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Previous: TAB PRODUCTS CO, 10-K405/A, 1999-08-27 |
Next: TIMKEN CO, S-8 POS, 1999-08-27 |
For the fiscal year Commission file number 0-3498
ended May 31, 1999
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, New York 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.
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 10-KSB or any amendments to Form 10-KSB [ ].
Issuer's revenues for its most recent fiscal year are $11,145,300.
The aggregate market value of the Common Stock held by non-affiliates (as affiliates are defined in Rule 12-b 2 of the Exchange Act) of the issuer, computed by reference to the average of the bid and asked price on August 27, 1999 was: $3,579,103. In addition to shares held by affiliates, this calculation also excludes shares of the issuer's common stock that are held by Schedule 13D filers.
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 27,1999
Common Stock, $.025 par value 2,785,233
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
PAGE
PART I.................................................................................................................................................................3
ITEM 1. DESCRIPTION OF BUSINESS..................................................................................3
ITEM 2. DESCRIPTION OF PROPERTY...........................................................................6
ITEM 3. LEGAL PROCEEDINGS.......................................................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................................................................................10
PART II........................................................................................................................................................10
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS...........................................................10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION.............................................................................................11
ITEM 7. FINANCIAL STATEMENTS..............................................................................13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................13
PART III......................................................................................................................................................14
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.................................................................................14
ITEM 10. EXECUTIVE COMPENSATION........................................................................14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................................................................14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................14
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K......................................................14
SIGNATURES.............................................................................................................................................19
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. The Company continues to achieve excellent growth in the rapidly developing seismic protection field and in the isolation of wind-induced vibrations.
Principal Products
The Company has six major product lines; namely, (1) Seismic Dampers, (2) Fluidicshoks, (3) Crane and Industrial Buffers, (4) Self-Adjusting Shock Absorbers, (5) Liquid Die Springs, and (6) Vibration Dampers. The following is a summary of the capabilities and applications for these product lines:
Seismic Dampers are designed to ameliorate the effects of earthquake tremors on structures, and represent a substantial part of the business of the Company. 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, ships, container 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.
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. The Company, however, faces greater competition on mature aerospace and defense programs which may use more conventional products manufactured under less stringent government specifications. Two foreign companies are the Company's competitors in the production of crane buffers.
The Company's principal competitors for the manufacture of products in the aerospace and commercial aerospace industries field 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, due to limited financing and manufacturing facilities, the Company cannot compete in the area of volume production.
The Company competes directly against two other firms supplying seismic damping devices, as well as numerous other firms which supply alternative seismic protection technologies.
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 Tayco Developments, Inc. ("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 2017. During the life of the patent, the Company pays Developments a 5% royalty on sales of items sold and shipped. During FY99, the Company incurred royalties to Developments of $173,614. 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 FY99; 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 FY99, 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 is not dependent on any one or a few major customers.
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, 1999 and May 31, 1998, the Company expended $167,078 and $139,805 respectively, on manufacturing research through its affiliate, Developments. The Company spent $185,400 and $165,590 on research and development in FY99 and FY98, respectively. For FY99 and FY98, defense sponsored research and development totaled $62,845 and $55,257, 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, 1999, the Company had 81 full time and 3 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 and one adjacent building 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. The adjacent building is an 8,500 square foot seismic assembly test facility constructed in 1998. Total square footage of these facilities is more than 33,000 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, N.A. (now HSBC Bank, N.A.) ("HSBC"), 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 HSBC Adjustable Rate Service ("MMARS") rate, plus an incremental amount designated by HSBC 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, 1999 is $765,000. 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 HSBC, 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 renewal note dated June 1, 1998 due June 1, 2008 in the face amount of $174,778 is held by HSBC on property located at 90 Taylor Drive, North Tonawanda.
A mortgage note dated January 1998, due January 1, 2013 in the face amount of $400,000 is also held by HSBC on property located at 90 Taylor Drive, North Tonawanda, with an interest rate equal to the bank's private interest rate plus 1%. A monthly payment of $2,222.22 is due on the first of each month. The principal balance at May 31, 1999 is $393,333. 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 Corporation ("Tayco Realty"), rental payments from June 1, 1998 to May 31, 1999 totaled $159,600 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 1999 was $9,900.
The following tables provide information regarding the properties discussed in this Item 2. Description of Property.
TAYLOR DEVICES, INC. AND SUBSIDIARY
Reg. 228.102(c)-Real Estate
ACCUM. NET
DEPREC. BOOK
5/31/99 VALUE
PROPERTY LOCATION COST (BOOK) 5/31/99
90 & 100 Taylor Drive
N. Tonawanda, NY 14120
(see below)
Land $ 141,483 N/A $ 141,483
Buildings 1,154,353 $ 537,275 617,078
Improvements 1,570,427 338,126 1,232,301
TOTAL $ 2,866,263 $ 875,401 $1,990,862
ACCUM. NET PERCENT-
DEPREC. BOOK AGE OF
5/31/99 VALUE TOTAL
PROPERTY LOCATION COST (BOOK) 5/31/99 ASSETS
90 Taylor Dr.
N. Tonawanda, NY 14120
Land $ 107,363 N/A $ 107,363
Building 428,506 381,094 47,412
Building Improve-Realty 38,717 14,318 24,399
Building Improve-Devices 1,531,710 323,808 1,207,902
TOTAL $2,106,296 $ 719,220 $1,387,076 13.4%
100 Taylor Dr.
N. Tonawanda, NY 14120
Land $ 34,120 N/A $ 34,120
Building 725,847 156,181 569,666
TOTAL $ 759,967 $156,181 $ 603,786 5.8%
Taylor Devices, Inc. & Subsidiary
Total Assets as of May 31, 1999 $10,350,725
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. 5/31/99
90 & 100 Taylor Dr.
