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 June 30, 1999
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ___________ to ___________
For Quarter Ended Commission File Number
June 30, 1999 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 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
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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 June 30, 1999, were
12,691,253.
TEJON RANCH CO.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Operations 1
for the Three Months and Six Months
Ended June 30, 1999 and June 30, 1998
Unaudited Consolidated Balance Sheets 2
As of December 31, 1998 and June 30, 1999
Unaudited Consolidated Statements of Cash 3
Flows for the Three Months and Six Months
Ended June 30, 1999 and 1998
Consolidated Condensed Statements of Stockholders' 4
Equity
Notes to Unaudited Consolidated Financial 5
Statements
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PART I FINANCIAL INFORMATION
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------------------------------
1999 1998 1999 1998
------------ ------------- ------------ ------------
Revenues:
Livestock $4,180 $ 6,382 $13,381 $13,493
Farming 7 6 283 271
Resource Management 1,159 772 1,744 1,212
Real Estate 1,186 177 3,151 409
Interest Income 180 244 331 517
----- ------- ------- -------
6,712 7,581 18,890 15,902
Costs and Expenses:
Livestock 4,178 6,561 13,214 13,895
Farming 335 231 700 621
Resource Management 542 550 897 886
Real Estate 1,536 786 2,501 1,563
Corporate Expense 782 670 1,488 1,213
Interest Expense 266 302 421 504
------ ------- ------- -------
7,639 9,100 19,221 18,682
------ ------- ------- -------
Operating Loss (927) (1,519) (331) (2,780)
Benefit for Income Tax (352) (576) (125) (1,056)
------ ------- ------- -------
Net Loss $ (575) $ (943) $ (206) $(1,724)
====== ======= ======= =======
Net Loss Per Share, diluted $(0.05) $ (0.07) $ (0.02) $ (0.14)
Cash Dividends Paid $0.025 $ 0.025 $ 0.025 $ 0.025
See Notes to Consolidated Condensed Financial Statements.
1
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In Thousands)
June 30, 1999 December 31, 1998*
------------------- ------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 343 $ 743
Cash in Escrow --- 4,200
Marketable Securities 11,567 13,294
Accounts & Notes Receivable 6,619 7,359
Inventories:
Cattle 18,770 16,577
Farming 2,816 326
Other 286 513
Prepaid Expenses and Other 682 996
------- -------
Total Current Assets 41,083 44,008
PROPERTY AND EQUIPMENT - NET 44,768 27,553
OTHER ASSETS 1,368 1,453
------- -------
TOTAL ASSETS $87,219 $73,014
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Accounts Payable $ 5,908 $ 3,235
Other Accrued Liabilities 33 502
Short-term Borrowings 28,396 20,249
Other Current Liabilities 220 254
------- -------
Total Current Liabilities 34,557 24,240
LONG-TERM DEBT 6,601 1,875
DEFERRED INCOME TAXES 4,030 4,194
------- -------
Total Liabilities 45,188 30,309
STOCKHOLDERS' EQUITY
Common Stock 6,346 6,346
Additional Paid-In Capital 382 382
Retained Earnings 35,633 36,156
Accumulated Other Comprehensive Income (330) (179)
------- -------
Total Stockholders' Equity 42,031 42,705
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $87,219 $73,014
======= =======
See Notes to Consolidated Condensed Financial Statements.
