<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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
June 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 June 30, 2000, were
12,706,236.
<PAGE>
TEJON RANCH CO.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Condensed Statements of 1
Operations for the Three Months and Six Months
Ended June 30, 2000 and 1999
Unaudited Consolidated Condensed Balance Sheets 2
As of June 30, 2000 and December 31, 1999
Unaudited Consolidated Condensed Statements of 3
Cash Flows for the Six Months Ended
June 30, 2000 and 1999
Consolidated Condensed Statements of Stockholders' 4
Equity
Notes to Consolidated Condensed Financial 5
Statements (unaudited)
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
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------------------------------------------
2000 1999 2000 1999
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Livestock $14,398 $4,840 $22,188 $13,233
Farming 235 7 405 283
Real Estate 1,352 1,685 2,398 4,028
Interest Income 154 180 312 331
-------------- ---------------- ---------------- ---------------
16,139 6,712 25,303 17,875
Costs and Expenses:
Livestock 13,097 4,714 20,306 12,917
Farming 612 335 1,039 700
Real Estate 1,203 1,542 2,434 2,680
Corporate Expense 749 782 1,509 1,488
Interest Expense 825 266 1,283 421
-------------- ---------------- ---------------- ---------------
16,486 7,639 26,571 18,206
-------------- ---------------- ---------------- ---------------
Operating Loss (347) (927) (1,268) (331)
Provision for Income Tax (132) (352) (482) (125)
-------------- ---------------- ---------------- ---------------
Net Loss $ (215) $ (575) $ (786) $ (206)
============== ================ ================ ===============
Net Loss Per Share, basic $ (0.02) $(0.05) $ (0.06) $ (0.02)
Net Loss Per Share, diluted $ (0.02) $(0.05) $ (0.06) $ (0.02)
Cash Dividends Paid $ --- $0.025 $ --- $ 0.025
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
1
<PAGE>
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999*
------------------------- -------------------------
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS
Cash and Cash Equivalents $ 520 $ 423
Marketable Securities 10,247 9,942
Accounts & Notes Receivable 4,335 5,019
Inventories:
Cattle 24,652 21,172
Farming 3,429 1,077
Other 380 559
Prepaid Expenses and Other 1,693 1,101
------------------ ----------------
Total Current Assets 45,256 39,293
PROPERTY AND EQUIPMENT - NET 47,568 50,737
OTHER ASSETS 2,772 1,489
------------------ ----------------
TOTAL ASSETS $95,596 $91,519
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Accounts Payable $ 1,359 $ 3,315
Other Accrued Liabilities 142 214
Short-term Borrowings 21,874 19,486
------------------ ----------------
Total Current Liabilities 23,375 23,015
LONG-TERM DEBT 24,331 20,606
DEFERRED INCOME TAXES 5,031 4,738
------------------ ----------------
Total Liabilities 52,737 48,359
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURE 300 ---
STOCKHOLDERS' EQUITY
Common Stock 6,354 6,349
Additional Paid-In Capital 589 379
Deferred Compensation (129) ---
Retained Earnings 35,915 36,701
Accumulated Other Comprehensive Income (170) (269)
------------------ ----------------
Total Stockholders' Equity 42,559 43,160
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $95,596 $91,519
================== ================
</TABLE>
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
<PAGE>
TEJON RANCH CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------------------------------
<S> <C> <C>
2000 1999
-------------------- -----------------
OPERATING ACTIVITIES
Net Loss $ (786) $ (206)
Items Not Affecting Cash:
Depreciation and Amortization 1,227 1,185
Deferred Income Taxes 337 (164)
Equity in Net Income from Unconsolidated Joint Venture 131 ---
Changes in Operating Assets and Liabilities:
Receivables, Inventories and other Assets, Net (5,070) (3,402)
Current liabilities, Net (2,028) 2,170
-------------------- -----------------
(6,189) (417)
NET CASH USED IN
OPERATING ACTIVITIES
INVESTING ACTIVITIES
Cash in Escrow --- 4,200
Maturities of Marketable Securities 1,599 6,190
Funds Invested in Marketable Securities (2,012) (4,614)
Property and Equipment Expenditures (6,368) (18,400)
Property and Equipment Disposals 331 ---
Bond Reimbursement from Community Facilities District 8,065 ---
Change in Breeding Herds (136) (260)
Investment in Unconsolidated Joint Venture (1,606) ---
Other --- 345
-------------------- -----------------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES (127) (12,539)
-------------------- -----------------
FINANCING ACTIVITIES
