Identifiable and Capital
Assets Amortization Expenditures
<S> <C> <C> <C>
----------------------------------------------------------------
1999
Livestock $27,661,000 $ 676,000 $ 603,000
Farming 13,574,000 811,000 2,086,000
Resource Management 1,492,000 161,000 98,000
Real Estate 30,483,000 745,000 22,624,000
Corporate 18,309,000 101,000 267,000
----------------------------------------------------------------
Total $91,519,000 $2,494,000 $25,678,000
================================================================
1998
Livestock $29,101,000 $ 602,000 $ 572,000
Farming 12,890,000 780,000 1,962,000
Resource Management 1,338,000 148,000 198,000
Real Estate 8,726,000 380,000 4,895,000
Corporate 20,959,000 88,000 73,000
----------------------------------------------------------------
Total $73,014,000 $1,998,000 $ 7,700,000
================================================================
1997
Livestock $24,215,000 $ 588,000 $ 4,109,000
Farming 10,176,000 737,000 1,287,000
Resource Management 363,000 21,000 25,000
Real Estate 5,933,000 328,000 1,571,000
Corporate 23,006,000 55,000 84,000
----------------------------------------------------------------
Total $63,693,000 $1,729,000 $ 7,076,000
================================================================
</TABLE>
Segment profits are total revenues less operating expenses, excluding interest
and corporate expenses. Identifiable assets by segment include both assets
directly identified with those operations and an allocable share of jointly used
assets. Corporate assets consist primarily of cash and cash equivalents,
refundable and deferred income taxes, land and buildings. Land is valued at
cost for acquisitions since 1936. Land acquired in 1936, upon organization of
Registrant, is stated on the basis (presumed to be at cost) carried by
Registrant's predecessor.
62
<PAGE>
13. UNAUDITED QUARTERLY OPERATING RESULTS
The following is a tabulation of unaudited quarterly operating results for the
years indicated (in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
Income (Loss) Earnings (Loss)
Segment Before Cumulative Per Share Before Cumulative
Total ------------ Effect of Accounting Effect of Accounting Change
Revenue(2) Profit Change (4)
(Loss)
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------
1999
First quarter (3) $12,177 $1,305 $ 369 $ 0.03
Second quarter 5,698 (59) (575) (0.05)
Third quarter 15,470 2,797 806 0.06
Fourth quarter 22,571 1,284 581 0.05
----------------------------------------------------------------------------------------------------
$55,916 $5,327 $1,181 $ 0.09
====================================================================================================
1998
First quarter $ 8,244 $ (789) $ (781) $(0.06)
Second quarter 6,564 (791) (943) (0.08)
Third quarter 14,659 3,871 1,986 0.16
Fourth quarter (5) 18,621 4,976 2,747 0.22
-----------------------------------------------------------------------------------------------------
$48,088 $7,267 $3,009 $ 0.24
=====================================================================================================
</TABLE>
(1) Includes interest income.
(2) Revenues in the second and third quarters of 1999 were restated by
$1,014,000 and $3,692,000, respectively, to conform to 1999 fourth quarter
presentation. Revenues during the first, second, third, and fourth
quarters of 1998 were restated by $77,000, $1,017,000, $2,044,000, and
$1,656,000, respectively, to conform to current year presentation.
(3) Includes receipt of one time payment of $1,750,000 ($1,085,000 net of tax
or $.09 per share) from a fiber optic easement sale.
(4) Earnings per share on a diluted basis.
(5) Includes receipt of one time payment of $4,250,000 ($2,569,000 net of tax
or $.20 per share) from the sale of non-strategic land.
63
<PAGE>
14. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
Registrant is as a member in a limited liability company, Petro Travel Plaza,
LLC, in which it has an ownership interest of 60%. Registrant accounts for its
investment in Petro Travel Plaza using the equity method of accounting. Petro
Travel Plaza owns and operates a travel plaza/commercial highway operation in
the Tejon Industrial Complex. Registrant's investment deficit in its
unconsolidated joint venture is $889,000 at December 31, 1999, which is included
in other assets in the accompanying consolidated balance sheets. The net loss
in earnings of its unconsolidated joint venture is $889,000, which is included
in Real Estate operations in the accompanying consolidated statements of income
for the year ended December 31, 1999.
