10-Q 1 taylor024027_10q.txt TAYLOR INVESTMENT CORPORATION FORM 10-Q -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------------------------------------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 30, 2002 Commission File Number 33-87024C ---------------------------------- -------------------------------- TAYLOR INVESTMENT CORPORATION (Exact name of registrant as specified in its charter) Minnesota 41-1373372 ----------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation organization) 43 Main Street SE, Suite 506 Minneapolis, MN 55414 (Address of principal executive offices) Issuer's telephone number, including area code: (612) 331-6929 Not applicable ----------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) -------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) or 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 ___ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value - 485,588 shares as of June 30, 2002 ----------------------------------------------------------------- -------------------------------------------------------------------------------- 1 of 16 TAYLOR INVESTMENT CORPORATION INDEX PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements: Condensed Consolidated Balance Sheets June 30, 2002 (unaudited) and December 31, 2001..............................3 Condensed Consolidated Statements of Income Three and six months ended June 30, 2002 and 2001 (unaudited)................4 Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2002 and 2001 (unaudited)..........................5 Notes to Condensed Consolidated Financial Statements (unaudited).............6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition................................7 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................................11 PART II. OTHER INFORMATION Item 1. Legal Proceedings...........................................................12 Item 2. Changes in Securities.......................................................12 Item 3. Defaults Upon Senior Securities.............................................12 Item 4. Submission of Matters To a Vote of Security Holders.........................12 Item 5. Other Information...........................................................12 Item 6. Exhibits and Reports on Form 8-K............................................12 Signatures..................................................................13 Exhibit 12.1-Computation of ratios - Ratio of earnings to fixed charges.....14 Exhibit 99.1-Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002...........15 Exhibit 99.2-Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002...........16

2 of 16 TAYLOR INVESTMENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements (unaudited). 3 of 16 TAYLOR INVESTMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001

See notes to condensed consolidated financial statements (unaudited). 4 of 16 TAYLOR INVESTMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 AND 2001

See notes to condensed consolidated financial statements (unaudited). 5 of 16 TAYLOR INVESTMENT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying condensed consolidated balance sheet for December 31, 2001 was derived from the audited consolidated balance sheet as of that date. The condensed consolidated balance sheet as of June 30, 2002 and the condensed consolidated statements of income for the three and six months ended June 30, 2002 and 2001 and the condensed consolidated statements of cash flows for the six months ended June 30, 2002 and 2001 have been prepared by the management of Taylor Investment Corporation (the Company) without audit. In the opinion of management, these condensed consolidated financial statements reflect all adjustments (consisting of normal, recurring adjustments) necessary to present fairly the financial position of the Company at June 30, 2002 and the results of operations and cash flows for all periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's 2001 Form 10-K. The results of operations for the interim periods are not necessarily indicative of results, which will be realized for the full year. 2. INVESTMENTS IN JOINT VENTURES In May 2002, the Company formed a joint venture to acquire, develop, and sell a specific parcel of land in Northern Minnesota. The Company made an initial investment of $200,000, and has also guaranteed the note payable of this joint venture in the amount of $1.03 million as of June 30, 2002. The Company has a 67% interest in and consolidates all operations of the joint venture. Accordingly, the proportionate year-to-date loss of $3,219 has been allocated to the other partner of the joint venture as a minority interest and is included in other revenue. All intercompany accounts and transactions have been eliminated in consolidation. 6 of 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FORWARD-LOOKING STATEMENTS: Various forms filed by the Company with the Securities and Exchange Commission, including the Company's Form 10-K and Form 10-Q, and other written documents and oral statements released by the Company, may contain forward-looking statements. Forward-looking statements generally use words such as "expect," "anticipate," "believe," "project," "should," "estimate," and similar expressions, and reflect the Company's expectations concerning the future. Such statements are based upon currently available information, but various risks and uncertainties may cause the Company's actual results to differ materially from those expressed in these statements. Among the factors which management believes could affect the Company's operating results are the following: * Changing economic conditions, including economic downturns or recessions and rising interest rates; * The ability of the Company to maintain and enhance its market position relative to its competitors, to realize productivity, and to continue to control expenses; * The availability of suitable tracts of undeveloped land in proximity to the marketplace; * Changes in zoning and subdivision regulations; * The availability and cost of financing; * Continuity of management. CRITICAL ACCOUNTING POLICIES The Company's significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in the 2001 Annual Report on Form 10-K. The accounting policies used in preparing the interim 2002 