SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934. For the fiscal year ended May 31, 1997.
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the transition period from _____________ to
______________.
Commission file number 0-10571
TOP AIR MANUFACTURING, INC.
(Name of Small Business Registrant as Specified in its Charter)
Iowa 42-1155462
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
317 Savannah Park Road
Cedar Falls, Iowa 50613
(Address of Principal Executive Offices) (Zip Code)
(319) 268-0473
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Act: Common Stock, no par value
Check if the Registrant: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 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. |X|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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 amendment to this Form 10-KSB. |_|
The Registrant's revenues for its most recent fiscal year are $13,802,266.
The aggregate market value of the voting stock held by non-affiliates was
approximately $4,032,669 as of August 25, 1997. (The exclusion from such amount
of the market value of the shares owned by any person shall not be deemed an
admission by the registrant that such person is an affiliate of the registrant.)
The Registrant had 5,164,765 shares of common stock outstanding as of August 25,
1997.
Portions of the definitive proxy statement of the Registrant for the
Registrant's 1997 annual meeting of shareholders, which definitive proxy
statement will be filed with the Securities and Exchange Commission not later
than September 28, 1997 (120 days after the end of the Company's most recently
completed fiscal year), are hereby incorporated by reference into Items 9, 10,
11 and 12 of Part III hereof.
<PAGE>
TABLE OF CONTENTS
PART I
Page
ITEM 1. Description of Business 3
ITEM 2. Description of Property 7
ITEM 3. Legal Proceedings 7
ITEM 4. Submission of Matters to a Vote of Security Holders 8
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters 8
ITEM 6. Management's Discussion and Analysis of Financial Condition 9
ITEM 7. Financial Statements 12
ITEM 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosures 12
PART III
ITEM 13. Exhibits and Reports on Form 8-K 12
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This information contained in this Form 10-KSB includes statements regarding
matters that are not historical facts (including statements as to the beliefs or
expectations of the Company) which are forward-looking statements within the
meaning of the federal securities laws. Because such forward-looking statements
include risks and uncertainties the Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in the
sections captioned "Description of Business," "Management's Discussion and
Analysis of Financial Condition" and those factors discussed in Exhibit 99.
PART I
Item 1 - Description of Business
General
Top Air Manufacturing, Inc. (hereinafter referred to as "Top Air" or
the "Company") was incorporated under the laws of the State of Iowa in
1981. Top Air is engaged in the business of manufacturing several
products used primarily in agricultural operations, including several
types of agricultural sprayers, liquid manure handling equipment, grain
carts and wagons, milking parlors, seed conveyors, feeding and forage
equipment and a line of attachments and replacement parts for all of
the products that the company manufactures. The Company currently
manufactures its products in two facilities, one in Cedar Falls, Iowa
and the other in Onarga, Illinois.
Acquisitions
On January 15, 1997, Top Air acquired all of the assets of Ficklin
Machine Co., Inc. ("Ficklin Machine"), indirectly by acquiring all of
the issued and outstanding stock of Ficklin Machine from Wayne W.
Whalen in exchange for 1,150,000 shares of Top Air's no par value
common stock. The Ficklin Machine acquisition was effected pursuant to
a Share Exchange Agreement dated as of January 15, 1997. At the closing
of the acquisition, Ficklin Machine became a wholly-owned subsidiary of
Top Air. Ficklin Machine is a manufacturer of grain carts and wagons,
augers, and lawn sprayers and has manufactured grain handling equipment
for over thirty years. Nearly all of the assets of Ficklin Machine
indirectly acquired constitute plant, equipment and other physical
property used in the manufacture of Ficklin Machine's products. Top Air
currently intends to continue the business of Ficklin Machine in
substantially the same manner as before the acquisition.
In June 1995, the Company acquired substantially all of the assets of
Clay Equipment Corporation in exchange for 837,666 shares of the
Company's no par value common stock and the assumption by the Company
of certain liabilities of Clay Equipment Corporation.
Business of Issuer
Principal Products and Markets
Sprayers. The Company currently manufactures several types of
agricultural sprayers including skid mount, two-wheel models,
three-wheel models, saddle tank models, home lawn models, trailer
sprayers, tandem wheel sprayers, T-Tank Sprayers, Master Link sprayers,
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Terrain Master sprayers and models which can be mounted in the bed of a
pickup truck. The sprayers are sold in sizes ranging from a 14 to 1,100
gallon capacity. The Company also offers various accessories for the
sprayers including several models of folding and self-leveling booms in
various lengths and designs.
The sprayers are used primarily for farming activities. They can be
pulled directly by a tractor or they can be hooked to a disc so that
their combined functions allow the farmer to eliminate one trip over
the ground. The sprayers are used for spraying jobs of all types,
including the spraying of chemicals, fertilizers, insecticides and weed
killers. They are used by farmers and commercial sprayers primarily for
row crops, but can also be used on other crops, golf courses,
cemeteries, etc. The wheels may be adjusted to compensate for difficult
row crop widths. Trees and shrubs may be sprayed by a hand gun
attachment to the sprayers.
Manure Handling Equipment. This product group consists of a line of
tanks ranging in size from 2,600 gallons to 6,000 gallons, either
trailer mounted or truck mounted to transport animal manure from a
storage pit or a storage lagoon to a farm field. The manure is then
spread on top of the ground or injected several inches under the
surface as a fertilizer which is very cost effective as opposed to the
purchase of a commercial substitute. In addition to the tanks, this
product group includes several types of pumps to agitate the storage
pit or storage lagoon and subsequently load the tank.
Grain Carts and Wagons. The Company manufactures a wide variety of
agricultural grain handling equipment, including side and center
unloading (gravity) wagons, ranging in size from 190 to 720 bushel
capacity, and grain carts equipped with integral, folding 14 inch
diameter augers, which range in size from 400 to 750 bushel capacity.
The grain wagons consist of two basic units, the grain box and the
wagon running gear, which can be sold together or separately. Grain
carts are most commonly sold as complete units with large floatation
tires.
Grain carts are used in the farm fields during the harvest season to
transport grain from the combine to nearby roads where the grain is
transferred from the cart to trucks or grain wagons for transport to
storage facilities. Carts are favored for use in the field because they
are pulled by tractors and can be pulled across wet fields in which
often trucks get stuck. Grain wagons can also be used during spring
planting as seed tenders for grain drills and planters.
Seed Conveyor. The trend in agriculture is away from handling seed in
bags and toward bulk handling. Since seed is very sensitive to cracking
and breaking which reduces germination, the traditional auger elevator
or chain type conveyor is less desirable in seed handling. The seed
conveyor utilizes a poly vinyl type of belt with rubber cleats
vulcanized to the belt which substantially reduces damage to the seed.
The seed conveyor is available in either a six-inch or twelve-inch
width. The six-inch wide conveyor is normally mounted on a gravity box
or a grain drill while the twelve-inch wide unit is mounted on a
trailer for mobility.
Milking Parlors. Dairy farmers who remodel or build new facilities
normally install a milking parlor or expand the existing milking
parlor. The milking parlor substantially reduces the time required to
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complete the milking process since more cows can be milked with fewer
man hours. Although the Company manufactures several types of milking
parlors, the most popular type is the rapid exit 90 degree parlor.
Feeding and Forage. Feeding and forage equipment consists of belt
feeders, belt conveyors and silo unloaders. These products are normally
used in a configuration to convey and feed chopped hay or corn silage
along with other ingredients to dairy cows or beef cattle. These
products are normally found in a small to medium size farm operation.
Replacement Parts and Attachments. The Company stocks a full line of
repair parts and attachments to fit all of the products that it
manufactures. The Company distributes these parts to retailers and
utilizes them in its own manufacturing processes. The Company has
actively promoted these parts and has established itself as a major
supplier in the replacement parts market.
Other Products. The Company also custom manufactures products for other
firms on a contract basis. Traditionally, these have been limited
production runs of new designs.
Method of Distribution
The Company has eleven salesmen and thirteen manufacturers'
representatives calling upon dealers and distributors in seventeen
states and Canada. The Company's efforts are ongoing to continue
expanding its sales territory into additional states and to further
enhance market penetration in the current marketing areas. The Company
is selling its products primarily to implement dealers, farm supply
stores and feed stores located primarily in lesser populated
agricultural areas for resale to farmers, tradesmen and to the general
public for commercial and individual use.
Seasonal Factors
As a result of the Company's relocation to the new facility during the
second quarter of fiscal 1997 and the acquisition of Ficklin Machine,
approximately 75% of the 1997 sales volume occurred during the last six
months of the fiscal year. It is anticipated that the addition of the
Ficklin Machine product line will greatly reduce the seasonal effect
experienced by the Company in the past because August through October
are typically Ficklin Machine's strongest shipping months.
Competitive Conditions
The Company competes with a large number of other agricultural
equipment manufacturers and suppliers. The Company's products, however,
are considered sufficiently different so that the Company can establish
and maintain a market for its products. In addition, the Company offers
a full line of sprayer products, liquid manure handling equipment,
grain wagons and carts, milking parlors and feeding and forage
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equipment that add to the Company's ability to penetrate the market.
The Company offers various dating and billing programs that allow the
Company's dealers incentive to stock larger quantities of products
without the necessity to commit financial resources several months in
advance. This also allows the Company to plan its production on a more
convenient basis.
Major Customers
The Customer base is sufficiently broad that no customer accounts for
10% or more of the Company's sales.
Backlog Orders
The Company had no material sales backlog as of May 31, 1997 or May 31,
1996. Because of the timing of its year end, the Company would normally
have little or no sales backlog at the end of its fiscal year. See
"Seasonal Factors."
