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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1998 Commission File Number 33-87024C
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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
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(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 - 484,129 shares as of September 30, 1998
1 of 13
<PAGE>
TAYLOR INVESTMENT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997.................3
Condensed Consolidated Statements of Operations
Three and nine month periods ended September 30,
1998 and 1997 (unaudited)............................................4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 (unaudited)............5
Notes to Condensed Consolidated Financial Statements (unaudited).....6
Item 2. Management's Discussion and Analysis of
Results of Operation and Financial Condition ........................7
Part II.............................................................12
Signatures..........................................................13
2 of 13
<PAGE>
TAYLOR INVESTMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
(Unaudited)
SEPTEMBER 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
ASSETS
INVENTORY - Principally land held for sale $ 10,801,260 $ 12,231,884
CONTRACTS AND MORTGAGES RECEIVABLE 9,177,443 9,094,999
INVESTMENT IN JOINT VENTURE 3,205 60,645
OTHER ASSETS:
Cash 373,920 648,760
Notes receivable from officer 225,000 250,000
Tax increment financing receivable 668,059 692,562
Other receivables 127,428 92,240
Income taxes receivable 0 314,296
Prepaid expenses 215,002 136,483
Funds held by trustee 73,000 0
Land, buildings, and equipment, less accumulated depreciation of
$709,084 and $579,114, respectively 515,336 747,325
Loan acquisition costs and debt issuance costs, less accumulated
amortization of $268,825 and $215,917, respectively 367,466 420,375
-------------- --------------
Total other assets 2,565,211 3,302,041
-------------- --------------
$ 22,547,119 $ 24,689,569
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LINES OF CREDIT $ 5,465,452 $ 5,932,225
NOTES PAYABLE 5,474,838 7,028,377
CONTRACTS AND MORTGAGES PAYABLE 328,819 406,948
SENIOR SUBORDINATED DEBT 3,905,000 3,990,000
OTHER LIABILITIES:
Accounts payable 201,103 351,907
Accrued liabilities 339,086 349,635
Deposits on land sales and purchase agreements 73,254 25,572
-------------- --------------
Total other liabilities 613,443 727,114
DEFERRED INCOME TAXES 1,042,843 1,544,708
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares authorized;
484,129 shares issued and outstanding 4,841 4,841
Additional paid-in capital 740,136 740,136
Retained earnings 4,971,747 4,315,220
-------------- --------------
Total stockholders' equity 5,716,724 5,060,197
-------------- --------------
$ 22,547,119 $ 24,689,569
============== ==============
</TABLE>
See notes to consolidated financial statements (unaudited).
3 of 13
<PAGE>
TAYLOR INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
REVENUES: 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales $ 4,793,365 $ 5,566,267 $ 14,418,798 $ 12,373,688
Interest income on contracts receivable 260,007 249,463 820,317 743,674
Equity in (loss) earnings of 50% owned joint venture (3,577) (1,961) 26,560 15,218
Other revenue 103,740 117,264 237,732 315,356
------------- ------------- ------------- -------------
Total revenue 5,153,535 5,931,033 15,503,407 13,447,936
EXPENSES:
Cost of sales 2,954,070 3,325,604 8,474,879 7,900,539
Selling, general, and administrative 1,454,465 1,785,032 4,362,958 4,370,039
Interest expense 219,835 434,502 1,119,322 1,324,368
------------- ------------- ------------- -------------
Total costs and expenses 4,628,370 5,545,138 13,957,159 13,594,946
INCOME (LOSS) BEFORE INCOME TAXES 525,165 385,895 1,546,248 (147,010)
INCOME TAX EXPENSE (BENEFIT) 211,823 154,358 619,679 (58,581)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 313,342 $ 231,537 $ 926,569 $ (88,429)
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE
OUTSTANDING $ 0.65 $ 0.48 $ 1.91 $ (0.18)
============= ============= ============= =============
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 484,129 484,129 484,129 484,235
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements (unaudited).
