TAYLOR DEVICES, INC. — Annual Report 2003

Aug 28, 2003

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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 ended May 31, 2003 Commission file number 0-3498

TAYLOR DEVICES, INC . (Exact name of small business issuer as specified in its charter)

New York 16-0797789

(State of other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

90 Taylor Drive, P.O. Box 748, N. Tonawanda, New York	14120-0748
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number (716) 694-0800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on 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 10-KSB or any amendments to Form 10-KSB [ ].

Issuer's revenues for its most recent fiscal year are $13,872,315.

The aggregate market value of the Common Stock held by non-affiliates (as affiliates are defined in Rule 12b-2 of the Exchange Act) of the issuer, computed by reference to the average of the bid and asked price on August 20, 2003 was $4,855,628. In addition to shares held by affiliates, this calculation also excludes shares of the issuer's common stock that are held by Schedule 13D filers.

The number of shares outstanding of each of the registrant's classes of Common Stock, as of the latest practicable date.

Class	Outstanding at August 20, 2003
Common Stock, $.025 par value	2,926,460

TAYLOR DEVICES, INC.

DOCUMENTS INCORPORATED BY REFERENCE

Documents Form 10-KSB Reference

Proxy Statement Part III, Items 9-12

FORM 10-KSB INDEX

		PAGE
PART I
ITEM 1.	DESCRIPTION OF BUSINESS	3
ITEM 2.	DESCRIPTION OF PROPERTY	6
ITEM 3.	LEGAL PROCEEDINGS	10
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	10
PART II
ITEM 5.	MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	10
ITEM 6.	MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION	12
ITEM 7.	FINANCIAL STATEMENTS	16
ITEM 8.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE	16
ITEM 8A.	CONTROLS AND PROCEDURES	17
PART III
ITEM 9.	DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(a)OF THE EXCHANGE ACT	17
ITEM 10.	EXECUTIVE COMPENSATION	17
ITEM 11.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT	17
ITEM 12.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	17
ITEM 13.	EXHIBITS AND REPORTS ON FORM 8-K	17
SIGNATURES		23

PART I

ITEM 1. DESCRIPTION OF BUSINESS

The Company was incorporated in the State of New York on July 22, 1955 and is engaged in the design, development, manufacture and marketing of shock absorption, rate control, and energy storage devices for use in various types of machinery, equipment and structures. In addition to manufacturing and selling existing product lines, the Company continues to develop new and advanced technology products. The Company continues to achieve excellent growth in the rapidly developing seismic protection field and in the isolation of wind-induced vibrations.

Principal Products

The Company has six major product lines; namely, (1) Seismic Dampers, (2) Fluidicshoks, (3) Crane and Industrial Buffers, (4) Self-Adjusting Shock Absorbers, (5) Liquid Die Springs, and (6) Vibration Dampers. The following is a summary of the capabilities and applications for these product lines.

Seismic Dampers are designed to ameliorate the effects of earthquake tremors on structures, and represent a substantial part of the business of the Company. Fluidicshoks are small, extremely compact shock absorbers with up to 19,200 inch-pound capacities, produced in 15 standard sizes for primary use in the defense, aerospace and commercial industry. Crane and industrial buffers are larger versions of the Fluidicshoks with up to 60,000,000 inch-pound capacities, produced in more than 60 standard sizes for industrial application on cranes, ships, container ships, railroad cars, truck docks, ladle and ingot cars, ore trolleys and car stops. Self-adjusting shock absorbers, which include versions of Fluidicshoks and crane and industrial buffers, automatically adjust to different impact conditions, and are designed for high cycle application primarily in heavy industry. Liquid die springs are used as component parts of machinery and equipment used in the manufacture of tools and dies. Vibration dampers are used primarily by the aerospace and defense industries to control the response of electronics and optical systems subjected to air, ship, or spacecraft vibration.

Distribution

The Company 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 no significant competition with respect to most of its products, many of which are patented. The Company, however, faces greater competition on mature aerospace and defense programs which may use more conventional products manufactured under less stringent government specifications. Two foreign companies are the Company's competitors in the production of crane buffers.

The Company's principal competitors for the manufacture of products in the aerospace and commercial aerospace industries field are Cleveland Pneumatic Tool Company in Cleveland, Ohio, and Menasco

Manufacturing Company in Burbank, California. While the Company is competitive with these companies in the areas of pricing, warranty and product performance, due to limited financing and manufacturing facilities, the Company cannot compete in the area of volume production.

The Company competes directly against two other firms supplying seismic damping devices, as well as numerous other firms which supply alternative seismic protection technologies.

Raw Materials and Supplies

The principal raw materials and supplies used by the Company in the manufacture of its products are provided by numerous U.S. suppliers. The loss of any one of these would not materially affect the Company's operations.

Patents, Trademarks and Licenses

Under a License Agreement ("License Agreement") dated November 1, 1959, between the Company and Tayco Developments, Inc. ("Developments"), the Company was granted preferential rights to market, in the United States and Canada, all existing and future inventions and patents developed by Developments. The term of this License Agreement is the life of the last-to-expire patent on which the Company is paying royalties, which is the year 2022. During the life of each patent, the Company pays Developments a 5% royalty on sales of items sold and shipped. The Company incurred royalties charges from Developments of $125,030 and $206,007 in FY03 and FY02, respectively. 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 FY03. 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 FY03, delivery time after receipt of orders averaged 12 to 14 weeks for the Company's standard products. Due to the volatility of construction and aerospace/defense programs, progress payments are usually required for larger projects utilizing custom designed components of the Company.

Dependence Upon Customers\Government Contracts

The Company is not dependent on any one or a few major customers.

Contracts between the Company and the federal government or its independent contractors are subject to termination at the election of the federal government. Contracts are generally entered into on a fixed price basis. From time to time, the Company has also entered into a cost plus defense contract. If the federal government should further limit defense spending, these contracts could be reduced or terminated, which could have a materially adverse effect on the Company.

Research and Development

The Company does not normally engage in any major product research and development activities in connection with the design of its products, except when funded by aerospace customers or the government. See Item 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, 2003 and May 31, 2002, the Company expended $400,910 and $415,800 respectively, on manufacturing research through Developments. For FY03 and FY02, defense sponsored research and development totaled $138,080 and $183,600, 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, 2003, the Company had 92 employees, including 3 executive officers, and 4 part time employees. The Company has good relations with its employees.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's production facilities occupies approximately six acres on Tonawanda Island, 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 with a recent expansion of 3,500 square feet (combined, approximately 13,500 square feet), and includes 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 building and is a 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 November 1994, as part of certain tax-exempt bond financing arrangements, the Company and the Niagara County Industrial Development Agency ("NCIDA") entered into a 15 year Series Lease by the Company of approximately 7,000 square feet of manufacturing space adjacent to the Company's existing large machine shop. The expansion partially accommodated the Company's increased need for additional manufacturing space for its seismic damper devices.

Rental payments, equivalent to payments of principal and interest due, are made quarterly by the Company over the term of the Lease, and are sufficient to amortize the $1,250,000 tax-exempt industrial development revenue Series A Bonds (the "Bond") issued by the NCIDA. The payments reimburse HSBC Bank, N.A. ("HSBC"), as issuer of the five year direct-pay irrevocable letter of credit, which is drawn upon by Bankers Trust Company, as Trustee, for the benefit of the bondholders. The letter of credit was renewed by HSBC on January 3, 2000 for another five-year period. The Bond bears interest at the HSBC Adjustable Rate Service ("MMARS") rate, plus an incremental amount designated by HSBC Securities, Inc. (the "Remarketing Agent"). The MMARS rate reflects the current bid-side yield of the highest rate short-term, federally tax exempt obligations currently being traded, announced weekly by the Remarketing Agent, not to exceed 15% per annum, and is the minimum rate of interest necessary to enable the Remarketing Agent to remarket the Bond at par. Annual principal payments by the Company in June of each year range from $25,000 to $150,000, including a final principal payment of $45,000 upon maturity on June 1, 2009. The Bond may be redeemed in whole, or in part, on any quarterly interest payment date, without penalty or premium. The principal amount outstanding on the Bond as of May 31, 2003 is $230,000.