* The Balance Sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
2
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(In Thousands)
(Unaudited)
Six Months Ended
June 30
-----------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net Loss $ (206) $(1,724)
Items Not Affecting Cash:
Depreciation and Amortization 1,185 953
Deferred Income Taxes (164) 15
Changes in Operating Assets and Liabilities:
Receivables, Inventories and other Assets, Net (3,402) (1,999)
Current liabilities, Net 2,170 (1,589)
-------- -------
NET CASH USED IN
OPERATING ACTIVITIES (417) (4,344)
INVESTING ACTIVITIES
Cash in Escrow 4,200 ---
Maturities of Marketable Securities 6,190 2,453
Funds Invested in Marketable Securities (4,614) (1,259)
Property and Equipment Expenditures (18,400) (2,253)
Change in Breeding Herds (260) (203)
Other 345 (317)
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (12,539) (1,579)
-------- -------
FINANCING ACTIVITIES
Proceeds From Revolving Line of Credit 22,483 11,081
Payments of Revolving Line of Credit (14,336) (5,496)
Payments of Long-term Debt (74) (63)
Borrowing of Long-term Debt 4,800 ---
Cash Dividend Paid (317) (317)
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,556 5,205
-------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (400) (718)
Cash and Cash Equivalents at Beginning of Year 743 976
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 343 $ 258
======== =======
See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
(In Thousands)
(Unaudited)
Accumulated
Additional Other
Common Paid-In Comprehensive Retained
Stock Capital Income Earnings Total
- ----------------------------------------------------------------------------------------------------------------
Balance January 1, 1998 $6,343 $385 $ 109 $33,651 $40,488
Net Income --- --- --- 3,139 3,139
Defined Benefit Plan
Funding Adjustments,
Net of taxes of $133,000 --- --- (216) --- (216)
Changes in Unrealized
Losses on Available-For-Sale
Securities, net of taxes of $49,000 --- --- (72) --- (72)
-------
Comprehensive Income --- --- --- --- 2,851
-------
Exercise of Stock Options 3 (3) --- --- ---
Cash Dividends Paid--
$.05 per share --- --- --- (634) (634)
-------------------------------------------------------------------
Balance, December 31, 1998 $6,346 $382 $(179) $36,156 $42,705
Net Loss First Six Months 1999 (206) (206)
Changes in Unrealized
Losses on Available-For-Sale
Securities, net of taxes of $85 (151) (151)
-------
Comprehensive Loss (357)
-------
Cash Dividends Paid--
$.025 per share --- --- --- (317) (317)
-------------------------------------------------------------------
Balance, June 30, 1999 $6,346 $382 $(330) $35,633 $42,031
===================================================================
4
TEJON RANCH CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
June 30, 1999
NOTE A - BASIS OF PRESENTATION
- -----------------------------
The summarized information furnished by Registrant pursuant to the instructions
to part I of Form 10-Q is unaudited and reflects all adjustments which are, in
the opinion of Registrant's management, necessary for a fair statement of the
results for the interim period. All such adjustments are of a normal recurring
nature.
The results of the period reported herein are not indicative of the results to
be expected for the full year due to the seasonal nature of Registrant's
agricultural activities. Historically, the largest percentages of revenues are
recognized during the third and fourth quarters.
For further information, refer to the Consolidated Financial Statements and
footnotes thereto included in Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
NOTE B - NET INCOME PER SHARE
- ----------------------------
Basic net income per share is based upon the weighted average number of shares
of common stock outstanding during the year, which at June 30, 1999 was
12,691,253 and at June 30, 1998 was 12,685,994. Diluted net income per share is
based upon the weighted average number of shares of common stock outstanding,
and the weighted average number of shares outstanding assuming the issuance of
common stock for stock options using the treasury stock method. Basic and
diluted common shares outstanding are the same for the periods shown because the
calculation for determining diluted common shares outstanding resulted in
antidilution.
NOTE C - MARKETABLE SECURITIES
- -----------------------------
Statement of Financial Accounting Standard ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires that an enterprise
classify all debt securities as either held-to-maturity, trading, or available-
for-sale. The Registrant has elected to classify its securities as available-
for-sale and therefore is required to adjust securities to fair value at each
reporting date.
5
The following is a summary of available-for-sale securities at June 30, 1999 and
December 31, 1998:
June 30, 1999 December 31, 1998
Estimated Estimated
Cost Fair Value Cost Fair Value
--------------------------------------------------------------------
Marketable Securities:
(in thousands)
U.S. Treasury and agency notes $ 6,268 $ 6,148 $ 6,905 $ 6,961
Corporate notes 5,490 5,419 6,328 6,333
----------------------------------------------------------
$11,758 $11,567 $13,233 $13,294
==========================================================
As of June 30, 1999, the fair value adjustment is a $191,000 unrealized loss.
The cumulative fair value adjustment to stockholders' equity, net of a deferred
tax of $77,000, is an unrealized loss of $114,000. Registrant's gross
unrealized holding gains equal $13,000, while gross unrealized holding losses
equal $204,000. On June 30, 1999, the average maturity of U.S. Treasury and
agency securities was 1.5 years and corporate notes was 1.8 years. Currently,
Registrant has no securities with a remaining term to maturity of greater than
five years.
Market value equals quoted market price, if available. If a quoted market price
is not available, market value is estimated using quoted market prices for
similar securities. Registrant's investments in corporate notes are with
companies with a credit rating of A or better.