N. Tonawanda, NY
14120 (see below)
STR.
LINE,
ACRS, 15-40
Building MACRS Yrs. $1,154,353 $576,921 $ 577,432
STR.
LINE,
Building ACRS, 7-40
Improvements MACRS Yrs. 1,570,427 285,720 1,284,707
$2,724,780 $862,641 $1,862,139
SUPPORTING SCHEDULE
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. 5/31/99
90 Taylor Dr.
N. Tonawanda, NY
14120
STR.
LINE,
ACRS, 15-25
Building MACRS Yrs. $ 428,506 $ 381,094 $ 47,412
STR.
LINE,
Building ACRS, 7-31.5
Improve-Realty MACRS Yrs. 38,717 14,318 24,399
STR.
LINE,
Building ACRS, 15-40
Improve-Devices MACRS Yrs. 1,531,710 271,402 1,260,308
Total $ 1,998,933 $666,814 $1,332,119
100 Taylor Drive
N. Tonawanda, NY
14120
STR.
LINE, 19-40
ACRS,
Building MACRS Yrs. $ 725,847 $ 195,827 $ 530,020
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 1999 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 2000 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.
ITEM 3. LEGAL PROCEEDINGS
None except for routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 FY98 and FY99 are obtained from NASDAQ.
Fiscal 1999 Fiscal 1998
High Low High Low
First Quarter 3.6876 3.3336 5.014 4.961
Second Quarter 3.1876 2.667 4.538 4.390
Third Quarter 2.7823 2.028 4.492 4.111
Fourth Quarter 2.419 2.214 4.458 3.979
Holders
As of May 31, 1999, the outstanding and issued share amount was 2,784,676 shares and the approximate number of record holders of the Company's Common Stock was 1,333. 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 2,000.
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 following is Management's discussion and analysis of certain significant factors which have affected the Company's earnings during the periods included in the accompanying consolidated condensed statements of income. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. 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 posted record figures for Revenues, Gross Margin, Operating Income, Net Income and Earnings Per Share in FY99. This performance was largely attributable to an increased volume of shipped seismic products, and the profitability of those shipments.
Net Shipments for FY99 of $11,145,309 represented an 8.9% increase over the shipments of $10,234,022 for FY98. The improvement of approximately $911,000 was the net of an increase of approximately $1,901,000 in seismic/commercial sales offsetting a decrease of approximately $990,000 in aerospace/defense/government sales. The shift in the product mix was dictated primarily by two factors, end-user delivery requirements and the Company's ability to assemble/test seismic products in its new facility.
The Gross Margin for FY99 of 4,277,521 (38.4% of net sales) compares very favorably to the Gross Margin of $3,715,047 (36.3%) for FY98 with the $562,474 increase representing a 15% improvement. Much of the improvement in Gross Margin performance is attributable to the seismic product shipments as the Company's engineers continued their concerted efforts to standardize basic seismic product components, thereby allowing the production function to manufacture in larger quantities. Another significant factor in the Gross Margin figure was the Company's increasing ability to estimate costs-to-complete on progress billed jobs. Using enhanced features of the manufacturing control software, Management was able to better determine the current and future costs of an order and take profits in the appropriate period.
Selling, General and Administrative (SGA) expenses totaled $3,065,932 and 27.5% of Net Sales in FY99 versus $2,888,087 and 28.22% in FY98. The pure dollar increase was generated primarily by personnel related expenses, including commissions while the decrease in SGA as a percentage of sales indicated overall continued stability in the function.
Net Operating Income exceeded the $1,000,000 level for the first time in the Company's history, finishing at $1,211,589, an increase of $384,629 over the FY98 figure of $826,960. The figure for FY98 was impacted by significant start-up expenses related to addressing new directions in the seismic market. The figure for FY99 did not include significant expenses of this nature. Net Other Expenses were almost unchanged, totaling $95,241 in FY99 and $97,772 in FY98.
Taxes for FY99 were booked at $407,900, a rate of 36.5% compared to $275,000 and 37.7% in FY98. The net impact of Equity Income and Minority Shareholders' Interest was minimal for both fiscal years at an income of $3,224 in FY99 versus an income of $8,035 in FY98. Net Income for FY99 was recorded as $711,672 which represents 6.4% of Net Sales, and Earnings Per Share of $.26. For FY98, these figures were $462,223 or 4.5% and $.17, respectively. As mentioned previously, the Net Income figure of $711,672 represents the highest figure ever posted by the Company. The Net Income is almost 54% higher than FY98 and is 16% higher than the previous record Net Income of $612,321 recorded in FY96 when the Company, taking advantage of loss carry-forwards, paid taxes at a 22% rate.
Overall, the Company's Balance Sheet reflects the Company's continuing strength and stability. The cash balance position is in good condition with a balance of $1,248,640. The decline of $447,000 in cash between FY98 and FY99 is just about equally offset by a $479,000 decline in Trade Accounts Payable, with both movements reflecting the conversion of prepaid balances into inventory and then into shipments. At this time, Management believes the Company's cash reserves, anticipated cash flows and short-term borrowing facilities are sufficient for the Company's requirements for the upcoming fiscal year and beyond. There are no current plans for any activity which would require raising additional funds. Receivables rose about $320,000 as proportionately more of the Company's shipments were recorded as progress billings which traditionally entail longer collection periods. All other asset items remained stable or displayed expected movement except the item entitled "Costs and estimated earnings in excess of billings", which is explained in Note 3 of the attached Notes. There was no significant shift of balances on the liability/equity side of the balance sheet, except for the decreased Trade Accounts Payable balance previously referenced and a $315,000 decrease in long term debt.