Condensed financial information of registrant's unconsolidated joint venture as
of and for the year ended December 31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Condensed Combined Income Statement Information
<S> <C>
Net Sales $13,647
-------
Net Loss (1,482)
Partner's Share of net loss (593)
-------
Equity in loss of unconsolidated joint venture $ (889)
=======
</TABLE>
<TABLE>
<CAPTION>
Condensed Combined Balance Sheet Information
- ---------------------------------------------------------------------------------------------------
<S> <C>
Current Assets $ 1,495
Property and equipment, net 17,237
Long-term Debt (13,000)
Other Liabilities (706)
--------
Net Assets $ 5,026
========
</TABLE>
64
<PAGE>
EXHIBIT 10.14
-------------
TEJON RANCH CO.
RESTRICTED STOCK AGREEMENT
Pursuant to the
1998 STOCK INCENTIVE PLAN
This Restricted Stock Agreement (this "Agreement") is made and entered into
as of the 7th day of December, 1999 by and between Tejon Ranch Co., a Delaware
corporation (the "Company"), and _________________ ("Grantee").
WHEREAS, Grantee is an executive officer of the Company; and
WHEREAS, pursuant to the Company's 1998 Stock Incentive Plan (the "Plan"),
the Board of Directors of the Company approved the grant to Grantee of a bonus
for services in the form of ___________ shares (the "Shares") of the Common
Stock, par value $.50 per share, of the Company, on the terms and conditions and
subject to the restrictions set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto agree as follows:
1. Issuance of Shares. As soon as practicable after the date of this
------------------
Agreement, the Company will issue the Shares to Grantee. The certificate or
certificates evidencing the Shares will have placed thereon a legend referring
to the existence of this Agreement, the rights of the Company to purchase the
Shares hereunder and the restrictions on transferability set forth herein.
2. The Right of Company to Repurchase the Shares. The Company will have
---------------------------------------------
the right to repurchase any or all the Shares (at the option of the Company)
from Grantee for a purchase price of $.01 per share if:
(a) the Ground Lease and Deed of Easement are not executed and
delivered as contemplated by the Option Agreement dated April 30, 1999
between Tejon Ranchcorp and Pastoria Energy Facility, LLC prior to the
expiration of the option to lease contemplated by that Option Agreement or
(b) the Financial Closing (as defined in the Transaction
Agreement dated April 30, 1999 among the Company, certain affiliates of the
Company, Enron Capital & Trade Resources Corp. and certain affiliates of
that entity) does not occur by the expiration of one year after the
execution and delivery of the Ground Lease and Deed of Easement referred to
in (a) above; or
65
<PAGE>
(c) the officer's employment is terminated prior to the later to
occur of the events in (a) and (b) above.
The right of the Company to purchase the Shares as provided above
shall terminate as to all the Shares upon the later to occur of (i) the
execution and delivery of the Ground Lease and Deed of Easement as described in
(a) above or (ii) the Financial Closing referred to in (b) above.
The Company may exercise its right to purchase the Shares by notifying the
Grantee of such exercise and delivering to the Grantee a Company's check in the
amount of the purchase price of the Shares. The Grantee will execute such
documents and instruments and make such deliveries as the Company may reasonably
request in connection with the purchase, including without limitation endorsing
the certificate or certificates evidencing the Shares or a stock assignment
separate from certificate and, if the certificate or certificates are not then
in the custody of the Company, delivering them to the Company at its request.
3. Restriction on Transfer. No Shares nor any interest therein may be
-----------------------
sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred
in any manner by the Grantee other than by will or the laws of descent and
distribution for so long as the Company has the right to purchase those Shares
as provided in Section 2. Any transfer by will or the laws of descent and
distribution shall be subject to the rights of the Company under this Agreement.
