TAYLOR DEVICES, INC. — Interim / Quarterly Report 2003

Oct 15, 2003

10QSB 1 taylor10-qsbaugust2003.htm HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN" saved from url=(0077)file://H:\TAYLOR\FILINGS\2004\1st%20Quarter\Taylor%2010-Q%20August%202003.htm

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarter ended August 31, 2003

Commission File Number 0-3498

| TAYLOR DEVICES,
INC. |
| --- |
| (EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER) |

NEW YORK	16-0797789
(State or other Jurisdiction of
incorporation or organization)	(I.R.S. Employer Identification
Number)

| 90 TAYLOR DRIVE, NORTH TONAWANDA, NEW
YORK | 14120-0748 |
| --- | --- |
| Address of principal executive
offices | Zip
Code |

Registrant's Telephone Number, Including Area Code -- 716-694-0800

Indicate by check mark whether the registrant (1) has filed all annual, quarterly, and other reports required to be filed with all the Commission and (2) has been subject to the filing requirements for at least the past 90 days.

Yes X No

Indicate the number of shares outstanding, of each of the Issuer's classes of common stock as of the close of the period covered by this report.

| CLASS | Outstanding at
August 31, 2003 |
| --- | --- |
| Common Stock (2-1/2 cents par value) | 2,926,460 |

| TAYLOR DEVICES,
INC. |
| --- |
| Index to Form 10-QSB |

| PART I | FINANCIAL INFORMATION — Item
1. | Financial Statements | |
| --- | --- | --- | --- |
| | | Condensed
Consolidated Balance Sheets August 31, 2003, and May 31, 2003 | 3 |
| | | Condensed Consolidated Statements of Income for the
three months ended August 31, 2003 and 2002 | 4 |
| | | Condensed Consolidated Statements of Cash Flows for
the three months ended August 31, 2003 and 2002 | 5 |
| | | Notes to Condensed Consolidated Financial
Statements | 6 |
| | Item
2. | Management's Discussion and
Analysis or Plan of Operation | 7 |
| | Item 3. | Controls and
Procedures | 11 |
| PART II | OTHER INFORMATION | | |
| | Item
1. | Legal Proceedings | 12 |
| | Item 2. | Changes in Securities | 12 |
| | Item 3. | Defaults upon Senior
Securities | 12 |
| | Item 4. | Submission of Matters to Vote
of Security Holders | 12 |
| | Item 5. | Other Information | 12 |
| | Item 6. | Exhibits and Reports on Form
8-K | 12 |
| ACCOUNTANTS' REVIEW REPORT | | | 13 |
| SIGNATURES | | | 14 |

| TAYLOR DEVICES, INC. AND
SUBSIDIARY | | |
| --- | --- | --- |
| Part I - Item 1.
Financial Statements | | |
| Condensed
Consolidated Balance Sheets | (Unaudited) | |
| | August 31, 2003 | May 31, 2003 |
| Assets | | |
| Current assets: | | |
| Cash and cash
equivalents | $ 122,444 | $
417,166 |
| Accounts receivable, net | 4,740,251 | 4,219,972 |
| Inventory | 4,454,974 | 4,794,308 |
| Costs and estimated earnings in excess of billings | 1,157,479 | 3,866,389 |
| Other current assets | 1,060,208 | 864,565 |
| Total current
assets | 11,535,356 | 14,162,400 |
| Maintenance and other inventory, net | 557,693 | 571,193 |
| Property and equipment, net | 3,845,523 | 3,916,008 |
| Investment in affiliate, at equity | 427,369 | 408,722 |
| Intangibles and other assets | 176,800 | 388,579 |
| | $16,542,741 | $19,446,902 |
| Liabilities and Stockholders'
Equity | | |
| Current
liabilities: | | |
| Short-term borrowings and current portion of
long-term debt | $ 2,039,027 | $ 4,535,227 |
| Payables - trade | 1,328,287 | 1,369,300 |
| Payables - affiliate | 575,513 | 561,504 |
| Accrued commissions | 1,270,599 | 1,633,381 |
| Billings in excess of costs and estimated earnings | 343,783 | 159,750 |
| Other current liabilities | 941,442 | 917,619 |
| Total current
liabilities | 6,498,651 | 9,176,781 |
| Long-term liabilities | 1,366,053 | 1,440,822 |
| Minority stockholder's interest | 402,301 | 396,929 |
| Stockholders' Equity: | | |
| Common stock and additional paid-in
capital | 3,802,732 | 3,746,927 |
| Retained earnings | 5,365,697 | 5,566,826 |
| | 9,168,429 | 9,313,753 |
| Treasury stock - at cost | (892,693) | (881,383) |
| Total stockholders'
equity | 8,275,736 | 8,432,370 |
| | $16,542,741 | $19,446,902 |

