SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year Commission file number 0-3498
ended May 31, 1997
TAYLOR DEVICES, INC.
(Exact name of small business issuer as specified in its charter)
New York 16-0797789
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Taylor Drive, P.O. Box 748, North Tonawanda, N Y 14120-0748
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (716) 694-0800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.025 par value)
(Title of class)
Indicate by check mark 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 twelve 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 _______
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 1O-KSB or any amendment to Form 10-KSB [ X ]
Issuer's revenues for its most recent fiscal year are $10,002,839.
The aggregate market value of the Common Stock held by
non-affiliates (as defined in Rule 405 of the Securities Act of
1933)
of the issuer, computed by reference to the average of the bid and
asked price on August 15, 1997, the latest practicable date, was:
$8,087,346.
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date.
Class Outstanding at August 15, 1997
Common Stock, $.025 par value 2,749,667
TAYLOR DEVICES, INC.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-KSB Reference
Form 10-KSB Part I, Items 1-4
Part II, Items 5-8 and
Part III, Item 13
Proxy Statement Part III, Items 9-12
FORM 10-KSB INDEX
PAGE
PART I. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . .3
ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . .5
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . .9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . .9
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . .9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION9
ITEM 7. FINANCIAL STATEMENTS. . . . . . . . . . . . . . 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . 11
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT . . . . . . . . . . . . . . 11
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . 11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . 11
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 11
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . 12
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company was incorporated in the State of New York on July 22,
1955 and is engaged in the design, development, manufacture and
marketing of shock absorption, rate control, and energy storage
devices for use in various types of machinery, equipment and
structures. In addition to manufacturing and selling existing
product lines, the Company continues to develop new and advanced
technology products (i.e., products which are produced from
existing products by applying proven designs or manufacturing
processes.)
Principal Products
The Company has six major product lines, namely (1) Fluidicshoks,
(2) Crane and Industrial Buffers, (3) Self Adjusting Shock
Absorbers, (4) Liquid Die Springs (5) Vibration Dampers and (6)
Seismic Dampers. A summary of the capabilities and applications
for these product lines is as follows:
Fluidicshoks are small, extremely compact shock absorbers with up
to 19,200 inch-pound capacities, which are produced in 15 standard
sizes for primary use in the defense, aerospace and commercial
industry. Crane and Industrial Buffers are larger versions of the
Fluidicshoks with up to 60,000,000 inch-pound capacities, produced
in more than 60 standard sizes for industrial application on
cranes, container ships, ships, railroad cars, truck docks, ladle
and ingot cars, ore trolleys and car stops. Self-Adjusting Shock
Absorbers, which include versions of Fluidicshoks and Crane and
Industrial Buffers, automatically adjust to different impact
conditions, and are designed for high cycle application primarily
in heavy industry. Liquid Die Springs are used as component parts
of machinery and equipment used in the manufacture of tools and
dies. Vibration Dampers are used primarily by the aerospace and
defense industries to control the response of electronics and optical
systems subjected to air, ship, or spacecraft vibration. Seismic
Dampers are designed to ameliorate the effects of earthquake tremors on
structures, and represent a substantial part of the business of the Company.
Distribution
The Company utilized the services of more than 50 sales
representatives and distributors in the United States and Canada.
Specialized technical sales in aerospace and custom marketing
activities are serviced by three sales agents, with the assistance
and under the direction of Douglas P. Taylor, the Company's
President. Sales representatives typically have non-exclusive, yearly
agreements with the Company, which, in most instances, provide for
payment of commissions on sales at 10% of the product's net
aggregate selling price. Distributors also have non-exclusive,
yearly agreements with the Company, whereby products are purchased
from the Company for resale purposes.
Competition
The Company faces no significant competition with respect to most of
its products, many of which are patented. However, on mature aerospace
and defense programs, competitors have qualified conventional products
where government specifications have been reduced. Two other competitors
are foreign companies, both of which produce crane buffers.
In connection with products produced for the
aerospace and commercial aerospace industries, the Company's
principal competitors are Cleveland Pneumatic Tool Company in
Cleveland, Ohio, and Menasco Manufacturing Company in Burbank,
California. While the Company is competitive with these companies
in the areas of pricing, warranty and product performance, it cannot
compete with Cleveland Pneumatic and Menasco in the area of volume
production due to the Company's limited financing and facilities.
The Company generally competes directly against two other firms
capable of supplying seismic damping devices. However, numerous other
firms compete in alternative seismic protection technologies. The
Company remains the only supplier of seismic fluid dampers that have
met specifications set forth by California's Office of State Wide
Health Planning and Development.
Raw Materials and Supplies
The principal raw materials and supplies used by the Company in the
manufacture of its products are provided by numerous U.S. suppliers, the
loss of any one of which would not materially affect the Company's
operations.
Patents, Trademarks and Licenses
Under a License Agreement ("License Agreement") dated November 1,
1959, between the Company and Developments, the Company was granted
preferential rights to market, in the United States and Canada, all
existing and future inventions and patents developed by
Developments. The term of this License Agreement is the life of the
last-to-expire patent on which the Company is paying royalties,
which is the year 2014. During the life of the patent, the Company
pays Developments a 5% royalty on sales of items sold and shipped.
During FY97, the Company incurred royalties to Developments of
$179,744. Payments are required to be made quarterly without
interest; payments are current.
The License Agreement also provides for Developments to pay the
Company 10% of the gross royalties received from third parties who
are permitted to make, use and sell machinery and equipment under
patents not subject to the License Agreement, as well as on
apparatus and equipment subject to the License Agreement but
modified by the Company, with rights to such modification having
been assigned to Developments. No royalties were received in FY97;
royalties, if any, are paid quarterly.
Although the Company and Developments share common management and
a close business relationship, as separate corporations responsible
to their own shareholders, interests may diverge regarding
development and licensing of future inventions and patents. In
that case, Developments would be permitted to license future
inventions and patents to parties other than the Company, rendering
the Company's option on future inventions and patents under its
License Agreement only minimally beneficial.
Terms of Sale
The Company does not carry significant inventory for rapid delivery
to customers, and goods are not normally sold with return rights
such as are available for consignment sales. No extended payment
terms are offered. During FY97, delivery time after receipt of
orders averaged 12 to 14 weeks for the Company's standard products.
Due to the volatility of construction and aerospace/defense programs,
progress payments are usually required for larger projects utilizing
custom designed components of the Company.
Dependence Upon Customers\Government Contracts
The Company's business is not dependent upon any single customer or
a few customers. In FY97, aggregate shipments to one customer
equaled 10% or more. A contract with Herrick Construction for seismic
damping products was for a single specific project. The Company may work
with Herrick on future projects, but none are currently pending. With
the receipt of four medium to large seismic orders in early FY98, the
Company believes it has replaced the Herrick Construction revenues for
FY98.
Contracts between the Company and the federal government or its
independent contractors, are subject to termination at the election
of the federal government. Contracts are generally entered into on
a fixed price basis. From time to time, the Company has also
entered into a cost plus defense contract. If the federal
government should further limit defense spending, these contracts
could be reduced or terminated, which could have a materially
adverse effect on the Company.
Research and Development
The Company does not normally engage in any major product research
and development activities in connection with the design of its
products, except when funded by aerospace customers or the
government. See Item 01. Business, "Patents, Trademarks and
Licenses". The Company, however, engages in research testing of
its products. For the fiscal years ended May 31, 1997 and May 31,
1996, the Company expended $128,525 and $166,283 respectively, on
manufacturing research through its affiliate, Developments. The
Company spent $186,283 and $292,322 on research and development in
FY97 and FY96, respectively. For FY97 and FY96, defense sponsored
research and development totaled $45,340 and $90,681, respectively.