4 of 13
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TAYLOR INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 926,569 $ (88,429)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 252,624 261,278
Loss on disposal of assets 109,957 --
Deferred income taxes (501,865) (141,095)
Equity in earnings of 50% owned joint venture (26,560) (15,219)
Contracts and mortgages receivables funded (4,554,271) (2,719,878)
Payments on contracts receivable 4,471,827 3,943,334
Decrease in inventory - land held for sale 4,629,420 4,769,840
Decrease in other receivables 14,315 145,629
Decrease in income taxes receivable 314,296 65,540
Increase in prepaid expenses (78,519) (115,689)
Decrease in accounts payable (150,804) (113,699)
(Decrease) Increase in accrued liabilities (10,549) 49,234
Increase in deposits on land sales and purchase agreements 47,682 55,638
------------ ------------
Net cash provided by operating activities 5,444,122 6,096,484
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (77,983) (141,411)
Proceeds from sale of property and equipment 300 --
Dividend from joint venture 84,000 30,000
Increase in funds held by trustee (73,000) --
------------ ------------
Net cash provided by (used in) investing activities (66,683) (111,411)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on lines of credit (466,773) (21,609)
Repayment of notes, contracts, and mortgage payables (4,830,464) (5,221,949)
Retirement of common stock 0 (70,188)
Dividends paid (270,042) (300,160)
Repayment of subordinated debt (85,000) --
------------ ------------
Net cash used in financing activities (5,652,279) (5,613,906)
------------ ------------
INCREASE (DECREASE) IN CASH (274,840) 371,167
CASH AT BEGINNING OF PERIOD 648,760 615,054
------------ ------------
CASH AT END OF PERIOD $ 373,920 $ 986,221
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest 1,132,411 1,327,102
============ ============
Income taxes 967,248 14,671
============ ============
Noncash financing activity - inventory and equipment
purchased with notes and contracts payable 3,198,796 3,317,562
============ ============
</TABLE>
5 of 13
<PAGE>
TAYLOR INVESTMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. The accompanying condensed consolidated balance sheet for December 31,
1997 was derived from the audited consolidated balance sheet as of that
date. The condensed consolidated balance sheet as of September 30, 1998
and the condensed consolidated statements of operations for the three and
nine month periods ended September 30, 1998 and 1997 and the statements of
cash flow for the nine months ended September 30, 1998 and 1997 have been
prepared by the management of Taylor Investment Corporation 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 Taylor
Investment Corporation at September 30, 1998 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 1997 Form
10-KSB.
The results of operations for the interim periods are not necessarily
indicative of results which will be realized for the full year.
2. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", which was adopted by the Company beginning January 1, 1998. SFAS
No.130 requires the disclosure of comprehensive income and its components
in the general-purpose financial statements. The adoption of the Company
of SFAS No. 130 did not have a material effect on the Company's financial
statements for the three or nine months ended September 30, 1998 or 1997.
6 of 13
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997.
Sales of $4,793,365, including sales of structures of $170,634, for the quarter
ended September 30, 1998 decreased by $772,902 from the same period in 1997.
Land sales of $4,622,731 decreased by $559,647 from the same period in 1997, and
structure sales decreased by $213,255. The decrease in land sales is
attributable to strong sales in the third quarter of 1997. The decrease in
structure sales is attributable to the planned reduction of this product.
Gross profit was $1,839,295 or 38.4%, for the quarter ended September 30, 1998
compared to $2,240,663 or 40.3%, for the same period in 1997. The gross profit
margin on land sales was 40.2% in 1998 compared to 42.1% in 1997. The decrease
in gross profit margin on land is due to unexpected development costs in the
third quarter of 1998. The gross profit margin on sales of structures is
negative for the third quarter of 1998. This is attributable to the liquidation
of the remaining time-share inventory at the Laurentian, at less than cost.
Selling, general and administrative expenses of $1,454,465 were 30.3% of sales
for the third quarter of 1998, compared to $1,785,032 or 32.1%, for the same
period in 1997. The 1.8% decrease in these expenses, as a percent of sales, is
attributable to management's continued efforts to control expenses.