Proceeds From Revolving Line of Credit 30,015 22,483
Payments of Revolving Line of Credit (26,208) (14,336)
Borrowing of Long-term Debt 4,181 4,800
Payments of Long-term Debt (1,875) (74)
Cash contribution from Investor in consolidated
Joint Venture 300 ---
Cash Dividends Paid --- (317)
-------------------- -----------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 6,413 12,556
-------------------- -----------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 97 (400)
Cash and Cash Equivalents at Beginning of Period 423 743
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 520 $ 343
==================== =================
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retaind Deferred Comprehensive
Stock Capital Earnings Compensation Income Total
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 --- --- (786) - --- (786)
Changes in Unrealized
Losses on Available-For-Sale
Securities, net of taxes of $44 --- --- --- - (64) (64)
Interest Rate Swap Adjustment --- --- --- - 163 163
-----
Comprehensive Loss - (687)
=====
Restricted Stock Issuance 5 210 --- (215) ---
Amortization of deferred compensation --- --- --- 86 --- 86
----------------------------------------------------- ----------------------------
Balance at June 30, 2000 $6,354 $589 $35,915 $ 129 $(170) $42,688
=================================================================================
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
4
<PAGE>
TEJON RANCH CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------
June 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.
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 LOSS PER SHARE
---------------------------
Basic net loss per share is based upon the weighted average number of shares of
common stock outstanding during the year, which at June 30, 2000 was 12,706,236
and at June 30, 1999 was 12,691,253. Diluted net loss per share is based upon
the weighted average number of shares of common stock outstanding during the
year, 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 and equity securities as either held-to-maturity, trading, or
available-for-sale. Registrant has elected to classify its securities as
available-for-sale and therefore is required to adjust securities to fair value
at each reporting date.
5
<PAGE>
The following is a summary of available-for-sale securities at June 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------------------------------------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marketable Securities:
(in thousands)
U.S. Treasury and agency notes $ 5,875 $ 5,400 $ 5,191 $4,824
Corporate notes 4,930 4,847 5,201 5,118
--------------------------------------------------------------------
$10,805 $10,247 $10,392 $9,942
====================================================================
</TABLE>
As of June 30, 2000, the cumulative fair value adjustment to stockholders'
equity is an unrealized loss of $333,000, net of a tax benefit of $225,000. The
Company's gross unrealized holding gains equal $3,000, while gross unrealized
holding losses equal $561,000. On June 30, 2000, the average maturity of U.S.
Treasury and agency securities was 3.2 years and corporate notes was two 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 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 six months ended June 30,
2000 there were $92,000 of gains associated with futures and option contracts
included in cost of sales.
6
<PAGE>
The following table identifies the cattle futures contract amounts outstanding
at June 30, 2000 and December 31, 1999 (in thousands, except number of
contracts):
<TABLE>
<CAPTION>
Original Estimated
No. Contract/Cost Fair Value
Cattle Future / Option Description Contracts (Bought) Sold (Bought) Sold
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corn futures bought, 50,000 lbs. per contract 280 $(3,288) $ 2,781
Corn options sold, 50,000 lbs. per contract 105 $ 22 $ (1)
Corn options bought, 50,000 lbs. per contract 105 $ (54) $ 189
Cattle futures bought, 50,000 lbs. per contract 20 $ (843) $ 865
Cattle futures sold, 40,000 lbs. per contract 195 $ 5,465 $(5,335)
Cattle options sold, 40,000 lbs. per contract 60 $ 15 $ (1)
Cattle options bought, 40,000 lbs. per contract 60 $ (20) $ 30
</TABLE>
<TABLE>
<CAPTION>
Original Estimated
December 31, 1999 No. Contract/Cost Fair Value
Commodity Future / Option Description Contracts (Bought) Sold (Bought) Sold
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
</TABLE>
The June 30, 2000 futures contracts and options expire between August 2000 and
December 2000. Estimated fair value at settlement is based upon quoted market
prices at June 30, 2000.