NOTE D - COMMODITY CONTRACTS USED TO MANAGE RISK
- -----------------------------------------------
Registrant uses commodity derivatives to manage its exposure to price
fluctuations on its purchased stocker cattle and its cattle feed costs. The
objective is to protect or create a future price for stocker cattle that will
protect a profit or minimize a loss once the cattle are sold and all costs are
deducted and protect the Registrant against a disastrous cattle market decline
or feed cost increase. To help achieve this objective the Registrant used both
the futures commodity markets and options commodity markets. A futures contract
is an obligation to make or take delivery at a specific future time of a
specifically defined, standardized unit of a commodity at a price determined
when the contract is executed. Options are contracts that give their owners the
right, but not the obligation, to buy or sell a specified item at a set price on
or before a specified date.
Registrant continually monitors any open futures and options contracts to
determine the appropriate risk exposure based on market movement of the
underlying asset. The options and futures contracts used typically expire on a
quarterly or semi-annual basis and are structured to expire close to or during
the month the stocker cattle and feed are scheduled to be sold or purchased.
The risk associated with hedging for the Registrant is that hedging limits or
caps the potential profits if cattle or feed prices begin to increase
dramatically or can add additional costs if cattle or grain prices fall
dramatically.
Realized gains, losses, and costs associated with both open and closed contracts
are recognized in costs of sales expense. At June 30, 1999 there were $135,000
of gains associated with futures and option contracts included in cost of sales
expense.
6
The following table identifies the cattle futures contract amounts outstanding
at June 30, 1999 (in thousands, except number of contracts) and sets forth the
purchase or sale price of the cattle under the contracts, the estimated fair
market value of the cattle at June 30, 1999 and the estimated gain or loss on
the contracts as of that date:
Cattle Future / Option No. Original Contract Estimated Estimated
Description Contracts (Bought) Sold Fair Value Gain (Loss)
- ---------------------------------------------------------------------------------------------------------------
Cattle futures sold,
40,000 lbs. per contract 695 $18,172 $17,747 $425
Cattle futures bought,
50,000 lbs. per contract 40 $(1,516) $ 1,491 $(25)
Cattle futures sold,
50,000 lbs. per contract 40 $ 1,519 $ 1,508 $ 11
The June 30, 1999 futures contracts and options expire between August 1999 and
February 2000. Estimated fair value at settlement is based upon quoted market
prices at June 30, 1999.
NOTE E - CONTINGENCIES
- ---------------------
Registrant leases land to National Cement Company of California, Inc. (National)
for the purpose of manufacturing portland cement from limestone deposits on the
leased acreage. National, Lafarge Corporation (the parent company of the
previous operator) and Registrant have been ordered to cleanup and abate an old
industrial waste landfill site and the cement kiln dust piles on the leased
premises. Lafarge has undertaken the investigation and remediation of landfills
and has completed the removal of contaminated soils above the groundwater level
from the landfills. Lafarge has also completed a substantial amount of the site
investigation with respect to chlorinated hydrocarbons. The plume of
chlorinated hydrocarbons covers an extensive area and has migrated off of the
leased premises in one direction. Lafarge is undertaking additional
investigation work as directed by the Regional Water Board and is developing a
feasibility study evaluating different remediation options. The cleanup order
for the kiln dust piles now requires only site stabilization measures of the
sort previously undertaken by National and does not call for transporting the
large piles off-site. Under both orders, Registrant is secondarily liable and
will be called upon to perform work only if National and Lafarge fail to do so.
Under the lease agreements with National and Lafarge, both companies are
required to indemnify Registrant for any costs and liabilities incurred in
connection with the cleanup order. Due to the reported financial strength of
National and Lafarge, Registrant believes that a material effect on the company
is remote at this time.
For further discussion refer to Registrant's 1998 Form 10-K, Part I, Item 3, -
"Legal Proceedings". There have been no significant changes since the filing of
the 1998 Form 10-K.
