FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ___________ to
For Quarter Ended Commission File Number
September 30, 2000 1-7183
--------------------------- ----------
TEJON RANCH CO.
------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 77-0196136
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
P.O. Box 1000, Lebec, California 93243
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code...(661) 248-3000
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
-----
Total Shares of Common Stock issued and outstanding on
September 30, 2000, were 12,712,236.
TEJON RANCH CO.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of 1
Operations for the Three Months and Nine Months
Ended September 30, 2000 and 1999
Unaudited Consolidated Condensed Balance Sheets 2
As of September 30, 2000 and December 31, 1999
Unaudited Consolidated Condensed Statements of 3
Cash Flows for the Nine Months Ended
September 30, 2000 and 1999
Unaudited Consolidated Condensed Statements of Stockholders' 4
Equity
Notes to Unaudited Consolidated Condensed Financial 5
Statements
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
PART I - FINANCIAL INFORMATION
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------------
2000 1999 2000 1999
---------------- ----------------- ---------------- ----------------
Revenues:
Livestock $12,486 $ 9,504 $34,674 $22,737
Farming 2,503 4,495 2,908 4,778
Real Estate 4,530 1,321 6,928 5,349
Interest Income 159 150 471 481
---------------- ----------------- ----------------- -----------------
19,678 15,470 44,981 33,345
Costs and Expenses:
Livestock 12,274 8,655 32,580 21,572
Farming 2,447 2,690 3,486 3,390
Real Estate 3,077 1,178 5,511 3,858
Corporate Expense 857 1,158 2,366 2,646
Interest Expense 976 488 2,259 909
---------------- ---------------- ---------------- ----------------
19,631 14,169 46,202 32,375
---------------- ----------------- ---------------- ----------------
Operating Income (Loss) 47 1,301 (1,221) 970
Income Tax Provision (Benefit) 18 495 (464) 370
---------------- ---------------- ---------------- ----------------
Net Income (Loss) $ 29 $ 806 $ (757) $ 600
================ ================= ================ ================
Net Income (Loss) Per Share, basic $0.00 $0.06 $(0.06) $ 0.05
Net Income (Loss) Per Share, diluted $0.00 $0.06 $(0.06) $ 0.05
Cash Dividends Paid Per Share $ --- $ --- $ --- $ 0.025
See Notes to Unaudited Consolidated Condensed Financial Statements.
1
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In Thousands)
September 30, 2000 December 31, 1999*
------------------------- -------------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and Cash Equivalents $ 245 $ 423
Marketable Securities 10,648 9,942
Accounts & Notes Receivable 6,389 5,019
Inventories:
Cattle 23,743 21,172
Farming 2,517 1,077
Other 329 559
Prepaid Expenses and Other 1,679 1,101
------------------------- -------------------------
Total Current Assets 45,550 39,293
PROPERTY AND EQUIPMENT - NET 47,977 50,737
OTHER ASSETS 2,511 1,489
------------------------- -------------------------
TOTAL ASSETS $ 96,038 $ 91,519
========================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Accounts Payable $ 2,043 $ 3,315
Other Accrued Liabilities 374 214
Short-term Borrowings 22,227 19,486
------------------------- -------------------------
Total Current Liabilities 24,644 23,015
LONG-TERM DEBT 23,119 20,606
DEFERRED INCOME TAXES 5,118 4,738
------------------------- -------------------------
Total Liabilities 52,881 48,359
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURE 300 ---
STOCKHOLDERS' EQUITY
Common Stock 6,357 6,349
Additional Paid-In Capital 682 379
Deferred Compensation (86) ---
Retained Earnings 35,944 36,701
Accumulated Other Comprehensive Income (40) (269)
------------------------- -------------------------
Total Stockholders' Equity 42,857 43,160
------------------------- -------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 96,038 $ 91,519
========================= =========================
See Notes to Unaudited Consolidated Condensed Financial Statements.
* The Consolidated Condensed Balance Sheet at December 31, 1999 has been
derived from the audited consolidated financial statements at that date.
