Form 10QSB for TS B HOLDINGS INC
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21-May-2004
Quarterly Report
Item 7. Management's Discussion and Analysis of Financial Condition and Resultof Operations.
The following information should be read in conjunction with our consolidatedfinancial statements and notes thereto appearing elsewhere in this Form 10-Q.
Forward Looking Statements
This Form 10-Q including the Management's Discussion and Analysis of FinancialCondition and Results of Operation contains forward-looking statements thatinvolve substantial risk and uncertainties. These forward-looking statements arenot historical facts but rather are based on current expectations, estimates andprojections about the Company's industry, beliefs, and assumptions. Suchforward-looking statements involve risks and uncertainties that could causerisks or outcomes to differ materially from those expressed in theforward-looking statements. Forward-looking statements may include withoutlimitation statements relating to the Company's plans, strategies, objectives,expectations and intentions and are intended to be made pursuant to the SafeHarbor provisions of the Private Securities Litigation Reform Act of 1995. Wordssuch as "anticipates", "expects", "intends", "plans", "believes", "seeks", and"estimates" and variations of these words and similar expressions are intendedto identify forward-looking statements. These statements are not guarantees offuture performance and are subject to certain risks, uncertainties, and otherfactors, some of which are beyond our control and difficult to predict and couldcause actual results to differ materially from those expressed or forecasted inthe forward-looking statements including without limitation:
o The state of securities markets in which the securities of the Company's
portfolio company trade or could be traded.
o Liquidity within the national financial markets.
o Economic downturns or recessions may impair the Company's customers' ability to repay our loans and increase our non-performing assets.
o A contraction of available credit and/or inability to access the equity
markets could impair our lending and investment activities.
o The risks associated with the possible disruption in the Company's operations due to terrorism and,
o The risks and uncertainties described under the caption "Risk Factors and Other Considerations" contained in Part I, Item I, which is incorporated herein by reference.
Although the assumptions on which these forward looking statements are based arereasonable, any of those assumptions also could be incorrect. In light of theseand other uncertainties, the inclusion of a projection or forward-lookingstatements in this Quarterly Report should be regarded as a representation ofthe Company that its plans and objectives will be achieved. Undue relianceshould not be placed on these forward-looking statements, which apply only as ofthe date of this Quarterly Report.
Overview
TS&B Holdings, Inc. is a financial service company providing financing andadvisory services to small and medium-sized companies throughout the UnitedStates. Effective January 5, 2004 the Company shareholders approved the proposalto allow the Company to convert to a business development company ("BDC") underthe Investment Company Act of 1940 ("1940 Act").
The Company's investments in portfolio companies typically range from $100,000to $1,000,000. The Company invests either directly in the equity of a companythrough equity shares or through a debt instrument. The Company's debtinstruments usual do not have a maturity of not more than five years. Interestis either currently paid or deferred.
Investment opportunities are identified for the Company by the management team.Investment proposals may, however, come to the Company from many sources, andmay include unsolicited proposals from the public and from referrals from banks,lawyers, accountants and other members of the financial community. Themanagement team brings an extensive network of investment referralrelationships.
Critical Accounting Policies and Estimates
The Company prepared its financial statements in accordance with accountingprinciples generally accepted in the United States of America for investmentcompanies. For a summary of all of its significant accounting policies,including the critical accounting policies, see Note A to the consolidatedfinancial statements in Item 8.
The increasing complexity of the business environment and applicableauthoritative accounting guidance requires the Company to closely monitor itsaccounting policies. The Company has identified three critical accountingpolicies that require significant judgment. The following summary of theCompany's critical accounting policies is intended to enhance your ability toassess its financial condition and results of operation and the potentialvolatility due to changes in estimates.
Valuation of Investments
At March 31, 2004 76.5% of the Company's total assets represented investmentsrecorded at fair value. Value as defined in Section 2(a)(41) of the 1940 Act, is(i) the market price for those securities for which a market quotation isreadily available and (ii) for all other securities and assets, fair value isdetermined in good faith by the board of directors. Since there is typically noreadily ascertainable market value for the investments in its portfolio, theCompany values substantially all of its investments at fair value as determinedin good faith by the board of directors pursuant to a valuation policy andconsistent valuation process. Because of the inherent uncertainty in determiningthe fair value of investments that do not have a readily ascertainable marketvalue, the fair value of its investments determined in good faith by the boardof directors may differ significantly from the values that would have been usedhad a ready market existed for the investments, and the differences could bematerial.