7
NOTE F - NEW ACCOUNTING PRONOUNCEMENTS
- -------------------------------------
Effective October 1, 1998 Registrant adopted the provisions of Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities (SFAS 133)". SFAS 133 standardizes accounting for all
derivative contracts and requires that all derivative contracts be reported in
the consolidated balance sheet at fair value. Derivatives meeting certain
specific requirements can be designated as hedges and the special accounting of
SFAS 133 applied. Registrant has elected to recognize all derivative gains and
losses whether or not the derivatives are classified as hedges in the statement
of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
Results on Operations
- ---------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements that are subject to many
uncertainties that could cause the actual results to differ materially from
those in the forward-looking statements. The forward-looking statements include
comments on future cattle prices and demand, crop yields and demands, the effect
of pending environmental proceedings, the source and adequacy of Registrant's
future cash resources and financial market and commodity risks. These forward-
looking statements are subject to factors beyond the control of Registrant (such
as weather and market forces), the outcome of pending administrative proceedings
and the fulfillment of mitigation obligations of third parties with regard to
environmental matters and the availability of financing. No assurance can be
given that any such forward-looking statements will turn out to be accurate.
Total revenues, including interest income for the first six months of 1999 were
$18,890,000 compared to $15,902,000 for the same period in 1998. The growth in
revenues during the first six months of 1999 is primarily attributable to
increases in resource management division revenues of $532,000 and real estate
division revenues of $2,742,000. The increase in real estate revenues when
compared to 1998 is primarily attributed to the sale of a fiber optic
communications easement for $1,750,000. Additionally, Registrant entered into
an option with Enron Capital & Trade Resources Corp. (see discussion in Item 5)
for a land lease for the construction and operation of a power plant. Revenues
received pursuant to this agreement total $600,000 as of June 30, 1999.
Finally, Registrant purchased three industrial and commercial buildings in
Phoenix, Arizona and one building in Rancho Santa Fe, California (see discussion
below under "Liquidity and Capital Resources") which increased revenue
approximately $350,000 in 1999. The improvement in resource management revenues
is due primarily to the increase in hunting program sales and increased
royalties from sand and rock aggregate production and cement production.
Operating activities during the first six months of 1999 resulted in a net loss
of $206,000 or $0.02 per share diluted, compared to a net loss of $1,724,000, or
$0.14 per share diluted for the same period of 1998. The improvement in
operating results for the first six months of 1999 are due to the increases in
revenues described above, but these increases were offset by higher real estate
division expenses ($938,000) and general and administrative costs ($275,000).
The increase in real estate expenses were attributable to additional costs
related to the planning and development of Registrant's land holding. These
costs included increases in professional service fees, staffing costs, and
advertising costs. In
8
addition to these real estate operating costs, Registrant recognized its portion
(60%) of the start-up, training, and pre-opening costs related to the June 30,
1999 opening of the Petro Travel Plaza, which were approximately $345,000.
General and Administrative costs were higher primarily due to higher
professional service fees and staffing costs.
Cattle prices during 1999 strengthened when compared to 1998 due to lower
supplies of cattle in feedlots during the first quarter of 1999. This
improvement in cattle prices may not continue as cattle feeders have placed
additional cattle on feed in response to the improved market. However, prices
are still below what they may have been due to the continuing impact of the
Asian economic crisis on the beef market. Of the United States' trading
partners, Asia is the largest importer of U.S. beef, which means that any
reduction in purchasing power within that region can hold down prices within the
beef market. California statewide estimates for almond and grape crop yields
for 1999 are greater than the 1998 crop yields. If crop yields are higher in
1999 than 1998, crop prices may decline. In particular, the almond crop may be
one of the largest ever in the state, which may reduce prices to levels
significantly below the levels of the last three years. Almond prices over the
last three years have ranged from $1.54 to $2.26 per pound.
Total revenues for the second quarter of 1999, including interest income, were
$6,712,000 compared to $7,581,000 for the second quarter of 1998. The decrease
is due primarily to the timing of cattle sales from the feedlot to third
parties. This decrease was partially offset by increased revenues in both the
real estate and resource management divisions of $1,009,000 and $387,000,
respectively. The increase in resource management revenues is primarily the
result of an increase in the sales of hunting memberships, $267,000 in the
second quarter of 1999 compared to $28,000 for the same period in 1998.
Additionally, resource management had increased royalties from sand and rock
aggregate production and cement production.
During the second quarter of 1999 Registrant had a net loss of $575,000, or
$0.05 per share, compared to a loss of $943,000, or $0.07 per share for the same
period of 1998. The improvement in operations compared to the second quarter of
1998 is due to a decrease in cost of sales on cattle as a result of the timing
of sales as described above, which was partially offset by the net decrease in
revenues described above.
Registrant continues to be involved in various environmental proceedings related
to leased acreage. For a further discussion, refer to Note E - Contingencies.