Government Regulation
Compliance with federal, state and local laws and regulations which
have been enacted or adopted regulating the discharge of materials
into the environment has had no material effect on the Company, and
the Company believes that it is in substantial compliance with such
provisions.
The Company is subject to the Occupational Safety and Health Act,
("OSHA") and the rules and regulations promulgated thereunder,
which establishes strict standards for the protection of employees,
and imposes fines for violations of such standards. The Company
believes that it is in substantial compliance with OSHA provisions
and does not anticipate any material corrective expenditures in the
near future.
The Company is also subject to regulations relating to production
of products for the federal government. These regulations allow
for frequent governmental audits of the Company's operations and
fairly extensive testing of Company products. The Company believes
that it is in substantial compliance with these regulations and
does not anticipate corrective expenditures in the future. The
Company is currently incurring only moderate costs with respect to
disposal of hazardous waste and compliance with OSHA regulations.
Employees
Exclusive of Company sales representatives and distributors, as of
May 31, 1997, the Company had 92 full time and 4 part time
employees, not including 3 executive officers. The Company has
good relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's production facilities are comprised of four
interconnected buildings located on approximately six acres on
Tonawanda Island, New York. Production facilities consist of a
small parts plant (approximately 4400 square feet), large parts
plant (approximately 10,000 square feet), including a facility of
approximately 7,000 square feet constructed in 1995 (see below), a
testing facility, storage area, pumping area and the Company's
general offices. Total square footage of these facilities is more
than 25,000 square feet. The Company has two separate remote
testing facilities used for shock testing. One facility is 800
square feet and a newer state-of-the-art test facility is of 1,225
square feet. The small parts plant consists of a complete small
machine shop and tool room and produces all of the Company's product
items which are less than two inches in diameter. The large parts
plant consists of a complete large machine shop and tool room. Both
plants contain custom built machinery for boring, deep hole drilling
and turning of parts.
In November 1994, as part of certain tax-exempt bond financing
arrangements, the Company and the Niagara County Industrial Development
Agency ("NCIDA") entered into a 15 year Series Lease by the Company of
approximately 7,000 square feet of manufacturing space adjacent to the
Company's existing large machine shop. The expansion partially
accommodated the Company's increased need for additional manufacturing
space for its seismic damper devices.
Rental payments, equivalent to payments of principal and interest
due, are made quarterly by the Company over the term of the Lease,
and are sufficient to amortize the $1,250,000 tax-exempt industrial
development revenue Series A Bonds (the "Bond") issued by the
NCIDA. The payments reimburse Marine Midland Bank ("Marine"), as
issuer of the five (5) year direct-pay irrevocable letter of
credit, which is drawn upon by Bankers Trust Company, as Trustee,
for the benefit of the bondholders. The Bond bears interest at the
Marine Midland Adjustable Rate Service ("MMARS") rate, plus an
incremental amount designated by Marine Midland Securities, Inc.
(the "Remarketing Agent"). The MMARS rate reflects the current
bid-side yield of the highest rate short-term, federally tax exempt
obligations currently being traded, announced weekly by the
Remarketing Agent, not to exceed 15% per annum, and is the minimum
rate of interest necessary to enable the Remarketing Agent to
remarket the Bond at par. Annual principal payments by the Company
in June of each year range from $25,000 to $150,000, including a
final principal payment of $45,000 upon maturity on June 1, 2009.
The Bond may be redeemed in whole, or in part, on any quarterly
interest payment date, without penalty or premium. The principal
amount outstanding on the Bond as of May 31, 1997 is $1,045,000.
All payments are current.
Rental payments are secured by the liens of the Master Indenture
between the NCIDA and the Trustee, the Series Supplemental
Indenture between the NCIDA and the Trustee, and the Series
Mortgage from the NCIDA, the Company, and Tayco Realty, to Marine,
as well as by other collateral security arrangements. When the
Bond matures on June 1, 2009, the Company must purchase the
Facility from the NCIDA for $1.00.
A mortgage note is also held by Marine Midland Bank, N.A., Buffalo,
New York, on property located at 90 Taylor Drive, N. Tonawanda, New
York 14120, with an interest rate equal to the bank's prime
interest rate plus 1%. A monthly payment of $1,444 plus interest
is due on the first of each month, and a balloon payment of
$176,222 is due at the maturity date of June 1, 1998. The
principal balance at May 31, 1997 is $192,111. All payments are
current.
Except for the premises leased from the NCIDA, Company leases
portions of both the building and the property on which it is
located from Tayco Realty, an affiliate.
Pursuant to the Lease Agreement between the Company and Tayco
Realty, rental payments from June 1, 1996 to May 31, 1997 totaled
$162,026 with standard terms and conditions, renewed on November 1,
1995 for a term of ten years. The annual rental amount is
renegotiated by management of the two companies. The total rent
paid by the Company is determined by a base rate and is subject to
adjustment for increases in taxes, maintenance costs and for
utilization of additional space by the Company. The Company also
pays for certain expenses incurred for the operation of the
facilities. In addition, the Company leases a separate warehouse
for storage from an unrelated third-party, consisting of
approximately 3,600 square feet at $825 per month. The warehouse
is located approximately one-half mile from the above-referenced
production facilities and office space. The actual rental expense
incurred by the Company for fiscal 1997 was $8,325.
The following tables provide information regarding the properties
discussed in this Item 2. Description of Property.
TAYLOR DEVICES, INC. AND SUBSIDIARY
DISCLOSURE FOR REG. 228.102(C) FOR FILING 10-KSB
5/31/97
Reg. 228.102(c)-Real Estate
ACCUM. NET
DEPREC. BOOK
5/31/97 VALUE
PROPERTY LOCATION COST (BOOK) 5/31/97
90 & 100 Taylor Drive
N. Tonawanda, NY 14120
(see below)
Land $ 141,483 N/A $ 141,483
Buildings $ 743,640 $471,797 $ 271,843
Improvements $1,445,271 $242,591 $ 1,202,680
TOTAL $2,330,394 $714,388 $ 1,616,006
ACCUM. NET
DEPREC. BOOK PERCENTAGE
5/31/97 VALUE OF TOTAL
PROPERTY LOCATION COST (BOOK) 5/31/97 ASSETS
90 Taylor Dr.
N. Tonawanda, NY 14120
Land $ 107,363 N/A $ 107,363
Building $ 428,506 $353,113 $ 75,393
Building Improve-Realty $ 33,863 $ 13,401 $ 20,462
Building Improve-Devices $1,411,408 $229,190 $1,182,218
TOTAL $1,981,140 $595,704 $1,385,436 16.6%
100 Taylor Dr.
N. Tonawanda, NY 14120
Land $ 34,120 N/A $ 34,120
Building $ 315,134 $118,684 $ 196,450
TOTAL $ 349,254 $118,684 $ 230,570 2.8%
Taylor Devices, Inc. & Subsidiary
Total Assets as of May 31, 1997 $8,341,084
Reg. 228.102(c)(7)(vi)(A-D)
FEDERAL FEDERAL FEDERAL FEDERAL NET TAX
DEPREC. LIFE TAX ACCUM. BASIS
PROPERTY LOCATION METHODS CLAIM COST DEPREC. 5/31/97
90 & 100 Taylor Dr.