The record results for FY99 were produced by a very favorable combination of events, foremost being the profitability of the product mix and timing of releases in customers' delivery schedules. Looking forward, management believes that certain of the elements contributing to the performance for FY99 will still be present in FY00, but their proportions are indeterminate at this early stage of the fiscal year. Management is aware of and is pursuing sizeable opportunities in the seismic and aerospace/defense market, but the Company's success in obtaining orders, and their impact on FY00, if obtained, is unknown at present. At this point, Management believes that FY00 will be another year showing good sales and strong financial results.
YEAR 2000 DISCLOSURE
Certain statements included in this discussion regarding the Company's Year 2000 ("Y2K") compliance are forward looking statements. These include Management's best estimates for completion dates for various phases and priorities, testing to be performed, and costs to be spent for compliance, either by the Company or third parties. These forward looking statements are subject to various factors which may materially affect the Company's efforts in that regard. Specific factors that might cause material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct, if needed, any relevant software and embedded components, the compliance of critical vendors, and similar uncertainties. The Company's assessments of the effects of Y2K on the Company are based, in part, upon the information received from third parties and the Company's reliance on such information, if and when received. Consequently, the risk that inaccurate information has been supplied by third parties,
and upon which the Company may rely, must be considered as a risk factor that could affect the Company's Y2K efforts. The Company is attempting to reduce such risks by utilizing an organized approach, extensive testing and allowance of ample contingency time to address issues identified by tests.
The Company continues to address and analyze its situation with respect to the Y2K problem. All departments have been inspected and nearing completion of analysis of potential Y2K problems. As previously reported, the Company's primary integrated manufacturing/accounting software is an "off-the-shelf," widely used product designed to function in the Y2K environment, but failure could conceivably result in some unknown level of inconvenience, until adapted or replaced. All Company computers and servers have been tested for functionality after January 1, 2000.
An outside computer programming consultant was hired to implement hardware and software modifications and improvements throughout the Company. In order to help the Company to assess the risk, if any, from third-party lack of preparedness, and the Company's purchasing department has contacted key vendors to determine if any of them anticipate experiencing significant Y2K problems. These assessments are 98% completed. The Company will continue to make assessments throughout 1999.
The Company has external communication links with its payroll service, government contract service, the SEC filing system, and has less vital information links with its bank, credit report service and other institutions, most of which have informed the Company to be Y2K ready. Investigation of the functionality of these links is ongoing. The Company acts as its own, and as Developments', stock transfer
agent. In connection with this function, the Company's newly installed Y2K shareholder program has been tested for Y2K readiness and is currently operating.
Some software manufacturing items have been scheduled for delivery late in calendar year 1999 to minimize the impact of potential Y2K problems. The Y2K Committee designated by the Company's Board of Directors continues to monitor the progress and costs of any required modifications. To date, the Company has not incurred any material costs in this regard. Consequently, the Company does not anticipate any need to establish a system to trace costs incurred by this effort. At this time, Management is unaware of any Y2K problems, other than those that are beyond its control. The Company believes that it can function temporarily, if need be, by using manual methods of operation should an unforeseen Y2K problem occur.
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
On April 9, 1998, upon the recommendation of the Audit Committee, the Board of Directors changed the Company's certified accountants from J.D. Elliott & Co. to Lumsden & McCormick, LLP for reasons of economy. There were no disagreements with the previous auditors, J.D. Elliott & Co. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope, or any reportable event.
The information required by Items 9, 10, 11 and 12 of this part will be presented in the Company's Proxy Statement to be issued in connection with the Annual Meeting of Shareholders to be held on October 22, 1999, which information is hereby incorporated by reference into this Annual Report . The proxy materials, including the Proxy Statement, will 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, 1999 and 1998
(ii) Consolidated Statements of Stockholders' Equity for the years ended May 31, 1999 and 1998
(iii) Consolidated Statements of Income for the years ended May 31, 1999 and 1998
(iv) Consolidated Statements of Cash Flows for the years ended May 31, 1999 and 1998
(v) Notes to Consolidated Financial Statements May 31, 1999
(vi) Independent Auditor's Report
(a) EXHIBITS:
(3) Articles of incorporation and by-laws
(I) Restated Certificate of Incorporation incorporated by reference to Exhibit (3) (I) of Annual Report on Form 10-K, dated August 24, 1983.
(ii) Amendment to Certificate of Incorporation incorporated by reference to Exhibit (3) (iv) to Form 8 [Amendment to Application or Report], dated September 24, 1993.
(iii) Amendment to Certificate of Incorporation creating Series A Junior Participating Preferred Stock, $.05 par value, incorporated as Exhibit (3)( I )(viii) to Quarterly Report on Form 10- QSB for the period ending November 30, 1998, dated January 12, 1999.
(iv) By-laws incorporated by reference to Exhibit (3)(ii) to Annual Report on Form 10-K, dated August 24, 1983.
(v) Amendment to Article I, Section 1 of By-laws (time of annual meeting), incorporated by reference to Current Report on Form 8-K, dated October 21, 1988.
(vi ) Amendment to Article V, Section 1 of By-laws (indemnification), incorporated by reference to Exhibit (3)(I) to Quarterly Report on Form 10-QSB for the period ending February 28, 1998, dated April 10, 1998.
(vii) Amendment to Article I, adding Sections 11 through 13 of By-laws (advance notice) incorporated by reference to Exhibit (3)(ii) to Quarterly Report on Form 10-QSB for the period ending February 28, 1998, dated April 10, 1998.
(viii) Proxy Review Guidelines incorporated by reference to Exhibit (3)(ii) to Quarterly Report on Form 10-QSB for the period ending February 28, 1998, dated April 10, 1998.