condensed consolidated financial statements are the same as those described in the annual report. In preparing the financial statements, the Company follows accounting principles generally accepted in the United States of America, which in many cases requires assumptions, estimates and judgments that affect the amounts reported. Many of these policies are relatively straightforward. There are, however, certain policies that are critical because they are important in determining the financial condition and results of operations and they can be difficult to apply. The most critical accounting policies include those related to: * accounting for contingencies, under which the Company accrues an expense when it is probable that a liability has been incurred and the amount can be reasonably estimated; * accounting for tax increment financing receivables because of the importance of management judgment in making the estimates necessary to assess collectibility; * the collectibility of contracts and mortgages receivable; and * the valuation of inventories, including adjustments to reduce inventory to the lower of cost or market. 7 of 16 RESULTS OF OPERATIONS COMPARISON OF THE THREE-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001. Sales of $7,216,985 for the quarter ended June 30, 2002 decreased by $1,195,025, or 14.2%, from the same period in 2001. This decrease is primarily the result of relatively low available inventory levels in the Midwest offices. Additionally, sales decreased in the Company's newer markets in the second quarter of 2002, as a result of lower than normal consumer demand in the more residential markets. Entering the third quarter of 2002, the Company had over $5 million of pending sales primarily due to the timing of when the inventory was placed on the market in late June. Gross profit was $2,694,754, or 37.3% of sales, for the quarter ended June 30, 2002 compared to $3,898,784, or 46.3% of sales for the same period in 2001. The decrease in gross profit margin, as a percentage of sales, in 2002 is a result of a slightly softer real estate market in Wisconsin as well as the Company's focus on the sale of aged inventory, primarily in the Midwest. The Company's selling, general and administrative expenses consist primarily of sales commissions, advertising expenses, office operating expenses and administrative overhead. Selling, general and administrative expenses of $2,407,087 were 33.4% of sales for the quarter ended June 30, 2002 compared to $2,678,183, or 31.8%, for the same period in 2001. The decrease in these expenses is attributable to cost reduction efforts on office expenses in the Company's newer markets. Due to a higher average balance of contracts and mortgages receivable, interest income increased 16.2% from the same period in 2001. For the quarter ended June 30, 2002, the Company had equity in earnings of joint ventures of $4,281, compared to equity in losses of joint ventures of $113,742 for the same period in 2001. The gains or losses reflect the Company's one-third share of net losses incurred by two limited liability companies established in the first quarters of 2001 and 2000 to acquire and develop specific parcels of land. The change is related to the improved performance of two of the Company's joint ventures in the quarter ended June 30, 2002 compared to the same period in 2001. Other revenue for the quarter ended June 30, 2002 remained relatively consistent from the same period in 2001. Included in other revenue is interest income on the average outstanding balance of receivables from joint ventures, which are subject to a monthly interest charge of prime plus 2%. Interest expense for the quarter ended June 30, 2002 was $163,119, compared to $343,946 for the same period in 2001. Significantly lower interest rates and higher levels of interest capitalization due to the growth in inventory under development contributed to the 52.6% decrease. 8 of 16 COMPARISON OF THE SIX-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001. Sales for the six months ended June 30, 2002 were $16,196,687, an increase of $1,603,281, or 11.0% over the same period in 2001. Sales increased due to the increase in inventory available in the Southeast and certain Midwest offices combined with strong consumer demand in those markets. Increased sales were also attributable to continued growth in the Company's new offices. Gross profit for the first six months of 2002 was $6,062,542 or 37.4%, compared to $6,723,540 or 46.1% for the same period in 2001. The decrease in gross profit, as a percentage of sales, is primarily due to the Company's focus on the sale of aged inventory by selling lots at reduced prices and a softening economy in certain markets. For the first six months of 2002, selling, general and administrative expenses were $5,039,772, or 31.1% of sales, compared to $4,987,149, or 34.2% of sales in 2001. The decrease in these expenses, as a percentage of sales, is primarily attributable to cost reduction efforts on office expenses in the Company's newer markets. Despite a small increase in the average balance of contracts and mortgages receivable, interest income of $432,289 for the first six months of 2002 decreased $25,383, or 5.6%, from the same period in 2001. This decrease is due to the company offering special, low-interest financing programs to reflect the current interest rate environment in the last year. For the six months ended June 30, 2002 and 2001, the Company had equity in losses of joint ventures of $41,447 and $150,416, respectively. The losses reflect the Company's one-third share of net losses incurred by two limited liability companies established in the first quarters of 2001 and 2000 to acquire and develop specific parcels of land. The change is related to the improved performance of two of the Company's joint ventures in the six months ended June 30, 2002 compared to the same period in 2001. Other revenue of $88,125 for the first six months of 2002 decreased significantly, compared to $273,386 for the same period in 2001. This decrease was the result of a project fee collected from one of the Company's joint ventures in the first quarter of 2001. Interest expense for the first six months of 2002 was $379,345, compared to $686,983 for the same period in 2001. Significantly lower interest rates and higher levels of interest capitalization due to the growth in inventory under development contributed to the 44.8% decrease. 