(see below)
N. Tonawanda, NY 14120
STR. LINE,
ACRS & 15-40
Building MACRS Years $ 743,640 $507,793 $ 235,847
STR. LINE,
Building ACRS & 7-40
Improvements MACRS Yrs. $1,445,271 $154,238 $1,291,033
$2,188,911 $662,031 $1,526,880
SUPPORTING SCHEDULE
Reg. 228.102(c)(7)(vi)(A-D)
FEDERAL FEDERAL FEDERAL FEDERAL NET TAX
DEPREC. LIFE TAX ACCUM. BASIS
PROPERTY LOCATION METHODS CLAIMED COST DEPREC. 5/31/96
90 Taylor Dr.
N. Tonawanda, NY 14120
STR. LINE, 15-25
Building ACRS,MACRS Yrs. $ 428,506 $353,113 $ 75,393
Building STR. LINE, 7-31.5
Improve-
Realty ACRS,MACRS Yrs. $ 33,863 $ 13,401 $ 20,462
Building STR. LINE, 15-40
Improve-
Devices ACRS,MACRS Yrs. $1,411,408 $140,837 $1,270,571
Total $1,873,777 $507,351 $1,366,426
100 Taylor Drive
N. Tonawanda, NY 14120
Building STR. LINE, 19-40
ACRS,MACRS Yrs. $ 315,134 $154,680 $ 160,454
Reg. 228.102(c)(2)
The Company leases approximately 800 square feet of office and
research and development space to Developments pursuant to a three
year, annually reviewed, lease agreement between the Company and
Developments. Rental payments for fiscal 1997 totaled $10,000.
The lease is automatically renewed, unless canceled by written
notice each to the other party. The lease agreement has been
renewed for fiscal 1998 at a base rental of $10,000. The total
rent paid by Developments is determined in accordance with the base
rental, and is subject to adjustment for increases in taxes,
maintenance costs and for utilization of additional space by
Developments. The real property utilized by Developments is in
good condition and adequate for its present operations. Management
believes that transportation to and from production facilities is
adequate, and that all of the Company's properties are adequately
covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock trades on the Small Cap market tier of
the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol TAYD.
The high and low market prices noted below for the quarters of FY96
and FY97 are obtained from NASDAQ.
Fiscal 1997 Fiscal 1996
High Low High Low
First Quarter 4.048 3.510 4 3.375
Second Quarter 4.597 4.003 5 4.3125
Third Quarter 6.296 5.764 4.5 3.625
Fourth Quarter 5.572 5.119 4 3.5
Holders
As of August 15, 1997, the approximate number of holders of record
of Common Stock of the Company was 2,441. Due to a substantial
number of shares of the Company's Common Stock held in street name,
the Company believes that the total number of beneficial owners of
its Common Stock exceeds 3,000.
Dividends
No cash or stock dividends have been declared during the last two
fiscal years. Under the terms of the Company's credit arrangement
with its major lender, the Company is prohibited from issuing cash
dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Information included
or incorporated by reference, and certain matters discussed in this
section and elsewhere in this Report, which are not historical facts,
are forward-looking statements. As such, these statements involve
risks and uncertainties including, but not limited to, economic
conditions, product demand and industry capacity, competition, pricing
pressures, the need for the Company to keep pace with customer needs
and technological developments, and other factors.
The Company recorded record revenues for the fourth consecutive
year in FY97. The revenue figure of $10,002,839 represented an
11.2% increase over Fiscal Year 1996 (FY96) revenues. The strong
performance was largely attributable to aggressive sales/marketing
efforts in the seismic protection market and steady
defense/aerospace shipments. Net Income, $531,575, declined from
the FY96 figure of $612,321. This was attributable to the
depletion in FY96 of the Company's remaining tax net operating loss
carry forwards (NOL). The subject of effective tax rates for the
two years is addressed later in this section.
The FY97 shipments increase of $1,086,003 represents the net of
higher seismic products sales ($1.6 million) and higher Unishok
sales ($.2 million) offsetting reduced shipments of crane buffers
($.5 million) and Plastishoks ($.2 million). The FY97 Gross Margin
was $3,765,203, or 37.5% of sales, compared to $3,222,372, or 36.1%
in FY96. The shifting nature of the Company's product mix makes
precise analysis difficult. Management believes the Gross Margin
percentage, the Company's best in eleven years, reflects the
continuing efforts to upgrade the facility, production machinery
and production control systems while meeting competitive price
pressures.
Selling, General and Administrative (SGA) expense was $2,857,055 in
FY97, or 28.6% of sales, compared to $2,361,943, or 26.5% in FY96.
Management review has indicated that the change in SGA expense was
generated by higher royalty expense (as a function of the product
mix), start-up costs related to the full implementation of the
electronic data processing system (EDP), and commission and
consulting costs related to the seismic sales in the product mix.
The EDP implementation expenses were relatively high in the first
two quarters of FY97, but have leveled off significantly since
then. Management anticipates there will be only modest EDP
expenses in FY98 directed at minor upgrades and improvements.
Net Operating Income in FY97 was $908,148, the highest in the
Company's history - approximately $48,000 higher than the previous
record set in FY96. In FY97, Net Other Expense decreased from
$96,550 (in FY96) to $78,939 due primarily to continued moderate
interest rates on declining loan balances. In FY97, the Company
completed the six year long process of paying off the loans of its
former affiliate, Tayco Technology, Incorporated.
Taxes for FY97 were computed to be 36.6% or $303,609 of earnings,
compared to $169,257 and 22.1% in FY96. As mentioned previously,
some of the income for FY96 was sheltered by that portion of the
Net Operating Loss (first used in FY94) that had not been used
previously. Management is unaware of any conditions that will
create another NOL for the Company and is basing future plans on
that premise. As an example of the impact of the NOL in previous
years, for FY97 the difference between a 36.6% rate and a 22.1%
rate would have been an additional $120,000 of net income - enough
to have made FY97 the most profitable year ever for the Company.
Equity in Earnings of Affiliates declined slightly, from $26,808 in
FY96 to $26,471 in FY97, due to Developments' stable performance.
Minority Shareholder Interest expense increased from $9,109 in FY96
to $20,496 in FY97 as Tayco Realty's income was impacted by a full
year of adjusted rental income.
Net Income for FY97 was $525,600 and $.19 per share versus $612,321
and $.22 per share in FY96. As discussed previously, the key
contributing factors to the change were the higher effective tax
rate and the items discussed in the SGA section.
The Company's cash balance improved to $1,096,456 in FY97 from
$913,284 in FY96. This balance may decline during the upcoming
fiscal year as the Company undertakes a large-scale order (for a
municipality) without the benefit of progress payments.
Receivables-Trade rose commensurately with Revenues while all other
Current Asset items remained stable. Property and Equipment, Net
increased by $161,133 with capital expenditures of $401,195 and
depreciation of $240,062. All other Asset items were relatively
stable.
Current Liability Items were stable from year to year with the
exception of Accrued Expenses, which rose to $449,329 in FY97 from
$340,337 in FY96, reflecting the increased commission expenses
referenced earlier. Long Term Debt declined from $1,750,583 to
$1,457,714, as the Company paid down approximately $370,600 of old
debt and incurred approximately $64,400 of new obligations related
to capital expenditures. Changes in Stockholders' Equity Section
- -
other than Retained Earnings - were increased primarily by proceeds
from exercise of stock options by Company employees and outside
directors. In addition, Paid-in-Capital was increased by federal
and state income tax benefits for stock option compensation expense
not recognized for financial reporting purposes but deductible for
income tax purposes.
Management believes that FY97 was another strong growth year for
the Company, with record sales, good profits, continued
improvements to the facility and production equipment, and
strengthening of its marketing capabilities. The Company's
Vertical Drop Test Facility, in addition to being indispensable for
internal production testing and research applications, was leased
out to customers on two occasions in FY97. Management anticipates
increased direct customer usage in the upcoming years. Late in
FY96, the Company delivered sample dampers to HITEC, the
government/industry consortium developing specification for highway
bridges.
