-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BwPOrIrAQJLh43KniDH2oQdc45Uh9p/amDDEKuuS3l37BJzX+VawoyxosvXija4A gICEwxnTK0MVUQqvlbg9HA== 0000096536-97-000004.txt : 19970828 0000096536-97-000004.hdr.sgml : 19970828 ACCESSION NUMBER: 0000096536-97-000004 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970827 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAYLOR DEVICES INC CENTRAL INDEX KEY: 0000096536 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 160797789 STATE OF INCORPORATION: NY FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-03498 FILM NUMBER: 97670135 BUSINESS ADDRESS: STREET 1: 90 TAYLOR DR STREET 2: P O BOX 748 CITY: NORTH TONAWANDA STATE: NY ZIP: 14120 BUSINESS PHONE: 7166940800 MAIL ADDRESS: STREET 1: 90 TAYLOR DR CITY: N TONAWANDA STATE: NY ZIP: 14120-0748 10KSB 1 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 tension control, energy storage and shock absorption 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) Power Plant Snubbers and (6) Seismic Energy Absorbers. Seismic Energy Absorbers are designed to ameliorate the effects of earthquake tremors on structures, and represent a substantial part of the business of the Company. 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. Fluidicshoks, Crane and Industrial Buffers and Liquid Die Springs for use in various industrial applications. Power Plant Snubbers are used in nuclear and fossil fuel power plants for arresting motion and shock on large piping systems, and are available in force ranges of up to 2 million pounds and strokes up to 30 inches. Presently this market is relatively quiet due to the lack of new power plant construction in North America. Seismic Energy Absorbers are sophisticated derivatives of existing Company technology and account for a significant expansion of the Company's business. 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 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. Competition The Company faces no significant competition with respect to its patented products; however, on mature weapons systems, 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 specification products produced for the aerospace and commercial aerospace industries, the Company's principal competitors are Cleveland Pneumatic Tool Company in Cleveland, Ohio, Menasco Manufacturing Company in Burbank, California, and Pacific Scientific of Anaheim, 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 three other firms capable of supplying viscous damping devices ("VDD") in the seismic protection field. However, numerous other firms compete in alternative seismic protection systems. The Company remains the only supplier of the VDD systems that has 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 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. 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. The contract with Herrick Construction was for a specific project only. 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 of 1,225 square feet. In November 1994, as part of certain tax-exempt bond financing arrangements, the Company and the 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. 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. 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, which are not historical facts, are forward-looking statements. Certain matters discussed in this section and elsewhere in this Report are forward-looking statements. As such 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 is considering a sizable addition to the Company's manufacturing facilities with a focus on assembly space and horizontal testing capabilities, and 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 OPTIONS O/S - F/Y/E 5/31/97 WEIGHTED AVG. COMMON STOCK OPTIONS 28,816 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 OPTIONS 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 hat 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 5, 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- holders 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 stockholders 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 (Note10) $ .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 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 stockholders 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 Companys 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) 1,045,00 1,180,00 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 20,514 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 Companys 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 Companys 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. INDEPENDENT AUDITOR'S REPORT ON CONSOLIDATING INFORMATION To The Board of Directors and Stockholders of Taylor Devices, Inc. Our audits of the consolidated financial statements of Taylor Devices, Inc. and subsidiary were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information in the following schedules is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual companies. The consolidating information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. /s/ J.D. Elliott & Co., P.C. J.D. Elliott & CO., P.C. Buffalo, New York August 5, 1997 EX-27 2
5 12-MOS MAY-31-1997 MAY-31-1997 1,096,456 0 1,451,729 27,900 2,412,265 5,228,479 5,468,084 2,903,471 8,341,084 2,379,941 1,102,000 68,536 0 0 4,189,892 8,341,084 10,002,839 10,002,839 6,237,636 9,094,691 (26,553) 0 105,492 829,209 303,609 525,600 0 5,975 0 531,575 .19 .188
EX-1 3 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 -----END PRIVACY-ENHANCED MESSAGE-----