See notes to condensed consolidated financial statements.

| TAYLOR DEVICES, INC. AND
SUBSIDIARY — Condensed Consolidated
Statements of Income | (Unaudited) | |
| --- | --- | --- |
| For the
three months ended August 31, | 2003 | 2002 |
| Sales, net | $2,989,261 | $4,021,331 |
| Cost of goods
sold | 2,398,048 | 2,214,820 |
| Gross profit | 591,213 | 1,806,511 |
| Selling, general and administrative
expenses | 943,121 | 1,166,154 |
| Operating income (loss) | (351,908) | 640,357 |
| Other income
(expense), net | 12,504 | (75,745) |
| Income (loss) before provision for income
taxes, equity in net income of affiliate and minority stockholder's
interest | (339,404) | 564,612 |
| Provision for income taxes
(benefit) | (125,000) | 204,000 |
| Income (loss) before equity in net income
of affiliate | | |
| and minority stockholder's
interest | (214,404) | 360,612 |
| Equity in net income
of affiliate | 18,647 | 6,961 |
| Income (loss) before minority stockholder's
interest | (195,757) | 367,573 |
| Minority stockholder's
interest | (5,372) | (5,187) |
| Net income (loss) | $
(201,129) | $ 362,386 |
| Basic and diluted
earnings (loss) per common share | $
(0.07) | $ 0.13 |

See notes to condensed consolidated financial statements.

| TAYLOR DEVICES, INC. AND SUBSIDIARY — Condensed Consolidated Statements of Cash
Flows | (Unaudited) | |
| --- | --- | --- |
| For the three months
ended August 31, | 2003 | 2002 |
| Cash flows from
operating activities: | | |
| Net income (loss) | $
(201,129) | $ 362,386 |
| Adjustments to reconcile net income (loss) to net cash flows
from | | |
| operating activities: | | |
| Depreciation and amortization | 85,770 | 82,200 |
| Net proceeds
on life insurance settlement | (53,719) | - |
| Equity in net income
of affiliate | (18,647) | (6,961) |
| Minority stockholder's
interest | 5,372 | 5,187 |
| Changes in other
current assets and current liabilities: | | |
| Accounts
receivable | (256,881) | (264,749) |
| Inventory | 352,834 | 150,995 |
| Costs and estimated earnings in excess of
billings | 2,708,910 | 64,181 |
| Other current assets | (213,662) | 211,827 |
| Payables - trade | (41,013) | (290,393) |
| Payables - affiliate | 14,009 | 10,038 |
| Accrued commissions | (362,782) | - |
| Billings in excess of costs and estimated
earnings | 184,033 | (810,189) |
| Other current liabilities | 23,823 | 81,077 |
| Net cash flows from (for)
operating activities | 2,226,918 | (404,401) |
| Cash flows from investing
activities: | | |
| Acquisition of property and
equipment | (13,185) | (26,081) |
| Other
investing activities | 18,019 | 63,750 |
| Net
cash flows from investing activities | 4,834 | 37,669 |
| Cash flows from financing
activities: | | |
| Net short-term
borrowings and repayments on long-term debt | | |
| | (2,570,969) | 219,908 |
| Proceeds from issuance of common stock | 55,805 | 52,066 |
| Acquisition of treasury stock | (11,310) | - |
| Net
cash flows from (for) financing activities | (2,526,474) | 271,974 |
| Net
decrease in cash and cash equivalents | (294,722) | (94,758) |
| Cash
and cash equivalents - beginning | 417,166 | 224,110 |
| Cash and cash
equivalents - ending | $
122,444 | $ 129,352 |

See notes to condensed consolidated financial statements.