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, secured by property located at 90 Taylor Drive, North Tonawanda, New York. The principal balance at May 31, 2003 is $91,000.

A mortgage note dated January 1998, due January 1, 2013 in the face amount of $400,000 is also held by HSBC on property located at 90 Taylor Drive, North Tonawanda, with an interest rate equal to the bank's

prime interest rate plus 1%. A monthly payment of $2,222.22 is due on the first of each month. The principal balance at May 31, 2003 is $260,000. All payments on the above obligations are current.

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, 2002 to May 31, 2003 totaled $159,600. The Lease Agreement, which contains standard terms and conditions, was renewed on November 1, 1995 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 $825 per month. The warehouse is located approximately one-half mile from the above-referenced production facilities and office space. In January 2000, the Company began leasing 4,450 sq. ft. in a warehouse located approximately 10 miles from the main production facilities. This warehouse is used to store completed units awaiting delivery instructions from customers. The total rental expense incurred by the Company for fiscal 2003 was $26,004.

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 05/31/03

Reg. 228.102(c)-Real Estate — PROPERTY LOCATION	COST	ACCUM. DEPRECIATION 05/31/03 (BOOK)	NET BOOK VALUE 05/31/03
90 & 100 Taylor Drive
N. Tonawanda, NY 14120
(see below)
Land	$ 141,483	N/A	$ 141,483
Buildings	1,154,353	$ 673,641	480,712
Improvements	2,575,562	604,529	1,971,033
TOTAL	$3,871,398	$1,278,170	$2,593,228

PROPERTY LOCATION	COST	ACCUM. DEPRECIATION 05/31/03 (BOOK)	NET BOOK VALUE 05/31/03	PERCENTAGE OF TOTAL ASSETS
90 Taylor Drive
N. Tonawanda, NY 14120
Land	$ 107,363	N/A	$ 107,363
Building	428,506	$ 424,914	3,592
Building Improve-Realty	297,664	39,931	257,733
Building Improve-Devices	2,277,898	564,598	1,713,300
TOTAL	$3,111,431	$1,029,443	$2,081,988	10.7%

| PROPERTY LOCATION | COST | ACCUM. DEPRECIATION 05/31/03 (BOOK) | NET BOOK VALUE 05/31/03 | PERCENTAGE OF
TOTAL ASSETS |
| --- | --- | --- | --- | --- |
| 100 Taylor Drive N. Tonawanda, NY 14120 | | | | |
| Land | $ 34,120 | N/A | $ 34,120 | |
| Building | 725,847 | $ 248,727 | 477,120 | |
| TOTAL | $759,967 | $248,727 | $511,240 | 2.6% |

Taylor Devices, Inc. & Subsidiary Total Assets as of May 31, 2003 $19,446,902

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.	05/31/03
90 & 100 Taylor Drive
N. Tonawanda, NY 14120
(see below)
	STR.
	LINE,
	ACRS,	15-40
Building	MACRS	Yrs.	$1,154,353	$ 721,464	$ 432,889
	STR.
	LINE,
Building	ACRS,	7-40
Improvements	MACRS	Yrs.	2,575,562	636,595	1,938,967
			$3,729,915	$1,358,059	$2,371,856

SUPPORTING SCHEDULE
Reg.228.102(c)(7)(vi)(A-D)
	FEDERAL	FEDERAL	FEDERAL	FEDERAL	NET TAX
	DEPREC.	LIFE	TAX	ACCUM.	BASIS
PROPERTY LOCATION	METHODS	CLAIM	COST	DEPREC .	05/31/03
90 Taylor Drive
N. Tonawanda, NY 14120
	STR.
	LINE,
	ACRS,	15-31.5
Building	MACRS	Yrs.	$ 428,506	$424,914	$ 3,592
	STR.
	LINE,
Building	ACRS,	7-39
Improve-Realty	MACRS	Yrs.	297,664	45,598	252,066
	STR.
	LINE,
Building	ACRS,	15-40
Improve-Devices	MACRS	Yrs.	2,277,898	590,997	1,686,901
TOTAL			$3,004,068	$1,061,509	$1,942,559
100 Taylor Drive
N. Tonawanda, NY
14120
	STR.
	LINE,
	ACRS,	19-40
Building	MACRS	Yrs.	$725,847	$296,550	$429,297

Reg. 228.102(c)(2)

Pursuant to the Lease Agreement dated July 1, 2000 between the Company and Developments, the Company leases approximately 800 square feet of office and research and development space to Developments at a base annual rental of $12,000. The rate of any rental increase may not exceed 10% annually and may be waived by both parties in writing. The lease automatically renews on each anniversary of its commencement date, unless either party gives three months' written notice to the other of termination. The lease provides that on April 1 of each year, management of both companies will review the agreement to determine possible increases for expenses due to increased taxes, maintenance costs, or for additional space utilized by Developments. In fiscal 2003, the Company received total rental payments of $12,000 from Developments.

ITEM 3. LEGAL PROCEEDINGS

None except for routine litigation incidental to the business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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 FY03 and FY02 are obtained from NASDAQ.

| | Fiscal 2003 — High | Low | Fiscal
2002 — High | Low |
| --- | --- | --- | --- | --- |
| First Quarter | 4.600 | 2.650 | 4.100 | 3.280 |
| Second Quarter | 2.940 | 2.000 | 6.770 | 3.700 |
| Third Quarter | 3.050 | 2.300 | 8.800 | 5.000 |
| Fourth Quarter | 2.750 | 2.050 | 6.900 | 4.440 |

Holders

As of August 20, 2003, the number of issued and outstanding shares of Common Stock was 2,926,460, and the approximate number of record holders of the Company's Common Stock was 1,030. 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 expire on October 5, 2008.

Other Information

On February 17, 2003, the Board of Directors approved the continued repurchase of Company stock in the open market in accordance with Rule 10b-18 of the Securities and Exchange Commission. In a Current Report on Form 8-K dated April 1, 2003, the Board of Directors of the Company announced that it will continue repurchases through April 1, 2004. The Company has purchased a total of 160,096 shares from January 12, 1999 through May 31, 2003 at an average price of $3.05 per share.

Equity Compensation Plan Information

The following table sets forth information regarding equity compensation plans of the Company as of May 31, 2003.

| Plan
Category | Equity Compensation Plan
Information — Number of securities to be issued upon exercise of outstanding
options, warrants, and rights (a) | Weighted-average exercise price of outstanding
options, warrants and rights (b) | Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column (a) ) (c) |
| --- | --- | --- | --- |
| Equity compensation plans approved by security holders | | | |
| 1994 Stock Option Plan 1998 Stock Option Plan 2002 Stock Option Plan 2002 Employee Stock Purchase Plan | 15,776 62,000 41,250 - | $4.19 $3.72 $3.42 - | - 0 - - 0 - 93,750 73,004 (1) |
| Equity compensation plans not approved by security
holders | none | | |
| Total | 119,026 | | 166,754 |

(1) As of May 31, 2003, 73,004 shares were available for issuance through an employee stock purchase plan. Eligible employees may purchase shares at fair market value through payroll deductions. The Company contributes a specified percentage of the employees' contribution based on the length of time the eligible employee has been an employee of the Company.

