UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSMISSION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 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 or organization)
43 Main Street S.E., Suite 506, Minneapolis, MN 55414
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 331-6929
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: None
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Check whether the issuer (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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _X_
Indicate by check mark whether the registrant is an accelerated filer.
Yes ___ No _X_
State the aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of June 30, 2002:
$1,224,637.
State 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 - 486,317 shares as of February 28, 2003
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of certain exhibits hereto are incorporated by reference to the
Company's Registration Statement on Form SB-2 (No. 33-87024C), effective January
12, 1995.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.............................................................1
General..............................................................1
Principal Business...................................................1
Competition..........................................................2
Regulation...........................................................3
Employees............................................................3
ITEM 2. PROPERTIES...........................................................3
ITEM 3. LEGAL PROCEEDINGS....................................................4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................4
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............4
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.................................5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................5
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................28
ITEM 11. EXECUTIVE COMPENSATION..............................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..........................................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................30
ITEM 14. CONTROLS AND PROCEDURES.............................................31
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....31
SIGNATURES....................................................................33
i
PART I
ITEM 1. BUSINESS
GENERAL
Taylor Investment Corporation (Taylor or the Company) was incorporated
in 1979 by its president, Philip C. Taylor, who then had 11 years of
experience in the development and sale of rural recreational
properties. The Company's principal business is the purchase,
development and sale of previously undeveloped tracts of land within a
reasonable driving distance of major metropolitan areas, primarily in
Minnesota, Wisconsin, Georgia, Texas and Tennessee. The Company
subdivides these tracts into lots and markets them through its Four
Seasons sales offices for use as primary residences, vacation retreats,
retirement residences, and investment. The size of lots sold by the
Company typically ranges from 1.5 to 2 acres each, but on occasion may
be as large as 40 acres. Historically, the Company has not participated
on a regular basis in the construction of homes on the lots which it
sells, but has contracted for the construction of homes on an isolated
basis. The Company believes it is the largest developer of waterfront
properties for the construction of primary and secondary homes in
Minnesota and Wisconsin and is not aware of any other major developer
in those states.
To simplify and facilitate the purchasing process for its customers,
the Company offers qualified customers loans collateralized by
mortgages on the lots. Customers desiring financing must submit credit
applications to the Sales and Marketing Department, which then has a
credit analysis completed on such customers to determine their
creditworthiness. Depending on the results of this analysis, the Sales
and Marketing Department approves or disapproves the loan or submits
the information to the Finance and Accounting Department for further
analysis. The number of lot purchases financed with Company-originated
mortgage loans depends on the availability and terms of alternative
sources of credit to the customer.
The Company believes it must position itself to take advantage of the
current and expected future demand for rural properties for primary and
secondary homes. The Company's strategy is to expand the organization
by continuing to explore its current markets as well as exploring new
markets outside its current locations.
PRINCIPAL BUSINESS
Taylor's operations are organized into four primary departments:
Acquisitions, Development, Sales and Marketing, and Finance and
Accounting.
ACQUISITIONS - Taylor's Acquisition Department reviews plat maps for
the areas served by its sales offices and identifies undeveloped tracts
of land for purchase, development, and sale. The Acquisitions
Department then obtains additional information regarding the property
and any nearby amenities from such sources as topographical maps and
reports from government agencies. Other due diligence activities
conducted to determine the suitability of the property for purchase by
the Company may include studies of local maps and development
ordinances, reviews of zoning regulations, soil testing, water testing,
trees and foliage typing, a study of local road access, and a
consideration of potential lot layout. The Acquisitions Department also
estimates the costs of development. If the results of these studies and
estimates are favorable, an offer is made for the property in
accordance with established pricing guidelines developed by the Company
based on its past experience. Negotiations then typically commence and,
if successful, a purchase agreement is entered into. The Company's
obligations under a purchase agreement are generally conditioned upon
Taylor obtaining the necessary subdivision approval from the local
governmental authority. Negotiations typically take 90 days or less,
but may take as long as a year before a purchase can be concluded.
1
DEVELOPMENT - After purchase negotiations are completed, the Company's
Development Department is responsible for obtaining regulatory approval
for the planned development. This process typically involves
determining the layout of lots, or platting the property, attending
public hearings, and conducting on-site inspections with governmental
and regulatory personnel. To date, the Development Department has
typically been successful in obtaining the necessary regulatory and
governmental approvals; however, there can be no assurance that any
particular transaction will be approved and ultimately consummated. The
Development Department also works with a title insurance company in
obtaining title abstracts, ordering title insurance, and preparing
other facets of the acquisition for closing. After closing, the
property is physically developed using road contractors, surveyors, and
Company work crews. Lots are platted to maximize their attractiveness,
privacy, and road and water access, taking into account view corridors
and the layout of trees on the lot. Roads are installed, the property
is prepared to receive telephone and electrical service, trails are
cut, underbrush is removed, shorelines are cleared, and the property is
otherwise prepared for marketing and sales to the buying public. The
Company then assigns prices to each lot based on market prices for
similar properties in the area. These sales prices generally range from
$25,000 - $100,000 per lot.
SALES AND MARKETING - Taylor's strategy is to purchase and develop
high-quality properties and then market the lots to residents of
metropolitan areas. Most properties developed by the Company are within
reasonable driving distances of major metropolitan areas. The Company's
lots are targeted toward buyers who desire property with many
attractive features on which to build primary and secondary homes for
use as primary residences, vacation retreats, retirement residences, or
investments. The primary purchasers of the Company's vacation
properties are individuals ranging from 30 to 60 years old. The
Company's strategy for remaining competitive in this market involves
building on its reputation of offering quality properties; using its
own regional sales offices and personnel; offering "on-the-spot"
financing for qualified purchasers; and offering properties with many
appealing features, such as trails, water access, creeks, attractive
views and shorelines.
The Company's sales and marketing activities are conducted principally
through its Four Seasons subsidiaries in Minnesota, Wisconsin, Georgia,
Texas and Tennessee. A principal element of the Company's strategy and
success to date has been the establishment and use of regional sales
offices in general proximity to the developed properties. The Company's
eight existing regional sales offices are located near Brainerd,
Minnesota; Spooner, Minocqua, and Stevens Point, Wisconsin; Watersmeet,
Michigan; Jasper, Georgia; Austin, Texas; and Knoxville, Tennessee. The
Company advertises in major metropolitan newspapers and other
publications and on television and radio and participates in home and
garden, outdoors, and sports shows to attract potential customers.
Sales personnel are compensated based on sales performance but are not
permitted to use "hard" sales techniques or enticements to prospective
purchasers (such as free products) to visit property sites. To
consummate sales, the Company relies heavily upon the quality of its
properties combined with the availability of "on-the-spot" financing
for qualified buyers.
FINANCE AND ACCOUNTING - The Finance and Accounting Department is
responsible for maintaining records of account for each project
developed by the Company and managing the Company's trade receivables
and payables and mortgages receivable. This department prepares
management information reports, prepares and services mortgage loans
extended to lot purchasers, projects cash flow and capital needs for
acquisition and lending activities, and performs collection activities.
The Company regularly offers financing for the purchase of its
properties. Upon execution of a purchase agreement, a customer may
submit an application for credit, which, combined with a credit report
from a credit rating agency, is given to the Sales Manager for
approval. Applications from customers who have experienced credit
problems in the past are submitted to the Controller for ultimate
approval or rejection. Approved customers execute notes secured by
first mortgages on the lots purchased.
2
COMPETITION
The Company operates in a highly competitive environment. It competes
with other real estate development companies and real estate brokers in
developing and selling its properties. In addition, and to a lesser
extent, it competes with banks and other financial institutions and
with several private companies and individual lenders in making
mortgage loans. The Company's competitive factors in the market for
developed lots include the ability to acquire quality inventory and the
quality of the sales force, and the principal competitive factor in the
mortgage loan market is the ability to offer favorable terms, including
interest rates. The Company believes that it competes successfully in
its market because of the quality of its product, access to capital
(which enables it to purchase large tracts at more favorable prices
than smaller industry participants), its dedicated sales staff, its
reputation, and its financial strength. Management believes that the
Company's ability to facilitate and simplify purchases by offering
competitive financing to qualified lot purchasers offers another
competitive advantage.
REGULATION
The Company's sales personnel, consisting primarily of those based in
its sales offices, must be registered as real estate brokers and
maintain such registration with the Minnesota Department of Commerce,
the Wisconsin Department of Registration and Licensing, the Michigan
Department of Consumer and Industry Services, and the Tennessee Real
Estate Commission. Michigan requires registration of subdivisions
containing more than 25 lots. Minnesota requires registration of
subdivisions containing more than ten lots. The Minnesota Department of
Commerce granted a waiver of the registration and instead requires
notification of the sale of any subdivision containing more than ten
lots, which will be offered to Minnesota residents. No registration is
required in Wisconsin, Georgia, Texas or Tennessee. In addition, the
development of properties requires compliance with state and local
zoning laws and regulations and local laws and ordinances regarding
such matters as the size of lots, the construction of roads, and the
amount of setback required from roads and bodies of water.