The Company's research engineers are currently concentrating on
upgrades of two existing defense/aerospace products per customer
requests. Another defense/aerospace project, which generated
substantial revenue in the period FY94-96 is being reactivated and
has already produced some revenue in FY98. The time frame and
scale of this project are still unknown, but its reactivation is a
positive sign for the Company.
Activity remains very strong in the seismic protection market.
Subsequent to the close of FY97, the Company booked two orders,
totaling approximately$1,800,000, for the seismic protection of two
west coast facilities. Management continues to pursue many other
opportunities, both foreign and domestic. The Company's seismic
sales/marketing team of employees, commissioned sales
representatives, and consultants experienced good success in
obtaining a high proportion of the orders that were actually placed
in FY97. In response to increased activity in the seismic market,
Management has decided to build an 8,500 square foot addition to the
Company's manufacturing facilities, as part of a $1 million project
to provide assembly space for large seismic and wind dampers, and
horizontal testing capabilities. The Company anticipates funding these
improvements through conventional means. Management will continue
to analyze the seismic marketing effort and make modifications, as
appropriate.
With respect to defense products, the significant orders
anticipated in FY97 did not materialize, but now appear more
probable for FY98.
In summary, Management believes that FY97 was another in a line of
strong years which position the Company for continuing strong
years. With respect to FY98, Management believes revenues will
approach, and likely exceed the record level of FY97 and that
profits, while still subject to the full tax rates, will improve.
ITEM 7. FINANCIAL STATEMENTS
For information concerning this Item, see the Company's balance
sheet and related financial statements at Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
There have been no disagreements between the Company and its
accountants as to matters which require disclosure.
PART III
The information required by Items 9, 10, 11 and 12 of this part are
presented in the Company's Proxy Statement issued in connection
with the Annual Meeting of Shareholders to be held on October 30,
1997 which information is hereby incorporated by reference into
such report to be filed within 120 days after the Company's fiscal
year end.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
DOCUMENTS FILED AS PART OF THIS REPORT:
Index to Financial Statements:
(i) Consolidated Balance Sheets May 31, 1997 and 1996
(ii) Consolidated Statements of Stockholders' Equity for the
years ended May 31, 1997 and 1996
(iii) Consolidated Statements of Income for the years ended
May 31, 1997 and 1996
(iv) Consolidated Statements of Cash Flows for the years ended
May 31, 1997 and 1996
(v) Notes to Consolidated Financial Statements May 31, 1997
(vi) Independent Auditor's Report
EXHIBITS:
(3) Articles of incorporation and by-laws
(i) Restated Certificate of Incorporation filed by the New
York Department of State on December 7, 1982, incorporated by
reference to exhibit (3) (i) of Annual Report on Form 10-KSB, dated
August 24, 1983.
(ii) Amendment to Certificate of Incorporation filed by the
New York Department of State on November 17, 1992, and incorporated
by reference to exhibit (3) (iv) to Form 8 [Amendment to
Application or Report], dated September 24, 1993.
(iii) By-laws of the registrant, as amended, incorporated by
reference to exhibit (3) (ii) of Annual Report on Form 10-KSB,
dated August 24, 1983.
(iv) Amendment to By-laws of the registrant incorporated by
reference to Current Report on Form 8-KSB, dated October 21, 1988.
(v) Certificate of Merger of Tayco Technology, Incorporated
into the registrant, filed by the New York Department of State on
June 29, 1994, effective as of July 1, 1994, incorporated by
reference to exhibit (3) (v) of Annual Report on Form 10-KSB, dated
August 26, 1994.
(4) Instruments defining rights of security holders, including
indentures
(i) Mortgage in the amount of $260,000 issued by Marine Midland
Bank dated May 28, 1993, incorporated by reference to Exhibit (10)
(vii) Annual Report on Form 10-KSB, dated September 10, 1993.
(ii) Master Indenture between Niagara County Industrial
Development Agency and Bankers Trust Company, as Trustee, dated as
of November 1, 1994 ($1,250,000 Niagara County Industrial
Development Agency, 1994 Adjustable Rate Demand, Industrial
Development Revenue Bonds, Series A [MMARS Second Program]).
Incorporated by reference to Exhibit (4) (iv) to the Annual Report
on Form 10-KSB, dated August 25, 1995.
(iii) Series Supplemental Indenture between Niagara County
Industrial Development Agency and Bankers Trust Company, as
Trustee, ($1,250,000 Niagara County Industrial Development Agency,
1994 Adjustable Rate Demand, Industrial Development Revenue Bonds,
Series A [MMARS Second Program]). Incorporated by reference to
Exhibit (4) (v) to the Annual Report on Form 10-KSB, dated August
25, 1995.
(iv) Series Mortgage from Niagara County Industrial Development
Agency, Tayco Realty, Inc. and registrant to Marine Midland Bank,
as Letter of Credit Bank, dated as of November 1, 1994.
Incorporated by reference to Exhibit (4) (vi) to the Annual Report
on Form 10-KSB, dated August 25, 1995.
(10) Material contracts
(i) Incentive Stock Option Plan, approved December 3, 1982,
incorporated by reference to exhibit (10) (ii) of Annual
Report on Form 10-KSB, dated August 24, 1983.
(ii) Non-Statutory Stock Option Plan, approved December 3, 1982,
incorporated by reference to exhibit (10) (iii) of Annual Report on
Form 10-KSB, dated August 24, 1983.
(iii) The 1994 Taylor Devices, Inc. Stock Option Plan, approved
October 28, 1994, incorporated by reference to Exhibit 4.1 of Form
S-8 Registration Statement No. 33-88152, as filed on December 30,
1994.
(iv) License Agreement between the registrant and Tayco
Developments, Inc., dated November 1, 1959 incorporated by
reference to exhibit (10) (i) of Annual Report on Form 10-KSB,
dated August 27, 1982.
(v) Employee Stock Purchase Plan, approved October 29, 1984
incorporated by reference to Exhibit 4.1 of Registration Statement
No. 2-94754.
(vi) Employee Stock Purchase Plan, approved October 28, 1994
incorporated by reference to Exhibit 4.1 to Form S-8 Registration
Statement, No. 33-88154, filed December 30, 1994.
(vii) Loan Agreements between the registrant and Marine Midland
Bank dated December 2, 1992 establishing a $940,000 term loan,
incorporated by reference to exhibit (10) (viii) to the Annual
Report on Form 10-KSB, dated September 10, 1993.
(viii) Series Lease between Niagara County Industrial Development
Agency and registrant, dated as of November 1, 1994 ($1,250,000
Niagara County Industrial Development Agency, 1994 Adjustable Rate
Demand, Industrial Development Revenue Bonds, Series A [MMARS
Second Program]). Incorporated by reference to Exhibit (10) (ix)
to the Annual Report on Form 10-KSB, dated August 21, 1995.
(ix) Lease Agreement between registrant and Tayco Realty
Corporation dated November 1, 1995 for a 10 year term, incorporated
by reference to Exhibit (10) (ix) of Annual Report on Form 10-KSB,
dated August 26, 1996.
(x) Form of Indemnity Agreement between the Company and certain
officers and directors, approved November 8, 1996, incorporated by
reference to exhibit (10) (x) on Form 10-QSB, dated February 1997.
(xi) Rental Agreement dated July 1, 1997 between the Company and
Tayco Developments, Inc. attached to and incorporated into this
Annual Report on Form 10-KSB.