2
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(In Thousands)
(Unaudited)
Nine Months Ended
September 30
--------------------------------------------
2000 1999
-------------------- -----------------
OPERATING ACTIVITIES
Net Income (Loss) $ (757) $ 600
Items Not Affecting Cash:
Depreciation and Amortization 1,908 1,829
Deferred Income Taxes 337 (150)
Equity in Net Loss from Unconsolidated Joint Venture 163 ---
Changes in Operating Assets and Liabilities:
Receivables, Inventories and other Assets, Net (5,248) (8,807)
Current liabilities, Net (1,112) 4,741
-------------------- -----------------
NET CASH USED IN
OPERATING ACTIVITIES (4,709) (1,787)
INVESTING ACTIVITIES
Cash in Escrow --- 4,200
Maturities of Marketable Securities 2,639 9,514
Funds Invested in Marketable Securities (3,236) (6,547)
Property and Equipment Expenditures (8,656) (22,473)
Property and Equipment Disposals 109 ---
Sale of Land 1,463 ---
Bond Reimbursement from Community Facilities District 8,065 ---
Change in Breeding Herds 108 (110)
Investment in Unconsolidated Joint Venture (1,611) ---
Other --- 677
-------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES (1,119) (14,739)
-------------------- --------------------
FINANCING ACTIVITIES
Proceeds From Revolving Line of Credit 49,713 26,996
Payments of Revolving Line of Credit (46,585) (14,991)
Borrowing from Long-term Debt 4,181 4,800
Payments of Long-term Debt (2,055) (151)
Cash Contribution From Investor in Consolidated
Joint Venture 300 ---
Exercise of Stock Options 96 ---
Cash Dividends Paid --- (317)
-------------------- -----------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 5,650 16,337
-------------------- -----------------
DECREASE IN CASH
AND CASH EQUIVALENTS (178) (189)
Cash and Cash Equivalents at Beginning of Period 423 743
-------------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 245 $ 554
==================== =================
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
(Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Deferred Comprehensive
Stock Capital Earnings Compensation Income Total
- ----------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 $6,346 $382 $36,156 $ --- $(179) $42,705
Net Income --- --- 1,181 --- --- 1,181
Defined Benefit Plan
Funding Adjustments,
Net of taxes of $133 --- --- --- --- 216 216
Changes in Unrealized
Losses on Available-For-Sale
Securities, net of taxes
of $205 --- --- --- --- (306) (306)
--------
Comprehensive Income --- 1,091
--------
Exercise of Stock Options 3 (3) --- --- --- ---
Cash Dividends Paid -
$.05 per share --- --- (636) --- --- (636)
--------------------------------------------------------------------------------
Balance at December 31, 1999 $6,349 $379 $36,701 $ --- $(269) $43,160
Net Loss --- --- (757) --- --- (757)
Changes in Unrealized
Losses on Available-For-Sale
Securities, net of taxes of --- --- --- --- 66 66
$43
Interest Rate Swap Adjustment --- --- --- --- 163 163
--------
Comprehensive Loss --- (528)
--------
Restricted Stock Issuance 5 210 --- (215) --- ---
Exercise of Stock Options 3 93 --- --- --- 96
Amortization of Deferred
Compensation --- --- --- 129 --- 129
--------------------------------------------------------------------------------
Balance at September 30, 2000 $6,357 $682 $35,944 $ (86) $ (40) $42,857
================================================================================
See Notes to Unaudited Consolidated Condensed Financial Statements.
4
TEJON RANCH CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------
September 30, 2000
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The summarized information furnished by Registrant pursuant to the instructions
to part I of Form 10-Q is unaudited and reflects all adjustments which are, in
the opinion of Registrant's management, necessary for a fair statement of the
results for the interim period. All such adjustments are of a normal recurring
nature.
The Registrant's accompanying consolidated condensed financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States and with the regulations of the Securities and Exchange Commission
(SEC). Certain financial information and footnote disclosures, normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States, have been condensed or
omitted pursuant to such SEC rules and regulations.
Certain amounts in the prior 2000 quarterly financial statements have been
reclassified to conform to the current year presentation.
The results of the period reported herein are not indicative of the results to
be expected for the full year due to the seasonal nature of Registrant's
agricultural activities. Historically, the largest percentages of revenues are
recognized during the third and fourth quarters.
For further information, refer to the Consolidated Financial Statements and
footnotes thereto included in Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999.
NOTE B - NET INCOME (LOSS) PER SHARE
- ------------------------------------
Basic net income per share is based upon the weighted average number of shares
of common stock outstanding, which for the three months ended September 30, 2000
and 1999 was 12,712,236 and 12,695,540, respectively. For the nine months ended
September 30, 2000 and 1999, the weighted average common shares outstanding were
12,708,236 and 12,694,515, respectively. Diluted net income per share is based
upon the weighted average number of shares of common stock outstanding assuming
the issuance of common stock pursuant to stock options using the treasury stock
method. For the three months ended September 30, 2000 and 1999, diluted common
shares outstanding were 12,825,798 and 12,870,046, respectively. For the nine
months ended September 30, 2000, basic and diluted common shares outstanding are
the same for the periods shown because the calculation of diluted shares
outstanding resulted in antidilution. For the nine months ended September 30,
1999 diluted common shares outstanding were 12,790,386.