The Company is subject to the Interstate Land Sales Full Disclosure
Act, which requires registration with the Department of Housing and
Urban Development of any project that consists of 100 or more lots. The
Company has received a Multiple Site Subdivision Exemption from the
Department of Housing and Urban Development allowing it to sell
projects consisting of no more than 99 lots in any given noncontiguous
site without registration.
The Company is also subject to consumer protection laws, such as the
Truth in Lending Act, in connection with its mortgage lending
activities.
EMPLOYEES
As of December 31, 2002, the Company has 85 full-time and 11 part-time
employees. None of the Company's employees are represented by a labor
union or are covered by a collective bargaining agreement. The Company
has not experienced any work stoppages and believes employee relations
are good.
ITEM 2. PROPERTIES
The Company leases its administrative office located at 43 Main Street
SE, Suite 506, in Minneapolis, Minnesota, consisting of 3,276 square
feet in an office/residential complex. The lease expires March 31,
2007.
The Company leases regional sales, acquisition and development offices
at various locations in Minnesota, Wisconsin, Michigan, Georgia, Texas
and Tennessee. These offices typically range from 1,000 to 2,500 square
feet and are leased on terms ranging from month-to-month to five years.
3
Management believes that these facilities provide sufficient space to
support its current activities, and that additional space will be
available in the future as needed.
4
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company from time to time
becomes subject to claims or proceedings relating 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 substantially all of the
above are incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's authorized capital stock consists of 10,000,000 shares of
common stock, $.01 par value, of which 486,317 shares were outstanding
and held of record by 22 stockholders as of December 31, 2002. There is
currently no public trading market for the Company's capital stock, and
the Company does not expect such a market to develop in the foreseeable
future. Holders of common stock have no preemptive or other rights to
acquire stock or other securities of Taylor. Cumulative voting for
directors is not permitted. Holders of common stock are entitled to one
vote per share on matters submitted to a vote of stockholders. All
shares of common stock presently outstanding are fully paid and
non-assessable. The Company's Credit Agreement contains a covenant
requiring the Company to obtain written approval for the declaration
and payment of cash distributions. Distributions declared and paid in
the future, if any, are subject to the discretion of the Board of
Directors and will depend on the Company's earnings, financial
condition, capital requirements, debt covenant limitations and other
relevant factors. In addition, the Board of Directors is authorized to
issue additional shares of common stock and to issue options and
warrants for the purchase of such shares, the aggregate of which may
not exceed the number of shares authorized by the Company's Articles of
Incorporation.
5
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
in conjunction with the consolidated financial statements, related
notes, and other financial information appearing elsewhere in this
Annual Report.
As of or for the Year Ended December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales $ 38,635 $ 35,994 $ 28,838 $ 23,519 $ 19,934
Interest income on contracts receivable 1,057 1,051 1,058 988 1,086
Equity in (losses) earnings from joint ventures (98) (172) (121) 58 35
Other revenue 826 377 546 409 318
-------- -------- -------- -------- --------
Total revenue 40,420 37,250 30,321 24,974 21,373
Costs and expenses:
Cost of sales 22,594 21,001 15,874 12,453 11,672
Reduction of inventory to net realizable value 294 138
Selling, general and administrative 11,862 11,750 9,338 7,955 5,959
Interest 784 1,141 1,370 1,213 1,482
-------- -------- -------- -------- --------
Total costs and expenses 35,240 33,892 26,582 21,915 19,251
Minority interest (116) -- -- -- --
Net income(1) 5,064 3,358 3,739 3,059 1,273
Net income per common share outstanding $ 10.44 $ 6.94 $ 7.72 $ 6.32 $ 2.63
Dividends paid per common share outstanding $ 5.34 $ 3.42 $ 4.25 $ 3.20 $ 0.62
BALANCE SHEET DATA:
Inventory $ 24,506 $ 19,463 $ 18,463 $ 9,939 $ 11,469
Contracts and mortgages receivable 11,768 12,114 10,453 8,695 9,365
Total assets 40,627 35,144 32,883 21,505 23,294
Total debt 22,633 19,859 21,410 12,249 15,748
Stockholders' equity 13,460 10,930 9,226 7,543 6,033
Book value per common share $ 27.68 $ 22.58 $ 19.06 $ 15.58 $ 12.46
(1) In January 1999, the Company obtained status as a Subchapter
S-Corporation under the Internal Revenue Code. Accordingly, taxable
income from operations in all fiscal years beginning after 1998 is
allocated to the individual shareholders with no income tax expense
recorded in the financial statements. Net income in 1998 is after
tax expense of $849.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the consolidated results of operations and
financial condition of the Company should be read in conjunction with
the Company's consolidated financial statements and notes thereto
included elsewhere in this document.
OVERVIEW
LAND AND STRUCTURE SALES - The Company's principal business is the
purchase, development and sale of previously undeveloped tracts of
land. The Company identifies, acquires and develops raw land inventory
through its Acquisition and Development departments. Financing for the
acquisition and development of real estate is provided primarily by a
network of financial institutions located in proximity to the Company's
properties as well as by an asset-based credit facility (the Credit
6
Agreement). On average, 80% of the purchase price of the acquired
property is financed with loans from financial institutions, which are
secured by mortgages on the acquired property. In addition, property
sellers may also agree to provide financing for up to 70% of the
purchase price.
The Company records its inventory, which consists primarily of land
held for sale, at the purchase price plus amounts expended for the
acquisition, development and improvement of the land. Structure
inventory consists of structures that existed on a property at the time
of acquisition. The Company currently attempts to maintain its
inventory at a level that, at any time, will meet its sales goals for
the next twelve months. Inventory balances were $24.5 million and $19.5
million as of December 31, 2002 and 2001, respectively.
Revenues from the sale of developed lots and structures are recognized
upon closing of the sale of the property and receipt of at least 10% of
the purchase price.
OTHER REVENUES - Other revenues consist primarily of commissions
collected on sales of property owned by an unaffiliated company. Also
included in other revenues is interest income from the Company's
financing operation. The Company records the finance receivables as
contracts and mortgages receivable. Generally, mortgage loans on lots
are originated for terms of up to ten years while loans on structures
are offered for a maximum term of five years. The Company's
underwriting parameters require a minimum down payment of 10%. Interest
rates currently range from 6.0% to 14.5% depending principally on the
amount of the down payment and program under which the loans were
originated. Company-financed sales were 29% and 31% of sales for the
years ended December 31, 2002 and 2001, respectively. The Company is
able to maintain a consistent percentage of financed sales because it
offers competitive finance programs with zero or low initial interest
rates to customers. The weighted average interest rate on outstanding
contracts and mortgages receivable was approximately 10.5% and 11.7% as
of December 31, 2002 and 2001, respectively.
Other revenues also include closing fee income the Company collects for
sales and equity in the income or loss of joint ventures.
CRITICAL ACCOUNTING POLICIES
In preparing the financial statements, the Company follows accounting
principles generally accepted in the United States of America, which in
many cases require assumptions, estimates and judgments that affect the
amounts reported. Many of these policies are relatively
straightforward. There are, however, a few 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 applied in the preparation of the
Company's financial statements relate to:
o measuring assets, including inventory held for sale, for impairment;
and
o accounting for tax increment financing receivables because of the
importance of management's judgment in making the estimates
necessary to apply these policies.
The difficulty in applying these policies arises from the assumptions,
estimates and judgments that have to be made currently about matters
that are inherently uncertain, such as future economic conditions,
operating results and valuations as well as management intentions. As
the difficulty increases, the level of precision decreases, meaning
that actual results can and probably will be different from those
currently estimated. The Company bases its assumptions, estimates and
judgments on a combination of historical experiences and other
reasonable factors.
Measuring assets for impairment requires estimating intentions as to
holding periods, future operating cash flows and residual values of the
assets under review. Changes in management intentions, market
conditions or operating performance could indicate that impairment
charges may be necessary.
7
Accounting for tax increment financing receivables involves estimating
property values and tax rates well into the future, as well as
estimating the length of time the property will remain vacant. To
accomplish this, assumptions are made regarding real estate market
inflation, tax rates and collectibility of taxes.
See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements,
included in this Form 10-K for a further discussion of certain specific
accounting policies.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
The Company reported a 7.3% increase in sales for the year ended
December 31, 2002 to $38.6 million, including sales of structure of
$0.3 million, or 0.8% of sales. For the same period in 2001, sales were
$36.0 million, including $0.7 million in sales of structures, or 2.0%
of sales. The increase in sales is attributable to a strong real estate
market in certain areas of the country, higher available inventory
levels in the Midwest, high consumer demand in the Company's newer
markets, and the Company's ability to retain knowledgeable sales staff
and successfully apply its marketing programs in those markets expanded
to by the Company in recent years.
The Company reported a 24.8% increase in sales for the year ended
December 31, 2001 to $36.0 million, including sales of structures of
$0.7 million, or 2.0% of sales. For the same period in 2000, sales were
$28.8 million, including $0.6 million in sales of structures, or 2.1%
of sales. The increase in sales is attributable to a strong real estate
market in certain areas of the country, higher available inventory
levels in the Midwest, and the Company's ability to retain
knowledgeable sales staff and successfully apply its marketing programs
in those markets expanded to by the Company in recent years.