(11) Statement re: Computation of per share earnings
REG.228.601(A)(11)STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
WEIGHTED AVERAGE OF COMMON STOCK/EQUIVALENTS O/S - F/Y/E 5/31/97
WEIGHTED AVG. COMMON STOCK OPTIONS 128,816
WEIGHTED AVG. COMMON STOCK 2,669,626
WEIGHTED AVG. COMMON STOCK/EQUIVALENTS O/S 2,798,442
NET INCOME F/Y/E 5/31/97 (1) $ 531,575
WEIGHTED AVG. COMMON STOCK/EQUIVALENTS O/S (2) 2,798,442
NET INCOME PER SHARE (1) DIVIDED BY (2) $ 0.19
WEIGHTED AVERAGE OF COMMON STOCK EQUIVALENTS O/S - F/Y/E 5/31/96
WEIGHTED AVG. COMMON STOCK OPTIONS 118,809
WEIGHTED AVG. COMMON STOCK 2,643,386
WEIGHTED AVG. COMMON STOCK /EQUIVALENTS O/S 2,762,195
NET INCOME F/Y/E 5/31/96 (1) $ 612,321
WEIGHTED AVG. COMMON STOCK /EQUIVALENTS O/S (2) 2,762,195
NET INCOME PER SHARE (1) DIVIDED BY (2) $ 0.22
(21) Subsidiaries of the registrant
Tayco Realty Corporation is a New York corporation organized on
September 8, 1977, 58% owned by the Company and 42% owned by Tayco
Developments, Inc.
(23) Report and Consent of Independent Certified Public Accountants
REPORTS ON FORM 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATE: August 15, 1997
TAYLOR DEVICES, INC.
(Registrant)
By: /s/ Douglas P. Taylor
Douglas P. Taylor,
President and Director
(Principal Executive Officer)
and
By: /s/ Kenneth G. Bernstein
Kenneth G. Bernstein,
Treasurer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
By: /s/ Joseph P. Gastel By: /s/ Richard G. Hill
Joseph P. Gastel Richard G. Hill
Director, August 15, 1997 Director, August 15, 1997
By: /s/ Donald B. Hofmar By: /s/ Randall L. Clark
Donald B. Hofmar Randall L. Clark
Director, August 15, 1997 Director, August 15, 1997
FINANCIAL STATEMENTS
TAYLOR DEVICES, INC.
May 31, 1997
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Stockholders of Taylor Devices, Inc.
We have audited the accompanying consolidated balance sheets of
Taylor Devices, Inc. and subsidiary as of May 31, 1997 and 1996,
and the related consolidated statements of income, stockholders'
equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the 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, the financial statements referred to above present
fairly, in all material respects, the financial position of Taylor
Devices, Inc. and subsidiary as of May 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ J.D. Elliott & Co., P.C.
J. D. ELLIOTT & CO., P.C.
Buffalo, New York
August 15, 1997
TAYLOR DEVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
May 31, 1997 and 1996
ASSETS
1997 1996
Current
Cash and cash equivalents $ 1,096,456 $ 913,284
Restricted funds held by
trustee (Note 7) 108,041 106,639
Receivables (Note 2) 1,423,829 1,210,435
Inventories (Note 3) 2,412,265 2,408,763
Prepaid expenses 130,258 130,843
Deferred tax assets (Note 9) 57,630 63,312
Total current assets 5,228,479 4,833,276
Property and Equipment, Net
(Note 4) 2,564,613 2,403,480
Investment in Affiliate, at
Equity (Note 5) 194,922 168,451
Other
Cash value - life insurance,
net 167,328 151,186
Goodwill, net 73,050 79,096
Deferred financing costs, net 108,622 120,888
Deferred tax assets (Note 9) 569 15,401
Other, net 3,501 3,799
353,070 370,370
$ 8,341,084 $ 7,775,577
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Current portion of long-term
debt (Note 7) $ 352,685 $ 366,003
Payables - trade 989,077 961,010
- affiliate (Note 11) 69,487 67,740
Accrued income taxes 99,462 62,582
Accrued expenses 449,329 340,337
Advance payments, customers 419,901 455,991
Total current liabilities 2,379,941 2,253,663
Long-Term Debt (Note 7) 1,457,714 1,750,583
Total liabilities 3,837,655 4,004,246
Minority Stockholder's Interest 245,001 224,505
Stockholders' Equity
Common stock, par value $.025
a share, authorized 8,000,000
shares issued 2,741,445
shares and 2,676,968 shares,
respectively (Notes 13 and 14) 68,536 66,924
Paid-in capital 2,468,888 2,258,725
Retained earnings 1,801,096 1,269,521
4,338,520 3,595,170
Less: Cost of treasury stock -
27,859 shares and 22,607
shares, respectively
Note 14) 80,092 48,344
4,258,428 3,546,826
$ 8,341,084 $ 7,775,577
TAYLOR DEVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended May 31, 1997 and 1996
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
Balance, June 1, 1995 $66,344 $2,161,732 $657,200 $(45,825)
Net income for the
year ended
May 31, 1996 - - 612,321 -
Common stock issued
for employee stock
purchase plan
(Note 13) 361 62,207 - -
Stock options
exercised (Note 14) 219 34,786 - -
Treasury stock
acquired (Note 14) - - - (2,519)
Balance, May 31, 1996 66,924 2,258,725 1,269,521 (48,344)
Net income for the
year ended
May 31, 1997 - - 531,575 -
Common stock issued
for employee stock
purchase plan
(Note 13) 444 79,570 - -
Stock options exercised
(Note 14) 1,168 60,518 - -
Tax benefit related
to stock option plan
(Note 9) - 70,075 - -
Treasury stock
acquired (Note 14) - - - (31,748)
Balance, May 31, 1997 $68,536 $2,468,888 $1,801,096 $(80,092)
TAYLOR DEVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the years ended May 31, 1997 and 1996
1997 1996
Sales, Net (Note 8) $10,002,839 $ 8,916,836
Cost of Sales 6,237,636 5,694,464
Gross profit 3,765,203 3,222,372
Selling, General and
Administrative Expenses 2,857,055 2,361,943
Operating income 908,148 860,429
Other Income/(Expense)
Rental income - affiliate
(Note 11) 10,000 11,852
Interest, net (105,492) (114,750)
Miscellaneous 16,553 6,348
(78,939) (96,550)
Income before provision for
income taxes, equity in
net income of affiliate
and minority stock-
holder's interest 829,209 763,879
Provision for Income Taxes
(Note 9) 303,609 169,257
Income before equity in net
income of affiliate and
minority stockholder's
interest 525,600 594,622
Equity in Net Income of
Affiliate (Note 5) 26,471 26,808
Income before minority
stockholder's interest 552,071 621,430
Minority Stockholder's Interest (20,496) (9,109)
Net income $ 531,575 $ 612,321
Net income per common share
(Note 10) $ .19 $ .22
TAYLOR DEVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended May 31, 1997 and 1996
1997 1996
Cash Flows From Operating Activities
Net income $ 531,575 $ 612,321
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 269,811 225,335
Equity in net income of affiliate (26,471) (26,808)
Increase in cash value -
life insurance (16,142) (15,292)
Deferred income taxes 20,514 103,605
Tax benefit - stock option plan 70,075 -
Minority stockholder's interest 20,496 9,109
Common stock issued, charged to
compensation expense, net - 32,486
Interest income - funds held by
trustee (1,402) (7,467)
Changes in:
Receivables (213,394) (417,389)
Inventories (3,502) (295,208)
Prepaid expenses 585 16,672
Payables - trade 28,067 202,848
Payables - affiliates 1,747 11,406
Advance payments, customers (36,090) (114,478)
Accrued income taxes 36,880 (1,234)
Accrued expenses 127,742 197,774
Net cash provided by
operating activities 810,491 533,680
Cash Flows From Investing Activities
Acquisition of property and equipment (336,756) (233,777)
Proceeds from sale of tax free money
fund held by trustee 106,680 -
Cash received from trustee 28,320 35,000
Cash remitted to trustee (135,000) (105,000)
Net cash used for investing
activities (336,756) (303,777)
Cash Flows From Financing Activities
Financing costs paid (11,139) (12,579)
Borrowings - bank demand notes - 150,000
Repayments - bank demand notes - (150,000)
- long-term debt (370,626) (281,902)
Proceeds from issuance of common stock
- employee stock purchase plan 80,014 62,568
- exercise of stock options 11,188 -
Net cash used for financing
activities (290,563) (231,913)
Net increase/(decrease) in cash
and cash equivalents 183,172 (2,010)
Cash and Cash Equivalents Balance at
Beginning of Year 913,284 915,294
Cash and Cash Equivalents Balance at
End of Year $1,096,456 $ 913,284
TAYLOR DEVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
For the years ended May 31, 1997 and 1996
Supplemental Disclosure of Cash Flow Information
1997 1996
Cash paid during the year for:
Interest $ 135,716 $147,094
Income taxes $ 176,140 $ 66,886
Schedule of Noncash Investing and Financing Activities
1997 1996
Property and equipment acquired
Cost $401,195 $637,298
Borrowings - long-term debt (64,439) (109,000)
Withdrawal of funds held by trustee - (598,419)
Payables - construction in progress - 303,898
Cash payments for property and
equipment $336,756 $ 233,777
Common stock issued - stock option plans $ 61,686 $ 35,005
Treasury stock received in payment for
stock options (31,748) (2,519)
Common stock issued, charged to accrued
compensation expense (18,750) -
Common stock issued, charged to
compensation expense, net - (32,486)
Net cash proceeds from exercise
of stock options $ 11,188 $ -
TAYLOR DEVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1997
NOTE 1 - CORPORATE ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Corporate Activity - The principal business activity of Taylor
Devices, Inc. ("the Company") is the manufacture and sale of
tension control, energy storage and shock absorption devices for
use in various types of machinery, equipment and structures
primarily to customers which are located throughout the United
States and several foreign countries.