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 in this Item 6, "Management's Discussion and Analysis or Plan of Operations," 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 update the forward-looking statements in this report.

A summary of the period to period changes in the principal items included in the consolidated statements of income is shown below:

Increase / (Decrease)
Sales, net	($2,113,630)
Cost of goods sold	($2,492,014)
Selling, general and administrative expenses	($200,011)
Other expense, net	$473,418
Income before provision for income
taxes, equity in net income of affiliate and
minority stockholder's interest	$104,977
Provision for income taxes	$70,600
Income before equity in net income of
affiliate and minority stockholder's
interest	$34,377
Equity in net income of affiliate	($18,941)
Minority stockholder's interest	$2,728
Net income	$18,164

The Company's consolidated results of operations for the fiscal year ended May 31, 2003 showed an approximate 13% decrease in net revenues with an increase in net income of approximately 5%. The decrease in net revenues is primarily attributable to a slow construction market on the west coast of the United States where many of our seismic products are used, combined with delays in U.S government spending for aerospace and long-term defense projects. The decrease in revenues can also be attributed to the overall continued economic softness in the publicly funded construction industry. The level of construction of new buildings and bridges as well as retrofitting for seismic protection of existing buildings and bridges are directly affected by the amount of public funds available for such projects. The amount of public funds available for such projects has decreased in the past year.

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 losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined.

For financial statement presentation purposes, the Company nets progress billings against the total costs incurred on uncompleted contracts. The asset, "costs and estimated earnings in excess of billings," represents revenues recognized in excess of amounts billed. The liability, "billings in excess of costs and estimated earnings," represents billings in excess of revenues recognized.

Gross profit for the fiscal year ended May 31, 2003 increased by slightly less than 8% over the prior year in spite of the reduction in revenue during the same period. The gross profit as a percentage of net revenues for the current year was 38% as compared to 31% for the prior year. This increase in gross profit is primarily due to management efforts to reduce overhead costs combined with negotiated selling prices that are more favorable than the prior year. All expenses for shipping and handling costs are recorded as cost of goods sold.

Selling, general and administrative costs decreased for the fiscal year ended May 31, 2003 by approximately 4% from the prior year primarily due to lower levels of commission and royalty expenses which are directly related to the level of sales for the period. This decrease in expenses was partially offset by increases in professional expenses of $80,000 incurred in part to assure the integrity of financial reporting and corporate disclosure following passage of the Sarbanes-Oxley Act in 2002. The Company also experienced the full effect of the increase in insurance premiums that went into effect during the last quarter of the fiscal year ended May 31, 2002. Insurance expense increased by $130,000 over the prior year.

Depreciation expense increased over the prior year as a result of the full year's use of turning equipment and hydraulic test equipment acquired during the fiscal year ended May 31, 2002.

Operating income for the year of $787,088 is 277% better than the $208,693 level reached in the prior year. This is a result of a combination of the more favorable selling prices, reduced overhead costs and reduced selling, general and administrative costs in 2003, as described above..

Interest expense for the year is up almost 11% over the prior year even with the lowering of interest rates through the year on the Company's variable long-term and short-term debt. This increase reflects the Company's more frequent use of its operating line of credit to fund the production of larger projects that did not allow for advance payments or progress payments.

Miscellaneous income of $466,194 in the fiscal year ended May 31, 2002 was primarily cancellation fees recorded as the result of customer cancellation of long-term projects during that year. There were no such fees recorded during the current year.

Capital Resources, Line of Credit and Long-Term Debt

The Company's primary liquidity and capital requirements relate to the working capital needs. These are primarily inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, accrued commissions, billings in excess of costs and estimated earnings, and debt service. The Company's primary sources of liquidity have been from positive operating cash flows and from bank financing.

Capital expenditures for the year were $97,006 compared to $620,686 in the prior year when costly turning equipment and hydraulic test fixtures were acquired, as noted above. There are no material commitments for capital expenditures as of May 31, 2003.

The Company has a $7,500,000 line of credit on which there is a $4,329,000 balance outstanding as of May 31, 2003. This is down from the $4,848,000 balance outstanding as of May 31, 2002. The balance is expected to fall to below $1,800,000 during the first quarter of the fiscal year ended May 31, 2004 as significant projects are completed and payments are received from customers for these projects. The outstanding balance of the line of credit will fluctuate as the Company's various long-term projects progress.

Principal maturities of long-term debt for the next five years are as follows: 2004 - $206,227; 2005 - $219,912; 2006 - $230,965; 2007 - $242,857; and 2008 - $232,166.

Inventory, at $4,794,308 as of May 31, 2003, is higher by approximately 2% over the prior year-end. Of this, approximately 83% is work in process, 11% is finished goods, and 6% is raw materials.

Maintenance and other inventory represent stock that is estimated to have a product life-cycle in excess of twelve months. This stock represents certain items that the Company is required to maintain for service of products sold, and items that are generally subject to spontaneous ordering.

This inventory is particularly sensitive to technological obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological advances and product obsolescence. Therefore, management of the Company has recorded an allowance for potential inventory obsolescence. Management intends to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders.

The provision for potential inventory obsolescence was $180,000 and $137,000 for the years ended May 31, 2003 and 2002.

The Company combines the totals of accounts receivable, the asset "costs and estimated earnings in excess of billings", and the liability, "billings in excess of costs and estimated earnings" , to determine how much cash the Company will eventually realize from revenue recorded to date. As the accounts receivable figure rises in relation to the other two figures, the Company can anticipate increased cash receipts within the ensuing 30-60 days.

Accounts receivable of $4,219,972 as of May 31, 2003 includes approximately $445,000 of amounts retained by customers on long-term construction projects. The increase in accounts receivable over the prior year-end by approximately $1,300,000 is due to (1) recently completed long-term projects which had no progress billing provisions; and (2) the advanced stage of completion of many of the long-term contracts which provide for progress billings to the customers. All of these amounts, including the retainage, are expected to be collected during the fiscal year ended May 31, 2004.

As noted, above, the current asset, "costs and estimated earnings in excess of billings," represents revenues recognized in excess of amounts billed. Whenever possible, the Company negotiates a provision in sales contracts to allow the Company to bill, and collect from the customer, payments in advance of shipments. However, provisions such as this are often not possible in certain governmental contracts and contracts with foreign customers. The $3,866,389 balance in this account at May 31, 2003 is a 34% decrease from the prior year-end for the same reasons noted above for the increase in accounts receivable. This entire amount is expected to be billed during the fiscal year ended May 31, 2004.

As noted, above, the current liability, "billings in excess of costs and estimated earnings", represents billings to customers in excess of revenues recognized. The $159,750 balance in this account at May 31, 2003 is a significant decrease from the $1,566,324 balance at the end of the prior year. Final delivery of product under these contracts is expected to occur during the fiscal year ended May 31, 2004.

The Company's backlog of sales orders at May 31, 2003 is $9.2 million, up slightly from the backlog at the end of the prior year of $9.0 million. The $9.0 million backlog accounted for 65% of sales in 2003.

The trend of higher deferred billings and lower advance billings is expected to continue due to current contracts with limited progress billing provisions.

Accounts payable, at $1,369,300 as of May 31, 2003, is approximately $415,000 less than the prior year-end.

Commission expense on applicable sales orders is recognized at the time revenue is recognized. The commission is paid following receipt of payment from the customers. Accrued commissions as of May 31, 2003 are $1,633,381. This is approximately $490,000 higher than the prior year-end as a result of certain jobs with no progress billing provisions. The entire amount is expected to be paid during the fiscal year ended May 31, 2004.