Source and Availability of Raw Materials
The Company purchases its raw materials from a number of suppliers. The
Company has had no difficulty in obtaining component parts in the past
and does not anticipate any difficulty in obtaining sufficient
component parts and raw materials as production increases.
Patents and Trademarks
The Company has received a design patent on the three-wheel sprayer,
the master-link sprayer and the self-leveling boom, and has trademark
registrations for Top-Air(R) and E-Z Boy(R). With its acquisition of
Clay Equipment, the company now sells a line of agricultural spreaders
under the registered trade name of "Better Built." While the Company
believes that its patents and trademarks have significant value, the
Company is not dependent upon patents, trademarks, service marks or
copyrights.
Environmental Compliance
The Company believes that it is presently in substantial compliance
with all existing applicable environmental laws and does not anticipate
that such compliance will have a material effect on its future capital
expenditures, earnings or competitive position.
Employees
On May 31, 1997, the Company's plant and executive offices employed 135
people on a full-time basis. Of this number, seven are executive
officers and the remainder are sales representatives, office staff,
production workers and truck drivers. Fifty full-time production
workers are currently covered under a collective bargaining agreement
with Local 1728 of the IAMAW (the "Union") which runs through June 30,
1998.
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<PAGE>
Research and Development
Research and development costs incurred for the years ended May 31,
1997, 1996 and 1995 were $448,350, $400,916 and $173,791, respectively.
Research and development activities consist primarily of wages paid for
the design and testing of new equipment and improvements to existing
equipment.
Item 2 - Description of Property
The Company completed its relocation to a newly constructed 85,000 square foot
facility in November, 1996. The facility, which is located on nine acres of land
in the Cedar Falls Industrial Park consists of one building containing the
executive offices (approximately 7,000 square feet) and manufacturing area,
assembly area and warehousing (approximately 78,000 square feet). The Company is
leasing the facility from the City of Cedar Falls, Iowa for an initial term of
10 years with a 5-year renewal option on the part of the City, as lessor. The
Company will have an option to buy the facility from the City for $1.3 million
at the end of the lease term.
On May 27, 1997 the Company entered into a second lease with the City of Cedar
Falls, Iowa for an additional four acres of land adjacent to the Industrial Park
facility. Under the terms of the lease, the Company will lease the land for a
period of two years at a lease rate of $1.00 per year. At the end of the lease
term, the Company will have three options: (i) vacate the property; (ii) buy the
property for $120,000; or (iii) agree to construct a new building or an addition
to the existing building, with a minimum taxable value of $800,000. If the
Company exercises the third option, the City will donate the land to the
Company.
The Company purchased four buildings totaling 41,300 square feet on 8.5 acres of
land in Onarga, Illinois in connection with the acquisition of Ficklin Machine.
See "Acquisition". These facilities consist of one building containing executive
offices (approximately 925 square feet) and manufacturing area (approximately
15,750 square feet) and three warehouses totaling approximately 24,625 square
feet. The Onarga property is subject to a mortgage dated January 13, 1997 in the
amount of $1,000,000 in favor of Norwest Bank Iowa, N.A. The Company believes
all of its facilities are adequately insured.
During the fiscal year ended May 31, 1997, the Company sold all of its
facilities in Parkersburg, Iowa. One property was sold for cash and the other
was sold on a one year contract which is due in monthly installments with a
balloon payment due March 1, 1998. There was no material gain or loss associated
with the sale of these properties.
Item 3 - Legal Proceedings
There are no material legal proceedings pending to which the Company is a party
or of which any of its property is the subject. No proceedings were terminated
during the fourth quarter of the fiscal year covered by this Report.
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Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
Item 5 - Market for Common Equity and Related Stockholder Matters
Market Information
Top Air's common stock is quoted on the Nasdaq SmallCap Market under
the symbol "TOPM." The Company's common stock was removed from
quotation on the Nasdaq SmallCap Market on April 13, 1995 for failure
to maintain a certain minimum bid price of the stock. The Company's
common stock was approved for relisting on the Nasdaq SmallCap Market
effective August 14, 1995.
The table below lists the high and low bid prices for each quarterly
period during the year ended May 31, 1996 and the high and low sales
prices during the year end May 31, 1997. The high and low bid and sales
prices from August 14, 1995 through May 31, 1997, during which time the
Company's common stock was quoted on the Nasdaq SmallCap Market, were
provided by the Nasdaq SmallCap Market, and the high and low bid prices
from June 1, 1995 through August 13, 1995, were provided by the
Company's market makers.
<TABLE>
<CAPTION>
Sales Price Range Bid Price Range
Fiscal 1997 Fiscal 1996
---------------- --------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $1.8750 $1.1875 $1.0000 $0.8750
2nd Quarter 1.8750 1.1875 1.2500 0.8750
3rd Quarter 1.8750 1.1875 1.3125 1.1875
4th Quarter 2.0000 1.3125 1.4375 1.1250
</TABLE>
These quotations reflect interdealer prices, without retail markup,
markdown or commission and may not necessarily represent actual
transactions.
Stockholders
As of May 31, 1997 the Company had approximately 500 holders of record
of the Company's common stock.
Dividends
The holders of common shares are entitled to receive dividends when and
as declared by the Board of Directors. Except for certain provisions in
the Company's loan agreement with Norwest Bank Iowa, N.A. regarding the
maintenance of certain working capital and tangible equity levels,
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there are no agreements that restrict dividend payments. The Company
has never paid a cash dividend. Because the Company currently intends
to retain any earnings to finance the development of its business, it
does not anticipate payment of any cash dividends in the foreseeable
future.
Recent Sales of Unregistered Stock
In January 1997, the Company issued 1,150,000 shares of common stock to
Wayne W. Whalen in connection with the Company's acquisition of Ficklin
Machine Co., Inc. in a transaction exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
Also in January 1997, the Company issued to Gregory Wilson a ten year
option to purchase 50,000 shares of the Company's common stock at a
price of $1.375 per share in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. The option was
granted as partial consideration in connection with certain services
that Mr. Wilson rendered to the Company. The Company believes that the
total value of the consideration paid was commensurate with the value
of the services the Company received. The option is immediately
exercisable and includes conditional registration rights.
Item 6 - Management's Discussion and Analysis of Financial Condition
Overview
The Company's growth in recent years has been bolstered by strategic
acquisitions. The acquisitions of Ficklin Machine and Clay Equipment
Corporation ("Clay Equipment") were completed on January 15, 1997 and
June 26, 1995, respectively. Both acquisitions were accounted for under
the purchase method of accounting, and accordingly, the results of
operations have been included in the Company's financial statements
commencing with the respective date of each acquisition. In addition to
improving annual sales and earnings, it is anticipated that these
acquisitions will substantially reduce the seasonality of the Company's
operations by providing strong sales of grain harvesting equipment and
livestock farming products during the first half of the Company's
fiscal year which has been an historically weak sales period.
Results Of Operations
Fiscal 1997 Compared to Fiscal 1996
Net sales increased $2,173,336 to $13,802,266 in fiscal year 1997 which
represents a 19% increase over 1996 sales of $11,628,930. This increase
can be attributed to strong sales in spraying and manure handling
equipment resulting from sales programs implemented during the year. In
addition, incremental sales increased in connection with the
acquisition of Ficklin Machine. The increases were offset by decreases
in a number of product lines formerly sold by Clay Equipment that were
sold off during the year to enable the Company to concentrate on
products with the greatest potential for growth and profitability.
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The Company's gross margin increased to $4,566,239 in 1997 from
$3,904,285 in 1996, a 17% increase, primarily due to increased sales
volume. Gross margin as a percentage of sales decreased to 33.1% in
1997 from 33.6% in 1996. This decrease is due primarily to the
incremental sales from the Ficklin Machine acquisition achieving a
lower percentage of profit than Top Air has historically experienced.
The margins experienced by Ficklin Machine in the spring months have
typically been lower than their margins on an annual basis.
Operating expenses increased $355,219 to $3,060,929 in 1997 which was a
13% increase from $2,705,710 in 1996. The increase was due to
incremental expenses associated with the acquisition of Ficklin Machine
and to the higher level of business. Operating expenses as a percentage
of sales decreased to 22.2% in 1997 compared to 23.3% in 1996.
Interest expense decreased $12,786 to $185,048 in 1997 which was a 6.5%
decrease from $197,834 in 1996. The decrease was a net result of lower
levels of operating debt carried throughout the year, offset by the
additional debt assumed in connection with the purchase of Ficklin
Machine. Interest expense as a percentage of sales decreased to 1.3% in
1997 from 1.7% in 1996.
Income tax expense increased $109,269 to $482,275 in 1997 which was a
29.3% increase from $373,006 in 1996. The increase was primarily a
result of higher earnings.
Net income increased $179,988 to $857,376 in 1997 which was a 26.6%
increase from $677,388 in 1996. Net income as a percentage of sales
increased to 6.2% in 1997 from 5.8% in 1996.
Fiscal 1996 Compared to Fiscal 1995
Net sales increased $5,413,064, or 87%, to $11,628,930 in fiscal 1996
from $6,215,866 in fiscal 1995. The majority of this increase is
attributed to the sales of products formerly produced by Clay Equipment
combined with an increase in sales of spraying equipment and parts of
approximately $122,000.
Cost of goods sold increased 91% to $7,724,645 in fiscal 1996 from
$4,042,058 in fiscal 1995. Cost of goods sold as a percentage of net
sales increased to 66.4% in fiscal 1996 from 65.0% in fiscal 1995. The
increase was primarily a result the inefficiency associated with the
operation of two facilities and the outmoded former Clay Equipment
facility. The Company expects that significant efficiencies will be
realized by consolidating its operations into the modern New Facility.
See "Part I - Description of Property" Such efficiencies should have a
positive effect on profit margins.