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.
7
<PAGE>
Strategies:
To meet this objective management entered into 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 or LIBOR plus
1.5%. 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 enter into interest rate swap for any purpose other than
cash flow hedging purposes. 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 is 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 six
months ended June 30, 2000 the fair value of the interest rate swap had
increased $163,000.
NOTE F - CONTINGENCIES
----------------------
As of June 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
8
<PAGE>
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 1,401 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
$380,000 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 1,401 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 cleanup or abate an old
industrial waste landfill site, a storage area for drums containing lubricants
and solvents, an underground storage tank for waste oil and solvents, an
underground plume of hydrocarbons, diesel fuel which leaked from a pipeline, and
the cement kiln dust piles on the leased premises. Lafarge has undertaken the
investigation and remediation of landfills and has completed the removal of
contaminated soils above the groundwater level from the landfills. Lafarge has
also completed a substantial amount of the site investigation with respect to
chlorinated hydrocarbons. The plume of chlorinated hydrocarbons covers an
extensive area and has migrated off of the leased premises in one direction
where it has been found to be leaking into a local creek. Lafarge is
undertaking additional investigation work as directed by the Regional Water
Board and is developing a feasibility study evaluating different remediation
options. The order for the kiln dust piles now requires only site stabilization
measures of the sort previously undertaken by National and does not call for
transporting the large piles offsite. Under the orders, Registrant is
secondarily liable and will be called upon to perform work only if National and
Lafarge fail to do so, although the relative priority of Lafarge and Registrant
is being reconsidered by the Board. 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 the company 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.
9
<PAGE>
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 share of operating losses in this
unconsolidated joint venture are $1,020,000 at June 30, 2000. This amount is
included in other assets in the accompanying consolidated condensed balance
sheets as an adjustment to Registrant's investment in the joint venture. The
portion of the net loss of the unconsolidated joint venture allocable to
Registrant for the six months ended June 30, 2000 was $131,000, which is
included in Real Estate revenues in the accompanying unaudited consolidated
condensed statements of income.
Condensed financial information of Registrant's unconsolidated joint venture as
of and for the six months ended June 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
Unaudited Condensed Combined Income Statement Information
---------------------------------------------------------
<S> <C>
Net Sales $16,040
-------
Net Loss (222)
Partner's Share of net loss (91)
-------
Equity in net loss of unconsolidated joint venture $ (131)
=======
</TABLE>
<TABLE>
<CAPTION>
Unaudited Condensed Combined Balance Sheet Information
------------------------------------------------------
<S> <C>
Current Assets $ 2,356
Property and equipment, net 16,830
Long-term Debt (13,000)
Other Liabilities (1,382)
--------
Net Assets $ 4,804
========
</TABLE>
NOTE H - PAYMENT OF DIVIDEND
----------------------------
On May 2, 2000, the Board of Directors voted to eliminate Registrant's annual
dividend of $0.05 per share. The dividend was eliminated in order to reinvest
all internally generated cash flow to support Registrant's growth.
10
<PAGE>
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 six months of 2000 were
$25,303,000 compared to $17,875,000 for the same period in 1999. The growth in
revenues during the first six months of 2000 is primarily attributable to
increases in livestock division revenues of $8,955,000, which were partially
offset by a decrease in real estate division revenues of $1,630,000. The growth
in livestock division revenues was due to an increase in livestock sales of
$8,128,000 and livestock feed sales of $859,000. Livestock sales increased due
to 8,229 additional head of cattle being sold during the first six months of
2000 when compared to the same period of 1999. This increase in cattle sales is
primarily due to the growth in Registrant's cattle herd over the prior two
years. Livestock feed sales increased due to an increase in the average head
count at the feedlot of approximately 6,000 head. The decrease in real estate
revenues when compared to 1999 is primarily due to the sale of a fiber optic
communications easement of $1,750,000 that occurred in the first quarter of
1999.