Goodwill represents the excess of purchase price paid over fair value of net assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", the Company stopped amortizing goodwill effective June 1, 2002. Amortization expense was $6,048 for the year ended May 31, 2002. The Company assesses for the potential impairment of goodwill at least annually by determining whether its carrying amount exceeds its implied fair value. The Company completed its assessment of goodwill for the year ended May 31, 2003 and determined that an impairment charge was not warranted.

During the fiscal year ended May 31, 2003, the Company purchased 29,800 shares of its common stock via the Share Repurchase Program authorized by the Board of Directors. From time to time, subject to market price, the Company expects to continue reacquiring shares.

Management believes that the Company's internally generated cash flows and borrowing capacity under the bank line of credit will be sufficient to fund ongoing operations, capital improvements and share repurchases for the fiscal year ended May 31, 2004.

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.

ITEM 8A. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures .

The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures as of May 31, 2003 and have concluded that as of the evaluation date, the disclosure controls and procedures were adequate to ensure that material information relating to the Company was made known to the officers by others within the Company; Management continues to proceed with plans to upgrade its cost accounting procedures through customization of its current software.

(b) Changes in internal controls.

There have been no significant changes in the Company's internal controls or in other factors that could significantly affect such controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Throughout FY03 the Company has performed backward-looking reviews of all significant sales orders shipped and costed under progress billing conditions and determined that the current techniques provide adequate in-process information. The effort will now concentrate on converting the data gathering aspects of this process to EDP methods to improve response times and minimize the manual input currently required.

PART III

The information required by Items 9, 10, 11 and 12 of this part will be presented in the Company's Proxy Statement to be issued in connection with the Annual Meeting of Shareholders to be held on November 14, 2003, which information is hereby incorporated by reference into this Annual Report. The proxy materials, including the Proxy Statement, will be filed within 120 days after the Company's fiscal year end.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

DOCUMENTS FILED AS PART OF THIS REPORT:

Index to Financial Statements:

(i)	Independent Auditors' Report
(ii)	Consolidated Balance Sheets May 31, 2003 and 2002
(iii)	Consolidated Statements of Income for the years ended May
31, 2003 and 2002
(iv)	Consolidated Statements of Stockholders' Equity for the
years ended May 31, 2003 and 2002
(v)	Consolidated Statements of Cash Flows for the years ended
May 31, 2003 and 2002
(vi)	Notes to Consolidated Financial Statements May 31, 2003 and
2002

(a) EXHIBITS:

(3)
(i)	Restated Certificate of Incorporation incorporated by reference to
Exhibit (3)(i) of Annual Report on Form 10-K, dated August 24, 1983.
(ii)	Amendment to Certificate of Incorporation incorporated by reference to
Exhibit (3)(iv) to Form 8 [Amendment to Application or Report], dated
September 24, 1993.
(iii)	Amendment to Certificate of Incorporation creating Series A Junior
Participating Preferred Stock, $.05 par value, incorporated by reference
as Exhibit (3)(i)(viii) to Quarterly Report on Form 10-QSB for the period
ending November 30, 1998, dated January 12, 1999.
(iv)	Certificate of Change incorporated by reference as Exhibit (3)(i) to
Quarterly Report on Form 10-QSB for the period ending November 30,
2002.
(v)	Proxy Review Guidelines incorporated by reference to Exhibit (3)(ii)
to Quarterly Report on Form 10-QSB for the period ending February 28,
1998, dated April 10, 1998.
(vi)	By-laws incorporated by reference to Exhibit (3)(i) to Quarterly
Report on Form 10-QSB for the period ending February 28, 2003, dated April
14, 2003.

(4)
(i)	Mortgage to Marine Midland Bank dated May 28, 1993 incorporated by
reference to Exhibit (10)(vii) to Annual Report on Form 10-KSB, dated
September 10, 1993.
(ii)	Master Indenture between Niagara County Industrial Development Agency
and Bankers Trust Company, as Trustee, dated as of November 1, 1994
($1,250,000 Niagara County Industrial Development Agency, 1994 Adjustable
Rate Demand, Industrial Development Revenue Bonds, Series A [MMARS Second
Program]), incorporated by reference to Exhibit (4)(iv) to Annual Report
on Form 10-KSB, dated August 21, 1995.
(iii)	Series Supplemental Indenture between Niagara County Industrial
Development Agency and Bankers Trust Company, as Trustee, ($1,250,000
Niagara County Industrial Development Agency, 1994 Adjustable Rate Demand,
Industrial Development Revenue Bonds, Series A [MMARS Second Program]),
incorporated by reference to Exhibit (4)(v) to Annual Report on Form
10-KSB, dated August 21, 1995.
(iv)	Series Mortgage from Niagara County Industrial Development Agency,
Tayco Realty, Inc. and registrant to Marine Midland Bank, as Letter of
Credit Bank, dated as of November 1, 1994, incorporated by reference to
Exhibit (4)(vi) to Annual Report on Form 10-KSB, dated August 21,
1995.
(v)	Mortgage from Niagara County Industrial Development Agency, Tayco
Realty, Inc. and registrant to Marine Midland Bank, dated January 3, 1998,
incorporated by reference to Exhibit (4)(v) to Annual Report on Form
10-KSB, dated August 25, 1998.
(vi)	Rights Agreement by and between registrant and Regan & Associates,
Inc, dated as of October 5, 1998 and letter to shareholders (including
Summary of Rights), dated October 5, 1998, attached as Exhibits 4 and 20,
respectively to Registration Statement on Form 8-A 12G, filed with the
Securities and Exchange Commission on October 6,
1998.

(10)
(i)	1994 Taylor Devices, Inc. Stock Option Plan incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-8, File No.
33-88152, as filed with the Securities and Exchange Commission on December
30, 1994.
(ii)	1998 Taylor Devices, Inc. Stock Option Plan attached as
Exhibit 4.1 to Registration Statement on Form S-8, File No. 33-6905, filed
with the Securities and Exchange Commission on December 24, 1998.
(iii)	2002 Taylor Devices, Inc. Stock Option Plan attached as
Exhibit A to Definitive Proxy Statement, filed with the Securities and
Exchange Commission on September 27, 2002.
(iv)	License Agreement between the registrant and Tayco
Developments, Inc., dated November 1, 1959, incorporated by reference to
Exhibit (10)(i) to Annual Report on Form 10-K, dated August 27,
1982.
(v)	The 1999 Taylor Devices, Inc. Employee Stock Purchase Plan
incorporated by reference to Exhibit 4.1 to Registration Statement on Form
S-8, File No. 333-89847, filed with the Securities and Exchange Commission
on October 28, 1999.