Operating expenses increased $1,231,782 or 83.6% to $2,705,710 (or
23.3% of net sales) in fiscal 1996 from $1,473,928 (or 23.7% of net
sales) in fiscal 1995. The increase is primarily a result of additional
expenses incurred from the acquisition of Clay Equipment.
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Interest expense increased $97,250 or 96.7% to $197,834 (or 1.7% of
sales) in fiscal 1996 from $100,584 (or 1.6% of net sales) in fiscal
1995. The increase was a result of additional debt assumed by the
Company in connection with its acquisition of Clay Equipment, offset
somewhat by a decrease in the average balance outstanding under the
Company's line of credit.
The Company's effective income tax rate decreased to 35.5% of income
before taxes in fiscal 1996 from 38.9% in fiscal 1995. The decrease in
the tax rate is a result of deferred tax items incurred in the Clay
Equipment acquisition.
Net income for fiscal 1996 was $677,388 or 5.8% of net sales, an
increase of $306,376 (or 82.6%) from fiscal 1995 net income of
$371,012, or 6.0% of fiscal 1995 net sales.
Liquidity
The Company's working capital on May 31, 1997 was $5,140,589 which had
increased from $3,728,790 in 1996 and $2,316,516 in 1995. Working
capital increased primarily as a result of current assets being
partially funded through earnings without the necessity to utilize
short-term borrowings. The current ratio decreased to 2.90:1 in 1997 as
compared to 3.43:1 in 1996 and 3.26:1 in 1995.
Net cash used in operations for 1997 was $336,016, a decrease of
$1,077,051 from the cash generated in 1996 of $740,990. The decrease
was primarily a result of increasing levels in accounts receivable and
inventories offset by improved earnings and higher accounts payable.
Net cash provided by investing activities in 1997 was $53,062, a
decrease of $66,836 from the cash generated in 1996 of $119,898. The
decrease resulted from the net change in property and equipment
associated with the relocation to the new facility and the acquisition
of Ficklin Machine offset by the net change in long-term receivables.
Net cash provided by financing activities in 1997 was $546,000, an
increase of $1,821,119 from the cash used in 1996 of $1,275,119. The
increase was due to borrowings to fund working capital needs in
connection with the purchase of Ficklin Machine.
The Company intends to use cash generated from operations and
short-term bank loans to fund fiscal 1998 cash requirements. As of May
31, 1997, the Company had a $4,000,000 line of credit from a bank
pursuant to a credit and security agreement originally dated January
13, 1997 which expires November 30, 1997 and bears interest at the
prime rate (8.5% as of May 31, 1997). The Company had outstanding
letters of credit of $250,000 under terms of this agreement. As of May
31, 1997, there was $432,000 outstanding under the Company's line and
letters of credit.
The Company has working capital requirements due primarily to the need
to maintain inventories and to finance accounts receivable. The Company
believes it has access to sufficient working capital for its present
and immediately foreseeable working capital requirements. The Company
anticipates that it will be borrowing funds seasonally, as the need
arises.
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Capital Resources
In October, 1996 the Company moved into a new building being
constructed by the City of Cedar Falls, Iowa. The Company is leasing
the Facility for an initial term of 10 years (with a renewable five
year option on the part of the City) at an annual rental of $200,664
(which includes real estate taxes), and the Company will be responsible
for the payment of all utilities, insurance and maintenance. The
Company will have an option to buy the facility for $1.3 million at the
end of the lease term.
Item 7 - Financial Statements
The financial statements of the Company are included herein as a separate
section of this Report which begins on page F-1.
Item 8 - Changes In and Disagreements with Accountants
On Accounting and Financial Disclosure
Not Applicable.
PART III
Items 9, 10, 11 and 12
The information called for by Items 9, 10, 11 and 12 is incorporated by
reference to the definitive proxy statement for the 1997 Annual Meeting of
Shareholders of the Company (which involves the election of Directors), which
will be filed with the Commission not later than September 28, 1997 (120 days
after the end of the Company's most recently completed fiscal year).
Item 13 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits of this Report.
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Commission dated January 24,
1997 disclosing the acquisition of Ficklin Machine on January 15, 1997.
A report on Form 8-K/A was filed with the Commission dated March 27,
1997 providing unaudited pro forma information related to the
acquisition of Ficklin Machine.
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TOP AIR MANUFACTURING, INC.
FINANCIAL REPORT
MAY 31, 1997
INDEX TO FINANCIAL REPORT
Page
INDEPENDENT AUDITOR'S REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance sheets F-2 to F-3
Consolidated Statements of income F-4
Consolidated Statements of stockholders' equity F-5
Consolidated Statements of cash flows F-6 to F-7
Notes to consolidated financial statements F-8 to F-18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Top Air Manufacturing, Inc.
Cedar Falls, Iowa
We have audited the accompanying consolidated balance sheets of Top Air
Manufacturing, Inc. and subsidiary as of May 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended May 31, 1997, 1996 and 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Top Air
Manufacturing, Inc. and subsidiary as of May 31, 1997 and 1996, and the results
of its operations and its cash flows for the years ended May 31, 1997, 1996 and
1995 in conformity with generally accepted accounting principles.
[GRAPHIC OMITTED]
Waterloo, Iowa
July 28, 1997
F-1
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<TABLE>
TOP AIR MANUFACTURING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
May 31, 1997 and 1996
<CAPTION>
ASSETS (NOTE 3) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 263,518 $ 517
Trade receivables, less allowance for doubtful
accounts 1997 $165,000; 1996 $167,000 3,344,742 1,564,968
Current portion of long-term notes receivable (Note 4) 198,013 10,578
Inventories (Note 2) 3,885,154 2,635,802
Prepaid expenses 102,571 154,032
Deferred income taxes (Note 5) 52,000 13,000
Equipment held for sale (Note 10) - 755,546
Other receivables (Note 10) - 131,500
---------------- ----------------
Total current assets 7,845,998 5,265,943
---------------- ----------------
Long-Term Receivables and Other Assets
Notes receivable, net of current portion (Note 4) 149,132 160,216
Deferred income taxes (Note 5) 111,500 65,000
Goodwill (Note 10) 1,138,081 -
Other assets 81,627 920
---------------- ----------------
1,480,340 226,136
---------------- ----------------
Property and Equipment
Land and improvements 65,286 67,550
Buildings 350,450 454,933
Machinery and equipment 1,599,591 737,345
Transportation equipment 546,045 531,785
Office equipment 280,680 183,979
---------------- ----------------
2,842,052 1,975,592
Less accumulated depreciation 782,912 967,939
---------------- ----------------
2,059,140 1,007,653
---------------- ----------------
$ 11,385,478 $ 6,499,732
================ ================
See Notes to Financial Statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Notes payable (Note 3) $ 432,000 $ -
Current maturities of long-term debt (Note 3) 361,778 81,497
Accounts payable 885,076 558,294
Accrued salaries and bonuses, including amounts
due to officers 1997 $205,844; 1996 $89,292 475,485 239,269
Accrued commissions payable 184,585 175,433
Other accrued expenses, including amounts due to
officers and related party 1997 $6,000; 1996 $7,210 74,670 336,304
Income taxes payable (Note 5) 291,815 146,356
---------------- ----------------
Total current liabilities 2,705,409 1,537,153
---------------- ----------------
Long-Term Debt (Note 3) 2,108,381 830,111
---------------- ----------------
Commitments (Notes 6 and 11)
Stockholders' Equity (Note 3)
Capital stock, common, no par value; stated value $.0625 per share;
authorized 20,000,000 shares; issued 1997
5,164,765 shares; 1996 4,013,765 shares (Note 6) 322,798 250,860
Additional paid-in capital 2,898,636 1,388,730
Retained earnings 3,369,945 2,512,569
---------------- ----------------
6,591,379 4,152,159
Less cost of common stock reacquired for the treasury
1997 and 1996 29,217 shares 19,691 19,691
---------------- ----------------
$ 6,571,688 $ 4,132,468
---------------- ----------------
$ 11,385,478 $ 6,499,732
================ ================
</TABLE>
F-3
<PAGE>
<TABLE>
TOP AIR MANUFACTURING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended May 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 13,802,266 $ 11,628,930 $ 66,215,866
Cost of goods sold 9,236,027 7,724,645 4,042,058
--------------- --------------- ---------------
Gross profit 4,566,239 3,904,285 2,173,808
--------------- --------------- ---------------
Operating expenses:
Selling 1,524,782 1,403,264 869,373
Provision for doubtful accounts (31,208) 6,572 11,039
Other general and administrative, including
amounts paid to related parties 1997,
1996 and 1995 $48,000 (Note 7) 1,567,355 1,295,874 593,516
--------------- --------------- ---------------
3,060,929 2,705,710 1,473,928
--------------- --------------- ---------------
Operating income 1,505,310 1,198,575 699,880
--------------- --------------- ---------------
Financial income (expense):
Interest income 19,389 49,653 8,281
Interest expense (185,048) (197,834) (100,584)
--------------- ----------------------------------
(165,659) (148,181) (92,303)
--------------- --------------- ------------------
Income before income taxes 1,339,651 1,050,394 607,577
Federal and state income taxes (Note 5) 482,275 373,006 236,565
--------------- --------------- ---------------
Net income $ 857,376 $ 677,388 $ 371,012
=============== =============== ===============
Earnings per common and common
equivalent share (Note 9) $ 0.19 $ 0.17 $ 0.12
=============== =============== ===============
See Notes to Financial Statements.