5
NOTE C - MARKETABLE SECURITIES
- ------------------------------
Statement of Financial Accounting Standard ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires that an enterprise
classify all debt and equity securities as either held-to-maturity, trading, or
available-for-sale. Registrant classifies its securities as available-for-sale
and therefore is required to adjust securities to fair value at each reporting
date.
The following is a summary of available-for-sale securities at September 30,
2000 and December 31, 1999:
September 30, 2000 December 31, 1999
----------------------------------------------------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
----------------------------------------------------------------------
Marketable Securities:
(in thousands)
U.S. Treasury and agency notes $ 6,040 $ 5,746 $ 5,191 $ 4,824
Corporate notes 4,949 4,902 5,201 5,118
-----------------------------------------------------------------------
$ 10,989 $ 10,648 $ 10,392 $ 9,942
=======================================================================
As of September 30, 2000, the cumulative fair value adjustment to stockholders'
equity is an unrealized loss of $203,000, net of a tax benefit of $138,000.
Registrant's gross unrealized holding gains equal $25,000, while gross
unrealized holding losses equal $366,000. On September 30, 2000, the average
maturity of U.S. Treasury and agency securities was 2.9 years and corporate
notes was 2.4 years. Currently, Registrant has no securities with a remaining
term to maturity of greater than five years.
Market value equals quoted market price, if available. If a quoted market price
is not available, market value is estimated using quoted market prices for
similar securities. Registrant's investments in corporate notes are with
companies with a credit rating of A or better.
NOTE D - COMMODITY CONTRACTS USED TO HEDGE PRICE FLUCTUATIONS
- -------------------------------------------------------------
Registrant uses commodity derivatives to manage its exposure to price
fluctuations on its purchased stocker cattle and its cattle feed costs. The
objective is to protect or create a future price for stocker cattle that will
protect a profit or minimize a loss once the cattle are sold and all costs are
deducted and protect Registrant against a disastrous cattle market decline or
feed cost increase. To help achieve this objective Registrant used both the
futures commodity markets and options commodity markets. A futures contract is
an obligation to make or take delivery at a specific future time of a
specifically defined, standardized unit of a commodity at a price determined
when the contract is executed. Options are contracts that give their owners the
right, but not the obligation, to buy or sell a specified item at a set price on
or before a specified date.
Registrant continually monitors any open futures and options contracts to
determine the appropriate risk exposure based on market movement of the
underlying asset. The options and futures contracts used typically expire on a
quarterly or semi-annual basis and are structured to expire close to or during
the month the stocker cattle and feed are scheduled to be sold or purchased.
The risk associated with
6
hedging for Registrant is that hedging limits or caps the potential profits if
cattle or feed prices begin to increase dramatically or can add additional costs
if cattle or grain prices fall dramatically.
Realized gains, losses, and costs associated with both open and closed contracts
are recognized in costs of sales expense. During the nine months ended
September 30, 2000 there were $379,000 of losses associated with futures and
option contracts included in cost of sales.
The following table identifies the cattle futures contract amounts outstanding
at September 30, 2000 and December 31, 1999 (in thousands, except number of
contracts and lbs.):
Original Estimated
No. Contract/Cost Fair Value
Cattle Future / Option Description Contracts (Bought) Sold (Bought) Sold
- --------------------------------------------------------------------------------------------------------------
Corn futures bought, 50,000 lbs. per contract 20 $ (229) $ 201
Corn options bought, 50,000 lbs. per contract 20 $ (217) $ 204
Cattle futures bought, 50,000 lbs. per contract 30 $(1,293) $ 1,311
Cattle futures sold, 40,000 lbs. per contract 218 $ 6,098 $(6,204)
Cattle options sold, 40,000 lbs. per contract 56 $ 12 $ (1)
Cattle options bought, 40,000 lbs. per contract 86 $(1,646) $ 1,633
Original Estimated
December 31, 1999 No. Contract/Cost Fair Value
Commodity Future / Option Description Contracts (Bought) Sold (Bought) Sold
- --------------------------------------------------------------------------------------------------------------
Cattle futures sold 40,000 lbs. per contract 142 $ 3,897 $(3,985)
Cattle futures bought 50,000 lbs. per contract 280 $(3,035) $ 2,960
Cattle options bought, 40,000 lbs. per contract 50 $ (20) $ 8
Cattle options sold 40,000 lbs. per contract 50 $ 20 $ (18)
The September 30, 2000 futures contracts and options expire between October 2000
and April 2001. Estimated fair value at settlement is based upon quoted market
prices at September 30, 2000.