(ix) Amendment to Article II, Sections 3 and 6 of By-laws (classified board of directors), incorporated by reference to Exhibit (3)(ii)(ix) to Quarterly Report on Form 10-QSB for the period ending November 30, 1998, dated January 12, 1999.
(4) Instruments defining rights of security holders, including indentures
(I) Mortgage to Marine Midland Bank dated May 28, 1993 incorporated by reference to Exhibit 10)(vii) to 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 Annual Report on Form 10-KSB, dated August 21, 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 Annual Report on Form 10-KSB, dated August 21, 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 Annual Report on Form 10-KSB, dated August 21, 1995.
(v) Mortgage from Niagara County Industrial Development Agency, Tayco Realty, Inc. and registrant to Marine Midland Bank, dated January 3, 1998, incorporated by reference to Exhibit (4)(v) to Annual Report on Form 10-KSB, dated August 25, 1998.
(vi) Rights Agreement by and between registrant and Regan & Associates, Inc, dated as of October 5, 1998 and letter to shareholders (including Summary of Rights), dated October 5, 1998, attached as Exhibits 4 and 20, respectively to Registration Statement on Form 8-A 12G, filed with the Securities and Exchange Commission on October 6, 1998.
(10) Material contracts
(I) Incentive Stock Option Plan incorporated by reference to Exhibit (10)(ii) to Annual Report on Form 10-K, dated August 24, 1983.
(ii) Non-Statutory Stock Option Plan incorporated by reference to Exhibit (10)(iii) to Annual Report on Form 10-K, dated August 24, 1983.
(iii) 1994 Taylor Devices, Inc. Stock Option Plan incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8, File No. 33-88152, as filed with the Securities and Exchange Commission 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) to Annual Report on Form 10-K, dated August 27, 1982.
(v) Employee Stock Purchase Plan incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8, File No. 2-94754, filed with the Securities and Exchange Commission on December 11, 1984.
(vi) Employee Stock Purchase Plan incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8, File No. 33-88154, filed with the Securities and Exchange Commission on December 30, 1994.
(vii) Loan Agreements between the registrant and Marine Midland Bank, dated December 2, 1992, incorporated by reference to Exhibit (10)(viii) to Annual Report on Form 10-K, 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, incorporated by reference to Exhibit (10) (ix) to Annual Report on Form 10-KSB, dated August 22, 1996.
(x) Form of Indemnity Agreement between registrant and certain officers and directors, incorporated by reference to Exhibit (10)(I) to Quarterly Report on Form 10-QSB for the period ending February 28, 1997, dated April 11, 1997.
(xi) Rental Agreement between registrant and Tayco Developments, Inc., dated July 1, 1997, incorporated by reference to Exhibit (10)(xi) to Annual Report on Form 10-KSB, dated August 1, 1997.
(xii) 1998 Taylor Devices, Inc. Stock Option Plan attached as Exhibit 4.1 to Registration Statement on Form S-8, File No. 33-6905, filed with the Securities and Exchange Commission on December 24, 1998.
(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 5/31/99
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING $2,745,772
COMMON SHARES ISSUABLE UNDER STOCK OPTION
PLANS USING TREASURY STOCK METHOD 9,134
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING
ASSUMING DILUTION 2,754,906
NET INCOME F/Y/E 5/31/99 (1) $ 711,672
WEIGHTED AVERAGE COMMON STOCK (2) 2,745,772
BASIC EARNINGS PER COMMON SHARE
(1) DIVIDED BY (2) $ 0.26
NET INCOME F/Y/E 5/31/99 (3) $ 711,672
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING
ASSUMING DILUTION (4) 2,754,906
DILUTED EARNINGS PER COMMON SHARE
(3) DIVIDED BY (4) 0.26
WEIGHTED AVERAGE OF COMMON STOCK OUTSTANDING
-F/Y/E 5/31/99
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING $2,727,246
COMMON SHARES ISSUABLE UNDER STOCK OPTION
PLANS USING TREASURY STOCK METHOD 27,468
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING
ASSUMING DILUTION $2,754,714
NET INCOME F/Y/E 5/31/99 (1) $ 462,223
WEIGHTED AVERAGE COMMON STOCK (2) 2,727,246
BASIC EARNINGS PER COMMON SHARE
(1) DIVIDED BY (2) $ 0 .17 NET INCOME F/Y/E 5/31/99 (3) $ 462,223
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING
ASSUMING DILUTION (4) 2,754,714
DILUTED EARNINGS PER COMMON SHARE
(3) DIVIDED BY (4) $ 0.17
(16) Letter on change of certifying accountants
Letter of registrant, dated April 9, 1998, and letters dated April 13, 1998, of J.D. Elliott & Co., incorporated by reference as Exhibits (16)(I), (ii), and (iii,) respectively, to Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 14, 1998.
(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
(b) REPORTS ON FORM 8-K:
Current Report on Form 8-K, dated and filed June 8, 1999 announcing offer by registrant to purchase registrant's common stock from shareholders owning, beneficially or of record, fewer than 100 shares.
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 10, 1999
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, Director Richard G. Hill, Director
August 10, 1999 August 10, 1999
By: /s/ Donald B. Hofmar By: /s/ Randall L. Clark
Donald B. Hofmar, Director Randall L. Clark, Director
August 10, 1999 August 10, 1999
CONSENT OF INDEPENDENT AUDITORS
Board of Directors of Taylor Devices, Inc.
We consent to the incorporation by reference in this Annual Report on Form 10-KSB (Commission File Number 0-3498) of Taylor Devices, Inc. of our report dated July 20, 1999, included in the May 31, 1999 Annual Report of Stockholders of Taylor Developments, Inc.