</TABLE>
F-4
<PAGE>
<TABLE>
TOP AIR MANUFACTURING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31, 1997, 1996 and 1995
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Capital Additional
Stock, Paid-In Retained Treasury
Issued Capital Earnings Stock Total
------ ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1994 $ 198,381 $ 840,700 $ 1,220,659 $ - $ 2,259,740
Net income - - 243,510 - 243,510
-------------------------------------------------------------------------------------
Balance, May 31, 1995 198,381 840,700 1,464,169 - 2,503,250
Net income - - 371,012 - 371,012
Issuance of 333 shares of
common stock upon the
exercise of options 21 177 - - 198
------------------------------------------------------------------------------------
Balance, May 31, 1995 198,402 840,877 1,835,181 - 2,874,460
Net income - - 677,388 - 677,388
Issuance of 837,666 shares
of common stock for the
purchase of Clay Equipment
Corporation (Note 10) 52,354 546,666 - - 599,020
Issuance of 1,666 shares
of common stock upon the
exercise of options 104 1,187 - - 1,291
Purchase of 29,217 shares
of common stock for the
treasury - - - (19,691) (19,691)
---------------------------------------------------------------------------------------
Balance, May 31, 1996 $ 250,860 $ 1,388,730 $ 2,512,569 $ (19,691) $ 4,132,468
Net income - - 857,376 - 857,376
Issuance of 1,150,000 shares
of common stock for the
purchase of Ficklin Machine
Co. (Note 10) 71,875 1,509,375 - - 1,581,250
Issuance of 1,000 shares
of common stock upon
exercise of options 63 531 - - 594
-----------------------------------------------------------------------------
$ 322,798 $2,898,636 $ 3,369,945 $ (19,691) $ 6,571,688
==========================================================================
See Notes to Financial Statements.
</TABLE>
F-5
<PAGE>
<TABLE>
TOP AIR MANUFACTURING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 857,376 $ 677,388 $ 371,012
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 331,021 268,933 159,379
Amortization 32,275 112 112
Deferred income taxes (87,000) 159,000 29,300
(Gain) on sale of equipment (79,921) (16,220) (17,431)
Change in assets and liabilities,
net of the effects of the business
acquisitions (Note 10):
(Increase) decrease in:
Trade receivables (1,500,679) (74,289) (207,184)
Inventories (41,043) 305,413 (334,845)
Prepaid expenses 50,630 (87,242) (3,806)
Increase (decrease) in:
Accounts payable and accrued expenses (125,765) (448,399) 81,663
Income taxes payable 227,045 (43,706) 51,428
------------ ------------- -------------
Net cash provided by (used in)
operating activities (336,061) 740,990 129,628
------------ ------------- -------------
Cash Flows From Investing Activities
Proceeds from sale of equipment 1,135,312 67,450 70,050
Purchase of property and equipment (996,927) (442,464) (325,173)
Payments received on long-term
notes and other receivable 148,149 540,076 23,271
Disbursements on notes receivable (193,000) - -
Increase in intangible and other assets (40,472) (45,164) (72,702)
------------ ------------- -------------
Net cash provided by (used in)
investing activities 53,062 119,898 (304,554)
------------ ------------- -------------
Cash Flows from Financing Activities
Proceeds from short-term borrowings 7,049,000 5,268,100 3,310,000
Principal payments on short-term borrowings (6,617,000) (5,268,100) (3,310,000)
Proceeds from long-term borrowings 1,388,444 3,562,700 360,000
Principal payments on long-term borrowings (1,275,038) (4,819,419) (210,765)
Purchase of common stock for the treasury - (19,691) -
Proceeds from issuance of common stock 594 1,291 198
------------
Net cash provided by (used in)
financing activities 546,000 (1,275,119) 149,433
------------ ------------- -------------
(Continued)
</TABLE>
F-6
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended May 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents 263,001 (414,231) (25,493)
Cash and Cash Equivalents
Beginning 517 414,748 440,241
--------- --------- ------------
Ending $ 263,518 $ 517 $ 414,748
========= ========= ============
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 173,334 $ 195,193 $ 99,341
========= ============ ==============
Income Taxes $ 344,029 $ 257,712 $ 155,837
========= ============ ==============
Supplemental Schedule of Noncash Investing
and Financing Activities
Acquisition of Ficklin Machine Co., Inc.
(Note 10):
Working capital acquired $ 1,075,457
Fair value of other assets acquired,
principally goodwill and property and
equipment 775,015
Goodwill 1,125,753
Long-term debt assumed (1,394,975)
$ 1,581,250
Issuance of 1,150,000 shares of common stock $ 1,581,250
============
Acquisition of Clay Equipment Corporation
(Note 10):
Working capital acquired $ 1,329,160
Fair value of other assets acquired,
principally equipment 1,098,595
Long-term debt assumed (1,828,735)
$ 599,020
Issuance of 837,666 shares of common stock $ (599,020)
============
See Notes to Financial Statements.
</TABLE>
F-7
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: The Company's operations consist of the design, manufacture
and sale of agricultural equipment and repair and replacement parts to dealers
located primarily in the midwestern states on credit terms that the Company
establishes for individual customers.
Significant accounting policies:
Principals of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Ficklin Machine
Co., Inc. All significant intercompany accounts and transactions have been
eliminated.
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all money market funds and savings accounts to be cash
equivalents.
Inventories: Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property and equipment and depreciation: Property and equipment is carried
at cost. Depreciation on property and equipment is computed by the
straight-line method over the estimated useful lives of the assets.
Goodwill: Goodwill resulting from the Company's acquisition of Ficklin
Machine Co., Inc. is being amortized over 15 years using the straight-line
method and is periodically reviewed for impairment based upon an assessment
of future operations to ensure that they are appropriately valued.
Accumulated amortization on goodwill totaled $28,144 at May 31, 1997.
Revenue recognition: Sales of all products are recognized as goods are
shipped.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Research and development: Research and development costs are charged to
operations as they are incurred.
F-8
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock options issued to employees: In fiscal year 1997, the company adopted
the provision of SFAS No. 123, "Accounting for Stock-Based Compensation",
which establishes a fair value based method for the financial reporting of
its stock-based employee compensation plans. However, as allowed by the new
standard, the Company has elected to continue to measure compensation using
the intrinsic value based method as prescribed by Accounting Principles
Board Option No. 25, "Accounting for Stock Issued to Employees." Under this
method, compensation is measured as the difference between the market value
of the stock on the grant date, less the amount required to be paid for the
stock. The difference, if any, is charged to expense over the periods of
service.
Fair value of financial instruments: The carrying amount of cash and cash
equivalents, trade receivables and accounts payable approximates fair value
because of the short maturity of these instruments. The carrying amount of
notes receivable and long-term debt approximate fair value because these
instruments bear interest at approximate current rates available to the
Company for similar borrowings.
Recently issued accounting standards: In March 1995, the Financial
Accounting Standards Board (FASB) issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed
Of, which will require the Company to review for the impairment of
long-lived assets and certain identifiable intangibles to be held and used
by the Company whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company adopted SFAS
No. 121 during fiscal 1997 and the impact to the financial statements or the
financial condition of the Company was not material.
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share", and SFAS No. 129, "Disclosure of
Information about Capital Structure". SFAS No. 128 specifies the
computation, presentation and disclosure requirements for earnings per share
for entities with publicly held common stock. Its objective is to simplify
the computation of earnings per share and to make the U.S. standard for
computing earnings per share more compatible with the standards of other
countries and with that of the International Accounting Standards Committee.
SFAS No. 129 incorporates related disclosure requirements from APB Opinion
No. 10, "Disclosure of Long-Term Obligations," and SFAS No. 47, "Disclosure
of Long-Term Obligations," for entities that were subject to the
requirements for those standards. Both statements are effective for fiscal
years ending after December 15, 1997.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in financial statements. SFAS No.
131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements,
and requires that these enterprises report selected information about
operating segments in interim financial reports to shareholders. Both
statements are effective for fiscal years beginning after December 15, 1997.
The Company will adopt the statements effective June 1, 1998.
F-9
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has not determined the effect adoption of the statements will
have on its current financial statements.
Note 2. Composition of Inventories
Inventories at May 31, 1997 and 1996 consisted of the following:
1997 1996
----------------------------------
Raw materials $ 206,833 $ 143,808
Work in process 257,099 38,303
Finished goods 3,421,222 2,453,691
----------- -------------
$ 3,885,154 $ 2,635,802
=========== =============
Note 3. Pledged Assets and Related Debt
The Company has a line of credit agreement with a bank which expires
November 30, 1997, under which they may borrow up to $4,000,000 in current notes
payable based on a percentage of inventory and trade receivables. Based on the
levels of inventory and trade receivables, the total amount available could be
borrowed under this agreement at May 31, 1997. The interest rate on advances
under this agreement is the bank's prime rate (effective rate of 8.50% at May
31, 1997). Under the terms of this agreement, the Company has outstanding
letters of credit as of May 31, 1997 of $250,000 for the benefit of certain
vendors. The Company has borrowings on this line of $432,000 and none as of May
31, 1997 and 1996, respectively. (a)
Long-term debt at May 31, 1997 and 1996 consisted of the following:
Amount Owed
1997 1996
---- ----
Line ofcredit, bank, borrowings bearing interest
at 8.50%, all outstanding principal and
interest due June 26, 2000. Under the terms of
this agreement the Company is allowed to use
excess cash to temporarily pay down this loan
and will be allowed to borrow up to a maximum
available credit established by the bank. At
May 31, 1997 there are no additional amounts
that could be borrowed under this agreement.
This borrowing limit decreases quarterly to
approximately $900,000 at the maturity of the
agreement. (a) $1,295,344 $ 689,700
F-10
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Notepayable, bank, due in monthly installments
and $15,711,05 including interest at 8.5%
through January 10, 2004.(a) 963,445 -
Notes payable, City of Cedar Falls and Black Hawk
County, Iowa, due in monthly installments of
$1,934, including interest at 6%, through May
11, 1998. Collateralized by substantially all
assets of the Company, except land and
buildings. 22,463 43,620
Note payable, City of Cedar Falls, Iowa, due in
annual installments of $12,857, noninterest
bearing, through September 15, 2000.