7
NOTE E - INTEREST RATE RISK MANAGEMENT
- --------------------------------------
Objectives:
Registrant uses variable-rate debt to finance its operations. These debt
obligations expose Registrant to variability in interest payments due to changes
in interest rates. If interest rates increase, interest expense increases.
Conversely, if interest rates decrease, interest expense also decreases.
Management believes it is prudent to limit the variability of a portion of its
interest payments. It is Registrant's objective to hedge between 25% and 50% of
its variable-rate interest payments.
Strategies:
To meet this objective management entered into an interest rate swap to manage
the potential fluctuations in cash flows resulting from interest rate risk.
The interest rate swap eliminates the risk of variable-interest rates on the
portion of the debt covered by the swap by effectively converting the variable
rates to fixed rates. Under the interest rate swap, Registrant receives
variable interest rate payments and makes fixed interest rate payments thereby
creating fixed-rate debt.
Registrant's risk management objective as described above is to minimize the
interest expense cash outflows related to our floating-rate debt obligations.
Registrant's current floating-rate debt obligations float at Prime less .50% or
can be fixed at 1.50% over a selected LIBOR rate. To minimize the variability
of the floating-rate debt obligations, Registrant entered into a three-year
interest rate swap with a notional amount of $10.0 million to receive interest
at a variable-rate equal to one month LIBOR and pay interest at a fixed-rate of
6.91%. The combination of the swap and the 1.5% additional spread within the
debt obligation results in a net cash outflow equal to a fixed rate of 8.41%.
Registrant does not speculate using derivative instruments but uses them only
for cash flow hedging purposes.
Risk management policies:
Registrant assesses interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.
Registrant maintains risk management control systems to monitor interest rate
cash flow risk attributable to both Registrant's outstanding or forecasted debt
obligations as well as Registrant's offsetting hedge positions. The risk
management control systems involve the use of analytical techniques, including
cash flow sensitivity analysis, to estimate the expected impact of changes in
interest rates on Registrant's future cash flows.
Changes in the fair value of the interest rate swap are reported in accumulated
other comprehensive income. These amounts are subsequently reclassified into
interest expense as a yield adjustment in the same period in which the related
interest on the floating-rate obligations affects earnings. During the nine
8
nine months ended September 30, 2000 the fair value of the interest rate swap
had increased $163,000.
NOTE F - CONTINGENCIES
- ----------------------
As of September 30, 2000, Registrant was guaranteeing the repayment of $3.8
million of debt of the Petro Travel Plaza L.L.C., its unconsolidated joint
venture. Total debt at Petro Travel Plaza L.L.C. is $13.0 million and is
related to the construction of the travel plaza. Registrant does not expect to
ever realize any loss as a result of the guarantee due to the cash flow provided
by the operations of the Petro Travel Plaza, L.L.C.
On June 27, 2000, the Tejon Ranch Public Facilities Financing Authority through
Community Facilities District No. 2000-1 issued $17,000,000 of tax-free special
tax bonds. The funds from this bond issuance are to be used to fund public
infrastructure improvements within the Tejon Industrial Complex. The Tejon
Ranch Public Financing Authority placed a lien on 1,762 acres of Registrant's
land to secure the collection of special taxes each year related to the bond.
Landowners within the Facilities District are responsible for these special
taxes, which are included each year with their property taxes. Commencing July
1, 2000 Registrant's property tax expense will increase by approximately
$400,000 over the next twelve months. The payments for subsequent periods are
not known at this time due to the timing of future development. As the Tejon
Industrial Complex is developed, new landowners and tenants will bear their
portion of the special tax and over time it is possible the portion of the
special tax actually paid by Registrant will be reduced to zero. As Tejon
Industrial Complex is developed and the collection of special taxes increases
due to development of the land, the Facilities District may at its option
release the lien on 1,101 acres of the above 1,762 acres that currently have a
lien against them.
Out of the above $17,000,000 in proceeds from the bond issuance Registrant
received $8,065,000 due to local government entities accepting infrastructure
improvements previously paid for by Registrant. The remainder of the proceeds
are in escrow and will be released in future years as new infrastructure is
completed at the Tejon Industrial Complex.
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 some
old industrial waste landfills, 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, and to implement a closure plan and conduct post-closure monitoring
of 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 seeping into surface waters. Lafarge has
initiated remedial actions to prevent further contamination of surface waters.
In addition, Lafarge is undertaking additional investigation work as directed by
the Regional Water Board and is developing a feasibility study evaluating
different remediation options. The order for the kiln dust piles now requires
only site stabilization measures of the sort previously undertaken by National
and does not call for transporting the large piles offsite. National is now
implementing this order. Under all of the orders, Registrant is
9
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.
