Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Issuer's revenues for its most recent fiscal year are $18,593,831.
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of August 13, 2008 was $18,030,860.
The number of shares outstanding of each of the issuer's classes of common equity as of August 13, 2008 3,219,923
TAYLOR DEVICES, INC.
DOCUMENTS INCORPORATED BY REFERENCE
|
Documents |
Form 10-KSB
Reference |
|
Proxy Statement |
Part III, Items
9-12 |
|
Annual Report to Shareholders |
Exhibit
13 |
FORM 10-KSB INDEX
|
PART I |
PAGE | ||
|
ITEM 1. |
DESCRIPTION OF BUSINESS |
3 | |
|
ITEM 2. |
DESCRIPTION OF PROPERTY |
6 | |
|
ITEM 3. |
LEGAL PROCEEDINGS |
8 | |
|
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
9 | |
|
PART II |
|||
|
ITEM 5. |
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES |
10 | |
|
ITEM 6. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION |
12 | |
|
ITEM 7. |
FINANCIAL STATEMENTS |
19 | |
|
ITEM 8. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
19 | |
|
ITEM 8A(T). |
CONTROLS AND PROCEDURES |
19 | |
|
ITEM 8B. |
OTHER INFORMATION |
19 | |
|
PART III |
|||
|
ITEM 9. |
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT |
| |
|
ITEM 10. |
EXECUTIVE COMPENSATION |
19 | |
|
ITEM 11. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
19 | |
|
ITEM 12. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
19 | |
|
ITEM 13. |
EXHIBITS |
20 | |
|
ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
24 | |
|
SIGNATURES |
25 | ||
2
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.
Business Combination
Effective April 1, 2008, the Company acquired the 77% of the outstanding common shares of Tayco Developments, Inc. ("Developments") that it did not already own. Following the merger of the companies, Taylor Devices, Inc. was the surviving company. The results of Developments' operations have been included in the consolidated financial statements since that date.
The merger will allow the complementary operations of both companies, including Developments' patents and other intellectual property and the product development and manufacturing process, to be fully integrated. The merger is expected to result in significant synergies and reduced administrative expenses, especially expenses associated with maintaining each as a separate company.
In the merger, each outstanding share of Developments' common stock has been converted into the right to receive one share of Taylor Devices, Inc. common stock. The aggregate purchase price of $5,058,191 was calculated by multiplying the total number of Developments' outstanding shares of common stock (987,928) by the average closing bid and ask prices for shares of the Company's common stock on March 31, 2008 ($5.12).
We have accounted for the merger using the purchase method in accordance with SFAS No. 141 "Business Combinations". As such, we analyzed the fair value of tangible and intangible assets acquired and liabilities assumed and we determined the excess of fair value of net assets acquired over cost. Because the fair value of the acquired assets and liabilities assumed exceeded the acquisition price, the valuation of the long-lived assets acquired was reduced to zero in accordance with SFAS No. 141. Accordingly, no basis was assigned to property, plant and equipment, patents or any other non-current assets and the remaining excess was recorded as an extraordinary gain.
Principal Products
The Company manufactures and sells a single group of very similar products that have many different applications for customers. These similar products are included in one of six categories; namely, Seismic Dampers, Fluidicshoks®, Crane and Industrial Buffers, Self-Adjusting Shock Absorbers, Liquid Die Springs, and Vibration Dampers. Management does not track or otherwise account for sales broken down by these categories. The following is a summary of the capabilities and applications for these products.
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, 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.
3
DistributionThe Company utilizes 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, under the direction and with the assistance 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 to purchase the Company's products for resale purposes.
Competition
The Company faces 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. and foreign suppliers. The loss of any one of these would not materially affect the Company's operations.
Dependence Upon Major Customers
The Company is not dependent on any one or a few major customers. Sales to two customers approximated 23% (13% and 10%, respectively) of net sales for 2008. The loss of either or both of these customers, unless the business is replaced by the Company, could result in an adverse effect on the results for the Company.