| (vi) | The 2002 Taylor Devices, Inc. Employee Stock Purchase Plan
incorporated by reference to Exhibit 4.1 to Registration Statement on Form
S-8, File No. 333-91232, filed with the Securities and Exchange Commission
on June 26, 2002. |
| --- | --- |
| (vii) | Loan Agreements between the registrant and Marine Midland
Bank, dated December 2, 1992, incorporated by reference to Exhibit
(10)(viii) to Annual Report on Form 10-K, dated September 10, 1993. |
| (viii) | Series Lease between Niagara County Industrial Development
Agency and registrant, dated as of November 1, 1994 ($1,250,000 Niagara
County Industrial Development Agency, 1994 Adjustable Rate Demand,
Industrial Development Revenue Bonds, Series A [MMARS Second Program]),
incorporated by reference to Exhibit (10)(ix) to the Annual Report on Form
10-KSB, dated August 21, 1995. |
| (ix) | Lease Agreement between registrant and Tayco Realty
Corporation, dated November 1, 1995, incorporated by reference to Exhibit
(10)(ix) to Annual Report on Form 10-KSB, dated August 22, 1996. |
| (x) | Form of Indemnity Agreement between registrant and certain
officers and directors, incorporated by reference to Exhibit (10)(i) to
Quarterly Report on Form 10-QSB for the period ending February 28, 1997,
dated April 11, 1997. |
| (xi) | Lease Agreement dated July 1, 2000 between the Registrant
and Tayco Developments, Inc., incorporated by reference to Exhibit
(10)(xii) to Annual Report on Form 10-KSB, dated August 25, 2000. |
| (xii) | Employment Agreement dated as of December 1, 2000 between
the Registrant and Douglas P. Taylor, incorporated by reference to Exhibit
(10)(x) to Annual Report on Form 10-KSB, dated August 22, 2002. |
| (xiii) | Employment Agreement dated as of December 1, 2000 between
the Registrant and Richard G. Hill, incorporated by reference to Exhibit
(10)(xi) to Annual Report on Form 10-KSB, dated August 22,
2002. |

(11) Statement re computation of per share earnings

REG. 228.601(A)(11) STATEMENT RE COMPUTATION OF PER SHARE

WEIGHTED AVERAGE OF COMMON STOCK/EQUIVALENTS O/S - F/Y/E 5/31/03

WEIGHTED AVERAGE COMMON STOCK OUTSTANDING		2,857,569
COMMON SHARES ISSUABLE UNDER STOCK OPTION PLANS USING TREASURY STOCK
METHOD		- 0 -
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING ASSUMING DILUTION		2,857,569
NET INCOME F/Y/E 5/31/03	(1)	$350,943
WEIGHTED AVERAGE COMMON STOCK	(2)	2,857,569
BASIC EARNINGS PER COMMON SHARE (1) DIVIDED BY (2)		$ .12
NET INCOME F/Y/E 5/31/03	(3)	$350,943
WEIGHTED AVERAGE COMMON STOCK
OUTSTANDING ASSUMING DILUTION	(4)	2,857,569
DILUTED EARNINGS PER COMMON SHARE (3) DIVIDED BY (4)		$ .12

WEIGHTED AVERAGE OF COMMON STOCK OUTSTANDING - F/Y/E 5/31/02

WEIGHTED AVERAGE COMMON STOCK OUTSTANDING		2,826,935
COMMON SHARES ISSUABLE UNDER STOCK OPTION PLANS USING TREASURY STOCK
METHOD		30,763
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING ASSUMING DILUTION		2,857,698
NET INCOME F/Y/E 5/31/02	(1)	$332,779
WEIGHTED AVERAGE COMMON STOCK	(2)	2,826,935
BASIC EARNINGS PER COMMON SHARE (1) DIVIDED BY (2)		$ .12
NET INCOME F/Y/E 5/31/02	(3)	$332,779
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING ASSUMING DILUTION	(4)	2,857,698
DILUTED EARNINGS PER COMMON SHARE (3) DIVIDED BY (4)		$ .12

(14) Code of Ethics

(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

(31)	Officer Certifications
	(i)	Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act.
	(ii)	Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act.
(32)	Officer Certifications
	(i)	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act.
	(ii)	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of Sarbanes-Oxley
Act.

| (b) |
| --- |
| Current Report on Form 8-K, filed April 1, 2003, announced the
Registrant's plan to continue to purchase Registrant's common stock from
selling shareholders through open-market purchases. |

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.

TAYLOR DEVICES, INC.
(Registrant)

By:
Douglas P. Taylor
President and Director
(Principal Executive Officer)

and

By:
Mark V. McDonough
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:	/s/Joseph P. Gastel	By:	/s/Richard G. Hill
	Joseph P. Gastel, Director		Richard G. Hill, Director
	August 22, 2003		August 22, 2003
By:	/s/Donald B. Hofmar	By:	/s/Randall L. Clark
	Donald B. Hofmar, Director		Randall L. Clark, Director
	August 22, 2003		August 22, 2003

CONSENT OF INDEPENDENT AUDITORS

To The Board of Directors of Taylor Devices Inc.

Gentlemen:

We hereby consent to the incorporation by reference in this Annual Report on Form 10-KSB (Commission File Number 0-3498) of Taylor Devices Inc. of our report dated August 8, 2003, included in the May 31, 2003 Annual Report of Stockholders of Taylor Devices, Inc.

/s/ Lumsden & McCormick, LLP

LUMSDEN & McCORMICK, LLP Buffalo, New York August 8, 2003

TAYLOR DEVICES INC.

CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2003

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders Taylor Devices, Inc.

We have audited the accompanying consolidated balance sheets of Taylor Devices, Inc. and Subsidiary as of May 31, 2003 and 2002 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Taylor Devices, Inc. and Subsidiary as of May 31, 2003 and 2002 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Lumsden & McCormick, LLP Buffalo, New York August 8, 2003

TAYLOR DEVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
May 31,	2003	2002
Assets
Current assets:
Cash and cash equivalents	$ 417,166	$ 224,110
Short-term
investments	265,720	261,455
Restricted funds held by Trustee (Note 9)	21,476	66,409
Accounts receivable, net (Note 2)	4,219,972	2,895,588
Inventory (Note 3)	4,794,308	4,699,064
Prepaid expenses	23,669	214,873
Prepaid income
taxes	-	243,933
Costs and estimated earnings in excess of billings
(Note 4)	3,866,389	5,822,945
Deferred income taxes (Note 11)	553,700	554,700
Total current assets	14,162,400	14,983,077
Maintenance and other inventory, net (Note
5)	571,193	719,736
Property and
equipment, net (Note 6)	3,916,008	4,148,524
Investment in
affiliate, at equity (Note 7)	408,722	381,624
Cash value of
life insurance, net	293,383	280,164
Intangible assets	52,381	60,781
Goodwill	42,815	42,815
	$19,446,902	$20,616,721
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings (Note 8)	$ 4,329,000	$ 4,848,000
Current portion of long-term debt (Note
9)	206,227	257,737
Payables -
affiliate	561,504	540,134
Payables -
others	1,369,300	1,784,847
Accrued
commissions	1,633,381	1,143,719
Other accrued
expenses	864,304	557,280
Billings in excess of
costs and estimated earnings (Note 4)	159,750	1,566,324
Accrued income
taxes	53,315	-
Total current liabilities	9,176,781	10,698,041
Long-term debt (Note
9)	1,208,522	1,414,276
Deferred income taxes (Note 11)	232,300	180,700
Minority stockholder's interest	396,929	372,945
Stockholders' Equity:
Common stock,
$.025 par value, authorized 8,000,000 shares,
issued 3,146,715
and 3,068,958 shares	78,668	76,724
Paid-in capital	3,668,259	3,468,158
Retained
earnings	5,566,826	5,215,883
	9,313,753	8,760,765
Treasury stock - 237,201
and 207,401 shares at cost	(881,383 )	(810,006)
Total stockholders' equity	8,432,370	7,950,759
	$19,446,902	$20,616,721
See
accompanying notes.