Prices received by Registrant for many of its products are dependent upon
prevailing market conditions and commodity prices. Therefore, Registrant is
unable to accurately predict revenue, just as it cannot pass on any cost
increases caused by general inflation, except to the extent reflected in market
conditions and commodity prices. The operations of the Registrant are seasonal
and results of operations cannot be predicted based on quarterly results.
9
Liquidity and Capital Resources
- -------------------------------
Registrant's cash, cash equivalents and short-term investments totaled
approximately $11,910,000 at June 30, 1999, compared to $18,237,000 on December
31, 1998 a decrease of 36%. Working capital as of June 30, 1999 was $6,526,000
compared to $19,768,000 on December 31, 1998. The decrease in working capital
during the first six months of 1999 is due primarily to capital expenditures
related to real estate infrastructure and farming developments and the purchase
of revenue producing properties in Phoenix, Arizona and Rancho Santa Fe,
California. Also working capital decreased due to an increase in the use of
short-term debt financing. During February 1999 Registrant completed the
purchase of three industrial and commercial buildings in Phoenix, Arizona having
aggregate rentable square feet of 101,482. The Phoenix property is a cluster of
three buildings in a master planned industrial park located near Sky Harbor
International Airport and adjacent to the Interstate 10 Freeway. Annualized
rentals under the leases currently aggregate $845,000. The leases provide for
built in rental escalations which approximate current inflation factors based on
the CPI index. During April 1999, Registrant completed the purchase of a
building in Rancho Santa Fe, California for $1,750,000. Annualized rents under
lease of all space currently total $126,000. The buildings were acquired to
complete a tax deferred exchange of real property in which $6,000,000 in
proceeds from the sale of land in December 1998 and easements in 1999 were used
together with $4,800,000 borrowed from a bank, with the loan secured by the
property acquired. The use of short-term credit has grown when compared to 1998
due to the funding of the inventories attributed to the growth of Registrant's
core business lines and to the short-term financing of real estate
infrastructure costs associated with Registrant's development of an industrial
complex in the Southern San Joaquin Valley.
Registrant has a revolving line of credit of $25,000,000 that as of June 30,
1999 had a balance outstanding of $24,752,000 at an interest rate of 7.25%.
Registrant also maintains a short-term line of credit for its feedlot operations
of $4,000,000. The outstanding balance at June 30, 1999 was $3,644,000 with the
interest rate approximating the bank's prime lending rate of 6.75%. The
outstanding line of credit balances will change throughout the year based on the
timing of proceeds from cattle and crop sales. The revolving lines of credit
are used as a short-term cash management tool.
The accurate forecasting of cash flows by Registrant is made difficult due to
the fact that commodity markets set the prices for the majority of Registrant's
products and the fact that the cost of water changes significantly from year-to-
year as a result of changes in its availability.
Registrant is currently evaluating the possibility of new farming developments,
continued expansion of the cattle herd, and additional commercial development
along the Interstate 5 corridor. These potential new projects would be funded
from current cash resources, from additional borrowings, and possibly funds
provided by joint venture partners involved in particular projects.
Registrant has traditionally funded its growth and capital additions from
internally generated funds and from its excess borrowing capacity. Management
believes that the combination of net earnings, short-term investments and
borrowing capacity will be sufficient for its near term operations.
10
Impact of Year 2000
- -------------------
Many older computer hardware, software and imbedded micro controllers are
designed to read and store dates using only the last two digits of the year. As
a result they cannot correctly interpret dates beyond the year 1999. If not
corrected, this problem could cause processing errors or computer system
failures that materially adversely affect Registrant.
During early 1997 Registrant initiated a review of all its financial and
accounting systems and implemented a conversion plan involving the acquisition
of new hardware and software that read and store dates in four digits. This
conversion was completed in 1997 at a cost of approximately $200,000, of which
approximately $90,000 was for the purchase of new software and consulting
services relating to the conversion. These expenditures were capitalized and
are being depreciated over a three year useful life. The funds were provided by
operations, including use of Registrant's short-term line of credit. Registrant
has conducted limited testing of the new system and believes that it will
function effectively when the dates beyond the year 1999 are processed.
Registrant has communicated with and is communicating with all significant
suppliers, customers, financial institutions, utilities, and other third parties
upon which it is dependent to determine the extent to which Registrant's
business operations are vulnerable the failure of those parties to correct their
own Year 2000 problems. Although all responses received to date have been
satisfactory, Registrant has not completed this phase of its Year 2000 readiness
program. Registrant is currently in the process of verifying which third
parties have corrected their Year 2000 problems.