4. Custody of Certificates. The Company shall retain custody of the
-----------------------
certificate or certificates evidencing the Shares until such time as its right
to purchase the Shares terminates pursuant to Section 2 or it exercises its
right to purchase the Shares pursuant to that Section.
Concurrently with the execution and delivery of this Agreement the
Grantee is executing and delivering to the Company stock assignments separate
from certificate with respect to each of the certificates evidencing the Shares
in order to facilitate the transfer of the Shares to the Company in the event
the Company exercises its right to purchase them pursuant to Section 2. Upon
termination of that right, the Company will deliver to the Grantee one or more
certificates evidencing the Shares.
In the event the Shares are increased, decreased or exchanged for or
converted into cash, property or a different number or kind of security, or
cash, property and/or securities are distributed in respect of the Shares or any
such other securities, in each case as a result of a reorganization, merger,
consolidation, recapitalization, reclassification or dividend (including both
cash and stock dividends) or other distribution, stock split, reverse stock
split or the like, the proceeds of the Shares with respect to any such
transaction shall be retained by the Company as custodian and shall be delivered
to the Company in the event it exercises its right to purchase pursuant to
Section 2. Upon termination of the Company's right to purchase the Shares and/or
the proceeds thereof, the Company will deliver to the Grantee the Shares and/or
such proceeds.
66
<PAGE>
5. Payment of Withholding Taxes. If the Company is obligated to
----------------------------
withhold an amount on account of any federal, state or local tax imposed with
respect to the Shares, whether as a result of the expiration or exercise of the
Company's rights under Section 2 or otherwise, including, without limitation,
any federal, state or other income tax, or any F.I.C.A., state disability
insurance tax or other employment tax, then Grantee shall promptly pay such
amount (the "Withholding Liability") to the Company in cash or by a cashier's or
certified bank check or, if the Company so elects, a personal check, in each
case payable to the Company
6. Notices. Any notice given to the Company shall be addressed to the
-------
Company at P.O. Box 1000, Lebec, California 93243, Attention: General Counsel,
or at such other address as the Company may hereinafter designate in writing to
Grantee. Any notice given to Grantee shall be sent to the address set forth
below Grantee's signature hereto, or at such other address as Grantee may
hereafter designate in writing to the Company. Any such notice shall be deemed
duly given when delivered personally or five days after mailing by prepaid
certified or registered mail return receipt requested.
7. The Plan. The Shares are being issued pursuant to the Plan as in
--------
effect on the date of this Agreement and are subject to all the terms and
conditions of the Plan, as the same may be amended from time to time; provided,
however, that no such amendment shall deprive Grantee, without his or her
consent, of the Shares or of any of Grantee's rights under this Agreement. The
interpretation and construction by the Board of Directors or any committee of
the Board administering the Plan now or in the future, this Agreement, and such
rules and regulations as may be adopted by the Board of Directors or any such
committee thereof for the purpose of administering the Plan shall be final and
binding upon Grantee. Until the Shares have been purchased by the Company
pursuant to Section 2 or the Company's right to purchase the Shares has
terminated, the Company shall, upon written request therefor, send a copy of the
Plan, in its then-current form, to Grantee or any other person or entity then
entitled to the Shares.
8. Stockholder Rights. Until such time as the Shares have been purchased
------------------
by the Company pursuant to Section 2 or Grantee has transferred the Shares,
Grantee shall be entitled to vote, receive dividends and be deemed for any
purpose the holder of the Shares, subject, however, to the provisions of Section
4.
9. Employment Rights. No provision of this Agreement shall (a) confer
-----------------
upon Grantee any right to continue in the employ of the Company or any of its
subsidiaries, (b) affect the right of the Company and each of its subsidiaries
to terminate the employment of Grantee, with or without cause, or (c) confer
upon Grantee any right to participate in any employee welfare or benefit plan or
other program of the Company or any of its subsidiaries other than the 1998
Plan. Grantee hereby acknowledges and agrees that the Company and each of its
subsidiaries may terminate the employment of Grantee at any time and for any
reason, or for no reason, unless Grantee and the Company or such subsidiary are
parties to a written employment agreement that expressly provides otherwise.
10. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California.