For further discussion refer to Registrant's 1999 Form 10-K, Part I, Item 3, -
"Legal Proceedings". There have been no significant changes since the filing of
the 1999 Form 10-K.
NOTE G - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
- ----------------------------------------------------
Registrant is 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 in its unconsolidated
joint venture is $1,053,000 at September 30, 2000, which is included in other
assets in the accompanying consolidated condensed balance sheet. Registrant's
equity in net loss of its unconsolidated joint venture is $167,000 for the nine
months ended September 30, 2000, which is included in real estate revenues in
the accompanying consolidated condensed statement of operations.
Condensed financial information of Registrant's unconsolidated joint venture as
of and for the nine months ended September 30, 2000 is as follows (in
thousands):
Unaudited Condensed Income Statement Information
---------------------------------------------------------------------------
Net Sales $ 26,388
--------
Net Loss (278)
Partner's Share of net loss (111)
--------
Equity in net loss of unconsolidated joint venture $ (167)
========
Unaudited Condensed Income Statement Information
---------------------------------------------------------------------------
Current Assets $ 2,454
Property and equipment, net 16,583
Long-term Debt (13,000)
Other Liabilities (1,289)
--------
Net Assets $ 4,748
========
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
Throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Quantitative and Qualitative Disclosures About Market
Risk," and the narratives on the preceding pages of this report, Registrant has
made forward-looking statements regarding future events, including without
limitation future yields, and prices, 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.
Results of Operations
- ---------------------
Total revenues, including interest income, for the first nine months of 2000
were $44,981,000 compared to $33,345,000 for the same period in 1999. The
growth in revenues during the first nine months of 2000 is primarily
attributable to increases in livestock and real estate division revenues of
$11,937,000 and $1,579,000, respectively. These increases were partially offset
by a decrease in farming division revenues of $1,870,000. The growth in
livestock division revenues was due to an increase in livestock sales of
$10,260,000 and livestock feed of $1,215,000. Livestock sales increased due to
improving prices and 15,741 additional head of cattle being sold during the
first nine months of 2000 when compared to the same period of 1999. Livestock
feed sales increased due to an increase in the average head count at the feedlot
of approximately 6,700 head. The increase in real estate revenues when compared
to 1999 is primarily due to the sale of 80 acres of land located within the
Tejon Industrial Complex to IKEA, which resulted in revenues of $2,000,000. In
addition to the sale of land, real estate revenues increased approximately
$1,384,000 due to an increase in the total payments received from Enron in 2000
of $1,000,000 ($1,900,000 and $900,000 received in 2000 and 1999, respectively)
and an increase in oil and mineral royalties of $384,000. These increases were
partially offset by a decrease in real estate revenues due to the sale of a
fiber optic communications easement of $1,750,000 that occurred in the first
quarter of 1999. Farming revenues decreased when compared to 1999 due to the
timing of the 2000 crop harvests and the type of crops being harvested. As of
September 30, 1999, Registrant had completed the crop harvest for pistachios and
three varieties of grapes. As of September 30, 2000, Registrant had not started
the pistachio harvest and had only completed two varieties of grapes. This
timing difference resulted in a decrease in revenues of $2,687,000. This
decrease was slightly offset by an increase in revenues of $800,000 due to the
walnut and almond harvests being closer to completion at the end of the 3rd
quarter of 2000 than when compared to 1999.
Operating activities during the first nine months of 2000 resulted in a net loss
of $757,000, or $0.06 per diluted share, compared to net income of $600,000, or
$0.05 per diluted share, for the same period of 1999. The decrease in earnings
when compared to 1999 is primarily attributable to the decrease in farming
revenues discussed above, an increase in real estate division expenses, and an
increase in interest expense of $1,350,000 in the first nine months of 2000 when
compared to the same period of 1999. The increase in interest expense is due to
increased livestock and real estate development activities. The increase in
real estate division expenses is primarily due to the recognition of
11
infrastructure costs and commissions related to sale of the land to IKEA.
Registrant believes that overall for 2000, cattle prices should improve due to
the continuing improvement in demand for beef product. Net margins on 2000
cattle sales increased approximately 6% over 1999. The higher margin is the
result of selling cattle bred and raised on Registrant's property, which have
lower costs than purchased cattle. It is still too early in the harvest season
for Registrant to make production estimates for its grapes and nuts. At this
time California statewide estimates for almonds are for a reduced crop that will
potentially help prices and estimates for grapes are that yields may be greater
in 2000 than the 1999 crop, which could force prices for grapes to decline.