Collateralized by all inventory and trade
receivables. 51,428 64,286
Contract payable, due in monthly installments of
$2,494, including interest at 8%, through May
7, 1999. Collateralized by a note receivable
of $134,622 (Note 4). 55,135 79,575
Notepayable, employee, due in weekly installments
of $962, noninterest bearing, through October
31, 1998. Collateralized by other assets. 70,959 -
Other contracts payable, secured 11,385 34,427
---------- ----------
2,470,159 911,608
Less current maturities 361,778 81,497
----------- ----------
$ 2,108,381 $ 830,111
=========== ==========
(a) These borrowings are collateralized by substantially all of the assets of
the Company. The agreements contain various restrictive covenants
including, among others, ones which require the Company to maintain a
certain amount of working capital, 3,000,00 of tangible equity and certain
minimum financial ratios. All covenants have been complied with at May 31,
1997.
F-11
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule by years of the maturities of the long-term debt as
of May 31, 1996:
Year ending May 31:
1998 $ 361,778
1999 322,177
2000 295,507
2001 1,033,182
2002 155,614
later 301,901
------------
$ 2,470,159
Note 4. Note Receivable
Notes receivable as of May 31, 1996 consist of the following:
To be received $2,500 monthly, including interest at 4.58%,
through March 1, 1998 $ 183,930
To be received $1,386 monthly, including interest at 8%,
through June 2009. 128,543
Stockholder, noninterest bearing, to be received in three
payments of $1,500 a year through January 2004. 31,672
---------
Noninterest bearing note due December 1, 1997 3,000
---------
347,145
Less current portion 198,013
---------
$ 149,132
F-12
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Income Taxes
<TABLE>
Net deferred tax liabilities consist of the following components as of May 31,
1997 and 1996:
<CAPTION>
1997 1996
----------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $50,000 $ 62,000
Accrued expenses 57,000 95,000
Contracts payable 25,000 42,000
Net operating loss carryforward 139,000 151,000
Deductible goodwill of predecessor company 208,000 226,000
Inventory 38,000 -
--------- ------------
517,000 576,000
--------- ------------
Deferred tax liabilities:
Property and equipment 38,500 334,000
Inventory 315,000 164,000
--------- ------------
353,500 498,000
--------- ------------
$ 163,500 $ 78,000
========= ============
</TABLE>
<TABLE>
The deferred tax amounts mentioned above have been classified on the
accompanying balance sheets as of May 31, 1997 and 1996 as follows:
<CAPTION>
1997 1996
-------------------------------------
<S> <C> <C>
Current assets $ 52,000 $ 13,000
Noncurrent assets 111,500 65,000
----------- -------------
$ 163,500 $ 78,000
=========== =============
</TABLE>
<PAGE>
The Company acquired operating loss carryforwards in connection with the
purchase of certain assets of Clay Equipment Corporation (Note 10). Limitations
imposed by current tax laws limit the utilization of these carryforwards to
approximately $40,000 per year through 2009.
<TABLE>
Income tax expense is made up of the following components:
<CAPTION>
Year Ended May 31,
-----------------------------------------------------
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 506,827 $ 188,000 $ 185,500
State 62,448 26,006 21,765
-----------
569,275 214,006 207,265
----------- ------------
Deferred tax expense (credit) ( 87,000) 159,000 29,300
----------- ----------- ------------
$ 482,275 $ 37,006 $ 236,565
=========== =========== ============
</TABLE>
F-13
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Total reported tax expense applicable to the Company's operations varies from
the amount that would have resulted by applying the federal income tax rate to
income before income taxes for the following reasons:
<CAPTION>
Year Ended May 31,
------------------------------------------------------
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Income tax expense at statutory federal
income tax rate $ 468,878 $ 367,638 $ 212,652
State tax expense, net of federal
income tax benefit 41,216 17,164 14,147
Benefit of income taxed at lower rates (13,397) (10,504) (6,076)
Other (14,422) (1,292) 15,842
---------- ------------ ------------
$ 482,275 $ 373,006 $ 236,565
=========== ============ ============
</TABLE>
F-14
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stock Option Plans
At May 31, 1997, the Company has a stock-based compensation plan which is
described below. As permitted under generally accepted accounting principles,
grants under this plan are accounted for following APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for grants under the plan. Had compensation cost for the stock based
compensation plan been determined based on the grant date fair values of the
awards (the method prescribed in SFAS No. 123), reported net income and earnings
per common share would have been reduced to the pro forma amounts shown below:
Year Ended May 31,
------------------
1997 1996
---- ----
Net income
As reported $ 857,376 $ 677,388
Pro forma 830,376 670,888
Primary earnings per share
As reported 0.19 0.17
Pro forma 0.19 0.17
Fully diluted earnings per share
As reported 0.19 0.17
Pro forma 0.18 0.17
The Company has a stock option plan adopted in 1993 which provides for the
issuance of a maximum of 425,000 shares of common stock to officers, directors
and key employees at a price per share of not less than 100% of the market price
at the date of grant. The options granted under this plan become exercisable
over three years. In addition, the Company granted an option to purchase 50,000
shares of common stock to non-employees in connection with the purchase of
Ficklin Machine Co., Inc. (Note 10)
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in fiscal 1997 and 1996: risk-free interest rate of
6.35%; expected lives of 10 years; price volatility of 29.6% and no expected
dividends.
The following table summarizes the options to purchase shares of the Company's
common stock under the two option plans combined.
F-15
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
-------------
Weighted
Average
Exercise
Outstanding Price
----------- -----
Balance at May 31, 1995 137,167 0.7673
Granted 67,000 1,2650
Exercised (1,666) 0.7251
Canceled (1,000) 0.7500
------------ -------------
Balance at May 31, 1996 201,501 0.9332
Granted 116,000 1.3750
Exercised (1,000) 0.5938
Canceled (7,000) 1.1429
------------ -------------
Balance at May 31, 1997 309,501 1.0952
============ =============
Number of Options
-----------------
1997 1996
---- ----
Exercisable, end of year 132,996 82,157
Weighted-average fair value per
option of options granted during
the year $ 0.78 $ 0.71
Options are exercisable over varying periods ending on January 2007.
A further summary of the fixed options outstanding at May 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
$ .5938 35,334 $ 5.625 $ 0.5938 35,334 $ 0.5938
$ .8438 38,667 6.625 0.8438 38,667 0.8438
$ .7500 to $1.0000 57,500 7.578 0.8261 38,323 0.8261
$1.2188 to $1.2813 62,000 8.584 1.2637 20,671 1.2637
$1.3750 116,000 9.625 1.3750 - -
---------------------------------------------- -----------------------------
309,501 $ 8.205 $ 1.0952 132,995 $ 0.8375
============================================== ===========================
</TABLE>
F-16
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Research and Development
Research and development costs included in the statements of income as part of
other general and administrative expenses totaled $448,350, $400,916, and
$173,791 for the years ended May 31, 1997, 1996 and 1995, respectively.
Note 8. Employee Benefit Plan
The Company has a 401(k) defined contribution plan covering substantially all
employees. The plan provides for a matching employer contribution based on the
employee's contributions up to 10% of compensation. Additional discretionary
contributions to the plan may also be made. Employer contributions for the years
ended May 31, 1997, 1996 and 1995 were $40,444, $35,029, and $21,620
respectively.
Note 9. Earnings Per Common and Common Equivalent Shares
Earnings per common and common equivalent shares, assuming no dilution, have
been computed on the weighted average number of common shares outstanding during
the period using the treasury stock method of accounting for the dilutive common
equivalent shares discussed in Note 6. The weighted average number of shares of
common stock outstanding for the years ended May 31, 1997, 1996 and 1995 were
4,531,022, 4,002,432 and 3,204,285, respectively.
Earnings per common and common equivalent shares, assuming full dilution, for
the years ended May 31, 1997, 1996 and 1995 are the same as the earnings per
common and common equivalent shares, assuming no dilution.
Note 10. Business Acquisitions
On January 15, 1997 the Company acquired all of the assets of Ficklin Machine
Co., Inc. ("Ficklin") of Onarga, Illinois in exchange for 1,150,000 shares of
the Company's no par value common stock. As a result, Ficklin became a
wholly-owned subsidiary of the Company.
Ficklin Machine designs, manufactures and distributes grain wagons and carts and
small lawn and garden sprayers. The Company currently intends to continue the
business of Ficklin Machine in substantially the same manner as conducted prior
to the acquisition. The acquisition has been accounted for by the purchase
method and results of operations of Ficklin since the date of acquisition are
included in the financial statements.
Unaudited pro forma consolidated condensed financial statements for the year
ended May 31, 1997 and 1996 as though Ficklin had been acquired as of March 6,
1996, Ficklin's date of inception, are as follows:
F-17
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996
---- ----
Net Sales $17,213,000 $12,681,000
Net Income 923,000 705,000
Income per common and common equivalent
share $ 0.18 $ 0.14
On June 26, 1995 the Company acquired certain assets of Clay Equipment
Corporation ("Clay") of Cedar Falls, Iowa in exchange for the assumption of
approximately $2,500,000 of liabilities and 837,666 shares of the Company's no
par value common stock with a value of approximately $628,000. In connection
with the issuance of these shares, the Company incurred stock registration costs
of approximately $29,000. Clay designed, manufactured, and distributed livestock
equipment and other agricultural related products, primarily manure spreader
wagons and milking equipment. The Company moved the combined operations to Cedar
Falls, Iowa in October 1996 where the Company has entered into a lease with the
City of Cedar Falls, Iowa (See Note 11). In association with the move, the City
purchased the land and building of the former Clay site under a flood relocation
plan. The City withheld $131,500 of the purchase price for possible clean up
costs after the former Clay site is demolished. Also, as part of the flood
relocation plan the Company sold equipment and be reimbursed by the City of
Cedar Falls for the moving costs or replacement of equipment with a book value
of $755,546. All proceeds and reimbursements were received by the Company. The
acquisition has been accounted for by the purchase method and results of
operations of Clay since the date of acquisition are included in the financial
statements.