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

| 1. | The accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of the Company, the accompanying
unaudited condensed consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of August 31, 2003 and May 31,
2003 and the results of operations and cash flows for the three months
ended August 31, 2003 and 2002. These financial statements should be read
in conjunction with the audited financial statements and notes thereto
contained in the Company's Annual Report to Shareholders for the year
ended May 31, 2003. |
| --- | --- |
| 2. | There is no provision nor
shall there be any provisions for profit sharing, dividends, or any other
benefits of any nature at any time for this fiscal year. |
| 3. | For the three month period
ended August 31, 2003, the loss was divided by 2,926,460, which is net of
the Treasury shares, to calculate the loss per share. For the three month
period ended August 31, 2002, the profit was divided by 2,874,616,which is
net of the Treasury shares, to calculate the earnings per
share. |
| 4. | The results of operations
for the three month period ended August 31, 2003 are not necessarily
indicative of the results to be expected for the full
year. |

TAYLOR DEVICES, INC.
Item 2. 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 2, "Management's Discussion and Analysis or Plan of Operations," and elsewhere in this 10-QSB 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	($1,032,000)
Cost of goods
sold	$183,000
Selling, general and
administrative expenses	($223,000)
Other income (expense),
net	$88,000
Income (loss)
before provision for income taxes, equity in
net income of affiliate
and minority stockholder's interest	($904,000)
Provision for
income taxes (benefit)	($329,000)
Income (loss)
before equity in net income of affiliate
and minority stockholder's
interest	($575,000)
Equity in net income of
affiliate	$12,000
Net income
(loss)	($563,000)

| TAYLOR DEVICES,
INC. |
| --- |
| Management's Discussion and Analysis or
Plan of Operation (Continued) |

The Company's consolidated results of operations for the three months ended August 31, 2003 showed a 26% decrease in net revenues from the three months ended August 31, 2002, and a decrease in net income from $362,000 to a net loss of $201,000. Gross profit for the quarter ended August 31, 2003 decreased by 67% over the first quarter of the prior year. The gross profit as a percentage of net revenues for the quarter was 20% as compared to 45% for the same period in the prior year. Gross margin for the quarter ended August 31, 2002 benefited from the final shipment or near close-out of several large orders that had been taken into revenue on a progress bill and estimated cost basis. The final close-out costs or revised estimates for these orders was more favorable than had been anticipated at the beginning of that period. Reduced volume of highly engineered aerospace products and increased volume of very competitively bid construction projects accounted for a reduced gross margin that appears to be a temporary condition. Based on the make-up of the current backlog, the Company expects to show future aerospace sales increasing and improved profit margin on construction projects.

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.

Selling, general and administrative costs decreased for the three months ended August 31, 2003 by approximately 19% from the prior year primarily due to lower levels of commission expenses which are directly related to the level of sales for the period. A 34% decrease in advertising and promotion expenses along with a 5% decrease in personnel related expenses contributed to the savings over the prior year. This decrease in expenses was partially offset by increases in professional expenses of $65,000 incurred in part to assure the integrity of financial reporting and corporate disclosure following passage of the Sarbanes-Oxley Act in 2002.

Depreciation expense increased by $7,000 over the same period of the prior year.

Operating loss of $352,000 for the three months ended August 31, 2003 is compared to operating income of $640,000 in the same period of the prior year. This is a result of the reduced volume, unfavorable product / project mix and other factors that affected the change in gross margins during the comparable periods, as mentioned above.

Interest expense decreased for the three months ended August 31, 2003 by approximately 41% from the same period of the prior year due to a combination of lower interest rates on the Company's variable long-term and short-term debt along with a lower level of use of the Company's operating line of credit. The line of credit is used primarily to fund the production of larger projects that do not allow for advance payments or progress payments.

Miscellaneous income of $54,000 in the three months ended August 31, 2003 is primarily the excess of proceeds from the life insurance policies on the Company's founder, Paul H. Taylor, over the net of the cash surrender value of the policies and loans against the policies.

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 cash flows and from bank financing.

Capital expenditures for the three months ended August 31, 2003 were $13,000 compared to $26,000 in the same period of the prior year. There are no material commitments for capital expenditures as of August 31, 2003.