Patents, Trademarks and Licenses
Under a License Agreement ("License Agreement") dated November 1, 1959, between the Company and Developments, an affiliate of the Company, the Company was granted preferential rights to market, in the United States and Canada, all existing and future inventions and patents developed by Developments. This License Agreement terminated when the Company and Developments merged effective April 1, 2008. As part of the merger, ownership of all patents held by Developments transferred to the Company. Prior to the merger, the Company recorded a royalty payable to Developments, equal to five percent of sales value of patented items sold and shipped. The Company incurred royalty charges from Developments of $119,000 and $92,000 in the years ended May 31, 2008 and 2007, respectively.
4
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. The Company has no inventory out on consignment and no consignment sales for the years ended May 31, 2008 and 2007. No extended payment terms are offered. During the year ended May 31, 2008, 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.
Need for any Government Approval of Principal Products or ServicesContracts 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 limit defense spending, these contracts could be reduced or terminated, which would not 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 federal government. See Item 1. Description of Business, "Patents, Trademarks and Licenses". The Company, however, engages in research testing of its products. For the fiscal years ended May 31, 2008 and 2007, the Company expended $113,000 and $162,000, respectively, on manufacturing research through Developments. For the years ended May 31, 2008 and 2007, defense sponsored research and development totaled $26,000 and $69,000, 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 establish strict standards for the protection of employees, and impose 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 currently incurring only moderate costs with respect to disposal of hazardous waste and compliance with OSHA regulations.
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.
Employees
Exclusive of Company sales representatives and distributors, as of May 31, 2008, the Company had 94 employees, including three executive officers, and one part time employee. The Company has good relations with its employees.
5
ITEM 2. DESCRIPTION OF PROPERTYThe Company's production facilities occupy approximately six acres on Tonawanda Island in North Tonawanda, New York and are comprised of four interconnected buildings and one adjacent building. The production facilities consist of a small parts plant (approximately 4,400 square feet), a large parts plant (approximately 13,500 square feet), and include a facility of approximately 7,000 square feet constructed in 1995 (see below), a test facility, storage area, pump area and the Company's general offices. The adjacent building is a 17,000 square foot seismic assembly test facility. These facilities total more than 45,000 square feet. The Company has two separate remote test facilities used for shock testing. One facility is 800 square feet, and a newer, state-of-the-art test facility is 1,225 square feet. The small parts plant consists of a complete small machine shop and tool room that 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 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 NCIDA to 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 HSBC Bank, N.A. ("HSBC"), as issuer of the five year direct-pay irrevocable letter of credit, which is drawn upon by Deutsche Bank Trust Company, Americas, as Trustee, for the benefit of the bondholders. The letter of credit was renewed by HSBC in November, 2004 for another five-year period. The Bond bears interest at the HSBC Adjustable Rate Service ("HSBC ARS") rate, plus an incremental amount designated by HSBC Securities, Inc. (the "Remarketing Agent"). The HSBC ARS rate reflects the current bid-side yield of the highest rated 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 of the Bond 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, 2008 is $80,000.
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 Corporation, an affiliate of the Company ("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 and is secured by property located at 90 Taylor Drive, North Tonawanda, New York. The principal balance at May 31, 2008 is $4,334.
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, New York, with an interest rate equal to the bank's prime interest rate plus 1%. A monthly payment of $2,222 is due on the first of each month. The principal balance at May 31, 2008 is $126,666. All payments on the above obligations are current.
Additional information regarding the Company's long-term debt is contained in Note 9 to the Consolidated Financial Statements filed with this report.