Principles of Consolidation - The accompanying financial statements
include the accounts of the Company and its 58% owned subsidiary,
Tayco Realty Corporation ("Realty"). Minority stockholder's
interest represents Tayco Developments, Inc.'s ("Developments") 42%
ownership interest in Realty. All intercompany transactions and
balances have been eliminated in consolidation.
The Company's investment in its minority-owned affiliate,
Developments, is reported on the equity method (see Note 5).
Revenue Recognition - Sales are recognized when units are delivered
or services are performed. Sales under fixed-price contracts are
recorded as deliveries are made at the contract sales price of the
units delivered. Sales under certain fixed-price contracts
requiring substantial performance over several periods prior to
commencement of deliveries, are accounted for under the percentage-
of-completion (cost to cost) method of accounting in which the
estimated sales value is determined on the basis of physical
completion to date. Related costs are expensed as incurred.
Payments received in advance from customers on fixed-price
contracts in progress for which revenues and related costs have not
yet been recognized are recorded as a liability.
Cash and Cash Equivalents - The Company classifies as cash
equivalents all highly liquid investments with maturities of three
months or less. As of May 31, 1997, cash equivalents consisted of
investments in money market funds of approximately $404,000.
Inventories - Inventories, other than inventoried costs related to
fixed-price contracts, are stated at the lower of cost (first-in,
first-out) or market. Inventoried costs relating to fixed-price
commercial and government contracts are stated at the actual
production cost, including factory overhead incurred to date,
reduced by amounts related to revenue recognized on units delivered
or progress completed (see Note 3).
Income Taxes - Deferred income taxes are provided to reflect the
tax consequences on future years of temporary differences between
the tax bases of assets and liabilities and their financial
reporting amounts at each year-end using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse (see Note 9).
Depreciation - The cost of property and equipment is depreciated
over the estimated useful lives of the related assets using the
straight-line and accelerated methods.
Financing Costs - Costs associated with obtaining new financing are
capitalized and are being amortized over the repayment terms of the
related debt obligations.
Goodwill, Net - Goodwill represents the
excess of the cost of obtaining ownership interests in a merged
subsidiary over its net worth at various dates of acquisition and
is amortized on a straight-line basis over 15 years.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the year. Actual
results could differ from those estimates.
NOTE 2 - RECEIVABLES
The Company's trade receivables primarily represent receivables for
units shipped and billed to customers. Generally, the Company does
not require collateral or other security to support customer
receivables.
Receivables are recorded net of an allowance for doubtful accounts
of $12,000 and $27,900 as of May 31, 1997 and 1996, respectively.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
1997 1996
Raw materials $ 212,004 $ 138,676
Work-in-process 516,517 762,453
Finished goods 1,683,744 1,507,634
$2,412,265 $2,408,763
Work-in-process inventory was reduced in the amount of $81,129 as
of May 31, 1997 for actual production costs related to revenue
recognized on a progress billed commercial contract.
The Company's inventories are particularly sensitive to
technological obsolescence in the near term due to their use in
industries characterized by the continuous introduction of new
product lines, rapid technological advances and product
obsolescence. Therefore, management of the Company has recorded an
allowance for potential inventory obsolescence of $75,000 as of May
31, 1997 and 1996.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and their respective depreciable lives
consisted of the following:
Depreciable
1997 1996 Lives
Land $ 141,483 $ 141,483 -
Buildings and improvements 2,180,105 2,141,148 10 - 25 years
Machinery and equipment 2,639,322 2,322,422 8 - 10 years
Office furniture and equipment 440,576 387,156 3 - 10 years
Autos and trucks 59,905 59,905 3 years
5,461,391 5,052,114
Less:
Accumulated depreciation 2,903,471 2,661,206
2,557,920 2,390,908
Construction in progress 6,693 12,572
$ 2,564,613 $ 2,403,480
Depreciation expense was $242,265 and $191,240 for the years ended
May 31, 1997 and 1996, respectively.
The following is a summary of property and equipment included above
which is held under capital leases:
1997 1996
Buildings and improvements $ 806,707 $ 806,707
Machinery and equipment 591,915 524,590
Office furniture and equipment 108,654 108,654
1,507,276 1,439,951
Less: Accumulated amortization 294,587 189,239
$1,212,689 $1,250,712
Minimum future lease payments under capital leases as of May 31,
1997 for each of the next five years and in the aggregate are
included in long-term debt (see Note 7).
Amortization of property and equipment under the capital leases
included in depreciation expense is $105,348 and $87,856 for the
years ended May 31, 1997 and 1996, respectively.
NOTE 5 - INVESTMENT IN AFFILIATE
Investment in affiliate consisted of the Company's 23% ownership
interest in common shares of Developments acquired at a cost of
$85,619, plus the Company's cumulative equity in the net income of
Developments of $109,303 and $82,832 through the years ended May
31, 1997 and 1996, respectively.
The Company's share of the underlying book value of net assets of
Developments at the date of original purchase exceeded the amount
paid for these shares by $79,018. This excess ($68,482 at May 31,
1997) is being amortized to income on the straight-line method over
40 years and is recorded as an addition to equity in net income of
the affiliate.
NOTE 6 - LINE OF CREDIT FACILITY
The Company has a line of credit facility with a bank which
provides for short-term borrowings of up to $300,000. Borrowings
against this line of credit are due on demand, with interest
payable at the banks prime rate plus 3/4%. Collateral for any
borrowings consists of the Companys trade accounts receivable,
equipment, inventories, and general intangibles. As of May 31,
1997 and 1996, no amounts were outstanding under this facility.
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following:
1997 1996
Taylor Devices, Inc.