Unaudited pro forma condensed financial statements for the years ended May 31,
1995 as though Clay had been acquired as of June 1, 1994 are as follows:
Net sales $12,724,000
Net (loss) (591,000)
(Loss) per common and common equivalent share (0.14)
F-18
<PAGE>
TOP AIR MANUFACTURING, INC. AND FICKLIN MACHINE CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Lease Commitments
The Company has entered into a 10 year noncancelable agreement to lease an
85,000 square foot facility from the City of Cedar Falls, Iowa ("City"). The
lease requires monthly payments of $16,722 plus insurance, utilities, and other
expenses to be paid by the Company. The City has the option to renew and extend
the lease for an additional 5 years at the end of the original lease term with
an increase in monthly rental not to exceed 3%. At the end of the lease
extension period, the Company has the option to purchase the facility for
approximately $1.3 million plus all reasonable costs and expenses incurred by
the City for the sale. The lease is being accounted for as an operating lease.
The total minimum rental commitment, including the extension period, at May 31,
1997 is approximately $2,900,000 which is due as follows:
Year ending May:
1998 $ 200,000
1999 200,000
2000 200,000
2001 200,000
2002 200,000
Thereafter 1,900,000
-------------
$ 2,900,000
Under this agreement, the Company incurred approximately $143,000 in rent
expense for the year ended May 31, 1997.
F-19
<PAGE>
SIGNATURES
In accordance with 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:
Registrant Top Air Manufacturing, Inc.
By (Signature and Title) /s/ Steven R. Lind, Principal Executive Officer
/s/ Steven F. Bahlmann, Principal Accounting Officer
Date: August 28, 1997
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/ Wayne C. Dudley By:
Wayne C. Dudley, Director Franklin A. Jacobs, Director
Date: August 28, 1997 Date:
By: /s/ Dennis W. Dudley By:
Dennis W. Dudley, Director S. Lee Kling, Director
Date: August 28, 1997 Date:
By: By: /s/ Sanford W. Weiss
Robert J. Freeman, Director Sanford W. Weiss, Director
Date: Date: August 28, 1997
By: /s/ Steven R. Lind By: /s/ Thaddeus P. Vannice, Sr.
Steven R. Lind, Director Thaddeus P. Vannice, Sr.
Date: August 28, 1997 Date: August 28, 1997
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------ ----------- ----
*2 Share Exchange Agreement between Wayne W. Whalen and the
Company dated January 15, 1997 under which the Company
acquired Ficklin Machine Co., Inc., filed as Exhibit 2.1 to
the Company's Form 8-K dated January 24, 1997
*3(a) Amended and restated Articles of Incorporation, filed as
Exhibit 3(c) to the Company's Annual Report on Form 10-KSB
for fiscal year 1991 (the "1991 Form 10-KSB")
*3(b) Amended and Restated By-laws, filed as Exhibit 3(d) to the
1991 Form 10-KSB
*3(c) Amendments to the Amended and Restated By-laws, effective
October 21, 1992, filed as Exhibit 3(c) to the Company's
Annual Report on Form 10-KSB for fiscal year 1993 (the "1993
Form 10-KSB)
*9 Amended and Restated Voting Trust Agreement by and among
Robert J. Freeman and Dennis W. Dudley and their successors,
dated September 15, 1992, filed as Exhibit 9 to the 1993 Form
10-KSB
*10(a) Promissory Note dated January 1, 1991, between the Company
and Wayne C. Dudley (the "Dudley Note"), filed as Exhibit
10(b) to the 1991 Form 10-KSB
*10(b) Letter Amendment, dated August 5, 1994, to the Dudley Note,
filed as Exhibit 10(c) to the Company's Annual Report on Form
10-KSB for fiscal year 1994 (the "1994 Form 10-KSB")
*10(c) 1993 Stock Option Plan adopted by the Board of Directors
November 6, 1992, filed as Exhibit 10(c) to the 1993 Form
10-KSB
*10(d) Summary Plan description for 401(k) plan adopted by the Board
of directors on October 22, 1991, filed as Exhibit 28(b) to
the Company's Annual Report on Form 10-KSB for fiscal year
1992 (the "1992 Form 10-KSB")
*10(e) Promissory Note dated May 16, 1996 between the Company and
Norwest Bank Iowa, N.A., filed as Exhibit 10(e) to the
Company's Annual Report of Form 10-KSB for the fiscal year
1996 (the "1996 Form 10-KSB")
<PAGE>
*10(f) Variable balance promissory note dated November 1, 1995,
between the Company and Norwest Bank Iowa, N.A. filed as
Exhibit 10(f) to the 1996 Form 10-KSB
**10(g) Promissory Note dated January 13, 1997 between the Company
and Norwest Bank Iowa, N.A.
**10(h) First Amendment to 1993 Stock Option Plan dated October 1,
1995
**10(i) Second Amendment to 1993 Stock Option Plan dated March 4,
1997
**10(j) Consulting Agreement dated December 12, 1996 between the
Company and Gregory Wilson, together with a Stock Option
Agreement issued in connection therewith
**11 Statement re Computation of Per Share Earnings
**23 Consent of Accountants
**27 Financial Data Schedule
(Filed in EDGAR version only)
**99 Cautionary Statement Identifying Important Factors that Could
Cause the Company's Actual Results to Differ from those
Projected in Forward-Looking Statements
- ----------------------
* Incorporated by reference to the indicated documents or parts
thereof, previously filed with the Commission.
** Filed herewith.
NORWEST BANKS Commercial Installment Note
Name Top Air Manufacturing, Inc. Date January 13, 1997
Promise to Pay: For Value received, the undersigned Borrower promises to pay to
the order of Norwest Bank Iowa National Association (the "Bank") at 191 West
Fifth Street, Waterloo, IA 50701 or such other place as the Bank or the holder
of this promissory note (the "Note") may designate, the principal sum of One
Million and NO /100 Dollars ($ 1,000,000.00), together with interest on the
unpaid balance in accordance with the repayment terms set forth below.
Interest: The Borrower will pay interest (calculated on the basis of actual days
elapsed in a 360 day year) on the unpaid principal balance at the following rate
(the "Note Rate"):
|_| an annual rate of ________%.
|X| an annual rate equal to 0% in excess of the Base Rate, floating.
|_| an annual rate which, for any month hereafter, shall be equal to ____ %
above the Base Rate in effect on the ________ day of the preceding
month, with an initial rate equal to _____%.
|_| an annual rate _____________.
If this |_| is checked and the Note Rate is variable, the Note Rate shall at no
time be less than an annual rate of _____%, and shall at no time exceed an
annual rate (if one is specified) of _____%. The annual rate of interest on this
Note shall never exceed the maximum rate permitted by law. "Base Rate" means the
rate of interest established by Northwest Bank Iowa , National Association from
time to time as its "base" or "prime" rate. "Due Date" means the maturity date
on which all unpaid principal and interest is scheduled to be repaid as stated
in the Section entitled "Repayment Terms" or the date of the acceleration of
this Note, whichever is earlier.
Repayment Terms: Unless payable sooner as a result of its acceleration, the
Borrower shall pay this Note as follows:
|X| Fixed Installments of Principal and Interest. Principal and interest shall
be paid together in 83 consecutive installments of $ 15,711.05 each, monthly
beginning February 10, 1997, and on the same day of each month thereafter until
December 10, 2003 , |_| plus irregular installments as follows: $ on ; $ on ;
and $ on . On January 10, 2004 , the entire unpaid balance of principal and
accrued but unpaid interest shall be due and payable. Each installment shall be
applied first to accrued interest and the balance to principal.
|_| Fixed Principal Payments Plus Interest. Principal only shall be paid: |_| in
consecutive installments of $ each, beginning , and on the same day of each
thereafter until , plus a final payment on , when the entire unpaid balance of
principal shall become due and payable. |_| $---------- on ; $------------- on ;
- ------------------------ ------------------------- ------------------------
- --------------------------- and in addition, interest shall be payable
- ----------, beginning ----------------, and on the same day of each subsequent
- -------.
<PAGE>
Late Fee: |_| Each time that a scheduled payment is not paid when due or within
days afterwards, the Borrower will pay a late fee equal to |_| $------- ; |_|
- -------% of the full amount of the late payment; |_| the lesser of $------ or
%------- of the full amount of the late payment.
|_| Additional Interest. Each time that a scheduled payment is not paid when due
or within days afterwards, the Borrower will pay additional interest
("Additional Interest") which will begin accruing on the next calendar day on
the entire unpaid principal balance at an annual rate of % in excess of the Note
Rate. The Additional Interest will continue to accrue until all past due
payments and any Additional Interest are paid in full. Acceptance by the Bank of
any late fee or Additional Interest shall not constitute a waiver of any default
hereunder.
Prepayment: The Borrower may prepay this Note at any time, in whole or in part,
|X| without penalty |_| provided that at the time of prepayment the Borrower
pays a prepayment penalty equal to % of the principal amount prepaid. Any
partial payment shall be applied against the principal portion of the
installments due in inverse order of maturity.
Other Fees: If this |_| is checked, the Borrower shall pay to the Bank a
nonrefundable: |_| commitment fee, |_| facility fee, |_| documentation fee, |_|
application and loan processing fee calculated as follows: (Choose one) |_|
$----- ; |_| -----% of the principal amount of this Note, at the time this Note
is signed.