Except for the premises leased from the NCIDA, the Company leases portions of both the building and the property on which it is located from Tayco Realty. Pursuant to the Lease Agreement between the Company and Tayco Realty, rental payments from June 1, 2007 to May 31, 2008 totaled $159,600. The Lease Agreement, which contains standard terms and conditions, was renewed on November 1, 2005 for a term of ten years. Annual rentals are renegotiated by management of the two companies. The total rent paid by the Company is determined by a base rate, 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 $975 per month. The warehouse is located approximately one-quarter mile from the above-referenced production facilities and office space. The total rental expense incurred by the Company for this facility in fiscal 2008 was $11,700. The Company also leases a separate facility for painting, packaging and shipping from an unrelated third party, consisting of approximately 10,000 square feet at $4,000 per month. The facility is located approximately four miles from the above-referenced production facilities and office space. The total rental expense incurred by the Company for this facility in fiscal 2008 was $48,000.
6
The Company believes it is carrying adequate insurance coverage on its facilities and their contents.
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
05/31/08
|
Reg. 228.102(c)-Real Estate |
| ||||||
|
Property Location / Description |
Book |
||||||
|
90 & 100 Taylor Drive |
Accumulated |
Net Book |
Percentage | ||||
|
N. Tonawanda, NY 14120 |
Depreciation |
Value |
of Total | ||||
|
(see below) |
Cost |
5/31/2008 |
5/31/2008 |
Assets | |||
|
Land |
$ 141,483 |
$ - |
$ 141,483 |
||||
|
Buildings |
1,154,353 |
792,914 |
361,439 |
||||
|
Improvements |
2,571,269 |
999,243 |
1,572,026 |
||||
|
Total |
$ 3,867,105 |
$ 1,792,157 |
$ 2,074,948 |
12.6% | |||
|
90 Taylor Drive |
|||||||
|
Land |
$ 107,363 |
$ - |
$ 107,363 |
||||
|
Building |
428,506 |
428,506 |
- |
||||
|
Building Improvements-Realty |
159,427 |
77,125 |
82,302 |
||||
|
Building Improvements-Devices |
2,411,842 |
922,118 |
1,489,724 |
||||
|
Total |
$ 3,107,138 |
$ 1,427,749 |
$ 1,679,389 |
10.2% | |||
|
100 Taylor Drive |
|||||||
|
Land |
$ 34,120 |
$ - |
$ 34,120 |
||||
|
Building |
725,847 |
364,408 |
361,439 |
||||
|
Total |
$ 759,967 |
$ 364,408 |
$ 395,559 |
2.4% | |||
|
Taylor Devices, Inc. & Subsidiary |
|||||||
|
Total Assets as of May 31, 2008 |
$ 16,414,650 |
||||||
7
Reg. 228.102(c)(3)
Until the time of merger between the Company and Developments (as further discussed in Item 1) and pursuant to the Lease Agreement dated July 1, 2000 between the Company and Developments, the Company, which leases the parcel from Tayco Realty, sub-leased approximately 800 square feet of office and research and development space located at 100 Taylor Drive, North Tonawanda, to Developments at a base annual rental of $12,000. In fiscal 2008, the Company received total rental payments of $10,000 from Developments.