Seven year term note due to
bank requiring monthly
principal payments of $13,500,
with interest at the bank's
prime rate plus 1% (9.5% at
May 31, 1997), with the
remaining unpaid principal
balance payable in December
1999 (1) $ 422,500 $ 584,500
Five year first mortgage note
due to bank requiring monthly
principal payments of $1,444,
with interest at the bank's
prime rate plus 1% (9.5% at
May 31, 1997), with the
remaining unpaid principal
balance payable in June 1998 (1) 192,111 209,445
Industrial Revenue Development
Bonds requiring annual principal
payments ranging from $25,000 to
$150,000 through June 2009 plus
interest at variable rates based
on the highest rated short term,
federally tax exempt obligations
(4.15% at May 31, 1997) (2) 1,045,000 1,180,000
Five year obligations due to
leasing companies requiring
aggregate monthly principal
and interest payments of $3,312,
with interest at 8.12% and 8.37%,
payable through March 2001 and
December 2001, secured by equipment 134,857 104,534
Three year obligation due to finance
company requiring monthly principal
and interest payments of $352, with
interest at 9.97%, payable through
April 2000, secured by equipment 10,389 -
Other ten year term notes 1,975 31,353
Tayco Realty Corporation
Five year obligation due to leasing
company requiring monthly principal
and interest payments of $331, with
interest at 11.4%, payable through
December 1997, secured by equipment 3,567 6,754
1,810,399 2,116,586
Less: Current portion 352,685 366,003
$1,457,714 $1,750,583
NOTE 7 - (CONTD)
(1) The five year first mortgage note is secured by real estate
and an assignment of rents. In addition, this note and the seven
year bank term note are secured by the Company's receivables,
equipment, inventories and general intangibles. The seven year
term note agreement includes various covenants requiring minimum
levels of net worth ($2,000,000 as of May 31, 1997) and working
capital and provides for restrictions on capital expenditures and
payments of dividends. In addition, the Company is restricted from
obtaining any additional borrowings or encumbering any of its
assets except as it pertains to borrowings from that bank.
(2) In November 1994, the Company entered into a capital lease
agreement with the Niagara County Industrial Development Agency
("NCIDA") to finance certain construction costs for additions to
its manufacturing/testing facilities and for the acquisition of
machinery and equipment. To finance the project, NCIDA authorized
the sale of its Industrial Revenue Development Bonds, in the
aggregate principal amount of $1,250,000, under a trust indenture
with Bankers Trust Company as trustee. The capital lease
obligation is secured by a first mortgage on real estate, project
machinery and equipment, and guaranteed by an irrevocable bank
letter of credit in the amount of $1,098,682 as of May 31, 1997.
As of May 31, 1997, $106,680 of funds were held by a trustee, plus
interest earned thereon of $1,361, representing an interest
bearing tax free money fund restricted for principal reduction
payments of the Industrial Revenue Development Bond during fiscal
year ended May 31, 1998.
The aggregate maturities of long-term debt for each of the
following years are:
1998 $ 352,685
1999 517,732
2000 287,233
2001 181,337
2002 91,412
Thereafter 380,000
$ 1,810,399
NOTE 8 - SALES
Net sales consisted of the following industry segments:
1997 1996
Commercial and other industries $ 6,108,705 $ 4,881,110
Aerospace and defense industries 3,339,335 3,376,820
Government agencies 554,799 658,906
$10,002,839 $8,916,836
Sales to commercial industries included sales to a customer in the
amount of $2,277,727 and $1,293,986 for the years ended May 31,
1997 and 1996,respectively. Sales to aerospace/defense industries
included sales to a customer in the amount of $1,072,101 for the
year ended May 31, 1996.
NOTE 9 - INCOME TAXES
The provision for income taxes consisted of the following:
1997 1996
Current Tax Provision
Federal $ 262,379 $ 51,622
State 20,716 14,030
283,095 65,652
Deferred Tax Provision
Federal 18,605 95,716
State 1,909 7,889
20,514 103,605
Total income tax provision $ 303,609 $ 169,257
A reconciliation of provision for income taxes at the statutory
rate to income tax provision at the Company's effective rate is as
follows:
1997 1996
Computed tax provision at the
expected statutory rate $ 281,931 $ 259,719
State income tax - net of
Federal tax benefit 14,933 14,467
Realization of benefits of tax
loss carryforwards - (48,406)
Prior year refund claim adjustment - (49,977)
Other 6,745 (6,546)
$ 303,609 $ 169,257
Significant components of the Company's deferred tax assets and
liabilities consisted of the following:
1997 1996
Deferred tax assets
Current
Allowance for doubtful receivables $ 4,357 $ 10,131
Tax inventory adjustment 4,399 7,554
Allowance for obsolete inventory 27,233 27,233
Accrued vacation 21,641 18,394
57,630 63,312
Noncurrent
AMT credit carryforwards 4,515 4,515
Excess book depreciation - 10,886
4,515 15,401
Deferred tax liabilities
Excess tax depreciation 3,946 -
Noncurrent, net 569 15,401
Net deferred tax assets $ 58,199 $ 78,713
The Company reported a Federal and State current tax benefit as a
contribution to capital in the amount of $70,075 for stock option
compensation expense deductible for income tax purposes but not
reported as compensation expense in the statement of income for the
year ended May 31, 1997.
The Company and its subsidiary file separate Federal and State
income tax returns. As of May 31, 1997 the Company had State
investment tax credit carryforwards of approximately $107,000
expiring through May 2007.
NOTE 10 - EARNINGS PER COMMON SHARE
Earnings per common share have been computed based upon the
weighted average number of common and common equivalent
(unexercised stock options granted) shares outstanding during the
year. The number of shares and common stock equivalents used in
the computation of earnings per share was 2,798,442 and 2,762,195
for the years ended May 31, 1997 and 1996, respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
Included in cost of sales are research and development expenses
charged by Developments for services performed by their research
engineers in the amount of $223,050 and $251,829 for the years
ended May 31, 1997 and 1996, respectively.
Included in selling, general and administrative expenses is royalty
expense charged by Developments for the use of their patents in the
Company's manufacturing operations in the amount of $179,744 and
$118,140 for the years ended May 31, 1997 and 1996, respectively.
The Company leases certain office and laboratory facilities to
Developments for a current annual rental of $10,000.
NOTE 12 - PREFERRED STOCK
The Company has 2,000,000 authorized but unissued shares of
preferred stock which may be issued in series. The shares of each
series shall have such rights, preferences, and limitations as
shall be fixed by the Board of Directors.
NOTE 13 - EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 200,000 shares of common stock for
issuance pursuant to a non-qualified employee stock purchase plan.
Participation in the employee stock purchase plan is voluntary for
all employees of the Company. Purchase of common shares can be
made by employee contributions through payroll deductions with a
matching contribution by the Company of a specified percentage of
the employees' contributions based on length of continuous
participation in the stock purchase plan. At the end of each
calendar quarter, the employer/employee contributions will be
applied to the purchase of common shares at fair market value which
are then held in the name of the Company as custodian for the
employees' shares. These shares are distributed to the employees
at the end of each calendar year or upon withdrawal from the plan.
During the years ended May 31, 1997 and 1996, 17,770 ($3.63 to
$5.13 price per share) and 14,466 ($3.69 to $5.44 price per share)
common shares, respectively, were issued to employees. As of May
31, 1997, there were 75,592 shares reserved for future issue. The
amount of Company matching expense was $20,749 and $16,485 for the
years ended May 31, 1997 and 1996, respectively.
NOTE 14 - STOCK OPTION PLANS
In 1994, the Company established both a non-qualified and incentive
stock option plan. The incentive stock option plan qualifies for
preferential treatment under the Internal Revenue Code. Under
these plans 125,000 shares of common stock have been reserved for
grant to key employees and directors of the Company. Under both
plans the option price may not be less than the fair market value
of the stock at the time the options are granted. Options expire
five to ten years from the date of grant.