The following table sets forth the sales, cost of sales and gross
profit information for the years ended December 31:
2002 Land Structures Total
Sales $38,335,614 100.0% $ 299,616 100.0% $ 38,635,230 100.0%
Cost of sales 22,380,600 58.4 213,799 71.4 22,594,399 58.5
----------- ---------- ----------- ---------- ----------- ----------
Gross profit $15,955,014 41.6% $ 85,817 28.6% $16,040,831 41.5%
2001 Land Structures Total
Sales $35,268,589 100.0% $ 725 100.0% $35,993,667 100.0%
Cost of sales 20,354,927 57.7 645,807 89.1 21,000,734 58.3
----------- ---------- ----------- ---------- ----------- ----------
Gross profit $14,913,662 42.3% $ 79,271 10.9% $14,992,933 41.7%
2000 Land Structures Total
Sales $28,245,169 100.0% $ 592,830 100.0% $28,837,999 100.0%
Cost of sales 15,365,177 54.4 508,598 85.8 15,873,775 55.0
----------- ---------- ----------- ---------- ----------- ----------
Gross profit $12,879,992 45.6% $ 84,232 14.2% $12,964,224 45.0%
For 2002, gross profit was $16.0 million or 41.5% of sales, compared to
$15.0 million or 41.7% of sales for the same period in 2001. The
decrease in gross profit, as a percentage of sales, 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.
For 2001, gross profit was $15.0 million or 41.7% of sales, compared to
$13.0 million or 45.0% of sales for the same period in 2000. The
decrease in gross profit, as a percentage of sales, is principally
8
due to lower margins on projects in Wisconsin as a result of a slightly
softer real estate market and an increase in sales in new markets where
slightly lower margins were achieved as compared with the Company's
more established markets.
9
Other revenues increased $448,000, or 119%, to $826,000 in 2002 from
$378,000 the same period in 2001. The increase was primarily due to
$679,000 of commissions collected on sales of property owned by an
unaffiliated company, partially offset by a $250,000 fee collected in
2001 for development services performed on behalf of a joint venture,
as well as a 35% reduction in sale closing fees charged to customers.
Other revenue was $378,000 in 2001, a decrease of $168,000 from the
same period in 2000. The decrease was primarily due to $80,000 in
nonrecurring marketing fees received related to land sales brokered by
the Company during 2000. Additionally, in 2000, the Company revised its
estimates of anticipated future tax collections under its tax increment
financing receivable contracts with tax districts based on property
value changes and changes in property tax assessments. These changes in
estimate resulted in an increase in the value of such receivables and a
corresponding increase in other revenue in 2000.
Equity in losses from joint ventures decreased $74,000 in 2002 to
$98,000, resulting from one of the land development joint ventures
formed by the Company turning profitable in 2002. Equity in losses from
joint ventures was $172,000 in 2001 as compared to $121,000 in 2000.
Interest income in 2002 remained consistent with 2001, which was the
result of a higher average balance of contracts and mortgages
receivable during 2002 offset by slightly lower average interest rates
on contracts during the same period. Interest income in 2001 remained
consistent with 2000 due to the same set of circumstances.
Selling, general and administrative expenses for 2002 were $11.9
million or 30.7% of sales, compared to $11.7 million or 32.6% of sales
for the same period in 2001. The decrease in selling, general and
administrative expense, as a percent of sales, is attributable to sales
and management's continued efforts to control expenses.
Selling, general and administrative expenses for 2001 were $11.7
million or 32.6% of sales, compared to $9.3 million or 32.4% of sales
for the same period in 2000. The increase in selling, general and
administrative expense, as a percent of sales, is due primarily to
$550,000 in costs written off associated with two parcels of land
previously under contract that were ultimately not acquired. Factors
offsetting this increase include a reduction of compensation and office
expenses, as a percentage of sales. Compensation, primarily
commissions, represented 79% of total selling, general and
administrative expenses in 2001 as compared with 81% in 2000. Office
expenses represented 9% and 11% of total selling, general and
administrative expenses in 2001 and 2000, respectively.
Interest expense in 2002 decreased $358,000, or 31%, to $784,000 from
$1,142,000 in the same period in 2001. The decrease is the result of a
significant reduction in interest rates on the Company's variable rate
borrowings throughout 2002, which include its lines of credit and
substantially all real estate notes payable. The decrease was partially
offset by higher average borrowings during 2002 as a result of a growth
in inventory. Interest expense of $1,142,000 in 2001 decreased by 17%
from $1,370,000 in 2000, also due to a reduction in interest rates
throughout 2001, partially offset by higher average borrowings during
2001.
The Company entered into a new joint venture during 2002 in which the
Company is a 67% shareholder. All financial information of this joint
venture is consolidated in the Company's financial statements. The
minority interest on the consolidated balance sheet and consolidated
statement of income represents the minority shareholder's portion of
the joint venture financial information.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW - 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
10
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
operating, investing and financing activities for the years ended
December 31:
2002 2001 2000
Net cash provided by (used in):
Operating activities $ 1,419,034 $ 4,815,558 $ (107,860)
Investing activities (1,080,864) 646,722 (1,311,324)
Financing activities (457,201) (5,514,207) 1,523,042
----------- ----------- -----------
Net (decrease) increase in cash $ (119,031) $ 51,927 $ (103,858)
=========== =========== ===========
Cash provided by operating activities in 2002 consisted primarily of
$10.0 million of payments on contracts and mortgages receivable and
$5.1 million in net income. These were primarily offset by $9.7 million
of funded contracts and mortgages receivable and a net increase in
inventory of $4.1 million. Cash provided by operating activities in
2001 consisted primarily of $8.1 million of payments on contracts and
mortgages receivable, $3.4 million of net income, a $2.5 million net
increase in accounts payable, and a $0.6 million net decrease in
inventory. These were primarily offset by $9.7 million of funded
contracts and mortgages receivable. Cash used in operating activities
in 2000 consisted primarily of $7.9 million in funded contracts and
mortgages receivable and a net increase in inventory of $3.0 million.
These were offset primarily by $6.1 million of payments on contracts
and mortgages receivable and $3.8 million in net income.
Cash used for financing activities in 2002 consisted primarily of
principal payments on notes, contracts, mortgages payable and
subordinated debt of $14.9 million and distributions to shareholders of
$2.6 million. These were primarily offset by $16.7 million in proceeds
from new notes, contracts, and mortgages payable and net borrowings on
lines of credit. Cash used in financing activities in 2001 consisted
primarily of principal payments on notes, contracts, and mortgages
payable and subordinated debt and net repayments on lines of credit of
$15.4 million, and distributions to shareholders of $1.7 million. These
were offset by $11.5 million in proceeds from new notes, contracts, and
mortgages payable. Cash provided by financing activities in 2000
consisted primarily of net borrowings on lines of credit and proceeds
from new notes, contracts, and mortgages payable of $12.6 million.
These were offset by $9.0 million in payments on notes, contracts, and
mortgages payable and subordinated debt and distributions to
shareholders of $2.1 million.
Cash used in investing activities in 2002 represents a $0.8 million
increase of receivables from joint ventures, $0.2 million investment in
joint ventures and $0.2 million for purchases of land, buildings and
equipment. Cash provided by investing activities in 2001 primarily
related to $0.6 million of repayment of receivables from joint
ventures, a $0.6 million reduction in funds held by trustee offset by a
$0.3 million investment in joint ventures. Cash used for investing
activities in 2000 primarily related to investments in joint ventures
of $0.5 million and an increase in funds held by trustee of
approximately $0.6 million.
FINANCING SOURCES - The Company's financing sources consist of
short-term financing under its Credit Agreement, seller financing,
financing from a network of commercial banks, and sales of contracts
11
and mortgages receivable. Long-term financing has been obtained through
the issuance of $4.0 million of Senior Subordinated Debt of which $1.9
million is still outstanding. The source of repayment for the Company's
working capital financing is the sale of lots and the receipt of
principal and interest on contracts and mortgages receivables. As a lot
is sold, a portion of the proceeds is used to pay down the respective
financing and release a portion of the related mortgage. On average,
the Company finances 80% of the cost of land acquisitions and
development. Based on the terms of the Company's loan agreements, a
loan is usually paid in full when approximately 75% of the lots in a
development are sold. Principal and interest received by the Company
from customer contracts or mortgages receivable are applied to the
outstanding balance under its Credit Agreement.
The following table sets forth the Company's sources of financing, the
amount of such financing and the weighted average interest rates on
such borrowings at December 31, 2002.
SOURCES OF FINANCING
Average Average
2002 Rate 2001 Rate
Lines of credit $ 7,173,374 5.26% $ 7,037,999 5.77%
Notes payable (1) 12,981,170 5.26 9,274,646 6.24
Contracts and mortgages payable 580,812 5.76 874,243 5.17
Senior subordinated debt 1,898,000 11.60 2,672,000 11.41
----------- ----- ----------- -----
Total debt $22,633,356 5.81% $19,858,888 6.72%
=========== ===== =========== =====
----------------------
(1) Notes payable includes the real estate line of credit in the
amounts of $4,929,419 and $ $3,266,101 as of December 31, 2002 and
2001, respectively.