Total revenues for the third quarter of 2000, including interest income, were
$19,678,000 compared to $15,470,000 for the third quarter of 1999. The increase
is due primarily to an increase in livestock division revenues of $2,982,000 and
real estate division revenues of $3,209,000. The increase in livestock revenues
is due to an increase in cattle sales. Approximately 3,100 additional head of
cattle were sold in the third quarter of 2000 when compared to the same period
in 1999. The increase in real estate revenue is primarily due to the payments
received from IKEA and Enron, both occurring in the third quarter of 2000, as
discussed above. The increase in revenue was partially offset by a decrease in
farming revenues as discussed above, totaling $1,992,000 for the third quarter.
During the third quarter of 2000 Registrant had a net income of $29,000, or
$0.00 per diluted share, compared to an income of $806,000, or $0.06 per diluted
share for the same period of 1999. The decrease in income compared to the third
quarter of 1999 is due to the net increase in revenues described above being
more than offset by an increase in livestock, real estate, and interest
expenses. Livestock expenses were higher due to an increase in cost of sales as
a result of more cattle being sold in the third quarter of 2000 than in the same
period for 1999. Real estate expenses were higher due to the costs recognized
on the sale of land to IKEA and expenses related to new development projects.
Interest expense was higher for the third quarter of 2000 compared to the same
period of 1999 due to an increase in these development activities.
Registrant continues to be involved in various environmental proceedings related
to leased acreage. For a further discussion, refer to Note F - Contingencies.
Prices received by Registrant for many of its products are dependent upon
prevailing market conditions and commodity prices. Therefore, Registrant is
unable to accurately predict revenue, just as it cannot pass on any cost
increases caused by general inflation, except to the extent reflected in market
conditions and commodity prices. The operations of Registrant are seasonal and
results of operations cannot be predicted based on quarterly results.
In order to fund public infrastructure improvements within Registrant's Tejon
Industrial Complex, Registrant agreed to subject 1,762 acres of the property in
the complex to a lien securing the payment of principal and interest on
$17,000,000 of tax-free special tax bonds. See Note F of Notes to Consolidated
Condensed Financial Statements. Landowners of parcels within the Complex are
responsible for the special taxes applicable to their respective parcels. As a
result of the debt service on the bonds, Registrant's property tax expense will
be increased by approximately $400,000 for the twelve months commencing July 1,
2000, and this expense will increase as the bond proceeds are spent for
development of the infrastructure. Registrant intends to have purchasers and
tenants of land in the complex bear portions of these payments allocable to
their parcels. Any delay or inability to sell or lease the land could result in
Registrant bearing more of the debt service than is presently anticipated. When
the entire
12
$17,000,000, has been spent, the annual debt service will increase to
approximately $1,250,000. Although Registrant can control the timing and extent
of the construction of the infrastructure improvements in the event that
marketing of the parcels in the complex is less than planned, it is possible
that Registrant could have to bear a substantial portion of the increased debt
service for an indefinite period of time.
Liquidity and Capital Resources
- -------------------------------
Registrant's cash, cash equivalents and short-term investments totaled
approximately $10,893,000 at September 30, 2000, compared to $10,365,000 at
December 31, 1999, an increase of 5%. Working capital as of September 30, 2000
was $20,906,000 compared to $16,278,000 on December 31, 1999. The increase in
working capital during the first nine months of 2000 is due primarily to the
growth of cattle and farming inventories that were partially funded by an
increase in the use of short-term debt financing.
Registrant has a revolving line of credit of $27,000,000 that as of September
30, 2000 had a balance outstanding of $17,000,000 bearing interest at an average
rate of 8.69%, 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 September 30, 2000 of $5,227,000 and an interest rate of 1.00% less
than the bank's prime lending rate of 9.50%. The revolving lines of credit are
used as a short-term cash management tool and for the financing of customer
cattle and feed receivables at the feedlot, respectively. The use of short-term
credit has grown due to increases in inventories because of the growth of
Registrant's core business lines and to the funding of infrastructure
construction costs on a short-term basis until longer-term sources of debt are
used. Registrant's use of long-term debt funding sources also increased due to
the purchase of an almond processing plant and to financing land improvements
and infrastructure with long-term financing as opposed to using short-term lines
of credit. This allows for better matching of assets to the liabilities funding
those assets.
At September 30, 2000 the current long-term note payable balance included a
$14,585,000 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 selected LIBOR rate.
In order to minimize the variability of interest expense cash flows Registrant
entered into an interest rate swap with a notional amount of $10,000,000. See
Note E - Interest Rate Risk Management for a discussion of the interest rate
swap. Long-term notes payable also consist of debt related to the purchase of
commercial/industrial buildings totaling $4,700,000 at September 30, 2000. The
interest rate is fixed at 7.61% with monthly principal and interest payments of
$34,000.