Options granted under the Company's previous non-qualified and
incentive stock option plans, which terminated in a prior year,
expire ten years from the date of grant and are exercisable over
the period stated in each option. The stock appreciation rights
(SAR's) granted under the non-qualified option plan enable the
option holders to exercise their right, in lieu of purchasing the
shares subject to their options, to relinquish the options and
receive an amount of cash or common stock equal to the excess of
the fair market value of the shares at the date of exercise over
the option price for such shares.
The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock
option plans. Accordingly, no compensation cost has been
recognized for its stock option plans. The Company has adopted the
disclosure method of SFAS No. 123 "Accounting for Stock-Based
Compensation". The Black-Scholes option valuation model was used in
estimating the fair value of traded options which have no vesting
restrictions.
SFAS No. 123 is effective for options granted by the Company during
fiscal years ended May 31, 1996 and 1997. Using the Black-Scholes
option valuation model, the estimated fair values of each option
granted during 1997 and 1996 was $2.76 and $2.04, respectively.
Principal assumptions used in applying the Black-Scholes model to
options at date of grant were as follows:
1997 1996
Risk-free interest rate 6.13% 6.04%
Expected life in years 4.5 4.5
Expected volatility .569 .569
Expected dividend yield 0% 0%
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced
to the proforma amounts indicated below:
1997 1996
Net Income:
As reported $ 531,575 $ 612,321
Proforma $ 473,655 $ 573,343
Net Income Per Common Share:
As reported $ .19 $ .22
Proforma $ .17 $ .21
The following is a summary of stock option activity:
1997 1996
Outstanding, beginning
of year 138,702 123,770
Options granted 33,000 30,000
Options exercised (41,350) (1,908)
Stock appreciation rights
exercised (10,000) (13,160)
Outstanding at May 31, 1997
(at prices ranging from
$.56 to 5.56 per share) 120,352 138,702
The option holders exercised 10,000 SARs and 11,760 SARs and
received 5,357 shares ($1.88 price per share) and 8,754 shares
($3.94 to $4.09 price per share) of the Company's common stock in
lieu of cash for the years ended May 31, 1997 and 1996,
respectively. In addition, the option holders exercised 1,400
SAR's for the year ended May 31, 1996 for cash reimbursement of
personal withholding taxes.
The Company received 5,252 common shares and 617 common shares of
its own stock as treasury stock at fair market value in lieu of
cash payment from the option holders, for the years ended May 31,
1997 and 1996, respectively. These treasury shares were received
from the option holders as payment for the purchase price of 20,350
options and 1,908 options exercised under the non-qualified and
incentive stock option plans for the years ended May 31, 1997 and
1996, respectively.
NOTE 15 - RETIREMENT PLAN
The Company maintains a retirement plan pursuant to Section 401(k)
of the Internal Revenue Code for all eligible employees who have
completed six months of service with the Company. The Companys
matching contribution is equal to 10% of employee voluntary salary
deferrals up to a maximum of 1.0% of each participant's eligible
compensation. The Company may also make discretionary
contributions as determined annually by the Company's Board of
Directors. The amount expensed under the plan was $18,397 and
$11,763 for the years ended May 31, 1997 and 1996, respectively.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair
value of each class of financial instruments for which it is
practicable to estimate that value.
The carrying amounts of cash and cash equivalents, restricted funds
held by trustee, accounts receivable, accounts payable, and other
accrued liabilities approximate fair value because of the short
maturity of these instruments.
The carrying amount of debt approximates fair value because the
interest rates on these instruments fluctuate with market interest
rates and are based on current rates offered to the Company for
debt with similar terms and maturities.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 1,096,456
<SECURITIES> 0
<RECEIVABLES> 1,435,829
<ALLOWANCES> 12,000
<INVENTORY> 2,412,265
<CURRENT-ASSETS> 5,228,479
<PP&E> 5,468,084
<DEPRECIATION> 2,903,471
<TOTAL-ASSETS> 8,341,084
<CURRENT-LIABILITIES> 2,379,941
<BONDS> 1,102,000
68,536
0
<COMMON> 0
<OTHER-SE> 4,189,892
<TOTAL-LIABILITY-AND-EQUITY> 8,341,084
<SALES> 10,002,839
<TOTAL-REVENUES> 10,002,839
<CGS> 6,237,636
<TOTAL-COSTS> 9,094,691
<OTHER-EXPENSES> (26,553)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,492
<INCOME-PRETAX> 829,209
<INCOME-TAX> 303,609
<INCOME-CONTINUING> 525,600
<DISCONTINUED> 0
<EXTRAORDINARY> 5,975
<CHANGES> 0
<NET-INCOME> 531,575
<EPS-PRIMARY> .19
<EPS-DILUTED> .188
</TABLE>
Exhibit to 10-KSB (10)(xi)
LEASE AGREEMENT
THIS AGREEMENT made this 1st day of July, 1997.
BY AND BETWEEN Taylor Devices, Inc. known and referred to as the
Owner in this Lease, having its principle office located at 90
Taylor Drive, North Tonawanda, NY and Tayco Developments, Inc.,
known and referred to as the Tenant in this Lease.
LET IT BE WITNESSED, that the Owner has agreed to lease and by this
Lease does grant a lease to the Tenant, and the Tenant has agreed
to this Lease, and has leased the following described premises:
(Premises) Located at 100 Taylor Drive, North Tonawanda, NY to
include 800 square feet of office space on the second floor,
including use of the rest rooms and kitchen facilities. Conference
room use is available upon prior approval from Owner.
(Term) For the term of three years beginning on the 1st day of
July, 1997 and ending the last day of June, 2000 at 12:00 in the
forenoon. Subject to the Terms of this Agreement
(Terms) The terms of this Agreement can be reviewed by either
party for any changes, adjustments or extentions upon which a 90
day written notice will be given each to the other party of any
change, adjustment or extention.
Any change, adjustment or extention will become attached
to this Agreement as an addendum.
(Rental) The Tenant agrees to pay the Owner at 90 Taylor Drive,
North Tonawanda, NY the rent of Ten Thousand Dollars ($10,000.00)
annually in one (1) payment of Ten Thousand Dollars ($10,000.00)
by the 1st day of July, each year, for three (3) years (in full, no
later than 30 days from due date) during the term of this Lease.
Subject to the terms of this Agreement.
(Agreements) The Tenant agrees as follows:
(a) To punctually pay rent on above agreed day at above agreed
place.
(b) That no rental payment made to Owner will be returned or
rebated for any reason.
(c) To hold the Owner harmless from any expense, loss or damage by
reason of the violation of any laws, regulations, rules,
ordinances and requirements, or by reason of any damage that
might be sustained by reason of the Tenant's negligence.
(d) To hold the Owner harmless for any and all injury or liability
claims, including those from employees of the Tenant.
(e) To maintain the facility to be neat, clean and secure at all
times.
(f) The agreements and conditions contained in this Lease shall
apply to and bind and enure to the benefit of the personal
representatives and assigns of the Owner and the personal
representatives and licensed assigns of the Tenant.
(g) Immediate eviction can occur when a violation is committed to
any part of this agreement, and that it is at the discretion
of the Owner when a violation has been committed.
IN WITNESS WHEREOF the parties hereto have affixed their hands and
seals the day and year first above written.
Accepted by Taylor Devices, Inc. Accepted by Tayco Developments,
Inc.
/s/Douglas P. Taylor L.S. /s/Joseph P. Gastel L.S.
Douglas P. Taylor, President Joseph P. Gastel, Secretary