67
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have duly executed this
Agreement as of the Date of Grant.
TEJON RANCH CO. GRANTEE
By:__________________________ __________________________
Name and Title: Signature
__________________________
Street Address
__________________________
City, State and Zip Code
__________________________
Social Security Number
68
<PAGE>
EXHIBIT 21
----------
(21) Subsidiaries of Registrant
A. Registrant: Tejon Ranch Co.
B. Subsidiaries of Registrant
a. Tejon Ranchcorp.
b. Laval Farms Corporation, formerly Tejon Agricultural Corporation.
c. Laval Agricultural Company, formerly Tejon Farming Company.
d. Tejon Marketing Company.
e. Tejon Ranch Feedlot, Inc.
f. White Wolf Corporation.
g. Tejon Development Corporation.
h. Tejon Industrial Corporation.
i. Champion Feedlot Trading Corp., a Texas corporation, 100% of
whose Common Stock is owned by Tejon Ranch Feedlot, Inc.
j. Liebre East Texas, Inc., a Texas corporation, 100% of whose
Common Stock is owned by Tejon Ranch Feedlot, Inc.
k. Tejon Almond Growers, LLC, a Delaware limited liability company.
l. Pastoria Power Project LLC, a California limited liability
company, 99% of whose membership interest is owned by Tejon
Ranchcorp and 1% of whose membership interest is owned by
Registrant.
m. Eastquads 3820 LLC, a Delaware limited liability company.
n. Eastquads 3826 LLC, a Delaware limited liability company.
o. Eastquads 3832 LLC, a Delaware limited liability company.
p. RSF 6051 LLC, a Delaware limited liability company.
q. Tejon Cattle Feeders L.L.C., a Texas limited liability company.
C. Each of the aforesaid subsidiaries is included in Registrant's
Consolidated Financial Statement set forth in answer to Item 14(a)(1)
hereof.
D. Each of the aforesaid subsidiaries (a) is a corporation unless
otherwise stated, (b) was organized and incorporated or filed under
the laws of the State of California unless otherwise stated, and (c)
has 100% of its Common Stock (if a corporation) or membership interest
(if a limited liability company) owned by Tejon Ranchcorp unless
otherwise stated.
E. Each of the aforesaid subsidiaries does business under its name, as
shown. Registrant also does business under the name Tejon Ranch
Company. Tejon Ranchcorp also does business under the names Tejon
Ranch Company, Tejon Ranch, Fireside Oak Co., and Grapevine Center.
Tejon Ranch Feedlot, Inc. and Champion Feedlot Trading Corp. also do
business under the name Champion Feeders. Tejon Almond Growers, LLC
also does business under the name Pacific Almond Co.
69
<PAGE>
EXHIBIT 23
----------
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-33491) pertaining to the Tejon Ranch Company 1992
Stock Option Plan and Registration Statement (Form S-8 No. 333-68869) pertaining
to the Tejon Ranch Company 1998 Stock Incentive Plan and Non-employee Director
Stock Incentive Plan of our report dated March 27, 2000, with respect to the
consolidated financial statements and schedules of Tejon Ranch Company included
in the Form 10-K for the year ended December 31, 1999.
ERNST & YOUNG LLP
Los Angeles, California
March 27, 2000
70
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<PAGE>
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<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
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<SECURITIES> 9,942
<RECEIVABLES> 5,019
<ALLOWANCES> 0
<INVENTORY> 22,808
<CURRENT-ASSETS> 39,293
<PP&E> 69,778
<DEPRECIATION> (19,041)
<TOTAL-ASSETS> 91,519
<CURRENT-LIABILITIES> 23,015
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0
0
<COMMON> 6,349
<OTHER-SE> 36,811
<TOTAL-LIABILITY-AND-EQUITY> 91,519
<SALES> 55,277
<TOTAL-REVENUES> 55,916
<CGS> 49,950
<TOTAL-COSTS> 49,950
<OTHER-EXPENSES> 3,198
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<INTEREST-EXPENSE> 863
<INCOME-PRETAX> 1,905
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<EPS-BASIC> .09
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