| TAYLOR DEVICES, INC. AND
SUBSIDIARY | | |
| --- | --- | --- |
| Consolidated Statements of
Income | | |
| For the years ended May
31, | 2003 | 2002 |
| Sales,
net (Note 10) | $13,872,315 | $15,985,945 |
| Cost
of goods sold | 8,569,204 | 11,061,218 |
| Gross profit | 5,303,111 | 4,924,727 |
| Selling, general and administrative expenses | 4,516,023 | 4,716,034 |
| Operating income | 787,088 | 208,693 |
| Other
income (expense): | | |
| Rental
income - affiliate (Note 13) | 12,000 | 12,000 |
| Interest, net | (314,475) | (284,535 ) |
| Miscellaneous | 22,716 | 466,194 |
| Total
other income (expense) | (279,759) | 193,659 |
| Income
before provision for income taxes, equity in | | |
| net income of affiliate and minority stockholder's
interest | 507,329 | 402,352 |
| Provision for income taxes (Note 11) | 159,500 | 88,900 |
| Income
before equity in net income of affiliate | | |
| and minority stockholder's interest | 347,829 | 313,452 |
| Equity
in net income of affiliate (Note 7) | 27,098 | 46,039 |
| Income
before minority stockholder's interest | 374,927 | 359,491 |
| Minority stockholder's interest | (23,984) | (26,712 ) |
| Net income | $
350,943 | $ 332,779 |
| Basic and diluted earnings per
common share (Note 12) | $
0.12 | $ 0.12 |
| See accompanying notes . | | |

| TAYLOR DEVICES, INC. AND
SUBSIDIARY | | | | |
| --- | --- | --- | --- | --- |
| Consolidated Statements of
Stockholders' Equity | | | | |
| For the years ended May 31, 2003 and
2002 | | | | |
| | Common | Paid-In | Retained | Treasury |
| | Stock | Capital | Earnings | Stock |
| Balance, May 31, 2001 | $ 73,253 | $ 2,938,818 | $ 4,883,104 | $
(393,245) |
| Net
income for the year ended May 31, 2002 | - | - | 332,779 | - |
| Common
stock issued for employee stock purchase plan (Note
15) | 1,021 | 198,353 | - | - |
| Common
stock issued under stock option plans (Note
16) | 2,450 | 330,987 | - | - |
| Treasury stock acquired (Note 17) | - | - | - | (416,761) |
| Balance, May 31, 2002 | 76,724 | 3,468,158 | 5,215,883 | (810,006 ) |
| Net
income for the year ended May 31, 2003 | - | - | 350,943 | - |
| Common
stock issued for employee stock purchase plan (Note 15) | 1,944 | 200,101 | - | - |
| Treasury stock acquired (Note 17) | - | - | - | (71,377) |
| Balance, May 31, 2003 | $
78,668 | $
3,668,259 | $
5,566,826 | $
(881,383) |
| See accompanying
notes. | | | | |

| TAYLOR DEVICES, INC. AND
SUBSIDIARY | | |
| --- | --- | --- |
| Consolidated Statements of Cash Flows | | |
| For the years ended May
31, | 2003 | 2002 |
| Cash flows from operating
activities: | | |
| Net
income | $ 350,943 | $ 332,779 |
| Adjustments to
reconcile net income to net cash flows from | | |
| operating activities: | | |
| Depreciation and
amortization | 337,919 | 306,955 |
| Gain on sale of equipment | (6,000 ) | - |
| Bad debts expense | 102,000 | 66,980 |
| Provision for inventory obsolescence | 180,000 | 137,000 |
| Equity in net income of affiliate | (27,098) | (46,039) |
| Deferred income
taxes | 52,600 | (85,800) |
| Minority
stockholder's interest | 23,984 | 26,712 |
| Changes in other
current assets and current liabilities: | | |
| Accounts receivable | (1,426,384) | 233,974 |
| Inventory | (126,701) | (1,770,976) |
| Prepaid expenses | 191,204 | (133,257) |
| Prepaid income taxes | 243,933 | (243,933) |
| Costs and estimated earnings in excess of
billings | 1,956,556 | (2,726,620) |
| Payables - affiliate | 21,370 | 149,125 |
| Payables - others | (415,547) | 259,415 |
| Accrued commissions | 489,662 | 577,871 |
| Other accrued expenses | 307,027 | 141,031 |
| Billings in excess of costs and estimated
earnings | (1,406,574) | 225,912 |
| Accrued income taxes | 53,315 | (59,820) |
| Net cash flows from (for) operating
activities | 902,209 | (2,608,691) |
| Cash flows from investing
activities: | | |
| Increase in
short-term investments | (4,265) | (9,691) |
| Net cash
received from trustee | 44,933 | 48,750 |
| Proceeds from
sale of property and equipment | 6,000 | - |
| Acquisition of
property and equipment | (97,006) | (620,686) |
| Increase in
cash value of life insurance | (13,219) | (20,917) |
| Net cash flows for investing
activities | (63,557) | (602,544) |
| Cash flows from financing
activities: | | |
| Net short-term
borrowings | (519,000) | 3,018,000 |
| Payments on long-term debt | (257,264) | (321,076) |
| Proceeds from long-term debt | - | 562,524 |
| Proceeds from issuance of common stock | | |
| - employee stock purchase plan | 202,045 | 199,374 |
| - exercise of stock options | - | 37,084 |
| Acquisition of treasury stock | (71,377) | (120,408) |
| Net cash flows from (for) financing
activities | (645,596) | 3,375,498 |
| Net increase in
cash and cash equivalents | 193,056 | 164,263 |
| Cash and cash
equivalents - beginning | 224,110 | 59,847 |
| Cash and cash equivalents -
ending | $ 417,166 | $ 224,110 |
| See accompanying
notes. | | |

| TAYLOR DEVICES, INC. AND
SUBSIDIARY |
| --- |
| Notes to Consolidated Financial
Statements |

1. Summary of Significant Accounting Policies:

Nature of Operations:

Taylor Devices, Inc. (the Company) is primarily engaged in the manufacture and sale of tension control, energy storage and shock absorption devices for use in various types of machinery, equipment and structures, primarily to customers which are located throughout the United States and several foreign countries.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the Company and its 58% owned subsidiary, Tayco Realty Corporation (Realty). Minority stockholder's interest represents Tayco Developments, Inc.'s (Developments) 42% ownership interest in Realty. All intercompany transactions and balances have been eliminated.

The Company's investment in its minority-owned affiliate, Developments, is reported on the equity method (see Note 7).

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents and Short Term Investments:

The Company includes all highly liquid investments in money market funds and certificates of deposit with original maturities of three months or less in cash and cash equivalents on the accompanying balance sheets. Certificates of deposit with original maturities of over three months are considered short-term investments.

Cash and cash equivalents in financial institutions may exceed insured limits at various times during the year and subject the Company to concentrations of credit risk.

Accounts Receivable:

Accounts receivable are stated at an amount management expects to collect from outstanding balances. Management provides for probable uncollectible accounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

Inventory:

Inventory is stated at the lower of first-in, first-out cost or market.

Property and Equipment:

Property and equipment is stated at cost net of accumulated depreciation. Deprecation is provided primarily using the straight-line method for financial reporting purposes, and accelerated methods for income tax reporting purposes. Maintenance and repairs are charged to operations as incurred; significant improvements are capitalized.

Cash Value of Life Insurance:

Cash value of life insurance is stated at the surrender value of the contracts less outstanding policy loans.

Intangible Assets:

Intangible assets consist of financing costs associated with obtaining new financing and are capitalized and amortized over the repayment terms of the related debt obligations.

Goodwill:

Goodwill represents the excess of purchase price paid over fair value of net assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, the Company stopped amortizing goodwill effective June 1, 2002. Amortization expense was $6,048 for the year ended May 31, 2002. The Company assesses for the potential impairment of goodwill at least annually by determining whether its carrying amount exceeds its implied fair value. The Company completed its assessment of goodwill for the year ended May 31, 2003 and did not record an impairment charge.