This Note is Secured by: |_| a Mortgage dated -----------, 19-- .
|_| a Mortgage dated -----------, 19-- and other
collateral.
|_| This Note is given in substitution and replacement for (and not in payment
of) a previous Note of the undersigned, payable to the Bank, dated ------------,
19--. This Note |_| evidences indebtedness in addition to the indebtedness
evidenced by the previous Note, or |_| evidences only a portion of the debt
evidenced by the previous Note.
IMPORTANT: READ BEFORE SIGNING, THE TERMS OF THIS AGREEMENT AND ANY RELATED
DOCUMENTS SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE
ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN
CONTRACT(S) MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THE
AGREEMENT(S) ONLY BY ANOTHER WRITTEN AGREEMENT. THIS NOTICE ALSO APPLIES TO ANY
OTHER CREDIT AGREEMENTS (EXCEPT CONSUMER LOANS OR OTHER EXEMPT TRANSACTIONS) NOW
IN EFFECT BETWEEN YOU AND THIS LENDER.
The undersigned acknowledges receipt of a copy of this document.
Additional Terms: The terms set forth on the reverse are incorporated into and
made a part of this Note.
Loan Purpose: The Borrower certifies that the proceeds of this loan will be used
for business or agricultural purposes.
Name Top Air Manufacturing, Inc. By: /s/ Steven R. Lind
Street address 317 Savannah Road By: Steven R. Lind, President
City, State and ZIP Cedar Falls, IA 50613 By:
By:
AMENDMENT TO
TOP AIR MANUFACTURING, INC.
STOCK OPTION PLAN
WHEREAS, Top Air Manufacturing, Inc. ("Company") as heretofore adopted
the Top Air Manufacturing, Inc.'s Stock Option Plan (the "Plan") effective
November 6, 1992; and
WHEREAS, Article VIII of the Plan permits the amendment thereof by the
Board of Directors of the Company (the "Board"); and
WHEREAS, the Board has this date authorized the amendment to Section G
of Article IV of the Plan to permit the exercise of options granted thereunder
following the termination of the optionee's employment or service as a director,
as the case may be, for reasons other than the "retirement" (as defined in the
Plan), permanent disability or death of the optionee, for a period of three
months following such termination.
NOW, THEREFORE, the Plan is hereby amended by deleting the first
paragraph of Section G of Article IV of the Plan and substituting the following
in lieu thereof:
"G. Termination of Employment or Cessation of Service as a Director. In
the event an individual's employment with the Company or term of service as a
director shall terminate for reasons other than: (i) retirement in accordance
with the terms of a retirement plan of the Company ("retirement"); (ii)
permanent disability (as defined in Section 22(e)(3) of the Code); or (iii)
death, the individual's Options shall terminate three months from the date on
which such termination occurs, and shall not be exercisable to any extent as of
and after such time."
This Amendment shall be effective as of October 1, 1995 with respect to
all options granted under the Plan from and after such date.
IN WITNESS WHEREOF, the Company has caused the Amendment to be executed
this 1st day of October, 1995.
AMENDMENT NUMBER 2 TO
TOP AIR MANUFACTURING, INC.
STOCK OPTION PLAN
WHEREAS, Top Air Manufacturing, Inc. ("Company") has heretofore adopted
the Top Air Manufacturing, Inc. Stock Option Plan (the "Plan") effective
November 6, 1992; and
WHEREAS, Article VIII of the Plan permits the amendment thereof by the
Board of Directors of the Company (the "Board"); and
WHEREAS, effective October 1, 1995, the Board authorized and the
Company adopted an Amendment to the Plan; and
WHEREAS, the Board has this date authorized a further amendment to the
Plan to increase the aggregate number of shares of stock which may be issued
under the Plan;
NOW, THEREFORE, the Plan is hereby amended by deleting the first
sentence of Article III of the Plan and substituting the following in lieu
thereof: "The aggregate number of shares of stock which may be issued under the
Plan shall not exceed four hundred twenty-five thousand (425,000)."
This Amendment shall be effective as of the date hereof with respect to
all options granted under the Plan.
IN WITNESS WHEREOF, the Company has caused the Amendment to be executed
this 4th day of March, 1997.
Top Air Manufacturing, Inc.
September 12, 1996
Mr. Gregory Wilson
17 East North Street
Hinsdale, IL 60521
Dear Mr. Wilson:
This letter will confirm our agreement with respect to certain services to be
performed by you on behalf of Top Air Manufacturing, Inc. ("Top Air") in
connection with Top Air's interest in pursuing its discussions with Wayne
Whalen, the sole shareholder of Ficklin Machine Co., Inc.
("Ficklin") regarding Top Air's acquisition of Ficklin.
We have agreed that you, either independently or through your investment
advisory firm, will perform and render certain investment advisory services,
assist Top Air in its due diligence review of Ficklin and its negotiation with
Mr. Whalen and other representatives of Ficklin, with respect to such an
acquisition.
Your fee for the performance of the services mentioned in the preceding
paragraph shall be: (a) the sum of $10,000, payable upon the signing of a letter
of intent for a proposed acquisition of Ficklin by Top Air; (b) out of pocket
expenses incurred in providing such services; and (c) an option to acquire
50,000 shares of the no par value common stock which option (i) shall be granted
as of the closing date of the acquisition, (ii) shall be for a term of ten
years, (iii) shall provide for a per share option price equal to the closing bid
price of the Top Air common stock on the Nasdaq Bulletin Board on such closing
date, and (iv) shall contain such other terms as are reasonably acceptable to
Top Air and you.
Please indicate your agreement with all of the foregoing by signing a copy
hereof in the space provided below for such purpose.
Very truly yours,
Top Air Manufacturing, Inc.
By: /s/ Steven R. Lind
Title: President
Agreed to this 12th day of September, 1996.
/s/ Gregory Wilson
Gregory Wilson
<PAGE>
THIS OPTION AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF (i)
RECEIPT BY THE COMPANY OF AN OPINION OF ITS COUNSEL, OR OTHER COUNSEL REASONABLY
ACCEPTABLE TO IT, THAT NO SUCH REGISTRATIONS ARE REQUIRED, OR (ii) REGISTRATION
UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
STOCK OPTION AGREEMENT
Grant Date: January 15, 1997. Number of Shares to Which Option Relates: 50,000
Option Price Per Share: $1.375
THIS OPTION AGREEMENT is made and effective as of the Grant Date set
forth above between TOP AIR MANUFACTURING, INC., an Iowa corporation (the
"Company"), and GREGORY WILSON, an individual currently residing at 17 East
North Street, Hinsdale, Illinois ("Optionee").
1. Grant of Option. As of the Grant Date identified above, the Company
grants to Optionee, subject to the conditions set forth herein, the right,
privilege and option (the "Option") to purchase up to an aggregate of Fifty
Thousand (50,000) shares (the "Shares") of the no par value common stock of the
Company (the "Common Stock"), at the per share price of One Dollar and
Thirty-Seven and One-Half Cents ($1.375).
2. Term and Exercise of Option. Subject to the exceptions and
limitations noted elsewhere herein, the Option may be exercised in whole, or
from time to time in part, only during the period commencing as of the Grant
Date and ending on the tenth anniversary of the Grant Date (such period to be
referred to hereinafter as the "Option Period").
3. Method of Exercise of Option. Optionee, or, to the extent permitted
herein, his personal representative, guardian, heirs, legatees, or any other
person authorized to exercise the Option on Optionee's behalf ("Authorized
Representative"), may exercise the Option, at any time and from time to time
during the Option Period, by delivery to the Secretary of the Company of a
written notice of election to exercise, identifying that number of whole Shares
as to which exercise is then being sought, which number may not exceed the
number of Shares as to which the Option may then be exercised taking into
account any and all prior partial exercises of the Option. If the person giving
such written notice is not Optionee, the notice also shall identify the nature
of such person's authority to exercise the Option. In all cases, such written
notice of election must be accompanied by surrender of the original of this
Agreement. The Exercise Date shall be the date on which the Secretary receives
the written notice of election, unless all required conditions to exercise are
not then satisfied within such period, in which case the Exercise Date shall be
<PAGE>
the first subsequent date on which all such conditions are satisfied. If
postponement of the Exercise Date becomes necessary, the Secretary shall give
Optionee reasonable advance notice of such postponement. At any time prior to
the Exercise Date, Optionee or such other person who submitted the written
notice of election to exercise may revoke such election by notice to the
Secretary, such revocation to become effective upon receipt. In the event of any
partial exercise of the Option and surrender of this Agreement to the Company,
the Secretary of the Company will make the appropriate notation of the partial
exercise on this Agreement, and return the original Agreement to Optionee or his
Authorized Representative, as the case may be.
Payment in full for that number of Shares as to which the Option is
being exercised must be received by the Secretary of the Company concurrent with
the written notice of election. Payment shall be in cash or by certified or
cashiers' check, payable and acceptable to the Company, for the Shares with
respect to which the Option is being exercised or in lieu of cash, optionee may
request the Company withhold the number of shares, upon exercise of the option,
having a "Fair Market Value" (as hereinafter defined) on the first trading day
immediately preceding the Exercise Date equal to the aggregate purchase price.
As used herein, the term "Fair Market Value" shall equal the closing price of
the Common Stock on the principal national exchange on which such shares are
traded or if not so listed, then the average of the closing ask and bid prices
in the over-the-counter market or if not so reported, then the Fair Market Value
as reasonably determined by the Company's Board of Directors.