CREDIT AGREEMENT - The Company began its borrowing relationship in 1986
and may currently borrow a total aggregate of up to $25 million under
the Credit Agreement which includes the following four lines of credit:
DESCRIPTION OF LINES OF CREDIT
Balance
Amount of Outstanding as of
Line(1) December 31, 2002
Mortgages and Contracts Receivable $14,000,000 $ 7,053,495
Real Estate Mortgage 12,000,000 4,929,419
Project 120,000 119,879
Interim Financing 4,000,000 --
-----------
$12,102,793
===========
----------------------
(1) These totals are the maximum principal amounts that may be
outstanding under each of the lines of credit; however, the maximum
aggregate principal amount outstanding under all of the lines of
credit cannot exceed $25 million.
The amounts borrowed by the Company under the Mortgages and Contracts
Receivable line of credit are at the discretion of the lender, are
based on 90% of eligible contracts receivable, and are to be used to
finance the development of properties. Borrowings under this credit
line bear interest at the lender's base rate plus 1.0% (5.25% as of
December 31, 2002). The lender's base rate is equal to the interest
rate publicly announced by the lender from time to time as its "Base"
rate.
The Company also may borrow up to $12 million under the Real Estate
Mortgage line of credit based on 80% of the purchase price of the real
estate plus 80% of eligible development costs. Funds obtained by the
Company under the Real Estate Mortgage credit line are to be used to
purchase real estate
12
pending development or sale. Borrowings under the Real Estate Mortgage
line of credit bear interest at a rate equal to 1.0% over the lender's
base (5.25% at December 31, 2002). The Project line of credit of
$120,000 is to be used to finance project development costs and the
purchase of real estate in connection with a project in northern
Minnesota. The assets of the project secure this line of credit.
Borrowings of up to $4,000,000 under the Interim Financing line are
available to the Company at the discretion of the lender to cover
demand overages on the other lines of credit. Borrowings under the
Project and Interim Financing lines of credit bear interest at a rate
equal to 1.5% over the lender's base rate (5.75% as of December 31,
2002). At December 31, 2002, $4,574,242 is available under the
Company's mortgage and contracts receivable and interim financing
credit facilities for operating needs and $7,070,581 is available under
its real estate loan facility.
All amounts borrowed by the Company under the Credit Agreement are due
April 30, 2004 under an amendment to the Credit Agreement. All funds
advanced by the lender under the Credit Agreement are collateralized by
an assignment by the Company of first mortgages, contracts for deed,
security interests, or other rights or property interests acquired by
the Company in connection with specific property development projects
and a security interest in virtually all of the Company's assets. In
addition, the Credit Agreement also contains a number of restrictive
covenants and is personally guaranteed by the Company's president,
Philip C. Taylor.
NETWORK BANKS - Another recurring source of capital is a network of
community banks, the majority of which Taylor has been utilizing as
financing sources since the mid-1980s. These financial institutions,
which are typically in proximity to the land being purchased, provide
loans that are secured by a first mortgage on the land. Interest
payments are made monthly and generally payments are made as the
individual lots are sold. The Company's borrowings through the network
of banks are shown as "Notes payable" in the table entitled "Sources of
Financing."
SELLER FINANCING - Seller financing or mortgages payable are equivalent
to accounts payable that are due on resale and result from the
Company's ordinary course of business. Seller financing typically
consists of a purchase agreement evidencing the sale and outlining the
terms of payment. The Company makes interest and principal payments on
a scheduled amortization which varies by transaction. The Company's use
of seller financing is shown as "Contracts and mortgages payable" in
the table entitled "Sources of Financing."
SENIOR SUBORDINATED DEBT - In April 1994, the Company issued $1.0
million of Senior Subordinated Notes, Series 1994 pursuant to Rule 504
of Regulation D under the Securities Act of 1933, as amended. The
proceeds were initially used to pay down existing debt. Ultimately the
funds were used to acquire additional inventory. The Company issued an
additional $3.0 million of Senior Subordinated Debt pursuant to a
Registration Statement on Form SB-2, which became effective January 12,
1995. The proceeds of this offering were used to reduce existing debt,
finance inventory, fund customer mortgage financing and open new
offices during 1995.
THE FOLLOWING SUMMARIZES THE COMPANY'S SIGNIFICANT CONTRACTUAL
OBLIGATIONS AND COMMITMENTS, AS OF DECEMBER 31, 2002, THAT IMPACT
LIQUIDITY.
Contractual obligations Payments due by period
----------------------------------------------------------------
Within After
In thousands 1 year 2-3 years 4-5 years 5 years Total
-----------------------------------------------------------------------------------------------------------
Lines of credit $ 7,173,374 $ 7,173,374
Notes, contracts and mortgages payable $2,229 10,853 $ 169 $ 311 13,562
Senior subordinated debt 713 1,185 - - 1,898
Operating leases 249 269 127 - 645
-----------------------------------------------------------------------------------------------------------
Total contractual cash obligations $3,191 $ 7,185,681 $ 296 $ 311 $ 7,189,479
===========================================================================================================
13
SALES OF CONTRACTS AND MORTGAGES RECEIVABLE - The general level of
stability in its contracts and mortgages receivable portfolio has
provided the Company with the opportunity to sell portfolios of
receivables to raise cash when needed and to take advantage of positive
interest rate spreads. Depending on the current interest rates, the
sale can be at a discount or premium to par. The typical structure
involves the Company selling the rights to payment on the contracts and
mortgages with recourse, and also requires a small percentage of the
sales price, approximately 5%, to be "held-back" and subsequently paid
to the Company as the portfolio is paid down. In order to obtain more
favorable pricing, the Company may retain servicing rights or grant put
options to the purchasers in connection with the receivables sold. The
put options typically require the Company to repurchase, at the option
of the purchaser, the balance of the receivables within 60 days of the
five-year anniversary of the sale. The sale of receivables with put
options is accounted for as a financing transaction in the Company's
consolidated financial statements. Future sales of contracts and
mortgages receivable will depend on the Company's cash needs and
prevailing interest rates.
Put options were granted to three purchasers in 1996 on an initial
aggregate amount of $5.6 million in contracts and mortgages receivable.
As of December 31, 2001, $96,141 in contracts and mortgages receivable
were outstanding with recourse, all of which had put options. In March
2002, the put options were exercised and the Company repurchased the
receivable for $92,573.
The following table lists, as of December 31, 2002 and 2001, the
balance of the Company's contracts and mortgages receivable
outstanding, the amount of the portfolio 90 days past due, average
portfolio term and weighted average interest rate. The table also sets
forth the amounts foreclosed and the contracts and mortgages foreclosed
during the years ended December 31.
2002 2001
Contracts and mortgages receivable:
Balance outstanding $11,768,447 $12,113,780
Amount 90 days past due 229,758 386,338
Percentage of balance 1.95% 3.19%
Amount foreclosed during period 77,857 45,071
Percentage of balance 0.66% 0.37%
Average portfolio term 3 years 3 years
Weighted average interest rate 10.2% 11.7%
The Company works aggressively and closely with its customers as soon
as an account becomes overdue to attempt to avoid default and
foreclosure. After the Company begins collection proceedings, most
accounts are eventually made current and the Company receives full
payment. On occasion, the Company must cancel the contract and begin
foreclosure proceedings. During 2002, there were $77,857 in contract
and mortgage receivable balances where the foreclosure process was
complete, and an additional $89,551 were in the process of foreclosure.
Subsequent to a completed foreclosure, the Company returns the
underlying property to inventory and begins re-marketing the lot.
Properties that are foreclosed upon and returned to inventory are
generally resold at a profit resulting in minimal bad debt exposure.
Based on expected cash generated from operations and the above
available financing resources, management believes it has adequate
sources of funds to meet the Company's anticipated working capital,
capital expenditure, and debt service requirements for the foreseeable
future.
NEW ACCOUNTING STANDARDS - In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, BUSINESS COMBINATIONS, and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 142 changes the accounting for
goodwill and certain other intangible assets from an amortization
method to an impairment only approach. The standard also requires a
reassessment of the useful lives of
14
identifiable intangible assets other than goodwill and test for
impairment of goodwill and intangibles with indefinite lives annually,
or more frequently if events and circumstances indicate that the
carrying amounts may not be recoverable. The adoption of SFAS No. 142
had no impact on the Company's financial position, results of
operations or cash flows.
The FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS, in August of 2001. SFAS No. 144 establishes
accounting and reporting standards for the impairment or disposal of
long-lived assets. The Company adopted SFAS No. 144 on January 1, 2002,
and the adoption had no impact on the Company's historical financial
position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45
clarifies the requirements for a guarantor's accounting for and
disclosure of certain guarantees issued and outstanding. The initial
recognition and initial measurement provisions of FIN 45 are applicable
to guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002.
The adoption of FIN 45 did not have an impact on the Company's
financial statement disclosures and is not expected to have an impact
on the Company's consolidated results of operations, financial
position, or cash flows.
The FASB also issued FIN 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, which applies to variable interest entities created after
January 31, 2003. FIN 46 addresses consolidation by business
enterprises of variable interest entities which meet certain criteria.
The Company does not have entities that would require consolidation or
meet the criteria of a variable interest entity.