Revenue Recognition:

Sales are recognized when units are delivered or services are performed. Sales under fixed-price contracts are recorded as deliveries are made at the contract sales price of the units delivered. Sales under certain fixed-price contracts requiring substantial performance over several periods prior to commencement of deliveries, are accounted for under the percentage-of-completion method of accounting whereby revenues are recognized based on estimates of completion prepared on a ratio of cost to total estimated cost basis. Costs include all material and direct and indirect charges related to specific contracts. Other expenses are charged to operations as incurred.

Adjustments to cost estimates are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined.

For financial statement presentation purposes, the Company nets progress billings against the total costs incurred on uncompleted contracts. The asset, "costs and estimated earnings in excess of billings," represents revenues recognized in excess of amounts billed. The liability, "billings in excess of costs and estimated earnings," represents billings in excess of revenues recognized.

Shipping and Handling Costs:

Shipping and handling costs are classified as a component of cost of goods sold.

Income Taxes:

The provision for income taxes provides for the tax effects of transactions reported in the financial statements regardless of when such taxes are payable. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax and financial statement basis of assets and liabilities. Deferred taxes are based on tax laws currently enacted with tax rates expected to be in effect when the taxes are actually paid or recovered.

Stock-Based Compensation:

The Company applies APB Opinion 25 Accounting for Stock Issued to Employees and related interpretations in accounting for its stock option plans. Since the option price is the fair market value per share on the date the option is granted, no compensation cost has been recognized for its stock option plans.

Had compensation cost for the stock options plans been determined based on the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below:

	2003	2002
Net
income:
As reported	$350,943	$332,779
Pro
forma	$299,891	$227,941
Basic and
diluted earnings per
common share:
As reported	$.12	$.12
Pro
forma	$.10	$.08

Reclassifications:

The 2002 financial statements have been reclassified to conform with the presentation adopted for 2003.

2. Accounts Receivable:

	2003	2002
Customers	$ 3,850,576	$2,767,838
Customers - retention	444,896	254,250
Other	1,500	4,500
	4,296,972	3,026,588
Less
allowance for doubtful
accounts	77,000	131,000
	$ 4,219,972	$2,895,588

3. Inventory:

	2003	2002
Raw
materials	$ 314,874	$ 210,030
Work-in-process	3,970,202	4,124,424
Finished goods	509,232	364,610
	$4,794,308	$4,699,064

4. Costs and Estimated Earnings on Uncompleted Contracts:

	2003	2002
Costs incurred on uncompleted
contracts	$6,615,975	$6,997,900
Estimated earnings	4,068,025	3,536,203
	10,684,000	10,534,103
Less billings to date	6,977,361	6,277,482
	$3,706,639	$4,256,621

Included in the accompanying balance sheets under the following captions:

	2003	2002
Costs and estimated earning in
excess of
billings	$3,866,389	$5,822,945
Billings in excess of costs and
estimated
earnings	(159,750)	(1,566,324)
	$3,706,639	$4,256,621

5. Maintenance and Other Inventory

	2003	2002
Maintenance and other inventory	$ 1,571,193	$1,539,736
Less allowance
for obsolescence	1,000,000	820,000
	$ 571,193	$ 719,736

Maintenance and other inventory represents stock that is estimated to have a product life-cycle in excess of twelve-months. This stock represents certain items that the Company is required to maintain for service of products sold, and items that are generally subject to spontaneous ordering.

This inventory is particularly sensitive to technological obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological advances and product obsolescence. Therefore, management of the Company has recorded an allowance for potential inventory obsolescence.

The provision for potential inventory obsolescence was $180,000 and $137,000 for the years ended May 31, 2003 and 2002.

6. Property and Equipment:

	2003	2002
Land	$ 141,483	$ 141,483
Buildings and improvements	3,751,018	3,737,192
Machinery and equipment	3,861,648	3,825,474
Office
furniture and equipment	474,373	467,132
Autos and trucks	86,625	76,081
	8,315,147	8,247,362
Less accumulated depreciation	4,399,139	4,098,838
	$3,916,008	$4,148,524

Depreciation expense was $329,519 and $292,507 for the years ended May 31, 2003 and 2002.

The following is a summary of property and equipment included above which is held under capital leases:

	2003	2002
Buildings and improvements	$ 806,707	$ 806,707
Machinery and equipment	722,915	722,915
Office
furniture and equipment	102,985	102,985
	1,632,607	1,632,607
Less
accumulated amortization	767,741	687,876
	$ 864,866	$ 944,731

Minimum future lease payments under capital leases as of May 31, 2003 for each of the next five years and in the aggregate are included in long-term debt (see Note 9).

Amortization of property and equipment under the capital leases included in depreciation expense is $79,865 and $76,951 for the years ended May 31, 2003 and 2002.

7. Investment in Affiliate:

Investment in affiliate consists of the Company's 23% ownership interest in common shares of Developments acquired at a cost of $85,619, plus the Company's cumulative equity in the net income of Developments of $323,103 and $296,005 through the years ended May 31, 2003 and 2002. The quoted market value of the Company's common shares of Developments at May 31, 2003 and 2002 was $439,510 and $764,862.

8. Short-Term Borrowings:

The Company has available a $7,500,000 bank demand line of credit with interest payable at the Company's option of 30, 60 or 90 day LIBOR rate plus 2.25% or the bank's prime rate less .25%. The line is secured by accounts receivable, equipment, inventory, and general intangibles. This line of credit is subject to the usual terms and conditions applied by the bank, and is subject to renewal annually. The amount outstanding under this line at May 31, 2003 was $4,329,000, of which $2,500,000 was payable at the 90 day LIBOR rate plus 2.25% (3.53% at May 31, 2003) and $1,829,000 payable at the bank's prime rate less .25% (4% at May 31, 2003). The amount outstanding at May 31, 2002 was $4,848,000.

The Company uses a cash management facility under which the bank draws against the available line of credit to cover checks presented for payment on a daily basis. Outstanding checks under this arrangement totaled $68,639 and $132,925 as of May 31, 2003 and 2002. These amounts are included in accounts payable.

9. Long-Term Debt:

	2003	2002
Bank
term note, monthly payments of
$13,713 including
interest at 7.19%,
secured by
substantially all assets of
the Company, with the
remaining
unpaid principal balance payable in
October 2008.	$ 737,300	$ 843,823
Industrial Revenue Development
Bonds, annual principal payments
ranging from $45,000 to
$150,000
through June 2009 plus interest
at
variable rates based on the
highest
rated short-term, federally
tax
exempt obligations (1.45% at
May
31, 2003).	230,000	315,000
Bank mortgage
note, monthly
principal payments of $1,444
plus
interest at the bank's prime
rate
plus 1% (5.25% at May 31,
2003),
secured by related property,
with
the remaining unpaid
principal
balance payable in June
2008.	91,001	108,334
Bank mortgage,
monthly principal
payments of $2,222 plus interest
at
the bank's prime rate plus
1%
(5.25% at May 31, 2003),
secured
by substantially all assets of
the
Company, due February
2013.	260,000	286,667
Capital lease and other
obligations
with varying maturities and
interest
rates, secured by related
assets.	96,448	118,189
	1,414,749	1,672,013
Less current portion	206,227	257,737
	$1,208,522	$1,414,276

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 a bank 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 $230,000 as of May 31, 2003.

As of May 31, 2003, $21,476 of funds were held by a trustee, representing an interest-bearing tax-free money fund restricted for principal reduction payments of the Industrial Revenue Development Bond during fiscal year ending May 31, 2004.

The term note and mortgage note are subject to certain restrictive covenants relating to net working capital, tangible net worth and capital expenditures.