9 of 16 LIQUIDITY AND CAPITAL RESOURCES The Company's capital resources are provided from both internal and external sources. The Company's primary capital resources from internal operations are: (i) cash sales, (ii) down payments on sales which are financed, (iii) principal and interest payments on contracts and mortgages receivable, and (iv) borrowings collateralized by contracts and mortgages receivable. External sources of liquidity include borrowings under the Company's Credit Agreement, notes and mortgages payable to finance inventory acquisitions and development, and the issuance of debt securities. The Company's capital resources are used to support the Company's operations, including (i) acquiring and developing inventory, (ii) providing financing for customer purchases, (iii) meeting operating expenses, (iv) shareholder distributions, and (v) satisfying the Company's debt and other obligations. The Company anticipates that it will continue to require external sources of liquidity to support its operations, satisfy its debt and other obligations and to provide funds for future strategic inventory acquisitions and growth. The following table sets forth the Company's net cash flows for operations, investing and financing activities for the three months ended June 30, 2002 and 2001. Six months ended Six months ended June 30, 2002 June 30, 2001 ------------- ------------- Net cash provided by (used in): Operating activities $ (994,392) $ (1,205,689) Investing activities (595,125) 1,161,498 Financing activities 987,498 (321,366) ---------------------------------- Net increase (decrease) in cash $ (602,019) $ (365,557) ================================== OPERATING ACTIVITIES: Operating activities used $894,392 in the first half of 2002, compared with the use of $1,205,689 for the same period in 2001, which reflects a year-over-year improvement of approximately $310,000. This improvement in the net decrease is primarily the result of decreases in contracts and mortgages receivable, which provided approximately $2.7 million of cash in the first half of 2002 from the end of fiscal 2001 compared to approximately $1.6 million provided during the same period in 2001. This change in contracts and mortgages receivable was due primarily to customer mortgage satisfactions of approximately $7 million compared to only $4.3 million in new receivables in the first half of 2002. The increase was offset by a $756,000 decrease in accounts payable in the first quarter of 2002 due primarily to the higher accounts payable balances at the end of 2001 related to the timing of inventory development and shareholder distributions and an increase in inventory of $3.8 million. INVESTING ACTIVITIES: Cash from investing activities decreased approximately $1.7 million in the first half of 2002 compared to the same period in 2001. The decrease was primarily related to total advances of $270,000 to joint ventures in 2002, whereas in 2001, there was a $1.0 million repayment of debts owed to the Company from one joint venture. In addition, there was a $591,000 decrease in funds held by trustee, which represents cash paid to the Company's trustee, for the purpose of paying scheduled maturities on senior subordinated debt. 10 of 16 FINANCING ACTIVITIES: At June 30, 2002 and December 31, 2001, the Company had total outstanding debt of approximately $20.9 million and $19.9 million, respectively. Sources of financing as of June 30, 2002 and December 31, 2001 are as follows: SOURCES OF FINANCING June 30, 2002 December 31, 2001 ------------- ----------------- Lines of credit $ 7,188,454 $ 7,037,999 Notes payable(1) 10,993,034 9,274,646 Contracts and mortgages payable 754,329 874,243 Senior subordinated debt 1,983,000 2,672,000 ---------------------------------- $ 20,918,817 $ 19,858,888 ================================== Notes payable increased approximately $1.7 million due primarily to new notes associated with the acquisition and development of inventory. In addition, a $600,000 subordinated debt payment was made during the first quarter of 2002. At June 30, 2002 and December 31, 2001 the Company had approximately $3.4 million and $3.0 million available under the Company's mortgage and contracts and interim financing credit facilities for operating needs and approximately $7.7 million and $5.2 million available under its real estate loan facility. Additionally, in May 2002, the Company's Credit Agreement was increased from $17,500,00 to $21,000,000 and its maturity was extended to April 30, 2004. The Company believes that cash generated from operations, inventory management and the above financing sources available will provide adequate short-term and long-term liquidity. ITEM 3. QUANTITIVATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk during the quarter ended June 30, 2002. For additional information, refer to Item 7A of the Company's 2001 Annual Report on Form 10-K. 11 of 16 ----------------------- (1)Notes payable include the real estate line of credit in the amounts of $4,644,954 and $3,266,101 as of June 30, 2002 and December 31, 2001, respectively. Part II. Other Information ITEM 1. LEGAL PROCEEDINGS In the ordinary course of business, the Company from time to time becomes subject to claims or proceedings related to the purchase, subdivision, sale and/or financing of real estate. Additionally, from time to time, the Company becomes involved in disputes with existing or former employees. The Company believes that the above matters are incidental to its business. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 12.1 Computation of Ratios - Ratio of earnings to fixed charges. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter covered by this report. 12 of 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Taylor Investment Corporation --------------------------------------------- (Registrant) Dated: August 14, 2002 /s/ Philip C. Taylor --------------------------------------------- Philip C. Taylor President, Chief Executive Officer and Director (principal executive officer) Dated: August 14, 2002 /s/ Paul T. Essler --------------------------------------------- Paul T. Essler Vice President of Finance (principal accounting and finance officer) 13 of 16

TAYLOR INVESTMENT CORP /MN/ 10-Q