Initially, the fair value of each such portfolio investment is based uponoriginal cost. There is no single standard for determining fair value in goodfaith. As a result, determining fair value requires the judgment be applied tothe specific facts and circumstances of each portfolio investment. The Board ofDirectors considers fair value to be the amount which the Company may reasonableexpect to receive for portfolio securities when sold on the valuation date. TheCompany analyzes and values each individual investment on a quarterly basis, andrecords unrealized depreciation for an investment that it believes has becomeimpaired, including where collection of a loan or realization of an equitysecurity is doubtful. Conversely, the Company will record unrealizedappreciation if it believes that the underlying portfolio company hasappreciated in value and, therefore, the Company's equity security has alsoappreciated in value. Without a readily ascertainable market value and becauseof the inherent uncertainty of valuation the fair value of the Company'sinvestments determined in good faith by the Board of Directors may differsignificantly from the values that would have been used had a ready marketexisted for the investments, and the favorable or unfavorable differences couldbe material.
In the valuation process, the Company uses financial information receivedmonthly, quarterly, and annually from the portfolio companies, which includeboth audited, and unaudited financial information supplied by portfoliocompanies management. This information is used to determine financial condition,performance and valuation of the portfolio investments. Valuation should bereduced if a company's performance and potential have significantlydeteriorated. If the factors, which led to the reduction in valuation, areovercome, the valuation may be restated.
Another key factor used in valuation the equity investments is recentarms-length equity transactions entered into by the investment company that theCompany utilizes to form a basis for its underlying value. Many times the termsof these equity transactions may not be identical to those of the Company andthe impact on these variations as it relates to market value may be impossibleto quantify.
Any changes in estimated fair value are recorded in our statements of operationsas "Net increase (decrease) in unrealized (deprecation) appreciation."
Valuation of Equity Securities
With respect to private equity securities, each investment is valued usingindustry valuation benchmarks and then the value is assigned a discountreflecting the illiquid nature of the investment, as well as the Company'sminority non-control positions. When an external event such as a purchasetransaction, public offering, or subsequent equity sale occurs, the pricingindicated by the external event will be used to corroborate the Company'sprivate equity valuation. Securities that are traded in the over-the-countermarket or on a stock exchange will generally be valued at the prevailing bidprice on the valuation date. However, restricted and unrestricted publiclytraded securities may be valued at discounts from the public market value due torestrictions on sale, the size of its investment or market liquidity concerns.
Valuation of Loans and Debt Securities
As a general rule, the Company does not value its loans or debt securities abovecost, but loans and debt securities will be subject to fair value write-downwhen the asset is considered impaired.
Financial Condition
The Company's total consolidated assets increased by $1,607,035 or (511%) to$1,921,476. The increase in total assets can be attributed to the increase inthe fair market value of the Company's assets from electing BDC status.
The Company's financial condition is dependent on the success of its portfolioholdings. It has invested a substantial portion of its assets in small andmedium-sized companies. These businesses tend to be thinly capitalized, smallcompanies that may lack experienced management. The following summaries theCompany's investment portfolio as of March 31, 2004, the Company's first quarteras a business development corporation
March 31, 2004 --------------Investment at Cost $ 465,711 Unrealized (depreciation) appreciation, net 1,004,389 --------------Investment's at fair value $1,470,100 --------------
The increase in investments at cost is due to the $504,130 of new investmentsmade with a combination of stock and cash in the first quarter of 2004 by theCompany.
The increase in unrealized appreciation is primarily attributable to due to theincreased in value placed on the Company's portfolio investments.
During the first quarter of 2004, the Company valued its equity and investmentholdings in accordance with the established valuation policies (see "Valuationof Investments and Equity Holdings") above.