|
Reg.228.102(c)(7)(vi)(A-D) |
|||||||||
|
Property Location / Description |
Federal Tax |
Federal Tax |
Federal |
Federal Tax |
Net Tax | ||||
|
90 & 100 Taylor Drive |
Depreciation |
Life |
Tax |
Accumulated |
Basis | ||||
|
N. Tonawanda, NY 14120 |
Methods |
Claim |
Cost |
Depreciation |
5/31/2008 | ||||
|
(see below) |
|||||||||
|
Straight Line, |
|||||||||
|
Building |
MACRS |
15-40 Yrs. |
$ 1,154,353 |
$ 803,187 |
$ 351,166 | ||||
|
Straight Line |
|||||||||
|
ACRS, |
|||||||||
|
Building Improvements |
MACRS |
7-40 Yrs. |
2,709,506 |
1,035,673 |
1,673,833 | ||||
|
Total |
$
3,863,859 |
$
1,838,860 |
$ 2,024,999 | ||||||
|
90 Taylor Drive |
|||||||||
|
Straight Line, |
|||||||||
|
Building |
MACRS |
15-31.5 Yrs. |
$ 428,506 |
$ 428,506 |
$ - | ||||
|
Building Improvements-Realty |
Straight Line |
7-39 Yrs. |
297,664 |
84,575 |
213,089 | ||||
|
Straight Line |
|||||||||
|
ACRS, |
|||||||||
|
Building Improvements-Devices |
MACRS |
15-40 Yrs. |
2,411,842 |
951,098 |
1,460,744 | ||||
|
Total |
$
3,138,012 |
$ 1,464,179 |
$ 1,673,833 | ||||||
|
100 Taylor Drive |
|||||||||
|
Building |
Straight Line |
19-40 Yrs. |
$ 725,847 |
$ 374,681 |
$ 351,166 |
The Company recorded $42,000 expense during the year for real property taxes and payments in lieu of taxes. This represents a combined tax rate of $39.69 per $1,000 of assessed valuation including a 50% reduction in taxes for the property leased from the NCIDA. This reduction will cease upon payment in full of the Bond and the Company's purchase for $1.00 of the land leased from the NCIDA.
8
ITEM 3. LEGAL PROCEEDINGS
The State of New York Workers Compensation Board ("Board") commenced a lawsuit against the Company and 264 other entities in May 2008, seeking to recover funds allegedly owed in connection with the Company's participation in the Manufacturing Self-Insurance Trust ("Trust"). Among the Board's claims are that (i) the Trust provided workers compensation self-insurance to its participating members, including the Company, from April 22, 1997 to August 31, 2006; (ii) the Board has assumed control of the Trust; (iii) the Trust's liabilities exceed its assets by approximately $29,000,000; and (iv) the Company and the other participating members are jointly and severally liable for the alleged deficit. The Board claims that it has calculated a rough estimate of each participating member's current share of the deficit, which, for the Company, is alleged to be in excess of $79,555. The Board also claims, however, that the Company and the other 264 participating members could be jointly and severally responsible for sums substantially in excess of the Board's rough estimates. See also "Note 22, Taylor Devices, Inc. and Subsudiary Consolidated Finacial Statements, May 31, 2008.
The Company denies the Board's claims that the Company owes the amounts sought. The lawsuit was recently commenced, and the Company's investigation into the factual allegations of the lawsuit continues. It appears that the Board is performing additional forensic audits regarding the Trust, in order to more accurately determine the amounts allegedly owed by the participating members.
Management intends to vigorously defend the claim and has joined with other participating members in a joint defense against the lawsuit. It is anticipated that the Company, together with other defendants, will conduct an independent forensic audit of the Trust's liabilities and assets. It is also anticipated that the Company will challenge the legal and contractual basis for the Board's claims.
There are no other legal proceedings except for routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 28, 2008, the Company held a special meeting of shareholders in the Company's offices, located at 90 Taylor Drive, North Tonawanda, New York, to vote upon the proposal regarding the pending merger of Developments with and into the Company.
A vote of 66 2/3% of the total shares outstanding, or 2,104,041 shares, was required to approve the merger. Of the 3,156,061 shares of common stock outstanding as of the record date of January 11, 2008, the holders of 2,129,866 shares, or 67.5%, voted for the approval of the merger, 41,228 shares, or 1.3%, voted against the merger and 8,001 shares, or 0.3% abstained.