Registrant also intends to develop contingency plans to handle its most likely
worst case scenarios with respect to the Year 2000 problem. Registrant intends
to complete its determination of worst case scenarios after it has received and
analyzed responses to substantially all of the inquiries made of third parties.
The contingency plans are expected to include methods of dealing with third
parties that are not dependent upon computer or micro controller technology.
The Registrant estimates that it will complete its inquiry of third parties and
development of contingency plans well in advance of the end of 1999.
Registrant believes that substantially all of the costs of completing its
efforts to be Year 2000 ready will consist of the compensation expense allocable
to employees who work on the project. Registrant does not separately track
these costs related to the year 2000 project but does not expect them to be
material.
All statements in this Report regarding the Year 2000 problem involve forward-
looking information as to which there is a great uncertainty. The actual
results of the Registrant's program to deal with the Year 2000 problem could
differ materially from what Registrant plans and anticipates because of the lack
of experience of Registrant and others with problems of this kind, the extent to
which computer and other systems of business and other entities are inter-
related and the lack of control over, and access to, information of third
parties upon whom Registrant's business is dependent. The failure of the
Registrant to correctly analyze and anticipate Year 2000 problems in its own
operations or those of third parties or the failure or inability to develop
effective contingency plans could have a material adverse effect on the
Registrant's business.
11
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Market risk represents the risk of loss that may impact the financial position,
results of operations, or cash flows of Registrant due to adverse changes in
financial or commodity market prices or rates. Registrant is exposed to market
risk in the areas of interest rates and commodity prices.
Financial Market Risks
- ----------------------
Registrant is exposed to financial market risks, including changes to interest
rates and credit risk related to marketable securities, interest rates related
to its own outstanding indebtedness and trade receivables.
The primary objective of Registrant's investment activities is to preserve
principal while at the same time maximizing yields consistent with prudently
managing risk. To achieve this objective and limit interest rate exposure,
Registrant limits its investments to securities with a maturity of less than
five years to limit interest rate exposure and with an investment grade of A or
better from Moody's or Standard and Poors to minimize risk. In addition, market
value changes due to interest rate changes are reduced because a large portion
of the portfolio has interest rates that float and are reset on a quarterly
basis. See Note C, Marketable Securities.
Registrant is exposed to interest rate exposure on its short-term working
capital line of credit and the long-term debt currently outstanding. The short-
term line of credit interest rate is tied to the lending bank's prime interest
rate and changes when that rate changes. The long-term debt has a fixed
interest rate, and the fair value of the long-term debt will change based on
interest rate movements in the market. Registrant typically does not attempt to
reduce or eliminate its exposure on this debt through the use of any financial
instrument derivatives. Registrant manages its interest rate exposure through
negotiation of terms.
Registrant's credit and market risk related to its inventories and receivables
ultimately depends on the value of the cattle, almonds, grapes, pistachios, and
walnuts at the time of payment or sale. Based on historical experience with
current customers and periodic credit evaluations of its customers' financial
condition, Registrant believes its credit risk is minimal. Market risk is
discussed below in commodity price exposure.
The following table provides information about Registrant's financial
instruments that are sensitive to changes in interest rates. The table presents
Registrant's marketable securities, debt obligations, principal cash flows and
related weighted-average interest rates by expected maturity dates as of June
30, 1999 and December 1998.