Operating activities during the first six months of 2000 resulted in a net loss
of $786,000, or $0.06 per share diluted, compared to a net loss of $206,000, or
$0.02 per share diluted, for the same period of 1999. The increased loss when
compared to 1999 is primarily attributable to the decrease in real estate
revenues discussed above and an increase in interest expense of $862,000 in the
first six months of 2000 when compared to the same period of 1999. The increase
in interest expense is due to increased real estate development activities.
Partially offsetting these unfavorable variances was an increase in profit
margins on cattle sold of approximately $950,000 due to improved cattle prices
and lower cost of sales.
The Company believes that overall for 2000, cattle prices should continue to
improve due to the increases in demand for product in the U.S. and to increased
export demand because of the improving economies in Asia. Net margins on 2000
cattle sales increased approximately 12% over 1999. The higher margin is the
result of selling a greater percentage of cattle raised on Registrant's
property, which have lower costs than purchased cattle. It is early in the year
for Registrant to make production estimates for its grapes and nuts. California
statewide estimates are for almonds to have lower production than the prior year
due to storms and cold weather during the bloom period. This potential
reduction in the almond crop could improve prices for the 2000 almond crop. It
is also being estimated that grape production will be equal to or greater than
1999. This level of production could put additional pricing pressure on grapes
during 2000.
11
<PAGE>
Total revenues for the second quarter of 2000, including interest income, were
$16,139,000 compared to $6,712,000 for the second quarter of 1999. The increase
is due primarily to an increase in livestock division revenues of $9,558,000,
which is primarily the result of approximately 9,400 additional head of cattle
being sold during the second quarter of 2000 when compared to the same period in
1999.
During the second quarter of 2000 Registrant had a net loss of $215,000, or
$0.02 per share, compared to a loss of $575,000, or $0.05 per share diluted, for
the same period of 1999. The improvement in operations is due primarily to an
increase in profit margins on cattle sold, as discussed above. This improvement
was partially offset by an increase in interest expense in the second quarter of
2000 compared to the second quarter of 1999 due to an increase in real estate
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 1,401 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 E 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 $380,000 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
$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 disappointing, 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 $10,767,000 at June 30, 2000, compared to $10,365,000 at December
31, 1999, an increase of 4%. Working capital as of June 30, 2000 was
$22,010,000 compared to $16,278,000 on December 31, 1999. The increase in
working capital during the first quarter 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 June 30,
2000 had a balance outstanding of $17,000,000 bearing interest at an average
rate of 8.50%, which floats with changes in the
12
<PAGE>
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 June 30, 2000 of $4,704,000 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 June 30, 2000 the current long-term note payable balance included a
$15,730,000 note used in funding long-term assets that is secured by farm
acreage. Principal is payable in quarterly payments of $375,000 beginning June
2000, with remaining principal due June 2004. Interest is at .50% less than the
bank's prime rate or a fixed rate of 1.50% greater than the specified LIBOR
rate. 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 $4,709,000 at June 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 $3,892,000 consists of a note for $2,092,000
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%.
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 Rathings 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
13
<PAGE>
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
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 June 30, 2000
and December 31, 1999.