SAFE HARBOR DISCLOSURE - 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:
o Changing economic conditions, including economic downturns or
recessions;
o The ability of the Company to maintain and enhance its market
position relative to its competitors, realize productivity, and
continue to control expenses;
o The availability of suitable tracts of undeveloped land in proximity
to the marketplace;
o Changes in zoning and subdivision regulations;
o The availability and cost of financing; and
o Continuity of management.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company is exposed to changes in interest rates primarily as a
result of its borrowing activities used to fund operations and to
acquire land. The Company uses both floating interest rate credit
facilities and notes payable and fixed rate notes payable to accomplish
this. At December 31, 2002 the Company currently has $19.8 million of
floating interest rate debt under its credit facilities or under notes
payable, $0.9 million of fixed rate notes payable and $1.9 million of
fixed rate subordinated debt. The floating interest rates are based
either upon the prevailing prime or three-month LIBOR interest
15
rates. A hypothetical one-percent change in the prevailing prime or
LIBOR, as applicable, would decrease net income of the Company by
approximately $198,000 per year, based on the increased interest
expense on variable rate debt. The fair value of fixed rate notes
payable would not be impacted as approximately 50% of the $0.9 million
in fixed rate notes payable mature in one year or less.
Additionally, an environment of increased interest rates may adversely
affect the Company's ability to successfully market and sell its
properties because the increased costs of borrowing would inflate the
cost of inventory and make it more difficult for customers to finance
purchases. The Company believes it can protect itself from sustained
high interest rates by selling its contracts and mortgages receivable
portfolios, originating loans with shorter maturities, and increasing
the rates it charges to customers who utilize Company financing, or by
incurring fixed rate debt. Such increases in rates would, however, have
an adverse impact on the Company's cost of carrying inventory. The
Company believes the best defense against rising interest rates is to
buy only the best property, which can be turned quickly. However,
sustained increases in interest rates could impact future sales levels.
If demand for product was to decline for an extended period of time,
the Company believes it could minimize the impact by reducing the sales
price of the product to stimulate sales and would discontinue
purchasing properties until the level of inventory more closely matched
customer demand.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report........................................16
Consolidated Balance Sheets.........................................17
Consolidated Statements of Income...................................18
Consolidated Statements of Stockholders' Equity.....................19
Consolidated Statements of Cash Flows...............................20
Notes to Consolidated Financial Statements..........................21
17
INDEPENDENT AUDITORS' REPORT
Board of Directors
Taylor Investment Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Taylor
Investment Corporation and subsidiaries (the Company) as of December 31, 2002
and 2001 and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2002. Our audits also included the financial statement schedule listed in
the Table of Contents at Item 15. These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Taylor Investment Corporation and
subsidiaries at December 31, 2002 and 2001 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
March 7, 2003
Minneapolis, Minnesota
18
TAYLOR INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
ASSETS
INVENTORY - Principally land held for sale $24,505,606 $19,462,763
CONTRACTS AND MORTGAGES RECEIVABLE 11,768,447 12,113,780
INVESTMENT IN JOINT VENTURES 557,887 529,048
OTHER ASSETS:
Cash 91,807 210,838
Restricted cash 552,192 519,716
Tax increment financing receivable 478,470 556,909
Receivable from joint ventures 1,317,775 556,889
Other receivables 261,695 203,245
Prepaid expenses and earnest money deposits 443,839 325,530
Funds held by trustee 42,500 44,500
Land, buildings, and equipment, less accumulated
depreciation of $304,561 and $1,113,821, respectively 453,019 431,484
Loan acquisition costs and debt issuance costs, less accumulated
amortization of $538,855 and $487,969, respectively 153,891 189,521
----------- -----------
Total other assets 3,795,188 3,038,632
----------- -----------
$40,627,128 $35,144,223
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LINES OF CREDIT $ 7,173,374 $ 7,037,999
NOTES PAYABLE 12,981,170 9,274,646
CONTRACTS AND MORTGAGES PAYABLE 580,812 874,243
SENIOR SUBORDINATED DEBT 1,898,000 2,672,000
OTHER LIABILITIES:
Accounts payable 2,244,683 3,195,037
Accrued liabilities 1,703,494 1,081,978
Amounts due to joint ventures 320,207
Deposits on land sales and purchase agreements 69,800 27,607
----------- -----------
Total other liabilities 4,338,184 4,304,622
DEFERRED INCOME TAXES 33,994 51,041
MINORITY INTEREST 161,239
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares authorized; 486,317 and
484,129 shares issued and outstanding at December 31, 2002 and 2001,
respectively 4,863 4,841
Additional paid-in capital 803,773 740,136
Retained earnings 12,651,719 10,184,695
----------- -----------
Total stockholders' equity 13,460,355 10,929,672
----------- -----------
$40,627,128 $35,144,223
=========== ===========
See notes to consolidated financial statements.
19
TAYLOR INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
REVENUES:
Sales $ 38,635,230 $ 35,993,667 $ 28,837,999
Interest income on contracts receivable 1,056,885 1,051,041 1,057,980
Equity in losses of joint ventures (98,161) (172,333) (121,082)
Other revenue 825,974 377,743 546,321
------------ ------------ ------------
Total revenue 40,419,928 37,250,118 30,321,218
COSTS AND EXPENSES:
Cost of sales 22,594,399 21,000,734 15,873,775
Selling, general, and administrative 11,861,900 11,749,931 9,338,661
Interest 783,937 1,141,549 1,369,712
------------ ------------ ------------
Total costs and expenses 35,240,236 33,892,214 26,582,148
------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 5,179,692 3,357,904 3,739,070
MINORITY INTEREST IN EARNINGS OF
SUBSIDIARY (115,739)
------------ ------------ ------------
NET INCOME $ 5,063,953 $ 3,357,904 $ 3,739,070
============ ============ ============
NET INCOME PER COMMON SHARE
OUTSTANDING - basic and diluted $ 10.44 $ 6.94 $ 7.72
============ ============ ============
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 485,116 484,129 484,129
============ ============ ============
See notes to consolidated financial statements.
20
TAYLOR INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------------------------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 1999 484,129 $ 4,841 $ 740,136 $ 6,798,353 $ 7,543,330
Dividends paid (2,056,577) (2,056,577)
Net income 3,739,070 3,739,070
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 484,129 4,841 740,136 8,480,846 9,225,823
Dividends paid (1,654,055) (1,654,055)
Net income 3,357,904 3,357,904
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 484,129 4,841 740,136 10,184,695 10,929,672
Dividends paid (2,596,929) (2,596,929)
Net income 5,063,953 5,063,953
Issuance of common stock 2,188 22 63,637 63,659
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 486,317 $ 4,863 $ 803,773 $12,651,719 $13,460,355
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
21
TAYLOR INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,063,953 $ 3,357,904 $ 3,739,070
Adjustments to reconcile net income to net cash provided
(used in) by operating activities:
Depreciation and amortization 331,574 290,626 320,027
Loss (gain) on disposal of fixed assets 5,125 28,732 (907)
Deferred income taxes (17,047) (166,302) (156,689)
Equity in losses from joint ventures 98,161 172,333 121,082
Contracts and mortgages receivables funded (9,685,586) (9,716,675) (7,856,127)
Payments on contracts and mortgages receivable 10,030,919 8,055,484 6,098,472
Minority interest in earnings of subsidiary 115,739 -- --
Changes in assets and liabilities:
Inventory - land held for sale (4,106,363) 578,529 (3,013,105)
Restricted cash (32,476) (92,014) 382,700
Other receivables 19,989 88,878 (507,521)
Prepaid expenses and earnest money deposits (118,309) (57,205) 74,277
Accounts payable (950,354) 2,457,506 371,912
Accrued liabilities 621,516 (180,615) 337,334
Deposits on land sales and purchase agreements 42,193 (1,623) (18,385)
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,419,034 4,815,558 (107,860)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of land, buildings and equipment (194,978) (232,713) (226,324)
Proceeds from sale of land, buildings and equipment -- 9,000 3,500
Investment in joint ventures (167,000) (333,000) (500,000)
Proceeds from distributions of joint ventures 40,000 8,250 9,000
(Increase) decrease in joint venture receivables (760,886) 601,685 --
Decrease (increase) in funds held by trustee 2,000 593,500 (597,500)
----------- ----------- -----------
Net cash (used in) provided by investing activities (1,080,864) 646,722 (1,311,324)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on lines of credit 135,375 (1,223,039) 4,463,530
Repayment of notes, contracts, and mortgage payables (14,115,455) (13,309,470) (8,807,615)
Proceeds from notes, contracts, and mortgage payables 16,592,068 11,534,004 8,144,943
Loan acquisition costs (127,626) (39,647) (35,239)
Dividends paid to stockholders (2,596,929) (1,654,055) (2,056,577)
Issuance of common stock 63,659
Repayment of subordinated debt (774,000) (822,000) (186,000)
Amount due to joint ventures 320,207
Contribution from minority interest investor in subsidiary 100,000
Distribution to minority interest investor in subsidiary (54,500)
----------- ----------- -----------
Net cash (used in) provided by financing activities (457,201) (5,514,207) 1,523,042
----------- ----------- -----------
(DECREASE) INCREASE IN CASH (119,031) (51,927) 103,858
CASH AT BEGINNING OF YEAR 210,838 262,765 158,907
----------- ----------- -----------
CASH AT END OF YEAR $ 91,807 $ 210,838 $ 262,765
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,442,890 $ 1,067,672 $ 1,773,121
=========== =========== ===========
Income taxes $ 23,046 $ 166,302 $ 156,689
=========== =========== ===========
Noncash financing activity - inventory and equipment
purchased with notes, contracts and mortgages payable $ 936,480 $ 3,969,030 $ 5,546,177
=========== =========== ===========
Noncash financing activity - inventory transferred to
joint venture $ -- $ 2,378,597 $ --
=========== =========== ===========
Noncash financing activity - note payable transferred
to joint venture $ -- $ 1,700,000 $ --
=========== =========== ===========
See notes to consolidated financial statements.