12
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At June 30, 1999
(Dollars in thousands)
-----------------------------------------------------------------------------------------
Total
-------- Fair
There Weighted Value
1999 2000 2001 2002 2003 -after Average 06/30/99
- -----------------------------------------------------------------------------------------------------------------
Assets:
Marketable
Securities $ 2,400 $3,084 $2,310 $1,742 $2,227 --- $11,763 $ 11,567
Average
Interest Rate 6.62% 6.10% 5.50% 6.20% 5.80% 6.12%
Liabilities:
Short-term
Debt $28,396 --- --- --- --- --- $28,396 $ 28,396
Average
Interest Rate 7.19% --- --- --- --- --- 7.19%
Long-term
Debt $ 245 $ 490 $ 490 $ 490 $1,365 $3,521 $ 6,601 $ 6,601
Average
Interest Rate 7.88% 7.88% 7.88% 7.88% 7.88% 7.88% 7.88%
=========================================================================================
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 1998
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------
Total
-------- Fair
There Weighted Value
1999 2000 2001 2002 2003 -after Average 12/31/98
- -------------------------------------------------------------------------------------------------------------------------------
Assets:
Marketable
Securities $ 5,885 $2,939 $2,662 $1,747 --- --- $13,233 $ 13,294
Average
Interest Rate 6.92% 5.93% 5.81% 6.40% 6.41%
Liabilities:
Short-term
Debt $19,999 --- --- --- --- --- $19,999 $ 19,999
Average
Interest Rate 7.38% --- --- --- --- --- 7.38%
Long-term
Debt $ 250 $ 250 $ 250 $ 250 $1,125 --- $ 2,125 $ 2,125
Average
Interest Rate 8.57% 8.57% 8.57% 8.57% 8.57% --- 8.57%
========================================================================================================
In comparison to the prior year Registrant's risks in regard to fluctuations in
interest rates has increased overall due to the growth in the use of short-term
lines of credit that fluctuate with the bank's prime lending rate.
13
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 it exposure to market price risk on a
daily basis in accordance with formal policies established for this activity.
These policies limit the duration to maturity of contracts entered into as well
as the level of exposure to be hedged.
Registrant's goal in managing its cattle and feed costs is to protect or create
a range of selling prices and feed prices that allow the company to recognize a
profit or minimize a loss on the sale of cattle once all costs are deducted.
See Note D, Commodity Contracts Used to Manage Risk. Gains on future contracts
and options as of June 30, 1999 were $135,000 as compared to gains on future
contracts and options as of December 31, 1998 of $485,000. The gains thus far
in 1999 are due to the volatility of the cattle prices during the second quarter
of 1999.
Inventories consist primarily of cattle for sale, and price fluctuations are
managed with futures and options contracts. See table below for contracts
outstanding at quarter-end. Registrant is at risk with respect to changes in
market prices with respect to cattle held for sale that are not protected by
futures and options contracts. At June 30, 1999 approximately 22% of the cattle
held in inventory or 10,217 head of cattle were not protected by futures and
options for price movement. This compares to 9,639 head of cattle at June 30,
1998. The 1999 number of head of cattle equates to approximately 10.2 million
pounds of beef. For each $.10 per pound changed in price, Registrant has a
potential exposure or benefit of $1,020,000 in future value. Although the
prices at which the cattle will ultimately be sold is unknown, over the last
three years the market price has ranged from $.50 per pound to $.68 per pound
and the current market price is $.66 per pound.
With respect to accounts receivable, the amount at risk relates to almonds and
pistachios. These receivables are recorded at estimates of the prices that
ultimately will be received for the crops. The final price will not be known
until the third or fourth quarter of 1999. Of the accounts receivable
outstanding at June 30, 1999, $944,000 is at risk to changing prices of almonds
and $116,000 is at risk to changing prices of pistachios. The comparable
amounts of accounts receivable at December 31, 1998 were $1,236,000 and
$122,000, respectively. The price estimated for recording accounts receivable
at June 30, 1999 was $1.85 per pound for almonds. For every $.25 change in the
price of almonds Registrant's receivable for almonds increases or decreases by
$350,000. Although the final price of almonds (and therefore the extent of the
risk) is not presently known, over the last three years the final prices have
ranged from $1.54 to $2.26. With respect to pistachios, the price estimated for
recording the receivable was $1.17 per pound, each $.15 change in the price
increases or decreased the receivable by $120,000 and the range of final prices
over the last three years has been $.92 to $1.17.
14
The following tables identify the future contract amounts and options contract
costs outstanding at June 30, 1999 and December 31, 1998.
Original Estimated
June 30, 1999 No. Contract/Cost Estimated Gain (Loss)
Commodity Future / Option Description Contracts (Bought) Sold Fair Value
- ----------------------------------------------------------------------------------------------------------------
Cattle futures sold, 40,000 lbs. per contract 695 $18,172 $17,747 $425
Cattle futures bought, 50,000 lbs. per 40 $(1,516) $ 1,491 $(25)
contract
Cattle futures sold, 50,000 lbs. per contract 40 $ 1,519 $ 1,508 $ 11
Original Estimated
December 31, 1998 No. Contract/Cost Estimated Gain (Loss)
Commodity Future / Option Description Contracts (Bought) Sold Fair Value
- ----------------------------------------------------------------------------------------------------------------
Cattle futures bought 50,000 lbs. per contract 20 $(710,000) $694,000 $(16)
Cattle options bought, 40,000 lbs. per contract 130 $ (72,000) $ 89,000 $ 17
Cattle options sold 40,000 lbs. per contract 130 $ 42,000 $ (6,000) $ 36
The June 30, 1999 futures contracts and options expire between August 1999 and
February 2000. Estimated fair value at settlement is based upon quoted market
prices at June 30, 1999.