For the quarter ended September 30, 1998, interest income was $10,544 higher
than for the same period in 1997 due to an increase in the average balance of
contracts and mortgages receivable, driven by increased sales for the first
three quarters of 1998. Other revenues of $103,740 for the third quarter of 1998
decreased by $13,524 for the same period in 1997. The decrease in other revenue
is attributable to management fees received in 1997, for the Resort Hospitality.
The company discontinued management of the resort on November 1, 1997.
Interest expense was $219,835 and $434,502 for the quarters ended September 30,
1998 and 1997, respectively. The decrease is due to the reduction of inventory
and related debt.
7 of 13
<PAGE>
COMPARISON OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997.
Sales for the nine months ended September 30, 1998 were $14,418,798, an increase
of $2,045,110 or 16.53%, compared to the same period in 1997. Land sales of
$13,366,758 increased by $2,354,525 from the same period in 1997, due to a
strong market place. Sales of structures declined $309,415 due to lower levels
of structure inventory in 1998, caused by a planned reduction of this product.
Gross profit for the first nine months of 1998 was $5,943,919, or 41.2%,
compared to $4,473,149 or 36.1% for the same period in 1997. The gross profit
from land sales was 43.7% and 38.9% for the nine months ended September 30, 1998
and 1997, respectively. The increase in gross profit is higher in 1998 compared
to 1997, as a result of sales programs being aimed toward the liquidation of
lower-margin, aged inventory in 1997. The gross profit from the sale of
structures was 9.5% in 1998 and 13.8% for the same period in 1997.
Interest income of $820,317 for the first nine months of 1998 was 10.3% higher
than for the same period in 1997, due to an increase in the average balance of
contracts and mortgages receivable, driven by increased sales. Other revenue for
the first nine months of 1998 decreased by $77,624, compared to the same period
in 1997, due to management fees for the Resort Hospitality received in 1997. The
Company discontinued management of the resort on November 1, 1997.
For the first nine months of 1998, selling, general and administrative expenses
were $4,362,958 or 30.3% of sales, compared to $4,370,039, or 35.3% of sales in
1997. The decrease in expenses, as a percent of sales, is due to management's
focus on controlling expenses and increasing sales in 1998.
Income tax expense, as a percentage of income, before income tax expense, was
40.1% for the first nine months of 1998 and income tax benefit, for the same
period in 1997, was 39.8% of loss before income tax benefit. Income taxes are
based on the Company's estimated annual income tax rate, which includes state
income taxes.
The loss on the disposal of fixed assets, in the amount of $109,957, is due
primarily to the replacement and disposal of accounting and custom software.
8 of 13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow is generated from operations as land inventory is sold and collections
are made on contracts and mortgages receivable. The primary use of cash flow is
for financing the Company's ongoing acquisition of land and subsequent customer
mortgage financing. Secondarily, the Company uses cash to reduce the aggregate
amounts outstanding under its Credit Agreement, notes and mortgages payable. The
following table sets forth the Company's net cash flows for operating, investing
and financing activities for the nine months ended September 30, 1998 and 1997.
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------ ------------------
Net cash provided by (used in):
Operating activities $ 5,444,122 $ 6,096,484
Investing activities (66,317) (111,411)
Financing activities (5,652,279) (5,613,906)
---------------------------------------
Net (decrease) increase in cash $ (274,840) $ 371,167
The principal sources of cash flow for the first nine months of 1998 and 1997
were cash received from sales of land and structures.
Sources of financing as of September 30, 1998 and December 31, 1997 are detailed
in the following table:
SOURCES OF FINANCING
<TABLE>
<CAPTION>
September 30, 1998 Percentage December 31, 1997 Percentage
------------------ ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Lines of Credit $ 5,465,452 36.0% $ 5,932,225 34.2%
Notes Payable(1) 5,474,838 36.1 7,028,377 40.5
Mortgages Payable 328,819 2.2 406,948 2.3
Subordinated Debt 3,905,000 25.7 3,990,000 23.0
--------------------------------------------------------------------
$ 15,174,109 100.00% $ 17,357,550 100.00%
====================================================================
</TABLE>
Total debt declined $2,183,441 from December 31, 1997, due to a decline in
inventory. As of September 30, 1998, contracts and mortgages receivable were
$9,177,443 compared to $9,094,999 as of December 31, 1997. The increase in the
portfolio is due to increased sales activity.