22
TAYLOR INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION - Taylor Investment
Corporation and subsidiaries (the Company) is a Minnesota corporation
organized in 1979 which is engaged in land development activities. The
Company owns 100% of Four Seasons Realty of Minnesota, Inc. (FSM), Four
Seasons Realty of Wisconsin, Inc. (FSW), Four Seasons Realty of
Michigan, Inc. (FSMI), Four Seasons Properties of Georgia, LLC (FSG),
Four Seasons Properties of Tennessee, LLC (FST), FSP Development of
Texas (FSPT), Laurentian Development Corporation, and 67% of Lakeridge
Community Center, LLC. FSM, FSW, FSMI, and Lakeridge Community Center,
LLC are engaged in the sale of recreational property while FSG, FST,
FSPT and Laurentian Development Corporation are engaged in both the
development and sale of recreational and residential property.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
INVENTORY - PRINCIPALLY LAND HELD FOR SALE - Land held for sale is
recorded at the purchase price plus amounts expended for development
and improvement of the land but not at a price more than its net
realizable value. Property sold and subsequently repossessed under the
terms of a defaulted sales contract is recorded at the lower of the
remaining unpaid contract balance or the net realizable value of the
property.
Total costs of a development are allocated to individual lots on the
basis of the estimated selling price of each lot, as a percentage of
the total estimated gross selling price of the entire development. In
addition, development costs are allocated to individual lots for the
purpose of recording cost of sales.
Interest is capitalized on all projects during the development stage.
Interest capitalized into inventory was $617,852 and $570,261 in 2002
and 2001, respectively.
LAND, BUILDINGS, AND EQUIPMENT - Depreciation of buildings and
equipment is computed using the straight-line method on the cost of the
assets based on their estimated useful lives, which range from three to
thirty years.
Land, buildings, and equipment consist of the following at December 31:
2002 2001
Land $ 62,544 $ 11,022
Buildings and improvements 177,885 168,095
Equipment 517,151 1,366,188
---------- ----------
757,580 1,545,305
Less accumulated depreciation 304,561 1,113,821
---------- ----------
Land, buildings, and equipment, net $ 453,019 $ 431,484
========== ==========
LOAN ACQUISITION AND DEBT ISSUANCE COSTS - Such costs are amortized
over the term of the related loan using the straight-line method.
REVENUE RECOGNITION - The Company recognizes revenue when a sale has
closed and the buyer's cumulative down payment and principal paid total
at least 10% of the sale price. Until 10% of the sale price is
received, no revenue is recognized and all payments received are
recorded as a current liability in the consolidated balance sheets
under the caption "deposits on land sales and purchase agreements."
During
23
2002, 2001 and 2000, down payments on sales financed by the Company
averaged 12%, 14% and 12% of the sale price, respectively.
EARNINGS PER COMMON SHARE (EPS) - As the Company has no dilutive items
that would require disclosure of diluted EPS, the Company calculates
basic EPS as net income divided by the weighted average number of
common shares outstanding during the year.
INVESTMENT IN JOINT VENTURES - The Company owns 33% of two limited
liability companies, which were formed to acquire and develop specific
plots of land. The Company accounts for these investments using the
equity method of accounting. The Company invested $167,000 and $333,000
in the joint ventures in 2002 and 2001, respectively. In 2001, the
Company transferred inventory valued at $2,378,597 and debt of
$1,700,000 to one of the joint ventures in return for a receivable,
which was repaid during 2001. At December 31, 2002 and 2001, the
Company has loans outstanding of $1,317,775 and $556,889, respectively,
to these limited liability companies. The Company also has amounts due
to the limited liability companies of $320,207. Such amounts are
reflected as due from joint ventures on the consolidated balance
sheets. In addition, as of December 31, 2002, the Company had $320,207
due to one of the joint ventures.
RESTRICTED CASH - Restricted cash represents cash that is designated
for a specific business transaction. The cash is segregated and
maintained in separate accounts.
FUNDS HELD BY TRUSTEE - Amounts represent cash paid to trustee for the
purpose of paying scheduled maturities on senior subordinated debt.
MINORITY INTEREST - The Company owns 67% of a limited liability company
(LLC) which was formed to acquire and develop a specific plot of land.
The Company invested $200,000 in the LLC in 2002. The financial
information of the LLC is included in the consolidated financial
statements of the Company.
ESTIMATES - The preparation of consolidated financial statements, in
conformity with accounting principles generally accepted in the United
States of America, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of contracts
and mortgages receivable, lines of credit, notes payable, contracts and
mortgages payable, and senior subordinated debt are reasonable
estimates of the fair value of these financial instruments based on the
short-term nature of these instruments and, if applicable, the interest
rates of these financial instruments.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically reviews the
carrying amounts of all its long-lived assets and identifiable
intangibles based on expected future cash flows from the use of those
assets. If impairment indicators are present and the estimated future
undiscounted cash flows are less than carrying value of the assets, the
carrying value is reduced to the estimated fair value as measured by
the discounted cash flows.
NEW ACCOUNTING STANDARDS - In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, BUSINESS COMBINATIONS, and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 142 changes the accounting for
goodwill and certain other intangible assets from an amortization
method to an impairment only approach. The standard also requires a
reassessment of the useful lives of identifiable intangible assets
other than goodwill and test for impairment of goodwill and intangibles
with indefinite lives annually, or more frequently if events and
circumstances indicate that the carrying amounts may not be
recoverable. The
24
adoption of SFAS No. 142 had no impact on the Company's financial
position, results of operations or cash flows.
The FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS, in August of 2001. SFAS No. 144 establishes
accounting and reporting standards for the impairment or disposal of
long-lived assets. The Company adopted SFAS No. 144 on January 1, 2002,
and the adoption had no impact on the Company's historical financial
position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45
clarifies the requirements for a guarantor's accounting for and
disclosure of certain guarantees issued and outstanding. The initial
recognition and initial measurement provisions of FIN 45 are applicable
to guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002.
The adoption of FIN 45 did not have an impact on the Company's
financial statement disclosures and is not expected to have an impact
on the Company's consolidated results of operations, financial
position, or cash flows.
The FASB also issued FIN 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, which applies to variable interest entities created after
January 31, 2003. FIN 46 addresses consolidation by business
enterprises of variable interest entities which meet certain criteria.
The Company does not have entities that would require consolidation or
meet the criteria of a variable interest entity.
2. CONTRACTS AND MORTGAGES RECEIVABLE
Contracts and mortgages receivable result from the sale of land or land
and structures. Generally, these fixed rate receivables are collected
in monthly installments, including interest, with a balloon payment at
the end of two to three years. The Company also has certain mortgage
receivables which are collected in monthly installments, including
interest, over eight to ten years. The weighted average maturity of
contracts and mortgages receivable at December 31, 2002 and 2001 was
approximately three years, and the weighted average interest rate on
outstanding contracts and mortgages receivable was approximately 10.2%
and 11.7%, respectively.
Maturities of contracts and mortgages receivable at December 31, 2002
are as follows:
Year ending December 31:
2003 $ 1,262,427
2004 1,387,451
2005 7,407,377
2006 480,499
2007 420,887
Thereafter 940,735
-----------
11,899,376
Less allowance for uncollectible contracts
and mortgages receivable 130,929
-----------
$11,768,447
===========
25
3. TAX INCREMENT FINANCING RECEIVABLES
Several taxing authorities have established tax increment financing
districts whereby the Company will be reimbursed for costs incurred in
the development of community infrastructure to the extent the community
improvements and related development increase property taxes collected
by the taxing authority. The Company recognizes these receivables,
which are generally noninterest-bearing, upon the sale of the developed
property or upon the completion of the structure by the owner.
Estimated amounts receivable under these agreements were $478,470 and
$556,909 at December 31, 2002 and 2001, respectively. Estimated
maturity of these receivables at December 31, 2002 is as follows:
Year ending December 31:
2003 $ 157,807
2004 78,307
2005 78,630
2006 36,518
2007 36,852
Thereafter 347,607
-----------
735,721
Less imputed interest at an average rate of 8.8% 257,251
-----------
Net receivable $ 478,470
===========
4. LINES OF CREDIT
The Company has a credit agreement that provides for total borrowings
of up to $25,000,000 at the discretion of the lender. The credit
agreement expires April 30, 2004. The credit agreement provides for
various lines of credit. Total borrowings outstanding under the credit
agreement are secured by substantially all of the Company's assets and
are guaranteed by the president of the Company. The credit agreement
contains certain financial and restrictive covenants, including
maintenance of minimum net worth (as defined), and limitation of
capital expenditures. The Company was in compliance with all such
covenants in the credit agreement at December 31, 2002 and 2001.