/s/ Lumsden & McCormick, LLP
LUMSDEN & McCORMICK, LLP
Buffalo, New York
August 13, 1999
TAYLOR DEVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1999
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Taylor Devices, Inc.
We have audited the accompanying consolidated balance sheets of Taylor Devices, Inc. and Subsidiary as of May 31, 1999 and 1998 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, 1999 and 1998 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ Lumsden & McCormick, LLP
Lumsden & McCormick, LLP
Buffalo, New York
July 20, 1999
TAYLOR DEVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
May 31, 1999 1998
Assets
Current assets:
Cash and cash equivalents $1,021,674 $1,408,559
Short-term investments 226,966 215,947
Restricted funds held by Trustee (Note 7) 112,575 113,193
Accounts receivable, net of allowance
for doubtful accounts of $72,000 and $32,000 1,933,599 1,613,087
Inventory (Note 2) 3,041,014 3,032,239
Prepaid expenses 76,185 65,308
Costs and estimated earnings in excess of billings (Note 3) 493,181 -
Deferred income taxes 130,300 111,400
7,035,494 6,559,733
Property and equipment, net (Note 4) 2,705,563 2,917,808
Investment in affiliate, at equity (Note 5) 253,584 222,392
Other:
Cash value of life insurance, net 208,548 185,497
Deferred financing costs, net 83,672 92,039
Goodwill, net 60,959 67,005
Other, net 2,905 3,203
356,084 347,744
$10,350,725 $10,047,677
=======================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt (Note 7) $ 336,612 $ 327,287
Payables - trade 746,900 1,226,035
Payables - affiliate 183,700 117,349
Accrued income taxes 373,127 165,481
Accrued expenses 560,226 476,857
Deferred revenue 452,340 552,604
Billings in excess of costs and estimated earnings (Note 3) 139,166 204,055 2,792,071 3,069,668
Long-term debt (Note 7) 1,629,022 1,952,724
Deferred income taxes 53,700 20,900
Minority stockholder's interest 292,404 264,436
Stockholders' Equity:
Common stock, $.025 par value, authorized
8,000,000 shares, issued 2,836,879 and 2,765,130 shares 70,922 69,129
Paid-in capital 2,678,017 2,562,654
Retained earnings 2,974,991 2,263,319
5,723,930 4,895,102
Treasury stock - 52,203 shares and 28,432 shares at cost (140,402) (83,153)
5,583,528 4,811,949 $10,350,725 $10,119,677
========== ===========
See accompanying notes.
TAYLOR DEVICES, INC. AND SUBSIDIARY Consolidated Statements of Income
For the years ended May 31, 1999 1998
Sales, net (Note 8) $11,145,309 $10,234,022
Cost of sales 6,867,788 6,518,975
Gross profit 4,277,521 3,715,047
Selling, general and administrative expenses 3,065,932 2,888,087
Operating income 1,211,589 2,826,960
Other income (expense):
Rental income - affiliate (Note 11) 10,000 10,000
Interest, net (112,494) (110,839)
Miscellaneous 7,253 3,067
(95,241) (97,772)
Income before provision for income taxes,
equity in net income of affiliate and
minority stockholder's interest 1,116,348 729,188
Provision for income taxes (Note 9) 407,900 275,000
Income before equity in net income of affiliate
and minority stockholder's interest 708,448 454,188
Equity in net income of affiliate (Note 5) 31,192 27,470
Income before minority stockholder's interest 739,640 481,658
Minority stockholder's interest (27,968) (19,435)
Net income $711,672 $462,223
===========================
Basic and diluted earnings per common share
(Note 10) $0.26 $0.17 ===========================
See accompanying notes.
TAYLOR DEVICES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the years ended May 31, 1999 and 1998
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
Balance, May 31, 1997 $68,536 $2,468,888 $1,801,096 $(80,092)
Net income for the year ended
May 31, 1998 - - 462,223 -
Common stock issued for employee
Stock purchase plan (Note 13) 500 90,798 - -
Stock options exercised (Note 14) 93 2,968 - -
Treasury stock acquired (Note 14) - - - (3,061) ________ _________ ________ ________
Balance, May 31, 1998 69,129 2,562,654 2,263,319 (83,153)
Net income for the year ended
May 31, 1999 - - 711,672 -
Common stock issued for employee stock
purchase plan (Note 13) 1,018 96,388 - -
Stock options exercised (Note 14) 775 18,975 - -
Treasury stock acquired (Note 15) - - - (57,249)
_________ __________ __________ __________
Balance, May 31, 1999 $70,922 $2,678,017 $2,974,991 $(140,402)
======== ========= ========= =========
See accompanying notes.