Based on expected cash generated from operations, inventory management and the
above financing sources available, management believes it has adequate sources
of financing to fund its cash requirements for the remainder of 1998.
- -----------------------------
(1) Notes payable includes the real estate line of credit in the amounts of
$1,866,785 and $1,592,221 as of September 30, 1998 and December 31, 1997,
respectively.
9 of 13
<PAGE>
SAFE HARBOR DISCLOSURE - Various forms filed by the Company with the Securities
and Exchange Commission, including the Company's Form 10-KSB and Form 10-QSB,
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.
THE YEAR 2000 ISSUE - As with other organizations, some of the Company's
computer programs were originally designed to recognize calendar years by their
last two digits. Calculations performed using these truncated fields may not
work properly with dates from the year 2000 and beyond. As a result, the year
2000 may cause system errors, or complete failure.
The Company has recently implemented new computer systems in all areas of
operations, except accounts receivable, that are expected to remedy this
situation. The new software and hardware systems have been purchased since the
year 2000 issue has been exposed and all sellers have assured the Company, in
writing, that their product is year 2000 compliant. The Company is currently in
the process of evaluating an accounts receivable software package that is
certified as year 2000 compliant. The plan is to have a new system selected by
December 31, 1998 and fully implemented by June 30, 1999.
The Company has, and will continue to, communicate with third parties with which
it does significant business to determine their year 2000 readiness and the
extent to which the Company is vulnerable to any third party issues. Of these
third party vendors, approximately half have been contacted, with the other half
to be contacted by the end of 1998. A written response regarding their year 2000
readiness has been, and will continue to be, requested.
Currently, the costs that have been associated to the year 2000 issue total
approximately $335,000, This cost is comprised, primarily, of new computer
hardware and new financial accounting software. The Company is still evaluating
the overall costs, however, the expected cost to complete, which includes the
purchase and implementation of new accounts receivable software, is not expected
to exceed $50,000.
10 of 13
<PAGE>
Overall, the Company believes it has amply researched the year 2000 issue and
has taken actions, which minimize the risk of system failure or corruption. In
the case that a new accounts receivable system is not in place by the year 2000,
or would fail to operate, the Company could keep records manually. This failure
may be a hindrance but the Company could continue with business, as normal.
Also, if third party creditors have system failures it may limit the immediate
credit available to the Company, but with cash and inventory on hand, business
would not be immediately affected.
11 of 13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults in 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.
Not applicable
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter covered by
this report.
12 of 13
<PAGE>
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: October 30, 1998 /S/ Philip C. Taylor
-----------------------------------------------
Philip C. Taylor
President, Chief Executive Officer and Director
(principal executive officer)
Dated: October 30, 1998 /S/ Joel D. Kaul
-----------------------------------------------
Joel D. Kaul
Vice President and Chief Operating Officer
13 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 373,920
<SECURITIES> 0
<RECEIVABLES> 10,197,930
<ALLOWANCES> 0
<INVENTORY> 10,801,260
<CURRENT-ASSETS> 0
<PP&E> 1,224,420
<DEPRECIATION> 79,568
<TOTAL-ASSETS> 22,547,119
<CURRENT-LIABILITIES> 0
<BONDS> 3,905,000
0
0
<COMMON> 4,841
<OTHER-SE> 4,971,747
<TOTAL-LIABILITY-AND-EQUITY> 22,547,119
<SALES> 4,793,365
<TOTAL-REVENUES> 5,153,535
<CGS> 2,954,070
<TOTAL-COSTS> 2,954,070
<OTHER-EXPENSES> 1,674,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 219,835
<INCOME-PRETAX> 525,165
<INCOME-TAX> 211,823
<INCOME-CONTINUING> 313,342
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 313,342
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
</TABLE>