The aggregate maturities of long-term debt subsequent to May 31, 2003 are:

2004	$ 206,227
2005	219,912
2006	230,965
2007	242,857
2008	232,166
Thereafter	282,622
	$1,414,749

10. Sales:

Sales to two customers approximated 11% and 13% of net sales for 2003. Sales to two customers approximated 11% and 11% of net sales for 2002.

11. Income Taxes:

	2003	2002
Current tax provision:
Federal	$98,200	$165,800
State	8,700	8,900
	106,900	174,700
Deferred tax position:
Federal	47,500	(77,500)
State	5,100	(8,300)
	52,600	(85,800)
	$ 159,500	$88,900

A reconciliation of provision for income taxes at the statutory rate to income tax provision at the Company's effective rate is as follows:

	2003	2002
Computed tax provision at the
expected statutory
rate	$173,600	$143,400
Effect
of graduated Federal rates on
subsidiary
income	(11,600)	(11,100)
State
income tax - net of Federal
tax
benefit	5,700	300
Tax
effect of permanent differences :

Equity in net income of affiliate	(9,200 )	(15,700)
Non-qualified stock
option
compensation	-	(20,400)
Other permanent
differences	-	(3,100)
Other	1,000	(4,500)
	$159,500	$88,900

Significant components of the Company's deferred tax assets and liabilities consist of the following:

	2003	2002
Deferred tax assets:
Allowance for
doubtful receivables	$ 28,000	$ 47,600
Tax
inventory adjustment	47,300	59,300
Allowance for obsolete inventory	363,100	297,700
Accrued vacation	35,200	33,700
Warranty allowance	29,000	29,000
Accrued losses on long-term
contracts	51,100	87,400
	553,700	554,700
Deferred tax
liabilities
Excess tax depreciation	(232,300)	(180,700)
Net deferred tax assets	$ 321,400	$374,000

Income on undistributed earnings from affiliates and subsidiary are considered to be permanently reinvested, and therefore no provision for deferred income taxes has been recorded.

The Company and its subsidiary file separate Federal and State income tax returns. As of May 31, 2003, the Company had State investment tax credit carryforwards of approximately $144,000 expiring through May 2013.

12. Earnings Per Common Share:

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average common shares outstanding for the period. Diluted earnings per common share reflects the weighted-average common shares outstanding and dilutive potential common shares, such as stock options.

A reconciliation of weighted-average common shares outstanding to weighted-average common shares outstanding assuming dilution is as follows:

	2003	2002
Average common shares:
outstanding	2,857,569	2,826,935
Common shares issuable under
stock
option plans	- 0 -	30,763
Average common shares
outstanding assuming dilution	2,857,569	2,857,698

13. Related Party Transactions:

Included in cost of goods sold are research and development expenses charged by Developments for services performed by its research engineers in the amount of $400,910 and $415,800 for the years ended May 31, 2003 and 2002.

Included in selling, general and administrative expenses is royalty expense charged by Developments for the use of patents in the Company's manufacturing operations in the amount of $125,030 and $206,007 for the years ended May 31, 2003 and 2002.

The Company leases certain office and laboratory facilities to Developments for a current annual rental of $12,000.

14. 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.

15. Employee Stock Purchase Plan:

The Company has reserved 135,000 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 employment with the Company. 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, 2003 and 2002, 77,757 ($2.17 to $3.98 price per share) and 40,836 ($3.42 to $7.48 price per share) common shares, respectively, were issued to employees. As of May 31, 2003, 73,004 shares were reserved for further issue. The amount of Company matching expense was $65,326 and $61,328 for the years ended May 31, 2003 and 2002.

In June 2002, the Company reserved an additional 135,000 shares of common stock for issuance pursuant to this plan.

16. Stock Option Plans:

In 2001, the Company adopted both a nonqualified and incentive stock option plan. The incentive stock option plan qualifies for preferential treatment under the Internal Revenue Code. Under these plans, 135,000 shares of common stock have been reserved for grant to key employees and directors of the Company. Under both plans the option price may not be less than the fair market value of the stock at the time the options are granted. Options expire ten years from the date of grant. Options granted under the Company's previous nonqualified and incentive stock option plans expire five to ten years from the date of grant and are exercisable over the period stated in each option.

The Company has adopted the disclosure method of SFAS No. 123 Accounting for Stock-Based Compensation . Using the Black-Scholes option valuation model, the estimated fair value of each option granted under the plan was $2.00 and $3.65 during 2003 and $4.92 and $3.20 during 2002. Principal assumptions used in applying the Black-Scholes model to options at date of grant were as follows:

	2003	2002
Risk-free interest
rate	3.625%	5.06% and 5.36%
Expected life in years	10	10
Expected volatility	82% and 86%	83%
Expected dividend
yield	0%	0%

The following is a summary of stock option activity:

	2003	2002
Outstanding, beginning of year	100,776	165,776
Options granted	33,250	38,000
Options exercised	-	(98,000)
Options expired	(15,000)	(5,000)
Outstanding, end of year (at
prices ranging
from $2.06 to
$5.75 per share)	119,026	100,776

During the year ended May 31, 2002, option holders exercised 98,000 options ranging from $2.06 to $5.56 per share and received 98,000 shares of the Company's common stock.

The following table summarizes information about stock options outstanding at May 31, 2003:

| Outstanding and Exercisable — Range of Exercise Prices | Number of Options | Weighted Average Remaining Years of
Contractual Life | Weighted Average Exercise
Price |
| --- | --- | --- | --- |
| $2.00-$3.00 | 48,000 | 8.2 | $2.40 |
| $3.01-$4.00 | 31,776 | 7.0 | $3.47 |
| $4.01-$5.00 | 8,250 | 9.2 | $4.26 |
| $5.01-$6.00 | 31,000 | 7.9 | $5.71 |
| $2.00-$6.00 | 119,026 | 7.9 | $3.68 |

The following table summarizes information about stock options outstanding at May 31, 2002:

| Outstanding and
Exercisable — Range of Exercise Prices | Number of Options | Weighted Average Remaining Years of
Contractual Life | Weighted Average Exercise
Price |
| --- | --- | --- | --- |
| $2.00-$3.00 | 23,000 | 7.5 | $2.42 |
| $3.01-$4.00 | 31,776 | 8.0 | $3.47 |
| $4.01-$5.00 | 15,000 | 0.9 | $4.28 |
| $5.01-$6.00 | 31,000 | 8.9 | $5.71 |
| $2.00-$6.00 | 100,776 | 7.1 | $4.04 |

17. Treasury Stock:

The Company purchased 29,800 shares of its common stock for a total of $71,377 (ranging from $2.02 to $2.50 per share) during the year ended May 31, 2003.

The Company purchased 69,363 shares of its common stock for a total of $416,761 (ranging from $3.43 to $7.95 per share) during the year ended May 31, 2002.

18. Retirement Plan:

The Company maintains a retirement plan for essentially all full-time employees pursuant to Section 401(k) of the Internal Revenue Code. The Company matches 10% of employee voluntary salary deferrals up to a maximum of 1% of each participant's eligible compensation. The Company may also make discretionary contributions as determined annually by the Company's Board of Directors. The amount expensed under the plan was $12,965 and $13,637 for the years ended May 31, 2003 and 2002.

19. Fair Value of Financial Instruments:

The carrying amounts of cash and cash equivalents, restricted funds held by trustee, accounts receivable, accounts payable, accrued liabilities, and short-term borrowings approximate fair value because of the short maturity of these instruments.

The carrying amount of long-term debt approximates fair value because the interest rates on these instruments fluctuate with market interest rates or the fixed rates are based on current rates offered to the Company for debt with similar terms and maturities.

20. Cash Flows Information:

	2003	2002
Interest paid	$311,833	$286,412
Income Taxes paid
(refunded)	($190,348)	$478,453