The remaining long-term debt of $3,834,000 consists of a note for $2,034,000
secured by Registrant's feedlot. This note has quarterly payments of $58,000 at
an interest rate of 8.5%. The remaining $1,800,000 is secured by an almond
processing plant that Registrant purchased during the first quarter of 2000.
This note has annual payments of $180,000 beginning in 2001. Interest on this
note is at a rate of 8.21%.
13
In future years, Registrant expects that substantial investments will need to
continue to be made in its land assets to secure entitlements and begin
development of the land. In order to fund this growth, Registrant has filed a
prospectus for a proposed rights offering to raise approximately $30.0 million
and has also elected to sell its livestock division. Additional cash funds are
available through borrowings from banks, cash flow from operations, and joint
ventures with financial partners.
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's exposure to financial market risks includes changes to interest
rates and credit risk related to marketable securities, interest rates related
to its own outstanding indebtedness and trade receivables.
The primary objective of Registrant's investment activities is to preserve
principal while at the same time maximizing yields and 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
Investors Services, Inc. or Standard and Poor's Ratings Group to minimize risk.
In addition, market value changes due to interest rate changes are reduced
because a large portion of the portfolio has interest rates that float and are
reset on a quarterly basis. See Note C - Marketable Securities.
Registrant is exposed to interest rate exposure on its short-term working
capital line of credit and the long-term debt currently outstanding. The short-
term line of credit interest rate is tied to the lending bank's prime interest
rate or LIBOR, and changes when those rates changed. The long-term debt has a
fixed interest rate component and a floating rate component that is tied to the
lending bank's prime rate or LIBOR, and the fair value of the long-term debt
will change based on interest rate movements in the market.
The floating rate obligations expose Registrant to variability in interest
payments due to changes in interest rates. If interest rates increase, interest
expense increases. Conversely, if interest rates decrease, interest expense
also decreases.
Management believes it is prudent to limit the variability of a portion of its
interest payments. It is Registrant's objective to hedge between 25% and 50% of
its variable-rate interest payments.
To meet this objective management entered into an interest rate swap to manage
the potential fluctuations in cash flows resulting from interest rate risk. See
Note E - Notes to Condensed Consolidated Financial Statements.
Registrant's 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. Market risk is discussed below in "Commodity Price
Exposure." Registrant believes its credit risk related to receivables is
14
minimal based on historical experience with current customers and periodic
credit evaluations of its customers' financial condition.
The following table provides information about Registrant's financial
instruments that are sensitive to changes in interest rates. The tables
presents Registrant's debt obligations, principal cash flows and related
weighted-average interest rates by expected maturity dates as of September 30,
2000 and December 31, 1999.
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At September 30, 2000
(Dollars in thousands)
Fair
There Value
2000 2001 2002 2003 2004 -after Total 9/30/00
- -------------------------------------------------------------------------------------------------------------------
Assets:
Marketable $ 777 $2,304 $1,855 $ 4,470 $1,583 --- $10,989 $ 10,648
Securities
Weighted Average
Interest Rate 6.30% 5.67% 5.98% 6.32% 6.89% --- 6.21%
Liabilities:
Short-term Debt $22,227 --- --- --- --- --- $22,227 $ 22,227
Weighted Average
Interest Rate 8.72% --- --- --- --- --- 8.72%
Long-term Debt $ 385 $1,973 $1,977 $ 2,855 $9,983 $5,946 $23,119 $ 23,119
Weighted Average
Interest Rate 8.26% 8.26% 8.26% 8.26% 8.21% 7.91% 8.24%
Variable-To-Fixed Swap:
Notional Amount
3-Year Swap --- --- $10,000 --- --- --- $10,000 $ 10,163
Weighted Average
Pay Fixed-Rate
Contract Rate 6.91% 6.91% 6.91% --- --- --- 6.91%
Weighted Average
Receive Variable-Rate,
Current Rate, Adjusts
Monthly 6.62% --- --- --- --- --- 6.62%
--------------------------------------------------------------------------------------------
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 1999
(Dollars in thousands)
Fair
There- Value
2000 2001 2002 2003 2004 after Total 12/31/99
- --------------------------------------------------------------------------------------------------------------------
Assets:
Marketable Securities $ 3,303 $2,477 $1,915 $ 2,351 $ 346 --- $10,392 $ 9,942
Weighted Average 6.31% 5.66% 6.49% 6.13% 6.70% --- 6.16%
Interest Rate
Liabilities
Short-term Debt $18,447 --- --- --- --- --- $18,447 $ 18,447
Weighted Average
Interest Rate 8.00% --- --- --- --- --- 8.00%
----------------------------------------------------------------------------------------------
15
Long-term Debt $ 1,039 $1,793 $1,797 $ 2,675 $9,803 $4,538 $21,645 $ 21,645
Weighted Average
Interest Rate 7.96% 7.96% 7.96% 7.96% 7.91% 7.61% 7.86%
----------------------------------------------------------------------------------------------
In comparison to the prior year Registrant's risk in regards to fluctuations in
interest rates has increased overall due to the growth in the use of both short-
term and long-term lines of credit that fluctuate with the bank's prime lending
rate.