At December 31, 2002 and 2001, the Company had borrowings outstanding
of $7,053,495 and $6,790,999, respectively, under the line of credit
based on 90% of eligible contracts receivable. In addition, the Company
may borrow up to $12,000,000 for real estate purchases. The real estate
borrowings are at the discretion of the lender based on 80% of the
purchase price of the real estate plus 80% of eligible development
costs. At December 31, 2002 and 2001, the Company had borrowings of
$4,929,419 and $3,266,101, respectively, which are included in real
estate notes payable (see Note 5). Borrowings under the line of credit
and real estate loan facility bear interest at the lender's "base" rate
plus 1.0% (5.25% and 5.75% at December 31, 2002 and 2001,
respectively). The "base" rate is equal to the interest rate publicly
announced by the lender from time to time as its "base" rate.
Also, under the credit agreement, the Company has a $120,000 line to
support financing of a major project. Borrowings under the project line
bear interest at the lender's "base" rate plus 1.5% (5.75% and 6.25% at
December 31, 2002 and 2001, respectively). Borrowings under the project
line outstanding at December 31, 2002 and 2001 were $119,879 and
$172,000, respectively, and are secured by a mortgage on the project.
The credit agreement also provides the Company up to $4,000,000 in
interim financing at the discretion of the lender. Borrowings under
this facility at December 31, 2002 and 2001 were $0 and $75,000,
respectively. Borrowings bear interest at the lender's "base" rate plus
1.5% (5.75% and 6.25% at December 31, 2002 and 2001, respectively).
At December 31, 2002, $4,574,242 is available under the Company's
mortgage and contracts receivable and interim financing credit
facilities and $7,070,581 is available under its real estate loan
facility.
26
5. NOTES PAYABLE
Notes payable consisted of the following at December 31:
2002 2001
Fixed rate notes payable, due through 2005 at
various rates of interest ranging from 6.15% to 10.00% $ 437,172 $ 2,439,566
Variable rate notes payable, due through 2010
at various rates of interest ranging from 3.99% to 7.76% 12,543,998 6,835,080
------------- --------------
$ 12,981,170 $ 9,274,646
============= ==============
At December 31, 2002, notes payable were secured by certain land held
for sale, contracts and mortgages receivable, and equipment. The
president of the Company personally guarantees the notes payable.
Maturity requirements on notes payable at December 31, 2002 are as
follows:
Years ending December 31:
2003 $ 2,132,874
2004 8,518,213
2005 1,966,100
2006 25,334
2007 27,372
Thereafter 311,277
------------
$ 12,981,170
============
6. CONTRACTS AND MORTGAGES PAYABLE
The Company has entered into contracts for deed and mortgages for the
purchase of land. At December 31, 2002, the agreements provide for
interest rates from 0% to 8% and maturity dates through 2006. The
contracts and mortgages payable are secured by land held for sale and
certain letters of credit. Due to their short-term nature, imputed
interest for relevant contracts with no stated interest rate is not
significant.
Maturity requirements on the contracts and mortgages payable at
December 31, 2002 are as follows:
Years ending December 31:
2003 $ 95,779
2004 103,256
2005 265,824
2006 115,953
------------
$ 580,812
============
7. SENIOR SUBORDINATED DEBT
The Company has $160,000 in senior subordinated notes outstanding which
bear interest at 10% and are unsecured. In addition, the Company has
$1,738,000 of senior subordinated debt that bears interest at 11.5% to
12% and is unsecured. These notes contain certain restrictive covenants
(as defined), including such items as maintenance of minimum net worth,
limitation of dividend payments, maximum debt to equity ratio, and
other financial ratios. The Company was in compliance with these
financial covenants at December 31, 2002 and 2001. At December 31,
2002, principal maturities of senior subordinated debt are as follows:
Years ending December 31:
2003 $ 713,000
2004 595,000
2005 590,000
------------
$ 1,898,000
============
27
8. COMMITMENTS AND CONTINGENCIES
The Company has sold certain contracts receivable to financial
institutions under recourse sales agreements. In the event of default
under these contracts receivable, the Company is required to pay the
outstanding balance of the contract, whereupon the Company will
reacquire title to the underlying land. Put options that typically
require the Company to repurchase, at the option of the purchaser, the
balance of the receivables within 60 days of the five-year anniversary
of the sale, were also granted for these contracts receivable. At
December 31, 2001 the balance on contracts and mortgages receivable
under such recourse sales agreements was approximately $96,141. In
March 2002, the put options were exercised and the Company repurchased
the receivables for $92,573.
The Company has guaranteed $5,029,358 notes payable outstanding at
December 31, 2002 for two limited liability companies in which it has a
33% ownership interest.
9. OPERATING LEASES
The Company has entered into noncancelable leases for office space.
Estimated payments under these lease agreements at December 31, 2002
are approximately as follows:
Years ending December 31:
2003 $ 248,727
2004 173,635
2005 95,393
2006 89,087
2007 37,899
------------
$ 644,741
============
Total rental expense for all operating leases was approximately
$290,000, $310,000 and $260,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
10. INCOME TAXES
In January 1999, the Company filed with the Internal Revenue Service
and obtained status as a Subchapter S Corporation. Accordingly, taxable
income from operations is allocated to the individual shareholders with
no income tax expense recorded in the financial statements. The Company
will continue to pay "built-in-gain" taxes related to deferred tax
liabilities existing at December 31, 1998 for installment sales, until
all installments of such sales have been received.
The Company's deferred tax liability at December 31, 2002 and 2001 of
$33,994 and $51,041, respectively, consists entirely of
"built-in-gains" on installment sales.
11. EMPLOYEE 401(k) PLAN
The Company's 401(k) plan covers substantially all employees meeting
minimum eligibility requirements. The plan provides for employee
contributions of up to a maximum of 15% of each employee's
compensation, with the Company matching 50% of the first 6% of each
employee's contribution. The Company's contributions to the plan
totaled approximately $128,000, $109,000 and $96,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.
28
12. TRANSACTIONS WITH OFFICERS AND EMPLOYEES
Included in contracts and mortgages receivable at December 31, 2002 and
2001 are contracts receivable from employees of the Company in the
amount of $18,600 and $177,200, respectively. During the years ended
December 31, 2002, 2001 and 2000, the Company had sales to officers and
employees of approximately $99,000, $138,000 and $52,000, respectively.
13. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial information for the years ended December
31, 2002 and 2001 is presented below.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2002
Revenue $ 9,170,599 $ 7,505,055 $10,372,924 $13,371,350
Minority interest earnings (102,006) (13,733)
Costs and expenses 8,460,825 7,092,437 8,384,980 11,301,994
----------- ----------- ----------- -----------
Net income 709,774 412,618 1,885,938 2,055,623
Net income per share $ 1.47 $ 0.85 $ 3.88 $ 4.23
2001
Revenue $ 6,633,504 $ 8,540,544 $ 9,400,419 $12,675,651
Costs and expenses 6,008,643 7,535,355 8,295,255 12,052,961
----------- ----------- ----------- -----------
Net income 624,861 1,005,189 1,105,164 622,690
Net income per share $ 1.29 $ 2.08 $ 2.28 $ 1.29
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with accountants have occurred during
the two-year period ended December 31, 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors and their ages and
positions with the Company are as follows:
Name Age Positions with Company
Philip C. Taylor 51 President, Chairman of the Board,
Secretary and Treasurer
Joel D. Kaul 43 Vice President and Chief Operating
Officer
W. John Driscoll 74 Director
John H. Hooley 51 Director
Charles J. McElroy 48 Director
William R. Sieben 50 Director
PHILIP C. TAYLOR is the founder, President, Chairman of the Board and
majority shareholder of the Company. Mr. Taylor has been actively
involved in real estate investment and development for over 20 years.
Since 1979, management of the Company has been his full-time
occupation. Mr. Taylor graduated in 1973 from the College of St.
Thomas, St. Paul, Minnesota, with a Bachelor of Arts degree in
Economics. In 1978, Mr. Taylor received his Juris Doctorate degree from
William Mitchell College of Law, St. Paul, Minnesota. Mr. Taylor has
been Chairman, President, Secretary, and Treasurer since the Company's
formation.
JOEL D. KAUL is Vice President and Chief Operating Officer. Mr. Kaul
joined the Company in June 1995 and has over 10 years of experience in
the real estate finance industry. From 1989-1995, Mr. Kaul served as
senior asset manager for Dain Corporation. In this capacity, Mr. Kaul
directed a staff of fifteen people in the management of a $300 million
national real estate portfolio. Prior to joining Dain Corporation, Mr.
Kaul spent four years employed as a CPA with Ernst and Young and
Coopers and Lybrand. Mr. Kaul also served as the Chief Financial
Officer for a Minnesota-based developer for four years. Mr. Kaul
graduated cum laude in 1981 from the University of Wisconsin-LaCrosse,
with a double major in finance and accounting.
W. JOHN DRISCOLL has been a director of the Company since 1986. Mr.
Driscoll is a director of Rock Island Company, a private investment
firm where he served as Chairman of the Board from May 1993 to June
1994 and as President prior to May 1993. Mr. Driscoll also serves as a
member of the board of directors of Comshare, Inc.; John Nuveen & Co.;
Xcel Energy; The St. Paul Companies, Inc. and Weyerhaeuser Company.
