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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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TAYLOR INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1373372
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(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 - 485,588 shares as of June 30, 2002
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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
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(Unaudited)
JUNE 30, 2002 DECEMBER 31, 2001
----------------- -----------------
ASSETS
INVENTORY - Principally land held for sale $ 23,321,751 $ 19,462,763
CONTRACTS AND MORTGAGES RECEIVABLE 9,413,053 12,113,780
INVESTMENT IN JOINT VENTURES 654,601 529,048
OTHER ASSETS:
Cash (Including restricted cash of $43,755 and $27,607, respectively) 128,535 730,554
Tax increment financing receivable 524,142 556,909
Receivable from joint ventures 827,171 556,889
Other receivables 148,807 203,245
Prepaid expenses and earnest money deposits 435,150 325,530
Funds held by trustee 42,500 44,500
Land, buildings, and equipment, less accumulated
depreciation of $1,202,093 and $1,113,821, respectively 503,057 431,484
Loan acquisition costs and debt issuance costs, less accumulated
amortization of $526,253 and $487,969, respectively 239,754 189,521
----------------- -----------------
Total other assets 2,849,116 3,038,632
----------------- -----------------
$ 36,238,521 $ 35,144,223
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LINES OF CREDIT $ 7,188,454 $ 7,037,999
NOTES PAYABLE 10,993,034 9,274,646
CONTRACTS AND MORTGAGES PAYABLE 754,329 874,243
SENIOR SUBORDINATED DEBT 1,983,000 2,672,000
OTHER LIABILITIES:
Accounts payable 2,439,430 3,195,037
Accrued liabilities 688,052 1,081,978
Deposits on land sales and purchase agreements 68,748 27,607
----------------- -----------------
Total other liabilities 3,196,230 4,304,622
DEFERRED INCOME TAXES 42,541 51,041
MINORITY INTEREST 96,781 0
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares authorized;
485,588 and 484,129 shares issued and outstanding, respectively 4,856 4,841
Additional paid-in capital 781,280 740,136
Retained earnings 11,198,016 10,184,695
----------------- -----------------
Total stockholders' equity 11,984,152 10,929,672
----------------- -----------------
$ 36,238,521 $ 35,144,223
================= =================
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
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
REVENUES:
Sales $ 7,216,985 $ 8,412,010 $ 16,196,687 $ 14,593,406
Interest income on contracts receivable 235,863 203,058 432,289 457,672
Equity in earnings (losses) of joint ventures 4,281 (113,742) (41,447) (150,416)
Other revenue 47,926 39,218 88,125 273,386
-------------- -------------- -------------- --------------
Total revenue 7,505,055 8,540,544 16,675,654 15,174,048
COSTS AND EXPENSES:
Cost of sales 4,522,231 4,513,226 10,134,145 7,869,866
Selling, general, and administrative 2,407,087 2,678,183 5,039,772 4,987,149
Interest 163,119 343,946 379,345 686,983
-------------- -------------- -------------- --------------
Total costs and expenses 7,092,437 7,535,355 15,553,262 13,543,998
NET INCOME $ 412,618 $ 1,005,189 $ 1,122,392 $ 1,630,050
============== ============== ============== ==============
NET INCOME PER COMMON SHARE
OUTSTANDING $ 0.85 $ 2.08 $ 2.32 $ 3.37
============== ============== ============== ==============
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 485,091 484,129 484,613 484,129
============== ============== ============== ==============
See notes to condensed consolidated financial statements (unaudited).
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TAYLOR INVESTMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
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2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,122,392 $ 1,630,050
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 126,556 153,706
Loss on disposal of assets -- 23,504
Deferred income taxes (8,500) (130,488)
Equity in losses of joint ventures 41,447 150,416
Contracts and mortgages receivables funded (4,272,971) (3,124,260)
Payments on contracts and mortgages receivable 6,973,698 4,776,467
Minority interest in loss of subsidiary (3,219) --
Changes in assets and liabilities
Inventory - land held for sale (3,842,988) (3,536,248)
Other receivables 87,205 (1,855)
Prepaid expenses and earnest money deposits (109,620) (289,764)
Accounts payable (755,607) (374,332)
Accrued liabilities (393,926) (495,157)
Deposits on land sales on purchase agreements 41,141 12,272
------------ ------------
Net cash used in by operating activities (994,392) (1,205,689)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of land, buildings and equipment (160,843) (144,455)
Proceeds from sale of equipment 1,000 9,000
Investment in joint ventures (167,000) (333,000)
Proceeds from distributions of joint ventures -- 8,250
Advances to joint ventures (270,282) 1,030,703
Decrease in funds held by trustee 2,000 591,000
------------ ------------
Net cash (used in) provided by investing activities (595,125) 1,161,498
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on lines of credit 150,455 (1,702,792)
Repayment of notes, contracts, and mortgage payables (7,055,844) (7,360,784)
Proceeds from notes, contracts, and mortgage payables 8,654,318 9,495,417
Loan and debt acquisition costs (104,519) (5,207)
Proceeds from sale of stock 41,159 --
Distributions to shareholders (109,071) (20,000)
Repayment of subordinated debt (689,000) (728,000)
Contribution from minority interest investor in subsidiary 100,000 --
------------ ------------
Net cash provided by (used in) financing activities 987,498 (321,366)
------------ ------------
DECREASE IN CASH (602,019) (365,557)
CASH AT BEGINNING OF PERIOD 730,554 690,467
------------ ------------
CASH AT END OF PERIOD $ 128,535 $ 324,910
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 445,577 $ 936,650
============ ============
Income taxes $ 8,500 $ 130,488
============ ============
Noncash financing activity - inventory and equipment
purchased with notes, contracts and mortgages payable $ -- $ 1,318,500
============ ============
Noncash financing activity - inventory transferred to joint venture $ -- $ 2,658,693
============ ============
Noncash financing activity - note payable transferred to joint venture $ -- $ 1,700,000
============ ============
See notes to condensed consolidated financial statements (unaudited).
5 of 16
TAYLOR INVESTMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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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.
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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.
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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.
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(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