The Company's total investments at fair value, whose values have been estimatedby the Board of Directors, approximated 76.5% of net assets at March 31, 2004.
The cash and cash equivalents approximated 6.8% of net assets as of March 31,2004.
The effect of the change in unrealized appreciation on investments resulted in anet increase in net deferred tax liability from $ — 0 — at March 31, 2003 to anet deferred tax liability of $390,000 at March 31, 2004.
Results of Operations
The results of operations for the quarter ended March 31, 2004 reflect ourresults as a business development company under the Investment Company Act of1940. The results of operations prior to January 1, 2004 reflect our results ofoperations prior to operating as a business development company under theInvestment Company Act of 1940. The principal differences between these tworeporting period relate to accounting for investments and income taxes. See NoteA to our Consolidated Financial Statements. In addition, certain prior yearitems have been reclassified to conform to the current year presentation as abusiness development company.
Dividends and Interest
Dividends and interest income on investments for the quarter ended March 31,2004 and nine month period ended March 31, 2004 was $37,100 and $56,845respectively. The increase in interest and dividends was primarily due to theinterest income accrued from investments in Buehler Earth and Waterworks, LLCand Gulf Coast Records, LLC.
Management Fees
Management fees for the quarter ended March 31, 2004 and nine month period endedMarch 31, 2004 was $ 10,000 and $10,000 respectively. The management fees wereprimarily due to the management fees for services rendered to Buehler Earth andWaterworks, LLC and Gulf Coast Records, LLC.
Operating Expenses
Total operating expenses for the quarter ended March 31, 2004 and nine monthperiod ended March 31, 2004 was $242,762 and $625,736. A significant componentof total operating expenses was professional fees of $162,937 for the threemonths ended March 31, 2004 and $514,599 for the nine months ended March 31,2004. A second component of operating expenses was general and administrativeexpense of $79,825 for the three month ended March 31, 2004 and $111,137 for thenine months ended March 31, 2004.
Liquidity and Capital Resources
At March 31, 2004 and March 31, 2003, we had $131,610 and $1,208 respectively incash and cash equivalents. The Company's objective is to have sufficient cash onhand to cover current funding requirements and operations.
The Company expects its cash on hand and cash generated from operations to beadequate to meet our cash needs at our current level of operations, includingthe next twelve months. The Company generally funds new originations using cashon hand and equity financing and outside investments.
Private Portfolio Company Investments
The following is a list of the private companies in which we had an investmentand the cost and fair market value of such securities at March 31, 2004
Name of Company Cost FMV ----------------------------------------- -------------- ------------Buehler Earth & Waterworks, LLC $ 0 $ 260,000 Sports Nation, Inc. 25,000 95,000 Gulf Coast Records, LLC 0 350,000 TSB Financial Services, Inc. 0 250,000 Wellstone Acquisition Corporation 632 75,000 KMA Capital Partners, Ltd. 440,000 440,000 TS & B Gaming & Entertainment Corporation 79 100 Total $465,711 $1,470,100
Recent Developments
On March 23, 2004 the Company signed a letter of intent with Osceola Downs, Inc.to act as consultants to raise debt and equity and make an investment into apara-mutual facility in Central Florida. The total project is estimated to cost$110,000,000. The Company's investment in the project will be made part of anewly formed subsidiary of the Company called TS & B Gaming & Entertainment,Inc.
In May 2004, the Company rescinded the sale of its stock to an entity. Under theterms of the original agreement, the Company would issue 49,318,597 of itscommon stock for total proceeds of $500,000. As of March 31, 2004 the Companyhad received $137,500 for the issuance of such stock. The entity has returnedand the Company has cancelled 24,818,597 shares and is in the process of havinganother 12,777,403 shares returned to the Company and cancelled.
On May 5, 2004 Buehler Earth and Waterworks, LLC formed BEW Landscape &Irrigation LLC ("BEW Landscape"). BEW Landscape will be involved in thewholesale distribution of palms trees and other nursery products.
On May 13, 2004 the Company agreed to acquire a 51% interest in CummingsFinancial Services, Inc. (a Florida licensed mortgage broker and financialservices entity) for a purchase price of $130,000.
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