Commodity Price Exposure
- ------------------------
Registrant has exposure to adverse price fluctuations associated with certain
inventories, gross margins, accounts receivables and certain anticipated
transactions in its Livestock and Farming Divisions. Commodities such as corn
and cattle are purchased and sold at market prices that are subject to
volatility. In order to manage the risk of market price fluctuations,
Registrant enters into various exchange-traded futures and option contracts.
Registrant closely monitors and manages it exposure to market price risk on a
daily basis in accordance with formal policies established for this activity.
These policies limit the duration to maturity of contracts entered into as well
as the level of exposure to be hedged.
Registrant's goal in managing its cattle and feed costs is to protect or create
a range of selling prices and feed prices that allow Registrant to recognize a
profit or minimize a loss on the sale of cattle once all costs are deducted.
See Note D - Commodity Contracts Used to Manage Risk. Losses on future
contracts and options as of September 30, 2000 were $379,000 as compared to
losses on future contracts and options as of December 31, 1999 of $256,000. The
losses recognized on our hedge positions are due to the favorable increase in
cattle prices during 2000.
Livestock inventories consist primarily of cattle for sale, and price
fluctuations are managed with futures and options contracts. Registrant is at
risk with respect to changes in market prices with respect to cattle held for
sale that are not protected by futures and options contracts. At September 30,
2000 approximately 60% of the cattle held in inventory or 28,941 head of cattle
were not protected by futures and options for price movement. This compares to
11,454 head of cattle at September 30, 1999. The number of head of cattle that
are unprotected at September 30, 2000 equates to approximately 31.3 million
pounds of beef. For each $.01 per pound change in price, the value of the
cattle increases or decreases $313,000. Although the prices at which the cattle
will ultimately be sold are unknown, over the last three years the market price
has ranged from $.50 per pound to $.75 per pound and the market price at
September 30, 2000 was $.66 per pound.
With respect to accounts receivable, the amount at risk relates to almonds,
pistachios, walnuts and grapes. These receivables are recorded at estimates of
the prices that ultimately will be received for the crops. The final price will
not be known until the third or fourth quarter of 2001. Of the accounts
receivable outstanding at September 30, 2000, only $2,651,000 is at risk to
changing prices. Of the amount at risk to changing prices, $1,634,000 is
attributable to almonds, $540,000 to walnuts, and $477,000 to grapes. The
comparable amounts of accounts receivable at December 31, 1999 were $661,000
attributable to almonds, $430,000 to pistachios, $285,000 to walnuts, and
$424,000 to grapes. The price estimated for recording accounts receivable at
September 30, 2000 was $1.00 per pound for almonds. For every $.01 change in the
price of almonds Registrant's receivable for almonds increases or
16
decreases by $16,000. 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.
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 $12,000. 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 variety. At year-end the average price used for recording
the accounts receivable was $185.00 per ton. For every $1.00 change in the
price, Registrant's receivables related to grapes can increase or decrease
approximately $3,000. The average price for grapes has averaged between $250.00
per ton to $375.00 per ton over the last three years.
For information about futures contracts and options outstanding at September 30,
2000 and December 31, 1999, see Note D of Notes to Consolidated Condensed
Financial Statements.
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.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
Not applicable.
Item 2. Changes in Securities
- ------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
17
Item 5. Other Information
- --------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits -
3.1 Restated Certificate of Incorporation *
3.2 Bylaws **
27.1 Financial Data Schedule (Edgar),
September 30, 2000
(b) Reports - on Form 8-K
None.
* This document, filed with the Securities Exchange Commission in Washington,
D.C. (file number 1-7183) under Item 14 to Registrant's Annual report on
Form 10-K for year ended December 31, 1987, is incorporated herein by
reference.
** This document, filed with the Securities Exchange Commission in Washington,
D.C. (file number 1-7183) under Item 14 to Registrant's Annual report on
Form 10-K for year ended December 31, 1994, is incorporated herein by
reference.
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEJON RANCH CO.
------------------------
(Registrant)
October 13, 2000 BY /s/ Allen E. Lyda
- ---------------- -----------------------------------
Allen E. Lyda
Vice President, Chief
Financial Officer
19