The Agreement and Plan of Merger was passed on behalf of the Company's shareholders, effective at the close of business on March 31, 2008. Developments' shareholders approved the Agreement and Plan of Merger at a special meeting of shareholders held on February 22, 2008.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's Common Stock trades on the Small Cap Market tier of the National Association of Securities Dealers Automated Quotation ("NASDAQ") stock market under the symbol TAYD. The high and low market prices noted below for the quarters of fiscal year 2008 and fiscal year 2007 were obtained from NASDAQ.
|
Fiscal 2008 |
Fiscal 2007 | |||||||
|
High |
Low |
High |
Low | |||||
|
First Quarter |
7.150 |
5.550 |
7.110 |
5.270 | ||||
|
Second Quarter |
7.710 |
5.880 |
6.140 |
4.310 | ||||
|
Third Quarter |
9.250 |
4.760 |
6.640 |
5.050 | ||||
|
Fourth Quarter |
7.690 |
4.600 |
5.940 |
4.780 | ||||
Holders
As of August 13, 2008, the number of issued and outstanding shares of Common Stock was 3,219,923 and the approximate number of record holders of the Company's Common Stock was 850. 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. Except as described below, under the terms of the Company's credit arrangement with its major lender, the Company is prohibited from issuing cash dividends.
On October 5, 1998, the Company's Board of Directors adopted a shareholder rights plan designed to deter coercive or unfair takeover tactics and prevent an acquirer from gaining control of the Company without offering a fair price to shareholders. Under the plan, certain rights ("Rights") were distributed as a dividend on each share of Common Stock (one Right for each share of Common Stock) held as of the close of business on or after October 19, 1998. Each whole Right entitles the holder, under certain defined conditions, to buy one two-thousandths (1/2000) of a newly issued share of the Company's Series A Junior Participating Preferred Stock ("Series A Preferred Stock") at an exercise price of $5.00. Rights attach to and trade with the shares of Common Stock, without being evidenced by a separate certificate. No separate Rights certificates will be issued unless and until the Rights detach from Common Stock and become exercisable for shares of the Series A Preferred Stock.
Such an event will occur if (1) a person or group acquires beneficial ownership of 30% or more of the Company's Common Stock (except through a tender or exchange offer for all shares which the Board determines is fair and in the best interests of the Company and its shareholders); or (2) a person or group commences a tender or exchange offer which will result in the person or group beneficially owning 24% or more of the Common Stock; or (3) the Board determines that a person or group holding at least 24% of the Common Stock intends to cause or pressure the Company into taking actions adverse to its or its shareholders' interests, or that the person or group is causing or is likely to cause a material adverse impact on the business or prospects of the Company. The Rights Plan will expire on October 5, 2008.
10
Equity Compensation
Plan Information
The following table sets forth information regarding equity compensation plans of the Company as of May 31, 2008.
|
Equity Compensation Plan Information |
| |||||||||
|
Plan Category |
|
|
Number of
securities |
| ||||||
|
|
| |||||||||
|
1998 Stock Option Plan 2001 Stock Option Plan 2005 Stock Option Plan |
10,000 19,250 91,250 |
$4.50 $3.80 $5.70 |
- - 47,250 |
| ||||||
|
|
| |||||||||
|
2004 Employee Stock Purchase Plan (1) |
|
|
|
| ||||||
|
|
|
|
| |||||||
|
| ||||||||||
|
(1) |
The Company's 2004 Employee Stock Purchase Plan (the "Employee Plan") permits eligible employees to purchase shares of the Company's common stock at fair market value through payroll deductions and without brokers' fees. Such purchases are without any contribution on the part of the Company. As permitted by its terms, the Employee Plan had been suspended by the Board of Directors from August 10, 2004 until August 4, 2005. As of May 31, 2008, 243,792 shares were available for issuance. | |||||||||
11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 6, "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this 10-KSB that does not consist of historical facts are "forward-looking statements." Statements accompanied or qualified by, or containing, words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements and, as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to release publicly any updates or revisions to the forward-looking statements herein to reflect any change in the Company's expectations with regard thereto, or any changes in events, conditions or circumstances on which any such statement is based.