The Company has a $7,500,000 line of credit on which there is a $1,800,000 balance outstanding as of August 31, 2003. This is down from the $4,300,000 balance outstanding as of May 31, 2003. The balance is expected to fall to below $1,000,000 during the second quarter of the fiscal year ending May 31, 2004 as payments are received from customers for significant projects that are now completed. 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 remainder of the current fiscal year and the subsequent four years are as follows: 2004 - $138,000; 2005 - $220,000; 2006 - $231,000; 2007 - $243,000; and 2008 - $232,000.

Inventory, at $4,455,000 as of August 31, 2003, is lower by approximately 7% over the prior year-end. Of this, approximately 85% is work in process, 9% 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 technical 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 $45,000 for the three month period ended August 31, 2003 as it was for the same period last year.

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 $4,740,000 as of May 31, 2003 includes approximately $592,000 of amounts retained by customers on long-term construction projects. The increase in accounts receivable over the prior year-end by approximately $520,000 is due to (1) recently completed long-term projects which have been billed to the customers; 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 current fiscal year.

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. Unfortunately, provisions such as this are often not possible in certain governmental contracts and contracts with foreign customers. The $1,157,000 balance in this account at August 31, 2003 is a 70% 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 current fiscal year.

As noted above, the current liability, "billings in excess of costs and estimated earnings", represents billings to customers in excess of revenues recognized. The $344,000 balance in this account at August 31, 2003 is an increase from the $160,000 balance at the end of the prior year. Final delivery of product under these contracts is expected to occur during the current fiscal year.

The Company's backlog of sales orders at August 31, 2003 is $8.1 million, down from the backlog at the end of the prior year of $9.2 million.

The trend of higher deferred billings and lower advance billings is expected to continue as the Company's sales through long-term construction contracts to governmental agencies and foreign customers continue.

Accounts payable, at $1,328,000 as of August 31, 2003, is approximately $41,000 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 August 31, 2003 are $1,271,000. This is approximately $360,000 higher than the prior year-end. The current accrued amount is expected to be paid during the fiscal year ending 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. 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 three months ended August 31, 2003, the Company purchased 4,600 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 ending May 31, 2004.

TAYLOR DEVICES, INC.
Item 3. 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 a date within 90 days of the filing date of this quarterly report 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. During the three months ended August 31, 2003, 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.

TAYLOR DEVICES, INC.
Part II - Other
Information

ITEM 1	Legal Proceedings
	The Company is not currently engaged in any
litigation.
ITEM 2	Changes in Securities None
ITEM
3	Defaults Upon Senior
Securities None
ITEM
4	Submission of Matters
to Vote of Securities Holders None
ITEM 5	Other
Information
	For the period
6/1/03 to 8/31/03, changes in the Company's outstanding shares are as
follows:
	1.	An increase of 21,546 shares
for purchase of Company stock by employees from the 2002 Taylor Devices,
Inc. Employee Stock Purchase Plan.
	2.	An increase in Treasury shares
of 4,600, which were returned to the treasury from open market purchases
by the Company for the period of 6/1/03 to 8/31/03. Treasury shares at
8/31/03 are 241,801.
ITEM
6	Exhibits and Reports
on Form 8-K
EXHIBITS
10(i)	Form of Indemnity
Agreement between the Company and Mark V. McDonough, Chief Financial
Officer, signed and dated September 8, 2003.
31(i)	Certification of Chief Executive Officer pursuant
to Section 302 of Sarbanes-Oxley Act.
31(ii)	Certification of Chief Financial Officer pursuant
to Section 302 of Sarbanes-Oxley Act.
32(i)	Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act.
32(ii)	Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act.

Accountants' Review Report

The Board of Directors and Stockholders

Taylor Devices, Inc.

We have reviewed the condensed consolidated balance sheet of Taylor Devices, Inc. and Subsidiary as of August 31, 2003, and the related condensed consolidated statements of income and cash flows for the three months ended August 31, 2003 and 2002. These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of May 31, 2003, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated August 8, 2003, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2003 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

Lumsden & McCormick, LLP Buffalo, New York October 9, 2003

TAYLOR DEVICES, INC.
Signatures

Pursuant to the requirements 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 Chairman of the Board of Directors (Principal Executive Officer)

AND

By
Mark V. McDonough Chief Financial Officer