14
<PAGE>
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At June 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Fair
There Value
2000 2001 2002 2003 2004 -after Total 6/30/00
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Marketable $ 1,698 $2,449 $1,761 $ 3,697 $1,200 --- $10,805 $ 10,247
Securities
Weighted Average
Interest Rate 6.99% 5.66% 6.06% 5.91% 5.20% --- 5.97%
Liabilities:
Short-term Debt $ 21,874 --- --- --- --- --- $21,874 $ 21,874
Weighted Average
Interest Rate 8.72% --- --- --- --- --- 8.72%
Long-term Debt $ 630 $1,973 $1,977 $ 2,855 $9,983 $6,913 $24,331 $ 24,331
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
Weighted Average
Pay Fixed-Rate
Contract Rate 6.91% 6.91% 6.91% --- --- --- 6.91%
Weighted Average
Receive Variable-Rate,
Current Rate, Adjusts
Monthly 6.63% --- --- --- --- --- 6.63%
---------------------------------------------------------------------------------------------
Interest Rate Sensitivity Financial Market Risks
Principal Amount by Expected Maturity
At December 31, 1999
(Dollars in thousands)
----------------------------------------------------------------------------------------
Fair
There-after Value
2000 2001 2002 2003 2004 Total 12/31/99
------------------------------------------------------------------------------------------------------------------
Assets:
Marketable $ 3,303 $2,477 $1,915 $ 2,351 $ 346 --- $10,392 $ 9,942
Securities
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%
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%
----------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
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. Gains on future contracts
and options as of June 30, 2000 were $92,000 as compared to losses on future
contracts and options as of December 31, 1999 of $256,000. The gain thus far in
2000 is due to favorable pricing trends related to feed costs.
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 June 30, 2000
approximately 50% of the cattle held in inventory or 24,827 head of cattle were
not protected by futures and options for price movement. This compares to
10,217 head of cattle at June 30, 1999. The 2000 number of head of cattle that
are unprotected equates to approximately 27.3 million pounds of beef. For each
$.01 per pound change in price, Registrant has a potential exposure of $273,000
in future value. 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 $.72 per pound and the market price at June 30, 2000 was $.69
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 2000. Of the accounts
receivable outstanding at June 30, 2000, only $537,000 is at risk to changing
prices. Of the amount at risk to changing prices, $192,000 is attributable to
almonds, $118,000 to pistachios, $139,000 to walnuts, and $88,000 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
June 30, 2000 was $.89 per pound for almonds. For every $.01 change in the price
of almonds Registrant's receivable for almonds increases or decreases by
$24,000. Although the final price of almonds (and therefore the extent of the
risk) is not presently known, over the last three years the final prices have
ranged from $1.32 to $2.26. With respect to pistachios, the price estimated for
recording the receivable was $1.35 per pound, each $.01 change in the price
increases or decreased the receivable by $6,000 and the range of final prices
over the last three years has been $.92 to $1.17.
16
<PAGE>
The price estimated for recording accounts receivable for walnuts was $.45 per
pound. For every $.01 change in the price of walnuts, Registrant's receivable
increases or decreases by $16,000. The final price for walnuts has averaged
from $.45 to $.60 over the last three years. The prices used to estimate
accounts receivable related to grapes is based on the variety of wine grape and
the market for that grape. At year-end the average price used for recording the
accounts receivable was $292.00 per ton. For every $1.00 change in the price,
Registrant's receivables related to grapes can increase or decrease
approximately $14,000. The average price for grapes has averaged between
$250.00 per ton to $375.00 per ton over the last three years.
For information about futures contracts and options outstanding at June 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.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
(a) The Annual Meeting of Shareholders was held on May 2, 2000.
(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
nominee for director was elected. Following are the voting results on each
of the nominees for director:
<TABLE>
<CAPTION>
------------------------------------------------
Votes Votes
Election of Directors For Withheld
------------------------------------------------
<S> <C> <C>
Otis Booth, Jr........ 10,908,689 25,400
Dan T. Daniels........ 10,911,302 22,787
Robert C. Roucco...... 10,910,590 23,499
Geoffrey L. Stack..... 10,908,090 25,999
</TABLE>
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),
June 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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEJON RANCH CO.
--------------------------
(Registrant)
August 14, 2000 BY /s/ Allen E. Lyda
---------------------- -------------------------
DATE Allen E. Lyda
Vice President, Chief
Financial Officer
19