Results of Operations
A summary of the period to period changes in the principal items included in the consolidated statements of income is shown below:
|
Summary comparison of the years ended May 31, 2008 and 2007 | ||
|
Increase / | ||
|
(Decrease) | ||
|
Sales, net |
$ 2,092,000 | |
|
Cost of goods sold |
$ 1,678,000 | |
|
Selling, general and administrative expenses |
$ (48,000) | |
|
Other income / (expense) |
$ 203,000 | |
|
Income before provision for income taxes, equity in net income of affiliate, minority stockholder's interest and extraordinary gain |
$ 666,000 | |
|
Provision for income taxes |
$ 159,000 | |
|
Income before equity in net income of affiliate, minority stockholder's interest and extraordinary gain |
$ 507,000 | |
|
Extraordinary gain, net of tax of nil |
$ 406,000 | |
|
Net income |
$ 914,000 | |
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.
Adjustments to cost estimates are made periodically and any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. However, any profits expected on contracts in progress are recognized over the life of the contract.
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.
12
For the year ended May 31, 2008 (All figures being discussed are for the year ended May 31, 2008 as compared to the year ended May 31, 2007.)
|
Year ended |
Change | |||
|
May 31, 2008 |
May 31, 2007 |
Increase /
|
Percent
| |
|
Net Revenue |
$18,594,000 |
$16,501,000 |
$2,093,000 |
13% |
|
Cost of sales |
12,424,000 |
10,746,000 |
1,678,000 |
16% |
|
Gross profit |
$ 6,170,000 |
$ 5,755,000 |
$ 415,000 |
7% |
|
|
|
|
||
The Company's consolidated results of operations showed a 13% increase in net revenues and an increase in net income of 148%. Gross profit increased by 7%. Revenues recorded in the current period for long-term construction projects decreased slightly over the level recorded in the prior year. Revenues recorded for all other product sales increased by 42% over last year. This significant increase is primarily due to customers in aerospace and defense related businesses. The gross profit as a percentage of net revenues for the current and prior year periods was 33% and 35%, respectively. Management is optimistic that the level of construction activity of structures requiring seismic protection as well as the demand for our products in aerospace and defense applications, will remain strong through the fiscal year ending May 31, 2009.
The Company's revenues and net income fluctuate from period to period. The increases in the current period, compared to the prior period, are not necessarily representative of future results.
13
|
Selling, General and Administrative Expenses |
|
Year ended |
Change |
|
May 31, 2008 |
May 31, 2007 |
Increase / |
Percent | |
|
Outside Commissions |
$1,101,000 |
$1,322,000 |
$ (221,000) |
-17% |
|
Other SG&A |
3,263,000 |
3,090,000 |
173,000 |
6% |
|
Total SG&A |
$4,364,000 |
$4,412,000 |
$ (48,000) |
-1% |
|
|
|
|
Selling, general and administrative expenses decreased by 1% from the prior year. Outside commission expense decreased by 17% over last year's level. Outside commission expense was lower in this period due to higher commission rates last year on a few large, long-term construction projects. Other selling, general and administrative expenses increased by only 6% from last year.
The above factors resulted in operating income of $1,806,000 for the year ended May 31, 2008, up 34% from the $1,343,000 in the prior year.
Interest expense of $137,000 is 55% less than in the prior year. The average level of use of the Company's operating line of credit decreased from $2.9 million last year to $1.4 million this year. The interest rate on the operating line of credit decreased 3.25 percentage points since May 31, 2007. The line of credit is used primarily to fund the production of larger projects that do not allow for advance payments or progress payments.