TAYLOR DEVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years end May 31, 1999 1998
Cash flows from operating activities:
Net income $711,672 $462,223
Adjustments to reconcile net income to net cash
flows from operating activities: Depreciation and amortization 274,894 298,836
Provision for losses on accounts receivable 40,175 23,059
Equity in net income of affiliate (31,192) (27,470)
Deferred income taxes 13,900 (32,300)
Minority stockholder's interest 27,968 19,435
Interest income - funds held by trustee (1,326) (1,403)
Changes in other current assets and current liabilities:
Receivables (360,687) (212,317)
Inventory (8,775) (619,974)
Prepaid expenses (10,877) 64,950
Costs and estimated earnings in excess
of billings (493,181) -
Payables - trade (479,135) 236,958
Payables - affiliate 66,351 47,862
Accrued income taxes 207,646 66,019
Accrued expenses 83,369 27,528
Deferred revenue (100,264) 132,703
Billings in excess of costs and estimated earnings (64,889) 204,055
Net cash flows from (for) operating activities (124,351) 690,164
Cash flows from investing activities:
Increase in short-term investments (11,019) (10,802)
Proceeds from sale of tax free money fund held by trustee 113,193 108,041
Cash received from trustee 31,808 26,959
Cash remitted to trustee (143,057) (138,750)
Acquisition of property and equipment (37,538) (629,105)
Increase in cash value of life insurance (23,051) (18,169)
Net cash flows for investing activities (69,664) (661,826)
Cash flows from financing activities:
Borrowings - long-term debt - 814,000
Repayments - long-term debt (324,777) (344,388)
Proceeds from issuance of common stock
- employee stock purchase plan 97,406 91,298
- exercise of stock options 19,750 -
Acquisition of treasury stock (57,249) -
Net cash flows from (for) financing activities (264,870) 560,910
Net increase (decrease) in cash and cash equivalents (458,885) 589,248
Cash and cash equivalents - beginning 1,480,559 891,311
Cash and cash equivalents - ending $1,021,674 $1,480,559
========= =========
See accompanying notes.
| TAYLOR DEVICES, INC. AND SUBSIDIARY |
| Notes to Consolidated Financial Statements |
1. Summary of Significant Accounting Policies:
Nature of Operations:
Taylor Devices, Inc. (the Company) is primarily engaged in 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 consolidated 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.
The Company's investment in its minority-owned affiliate, Developments, is reported on the equity method (see Note 5).
Cash and Cash Equivalents:
The Company includes all highly liquid investments in money market funds and certificates of deposit with original maturities of three months or less in cash and cash equivalents on the accompanying balance sheets. Certificates of deposit with original maturities of over three months are considered short-term investments.
Cash and cash equivalents in financial institutions may exceed insured limits at various times during the year and subject the Company to concentrations of credit risk.
Inventory:
Inventory is stated at the lower of first-in, first-out cost or market.
Property and Equipment:
Property and equipment is stated at cost net of accumulated depreciation. Deprecation is provided primarily using the straight-line method for financial reporting purposes, and accelerated methods for income tax reporting purposes. Estimated useful lives range from 3 to 39 years. Maintenance and repairs are charged to operations as incurred; significant improvements are capitalized.
Cash Value of Life Insurance:
Cash value of life insurance is stated at the surrender value of the contracts less outstanding policy loans.
Financing Costs:
Costs associated with obtaining new financing are capitalized and amortized over the repayment terms of the related debt obligations.
Goodwill:
Goodwill represents the excess of the cost to obtain ownership interests in a merged subsidiary over its net assets at acquisition, and is amortized on a straight-line basis over 15 years.
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 method of accounting whereby revenues are recognized based on estimates of completion prepared on a ratio of cost to total estimated cost basis. Costs include all material and direct and indirect charges related to specific contracts. Other expenses are charged to operations as incurred.
Adjustments to cost estimates are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined.
For financial statement presentation purposes, the Company nets progress billings against the total costs incurred on uncompleted contracts. The asset, costs and estimated earnings in excess of billings, represents revenues recognized in excess of amounts billed. The liability, billings in excess of costs and estimated earnings, represents billings in excess of revenues recognized.
Income Taxes:
The provision for income taxes is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax and financial statements bases of assets and liabilities.
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications:
The financial statements for the year ended May 31, 1998 have been reclassified to conform with the presentation adopted for 1999.
2. Inventory:
| 1999 | 1998 | |
| Raw materials | $ 392,737 | $ 282,309 |
| Work-in-process | 432,964 | 602,548 |
| Finished goods | 2,215,313 | 2,147,382 |
| $3,041,014 | $3,032,239 |
The Company's inventory is particularly sensitive to technological obsolescence in the near term due to its 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 $245,000 and $120,000 at May 31, 1999 and 1998.
3. Costs and Estimated Earnings on Uncompleted Contracts:
| 1999 | 1998 | ||
| Costs incurred on uncompleted | |||
| contracts | $2,295,825 | $1,683,993 | |
| Estimated earnings | 1,832,390 | 809,952 | |
| 4,128,215 | 2,493,945 | ||
| Less billings to date | 3,774,200 | 2,698,000 | |
| $ 354,015 | $ (204,055 | ) |
Included in the accompanying balance sheets under the following captions:
| 1999 | 1998 | |||
| Costs and estimated earnings in | ||||
| excess of billings | $ 493,181 | $ - | ||
| Billings in excess of costs and | ||||
| estimated earnings | ( 139,166 | ) | (204,055 | ) |
| $ 354,015 | $ (204,055 | ) |
4. Property and Equipment:
| 1999 | 1998 |
| Land | $ 141,483 | $ 141,483 |
| Buildings and improvements | 2,724,780 | 2,693,600 |
| Machinery and equipment | 2,644,884 | 2,726,637 |
| Office furniture and equipment | 462,636 | 452,237 |
| Autos and trucks | 68,346 | 68,346 |
| 6,042,129 | 6,082,303 | |
| Less accumulated depreciation | 3,336,566 | 3,164,495 |
| $2,705,563 | $2,917,808 |
Depreciation expense was $260,183 and $278,112 for the years ended May 31, 1999 and 1998.
The following is a summary of property and equipment included above which is held under capital leases:
| 1999 | 1998 | |
| Buildings and improvements | $ 806,707 | $ 806,707 |
| Machinery and equipment | 591,915 | 591,915 |
| Office furniture and equipment | 102,985 | 92,585 |
| 1,501,607 | 1,491,207 | |
| Less accumulated amortization | 458,634 | 380,325 |
| $1,042,973 | $1,110,882 |
Minimum future lease payments under capital leases as of May 31, 1999 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 $78,309 and $99,945 for the years ended May 31, 1999 and 1998.