JOHN H. HOOLEY has been a director of the Company since 1986. Mr.
Hooley is President of Cub Foods, a division of Super Valu, Inc. He
received a Bachelor of Arts degree in economics in 1974 from St. John's
University, Collegeville, Minnesota. In 1980, he received his Juris
Doctorate degree from William Mitchell College of Law, St. Paul,
Minnesota.
30
CHARLES J. MCELROY has been a director of the Company since 1986. Mr.
McElroy is a partner with the firm of Larson, Allen, Weishair &
Company, a regional certified public accounting firm. He received his
Bachelor of Arts degree in accounting from the College of St. Thomas,
St. Paul, Minnesota, in 1976. Mr. McElroy is Mr. Philip C. Taylor's
brother-in-law.
WILLIAM R. SIEBEN has been a director of the Company since 1986. Mr.
Sieben is a partner in the law firm of Schwebel, Goetz & Sieben, P.A.,
of Minneapolis, Minnesota. He received his Bachelor of Arts in 1972
from St. Cloud State University and a Juris Doctorate degree from
William Mitchell College of Law in 1977. He is past President of the
Minnesota Trial Lawyers Association and has written several legal
publications.
All members of the Board of Directors hold office until the next annual
meeting of stockholders or until their successors are elected and
qualified. The Company pays each director an annual fee of $7,500
($4,500 in 2001), plus reimbursement of out-of-pocket expenses. During
2002, the Board of Directors were given the option to purchase stock
with their annual fee in lieu of cash. Three out of the five Directors
elected to receive stock in lieu of cash.
The Company does not have a class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934 (the
Exchange Act) and therefore is not subject to Section 16 of the
Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for services rendered during the years ended December 31, 2002
and 2001 with respect to the President (Chief Executive Officer) and
all officers of the Company whose total annual salary and bonus for
2002 exceeded $100,000:
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------------------------------------------
Name and Other Annual
Principal Position Year Salary Bonus(1) Compensation
Philip C. Taylor, President 2002 $150,000 $354,859 $ 7,500(2)
2001 150,000 280,395 4,500
Joel D. Kaul, Vice President 2002 100,000 344,479 --
2001 100,000 346,775 --
Stephen J. Roman,
Executive Vice President -
Four Seasons Realty of Wisconsin 2002 100,000 355,231 --
2001 85,000 240,752 --
----------------
(1) The amount of Mr. Taylor's bonus is approved by the Board of
Directors and is related to the Company's profitability.
(2) Annual fee paid to Mr. Taylor for serving as a member of the
Company's Board of Directors.
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 2002, the number of
shares of the Company's common stock beneficially owned by (i) each
director of the Company, (ii) each executive officer of the Company
named in the Summary Compensation Table, (iii) each person known by the
Company to beneficially own more than five percent of the outstanding
shares of the Company's common stock, and (iv) all executive officers
and directors as a group. Unless otherwise indicated, each person has
sole voting and dispositive power over such shares.
Shares
Name and Address of Outstanding Beneficially
Beneficial Owner Shares(2) Owned(1)
Philip C. Taylor
43 Main Street SE, Suite 506
Minneapolis, Minnesota 55414 387,804(3) 79.7%
Charles J. McElroy
Pillsbury Center
220 South Sixth Street
Suite 1000
Minneapolis, Minnesota 55402 120,000(4) 24.7
Joel D. Kaul
2821 Overlook Lane North
Stillwater, Minnesota 55082 9,000 1.9
John H. Hooley
9770 Old Deer Trail
Stillwater, Minnesota 55082 5,983 1.2
William R. Sieben
1201 Southview Drive
Hastings, Minnesota 55033 5,983 1.2
W. John Driscoll
2090 First National Bank Building
St. Paul, Minnesota 55101 243(5) *
All executive officers and directors
as a group (6 persons) 409,013 84.1
-----------------------
(1) Unless otherwise indicated, each person has sole voting and
dispositive power with respect to all outstanding shares reported
in the foregoing table.
(2) Based on 486,317 shares of common stock outstanding at December 31,
2002.
(3) Includes 132,573 shares owned by Mr. Taylor's wife, 120,000 shares
held in trust for his children. The 120,000 shares held in trust
for Mr. Taylor's children have also been included in the number of
shares shown for Mr. Charles J. McElroy, the trustee.
(4) Includes 120,000 shares held by Mr. McElroy as trustee under trusts
for the benefit of Philip C. Taylor's children that have also been
included in the number of shares shown for Mr. Taylor.
(5) Does not include 35,700 shares held in a trust for which Mr.
Driscoll was the trustee or 7,140 shares held by Mr. Driscoll as
trustee as to which Mr. Driscoll disclaims beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Employees of the Company have from time to time purchased from the
Company vacation property for their personal use. In connection with
such purchases, the Company has provided, to such employees, mortgage
financing on the same or similar terms it makes available to
unaffiliated customers in the ordinary course of its business. In the
opinion of management, the terms of such sales and financing are no
more favorable to the employee(s) than those generally made available
to its customers.
32
Under the terms of the Subordinated Debt, the Company may not, and may
not permit any subsidiary to, conduct any business or enter into any
transaction or series of transactions with or for the benefit of any
affiliate or any subsidiary of the Company, or any holder of 5% or more
of any class of capital stock of the Company, except in good faith and
on terms that are, in the aggregate, no less favorable to the Company
or any subsidiary, as the case may be, than those that could have been
obtained in a comparable transaction on an arm's length basis from a
person not an affiliate of the Company or such subsidiary.
ITEM 14. CONTROLS AND PROCEDURES
The Company's President and Chief Executive Officer and the Company's
Controller have concluded, based on an evaluation within 90 days of the
filing date of this report, that the Company's disclosure controls and
procedure are effective for gathering, analyzing and disclosing
information required to be disclosed in the Company's reports filed
under the Securities Exchange Act of 1934. There have been no
significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to
the date of the foregoing evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2002, 2001, and 2000
2. FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts
BEGINNING CHARGED TO ENDING
DESCRIPTION BALANCE COSTS DEDUCTIONS BALANCE
2002
----
Allowance for doubtful
accounts $ 119,161 $ 11,768 $ -- $ 130,929
2001
----
Allowance for doubtful
accounts 116,083 16,031 12,953 119,161
2000
----
Allowance for doubtful
accounts 96,709 23,573 4,199 116,083
All other schedules have been omitted because they are not
applicable.
33
3. EXHIBITS.
3.1 Articles of Incorporation of the Company, as amended *
3.2 Bylaws of the Company, as amended *
4.1 Form of Debenture (included as Article Two of
Indenture filed as Exhibit 4.2)
* 4.2 Forms of Indenture by and between the Company and
American Bank National Association, as Trustee *
10.3 Redevelopment Agreement between the City of Hillsboro,
Illinois and the Company dated April 26, 1994 *
10.5 Contract for Private Development between The Joint East
Range Economic Development Authority and Laurentian
Development Authority *
10.6 Second Contract for Private Development between The
Joint East Range Economic Development Authority and
Laurentian Corporate Authority *
10.8 Credit Agreement between Diversified Business Credit,
Inc. and the Company dated November 18, 1986, as
amended by Amendment to Credit Agreement dated
June 2, 1993
10.9 Security Agreement between Diversified Business Credit,
Inc. and the Company dated November 18, 1986 *
10.10 Agreement between the City of Coleraine, Minnesota and
the Company dated September 26, 1994 *
21 Subsidiaries of the Company
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
--------------------
* Incorporated by reference to the Company's registration statement
on Form SB-2 (No. 33-87024C), effective January 12, 1995.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
last quarter of the period covered by this report.
34
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TAYLOR INVESTMENT CORPORATION
(Registrant)
Dated: March 26, 2003 By /S/ Philip C. Taylor
--------------------- --------------------
Philip C. Taylor
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- -----
/S/ Philip C. Taylor Chairman of the Board, President, March 26, 2003
- ----------------------------- Secretary and Treasurer (Chief ------------------
Philip C. Taylor Executive Officer)
/S/ W. John Driscoll Director March 26, 2003
- ----------------------------- ------------------
W. John Driscoll
/S/ John H. Hooley Director March 26, 2003
- ----------------------------- ------------------
John H. Hooley
/S/ Charles J. McElroy Director March 26, 2003
- ----------------------------- ------------------
Charles J. McElroy
/S/ William R. Sieben Director March 26, 2003
- ----------------------------- ------------------
William R. Sieben
/S/ Steven C. VanHandel Assistant Vice President March 26, 2003
- ----------------------------- and Controller (Principal ------------------
Accounting Officer)
35
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Philip C. Taylor, Chief Executive Officer of Taylor Investment Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of Taylor Investment
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during this period in which the
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors and material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Philip C. Taylor
Philip C. Taylor
Chief Executive Officer
March 26, 2003
36
CERTIFICATION OF CONTROLLER
SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven C. VanHandel, Controller of Taylor Investment Corporation, certify
that:
1. I have reviewed this annual report on Form 10-K of Taylor Investment
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during this period in which the
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors and material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Steven C. VanHandel
Steven C. VanHandel
Controller
March 26, 2003
37