Merger with Tayco Developments
As noted in Item 1, above, the Company merged with Developments effective April 1, 2008. This transaction had a significant effect on the following consolidated balance sheet items:
May 31, 2008
May 31,
2007
Consolidated Balance Sheet
items:
Investment in affiliate, at
equity
-
$ 451,520
Payables --
affiliate
-
$ 174,609
Minority stockholder's
interest
-
$ 520,504
Paid-in
capital
$6,332,677
$4,745,293
Treasury
stock
$2,225,065
$1,056,082
The Investment in affiliate represented the Company's 23% equity interest in Developments. After the transaction the Company owned 100% of Developments, the Company was the surviving entity in the merger and the operations were merged. The Payables -- affiliate item represented amounts owed by the Company to Developments. The corresponding receivable on the books of Developments offset this payable and both were eliminated upon merger. Minority stockholder's interest represented Developments' 42% equity interest in Realty. Upon merger, the Company owned 100% of Realty so there was no longer any minority stockholder interest.
In the merger, each outstanding share of Developments' common stock was converted into the right to receive one share of Taylor Devices, Inc. common stock. The Paid-in capital of the Company was increased for most of the value of the new shares of stock exchanged for the Developments' shares of stock. This was offset considerably by the cancellation of the shares of the Company's stock that had been owned by Developments. The net increase in Paid-in capital for this transaction was $1,479,389. The per-share value of $5.12 was calculated as the average of the closing Bid and Ask prices on March 31, 2008. This same amount was used to value the Company's shares of stock that were received as Treasury stock for each share of Developments' stock that was owned by the Company. A summary of the Company's common stock changes due to the merger follows:
14
Shares
of
Common Common
Paid-in
Treasury
Stock
Stock
Capital
Stock
Shares exchanged for Developments'
shares
987,928
$24,698
$5,033,493
-
Shares cancelled that were owned by Developments
(697,567) (
17,439) (
3,554,104)
-
Shares received as Treasury shares for each
share
of Developments owned by the Company
(228,317)
-
- ( 1,168,983)
Net change 62,044 $ 7,259 $1,479,389 ($1,168,983)
A significant change in the Company's Consolidated Statement of Income from last year to this year is the recording of an extraordinary gain that resulted from the merger. The $406,157 gain was calculated as the amount by which the fair value of the net assets acquired with Developments exceeded the total acquisition costs. The Equity in net income of affiliate and Minority stockholder's interest lines on the Consolidated Statement of Income were not significantly affected in the current year because the transaction occurred after ten months of the year were completed so the level of activity was not significantly different from a full year.
2008
2007
Consolidated Statement of Income
items:
Equity in net income of
affiliate
$
12,016
$
11,142
Minority stockholder's
interest
$
36,430
$
36,609
Extraordinary gain on the
merger
$
406,157
-
Following the merger, the independent existence of Developments ended and Realty became a wholly owned subsidiary of the Company. The chart below shows the Company's equity interest in the affiliated companies prior to the merger and subsequent to the merger:
Before Merger After
Merger
Tayco Developments,
Inc.
23%
100% Prior to becoming part of
the Company
Tayco Realty,
Inc.
58%
100%
Stock Options
The Company has a stock option plan which provides for the granting of nonqualified or incentive stock options to officers, key employees and non-employee directors. Options granted under the plan are exercisable over a ten year term. Options not exercised by the end of the term expire.
On June 1, 2006, the Company adopted the stock option expensing rules of Statement of Financial Accounting Standards (SFAS) No. 123R, "Share Based Payment," using the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company utilized the modified prospective approach of adoption under SFAS No. 123R which resulted in the recognition of $81,000 and $119,000 of compensation cost for the years ended May 31, 2008 and 2007.
The fair value of each stock option grant has been determined using the Black-Scholes model. The model considers assumptions related to exercise price, expected volatility, risk-free interest rate, and the weighted average expected term of the stock option grants. The Company used a weighted average expected term. Expected volatility assumptions utilized in the model were based on volatility of the Company's stock price for the thirty month period immediately preceding the granting of the options. The Company issued stock options in August 2007 and April 2008. The risk-free interest rate is derived from the U.S. treasury yield.
15
The following assumptions were used in the Black-Scholes model in estimating the fair market value of the Company's stock option grants:
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