5. Investment in Affiliate:
Investment in affiliate consists 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 $167,965 and $136,773 through the years ended May 31, 1999 and 1998.
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 ($64,531 at May 31, 1999) 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.
6. Short-Term Borrowings:
The Company has available a $1,000,000 bank demand line of credit with interest payable at prime plus 1/4%. The line is secured by accounts receivable, equipment, inventory, and general intangibles. As of May 31, 1999 and 1998, no amounts were outstanding under this line.
7. Long-Term Debt:
| 1999 | 1998 | |
| Industrial Revenue Development | ||
| Bonds, annual principal pay- | ||
| ments ranging from $45,000 to | ||
| $150,000 through June 2009 | ||
| plus interest at variable rates | ||
| based on the highest rated | ||
| short-term, federally tax | ||
| exempt obligations (3.55% at | ||
| May 31, 1999). | (1) 765,000 | 910,000 |
| Bank term note, monthly | ||
| principal payments of $8,512 plus interest | ||
| plus interest at the bank's | ||
| prime rate plus 1% (8.75% at | ||
| May 31,1999), secured by | ||
| substantially all assets of the | ||
| Company, with the remaining | ||
| unpaid principal balance | ||
| payable in February 2005. | (2) $587,321 | $689,464 |
| Bank mortgage note, monthly | ||
| principal payments of $1,444 | ||
| plus interest at the bank's | ||
| prime rate plus 1% (8.75% at | ||
| May 31, 1999), secured by | ||
| related property, with the | ||
| remaining unpaid principal | ||
| balance payable in June 2008. | (2) 160,334 | 174,778 |
| Bank mortgage, monthly | ||
| principal payments of $2,222 | ||
| plus interest at the bank's | ||
| prime rate plus 1% (8.75% at | ||
| May 31, 1999), secured by | ||
| substantially all assets of the | ||
| Company, due February 2013. | (2) 366,667 | 393,333 |
| Capital lease and other | ||
| obligations with varying | ||
| maturities and interest rates, | ||
| secured by related assets. | 86,312 | 112,436 |
| 1,965,634 | 2,280,011 | |
| Less current portion | 336,612 | 327,287 |
| $1,629,022 | $1,952,724 |
(1) 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 $646,593 as of May 31, 1999.
As of May 31, 1999, $112,575 of funds were held by a trustee, representing an interest bearing tax free money fund restricted for principal reduction payments of the Industrial Revenue Development Bond during fiscal year ending May 31, 2000.
(2) The term note and mortgage note are subject to certain restrictive covenants relating to net working capital, tangible net worth and capital expenditures. As of May 31, 1999 the Company was in compliance with all such covenants.
The aggregate maturities of long-term debt subsequent to May 31, 1999 are:
| 2000 | $ 336,612 | |
| 2001 | 329,311 | |
| 2002 | 304,724 | |
| 2003 | 233,714 | |
| 2004 | 172,856 | |
| Thereafter | 588,417 | |
| $1,965,634 |
8. Sales:
Net sales consist of the following industry segments:
| 1999 | 1998 | |
| Commercial and other industries | $ 6,590,170 | $ 4,689,175 |
| Aerospace and defense industries | 4,313,292 | 5,261,198 |
| Government agencies | 241,847 | 283,649 |
| $11,145,309 | $10,234,022 |
Sales to aerospace and defense industries include sales to two customers totaling $3,076,738 for the year ended May 31, 1999. Sales to commercial industries include sales to a customer totaling $1,268,078 for the year ended May 31, 1998.
9. Income Taxes:
| 1999 | 1998 | |||
| Current tax provision: | ||||
| Federal | $360,200 | $284,500 | ||
| State | 33,800 | 22,800 | ||
| 394,000 | 307,300 | |||
| Deferred tax provision: | ||||
| Federal | 12,600 | (33,000 | ) | |
| State | 1,300 | 700 | ||
| 13,900 | (32,300 | ) | ||
| $407,900 | $275,000 |
A reconciliation of provision for income taxes at the statutory rate to income tax provision at the Company's effective rate is as follows:
| 1999 | 1998 | |||
| Computed tax provision at the | ||||
| expected statutory rate | $379,558 | $247,924 | ||
| State income tax - net of Federal | ||||
| tax benefit | 23,200 | 15,510 | ||
| Other | 5,142 | 11,566 | ||
| $407,900 | $275,000 |
Significant components of the Company's deferred tax assets and liabilities consist of the following:
| 1999 | 1998 | |||
| Deferred tax assets | ||||
| Allowance for doubtful | $ 26,100 | $ 11,600 | ||
| receivables | ||||
| Tax inventory adjustment | 19,700 | 19,000 | ||
| Allowance for obsolete | 70,000 | 44,000 | ||
| inventory | ||||
| Accrued stock appreciation | - | 17,800 | ||
| rights | ||||
| Accrued vacation | 14,500 | 19,000 | ||
| 130,300 | 111,400 | |||
| Deferred tax liabilities | ||||
| Excess tax depreciation | 53,700 | 20,900 | ||
| Noncurrent, net | (53,700 | ) | (20,900 | ) |
| Net deferred tax assets | $ (76,600 | ) | $ 90,500 |
The Company and its subsidiary file separate Federal and State income tax returns. As of May 31, 1999, the Company had State investment tax credit carryforwards of approximately $170,000 expiring through May 2009.
10. Earnings Per Common Share:
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS No. 128) Earnings per Share, which is effective for financial statements for periods ending after December 15, 1997 and requires that all prior period earnings per share data be restated. The new standard eliminates primary and fully diluted earnings per common share and requires presentation of basic and, if applicable, diluted earnings per common share. Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per common share reflects the weighted-average common shares outstanding and dilutive potential common shares, such as stock options.