PART II OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
- --------------------------
Not applicable.
Item 2. Changes in Securities
- ------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
15
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) The Annual Meeting of Shareholders was held on May 4, 1999.
(b) The only matter submitted to a vote of security holders was for the
election of directors. Each of the persons named in the Proxy Statement as
a nominee for director was elected. Following are the voting results on
each of the nominees for director:
- --------------------------------------------------------------------------------------------
Votes Votes
Election of Directors For Withheld
- --------------------------------------------------------------------------------------------
John L. Goolsby..................................... 11,105,682 31,024
Norman Metcalfe..................................... 11,107,945 28,761
Kent G. Snyder...................................... 11,106,443 30,263
Martin J. Whitman................................... 11,108,454 28,252
Item 5. Other Information
- --------------------------
Effective April 30, 1999 Registrant entered into an option with Enron Capital &
Trade Resources Corp., a wholly-owned subsidiary of Enron Corporation, and an
affiliated company (collectively "Enron") to lease to Enron up to 35 acres of
undeveloped land at the southern end of the San Joaquin Valley for the
construction and operation of a power plant having a capacity anticipated to be
between 750 and 1,000 megawatts of electricity. The project would be powered by
natural gas turbines and would be subject to environmental requirements. The
transaction is subject to a number of contingencies, and Enron has the right to
terminate the arrangement unilaterally at any time before the lease becomes
effective.
The amounts payable to Registrant under the arrangement are subject to a number
of contingencies, but scheduled payments would aggregate $1,450,000 in 1999 (of
which $600,000 has been paid to Registrant as of June 30, 1999) if the
arrangement is not terminated by Enron. Thereafter, $100,000 would be payable
monthly until rental under the lease commences or the payments reach an agreed
maximum amount, although such payments could be significantly higher and could
be paid earlier under certain circumstances. If Enron exercises its right to
terminate the arrangement, Registrant would be entitled to retain the payments
made to the date of termination, but Enron would have no obligation to make any
further payments. Payments under the lease, which include both rent and
compensation for significant easement rights over other Registrant land, would
be $2,600,000 per year (subject to certain adjustments which could be material),
would commence when the plant becomes operational or earlier under certain
circumstances and would be subject to escalation based upon changes in a
designated consumer price index. Registrant would also be entitled to receive
additional rent after commercial operation of the plant begins, based upon
production output at the plant and energy prices. The term of the lease would
be 25 years from the date the plant becomes operational (or earlier under
certain circumstances), and Enron would have three five-year options to extend
the term.
16
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits -
3.1 Restated Certificate of Incorporation *
3.2 Bylaws **
10.12 Transaction and Option Agreement
with Enron Capital & Trade Resources Corp. 19
10.13 Option Agreement
with Enron Capital & Trade Resources Corp. 55
27.1 Financial Data Schedule (Edgar),
June 30, 1999 56
(b) Reports - on Form 8-K
On March 12, 1999, Registrant filed a Current Report on Form 8-K (Item 2),
announcing the purchase of commercial industrial buildings in Phoenix,
Arizona.
On May 11, 1999, Registrant filed a Current Report on Form 8-K/A (Item 2),
amending the Current Report on Form 8-K filed on March 12, 1999 which
reported the acquisition of buildings. This filing includes the Statement
of Revenue and Certain Expenses for the properties purchased and pro forma
financial statements and related notes.
* This document, filed with the Securities Exchange Commission in Washington,
D.C. (file number 1-7183) under Item 14 to Registrant's Annual report on
Form 10-K for year ended December 31, 1987, is incorporated herein by
reference.
** This document, filed with the Securities Exchange Commission in Washington,
D.C. (file number 1-7183) under Item 14 to Registrant's Annual report on
Form 10-K for year ended December 31, 1994, is incorporated herein by
reference.
17
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)
_____________________________ BY _________________________________
DATE Allen E. Lyda
Vice President, Finance
& Treasurer
18