A reconciliation of weighted-average common shares outstanding to weighted-average common shares outstanding assuming dilution is as follows:
| 1999 | 1998 | |
| Average common shares | ||
| outstanding | 2,745,772 | 2,727,246 |
| Common shares issuable under | ||
| stock option plans | 9,134 | 27,468 |
| Average common shares | ||
| outstanding assuming dilution | 2,754,906 | 2,754,714 |
11. Related Party Transactions:
Included in cost of sales are research and development expenses charged by Developments for services performed by its research engineers in the amount of $251,173 and $296,116 for the years ended May 31, 1999 and 1998.
Included in selling, general and administrative expenses is royalty expense charged by Developments for the use of patents in the Company's manufacturing operations in the amount of $174,964 and $138,368 for the years ended May 31, 1999 and 1998.
The Company leases certain office and laboratory facilities to Developments for a current annual rental of $10,000.
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.
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, 1999 and 1998, 40,749 ($1.91 to $3.66 price per share) and 20,010 ($4.22 to $5.09 price per share) common shares, respectively, were issued to employees. As of May 31, 1999, there were 14,835 shares reserved for further issue. The amount of Company matching expense was $27,938 and $23,985 for the years ended May 31, 1999 and 1998.
14. Stock Option Plans:
In 1998, 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 ten years from the date of grant.
Options granted under the Company's previous non-qualified and incentive stock option plans expire five to ten years from the date of grant and are exercisable over the period stated in each option.
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, 1999 and 1998. Using the Black-Scholes option valuation model, the estimated fair values of each option granted under the Company's previous non-qualified and incentive stock option plans during 1999 and 1998 was $1.46 and $2.42. The estimated fair value of each option granted under the 1998 plans during 1999 was $1.63. Principal assumptions used in applying the Black-Scholes model to options at date of grant were as follows:
| 1999 | 1998 | |||
| Risk-free interest rate | 5.79% and 6.07 | % | 5.48 | % |
| Expected life in years | 8.0 | 4.5 | ||
| Expected volatility | .53 | .60 | ||
| Expected dividend yield | 0% | 0 | % |
Had compensation cost for the Company's stock options 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:
| 1999 | 1998 | |||
| Net income: | ||||
| As reported | $711,672 | $462,223 | ||
| Proforma | $675,967 | $421,573 | ||
| Basic and diluted earnings per | ||||
| common share: | ||||
| As reported | $ .26 | $ .17 | ||
| Proforma | $ .25 | $ .15 |
The following is a summary of stock option activity:
| 1999 | 1998 | |||
| Outstanding, beginning of year | 138,002 | 120,352 | ||
| Options granted | 37,000 | 25,000 | ||
| Options exercised or expired | (31,002 | ) | (3,675 | ) |
| Stock appreciation rights | ||||
| exercised | - | (3,675 | ) | |
| Outstanding, end of year (at | ||||
| prices ranging from $2.06 to | ||||
| $5.56 per share) | 144,000 | 138,002 |
The option holders exercised 31,000 options and received 31,000 shares (ranging from $1.68 to $2.66 per share) of the Company's common stock in lieu of cash for the year ended May 31, 1999. In addition, the option holders exercised 3,765 SARs for the year ended May 31, 1998 for cash reimbursement of personal withholding taxes.
The Company received 583 common shares of its own stock as treasury stock at fair market value in lieu of cash payment from the option holders for the year ended May 31, 1998. These treasury shares were received from the option holders as payment for the purchase price of 3,675 options exercised under the incentive and nonqualified stock option plans for the year ended May 31, 1998.
15. Treasury Stock:
The Company purchased 23,771 shares of its common stock for a total of $57,249 (ranging from $1.94 to $2.81 per share) during the year ended May 31, 1999.
During July 1999, the Company purchased 5,310 shares of its common stock for a total of $17,523 ($3.30 per share) under an agreement to purchase for cash all shares of common stock from holders of fewer than 100 shares.
16. Retirement Plan:
The Company maintains a retirement plan for essentially all full-time employees pursuant to Section 401(k) of the Internal Revenue Code. The Company matches 10% of employee voluntary salary deferrals up to a maximum of 1% 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 $12,731 and $17,116 for the years ended May 31, 1999 and 1998.
17. Fair Value of Financial Instruments:
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.
18. Cash Flows Information:
| 1999 | 1998 | |||
| Cash paid during the year for: | ||||
| Interest | $167,172 | $151,578 | ||
| Income taxes | $186,354 | $221,117 | ||
| Schedule of Noncash Investing and | ||||
| Financing Activities | ||||
| Property and equipment acquired: | ||||
| Cost | $ 10,400 | $629,105 | ||
| Common stock issued - stock | ||||
| options plan | $ 19,750 | $ 3,061 | ||
| Treasury stock received as | ||||
| payment for stock options | - | (3,061 | ) | |
| Net cash proceeds from exercise | ||||
| of stock options | $ 19,750 | $ - |
19. Contingencies:
The Company is a respondent in an administrative proceeding filed by one of its former employees for alleged discrimination. At this stage in the proceeding an opinion as to the probable outcome cannot be offered by management. The Company, after considering information provided by legal counsel, believes the claimant's allegations are without merit and is vigorously defending its position.
The Company has filed a suit against one of its customers to collect $54,000 owed for the purchase of motion control devices from the Company. The defendant has asserted counterclaims against the Company for alleged failure of his equipment. The Company is vigorously prosecuting its claim and defending against the defendant's counterclaim. The ultimate outcome cannot be determined at this time, however, it will not have a material effect on the financial position or condition of the Company.
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