On the Exercise Date, the Company shall make delivery to Optionee of
the number of Shares as to which the Option has been exercised. To the extent
that the exercise of the Option obligates the Company to pay withholding taxes
on behalf of Optionee, the Company will pay the minimum amount of such
withholding taxes then due and at the option of Optionee (i) be reimbursed by
the Optionee simultaneously with the delivery of the number of Shares as to
which the Option has been exercised, in cash or by certified or cashiers check
for the amount of the withholding obligation or (ii) withhold from the Shares
then issuable to Optionee a number of Shares having a Fair Market Value on the
on the first trading day immediately preceding the Exercise Date equal to the
amount of such payment, in which event Optionee shall have no further rights to
such withheld Shares.
4. Nontransferability of Option. The Option may not be transferred by
the Optionee and Optionee agrees not to transfer the Option, other than (i) by
will or the laws of descent and distribution, or (ii) by transfer to one or more
revocable living trusts created during his lifetime of which Optionee is the
primary beneficiary, provided that Optionee is either a trustee or a co-trustee
of such trust and the trustee or all co-trustees confirm in writing his or their
agreement to be bound by the terms of this Option.
If Optionee dies or becomes incapacitated while entitled to exercise
the Option, Optionee's personal representative, guardian, heir or legatee, as
the case may be, shall have the full right to exercise the Option, but, in
either case, only to the extent that Optionee was entitled to exercise the
Option on the day immediately prior to Optionee's death or incapacity.
5. Stockholder Rights. Neither Optionee nor any Authorized
Representative shall have any rights as a stockholder with respect to any of the
<PAGE>
Shares until the Option shall have been exercised with respect to such Shares
and such Shares have been issued in the name of Optionee or Authorized
Representative, as the case may be.
6. Adjustments. In the event of any change in the outstanding shares of
Common Stock, whether the number of Shares are increased or decreased, or such
shares are exchanged for a different number or kind of shares or securities of
the Company or other entity through a reorganization, merger, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, combination
or exchange of shares or other similar transaction, the aggregate number of
Shares subject to issuance under the Option shall be appropriately and
proportionately adjusted. Any such adjustment in the Option shall be made
without change in the aggregate purchase price applicable to the unexercised
portion of the Option but with an appropriate adjustment in the Exercise Price
for each Share or other security covered by the Option. The provisions of this
paragraph shall not apply to shares of Common Stock issued pursuant to an
employee or director stock option plan, or other stock based plans of the
Company for the benefit of its officers, directors or employees, or any Shares
issued pursuant to an exercise of the Option.
7. Agreement to Hold Shares; Securities Law Restrictions. Optionee
acknowledges his understanding that neither this Option or the Shares issuable
upon the exercise hereof have been registered under the Securities Act of 1933,
as amended (the "Act"), and that subject to paragraph 12 below, the Company is
under no obligation to register this Option or such Shares. Optionee further
acknowledges his understanding and agreement that as a result of the foregoing,
neither this Option nor any of the Shares may be transferred in the absence of
(i) receipt by the Company of an opinion of its counsel, or other counsel
reasonably acceptable to it that no such registration is required, or (ii)
registration under the "Act" and all applicable state securities laws.
Accordingly, if, at the time of the exercise of the Option (whether in whole or
in part), in the opinion of counsel for the Company, it is necessary or
desirable, in order to comply with any then applicable laws or regulations
relating to the sale of securities, for Optionee to agree to hold any Shares
issued to Optionee for investment purposes only and without intention to resell
or distribute same and for Optionee to agree to dispose of such Shares only in
compliance with such laws and regulations, Optionee agrees, upon the request of
the Company, and at the Company's expense, to execute and deliver to the Company
an agreement to such effect.
8. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Iowa.
9. Nonqualified Stock Option. This Option is not intended to be, and
will not be treated as, an "incentive stock option" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended and in effect from
time to time.
10. Consideration. This Option is granted as partial payment to
Optionee in connection with certain services performed by Optionee for the
Company.
11. Representations of the Company. The Company hereby represents to
Optionee that (i) it has sufficient authorized and unissued shares of Common
Stock available for issuance to Optionee upon the exercise of the Option, and
<PAGE>
(ii) this Option and the Shares issuable hereunder have been duly authorized,
and the Shares, when so issued to Optionee pursuant to the Option, will be
validly issued, fully paid and nonassessable.
12. Registration Rights. (a) If, at any time during the Option Period,
the Company proposes to file a registration statement on form S-8 (or any
successor form) relating to stock based plans or to amend any such registration
statement to increase the number of shares of Common Stock subject to such plan,
it will, prior to such filing, give written notice to Optionee of its intention
to do so and, upon the written request of Optionee given within ten (10) days
after the Company provides such notice, the Company shall use all reasonable
efforts to cause all of the Shares then remaining subject to the Option and the
Option to be registered under the Act; provided, that, (i) in the opinion of
counsel for the Company, the Option and the Shares remaining issuable on the
exercise thereof are permitted to be so registered; and (ii) the Company shall
have the right to postpone or withdraw any such registration proposed or filed
without obligation to Optionee. Further, Optionee shall do all things reasonably
requested by the Company to effect the registration of the Option and Shares,
including, without limitation, providing the Company with all necessary
information required to be included in any such registration statement and
giving the Company appropriate representations, warranties and undertakings as
reasonably requested by the Company.
(b) If, at any time during the Option Period, the Company proposes
to file a "Qualifying Registration Statement" (as hereinafter defined), it will,
prior to such filing, give written notice to Optionee of its intention to do so
(the "Notice") and, upon the written request of Optionee, specifying the number
of "Registrable Shares" (as hereinafter defined) Optionee wishes to be included
in such Qualifying Registration Statement, given within ten days after the
Company provides such Notice, the Company shall use all reasonable efforts to
cause such Registrable Shares to be included in such Qualifying Registration
Statement for registration under the Act; provided, however, that no shares of
Common Stock will be registered pursuant to this subparagraph (b) if (i) such
shares are not held of record and beneficially by Optionee, (ii) such shares
were issued to Optionee pursuant to an exercise of this Option which occurred
more than twelve (12) months prior to the giving of the Notice by the Company to
Optionee, (iii) in the case of an underwritten offering by the Company, the
underwriter advises the Company that the inclusion of all or a portion of the
Registrable Shares will have a material adverse impact upon the sale of the
shares of Common Stock to be covered by the Qualifying Registration Statement
(other than the Registrable Shares); or (iv) Optionee does not enter into an
agreement with the Company and/or underwriter, if applicable, with respect to
customary representations and warranties of Optionee and such other matters as
may be reasonable under the circumstances. The Company shall be responsible for
all costs and expenses associated with the inclusion of the Registrable Shares
in the Qualifying Registration Statement other than any underwriting discounts
and commissions and the registration fees associated therewith. As used herein,
the term: (i) "Registrable Shares" means shares of Common Stock which have been
issued to and are then held of record and beneficially by Optionee pursuant to
an exercise of this Option, and shall also include any other shares of Common
Stock of the Company issued in respect of such shares (because of stock splits,
stock dividends, reclassifications, recapitalizations, or similar events); and
(ii) "Qualifying Registration Statement" means a registration statement in which
the Company intends to register shares of Common Stock for sale by the Company
other than (A) for issuance under any stock-based plan for officers, directors,
<PAGE>
employees and/or consultants of the Company, or (B) in connection with any
business combination or other transaction described in Part A of the General
Instructions to Form S-4. For the purposes of this Section 12(b) Optionee shall
include Optionee or an Authorized Representative.
IN WITNESS WHEREOF, the parties hereto have, by a duly authorized
representative, executed this Agreement as of the 15th of January, 1997.
TOP AIR MANUFACTURING, INC.
By------------------------------------
Title---------------------------------
--------------------------------------
Gregory Wilson
<TABLE>
COMPUTATIONS OF EARNINGS PER SHARE
<CAPTION>
Year Ended May 31,
-------------------------------------------------
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Computation of weighted average number
of common shares outstanding and
common equivalent shares:
Common shares outstanding at the
beginning of the period 4,013,765 3,174,433 3,174,100
Weighted average number of shares
issued during the period 431,830 781,357 295
Weighted average of the common
equivalent shares attributable
to stock options granted, computed
under the treasury stock method(1) 85,427 46,642 29,890
--------- ---------- ----------
Weighted average number of common
and common equivalent shares(2) 4,531,022 4,002,432 3,204,285
---------- --------- ---------
Net Income $ 857,376 $ 677,388 $ 371,012
========== ========== =========
Earnings per common and common $ .19 $ .17 $ .12
equivalent share(2) ========== ========== ==========
- ---------------
<FN>
(1) Some stock options have not been included because they are anti-dilutive.
(2) The difference between fully diluted earnings per share and primary earnings
per share is less than $0.01 per share.
</FN>
</TABLE>
Ficklin Machine Co., Inc.
Incorporated under the laws of the State of Illinois
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference into the registration statement of
Top Air Manufacturing, Inc. on Form S-8 (Registration No 33-74378) of our report
dated July 28, 1997, with respect to the financial statements of Top Air
Manufacturing, Inc. included in its Annual Report on Form 10-KSB for the fiscal
year ended May 31, 1997.
/s/McGladrey & Pullen, LLP
Waterloo, Iowa
August 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Balance Sheet at May 31, 1996 and the Company's Statement of Income
for the Twelve Months Ended May 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-1-1996
<PERIOD-END> MAY-1-1997
<CASH> 263,518
<SECURITIES> 0
<RECEIVABLES> 3,494,742
<ALLOWANCES> 165,000
<INVENTORY> 3,885,154
<CURRENT-ASSETS> 7,845,998
<PP&E> 2,842,052
<DEPRECIATION> 782,912
<TOTAL-ASSETS> 11,385,478
<CURRENT-LIABILITIES> 2,705,409
<BONDS> 2,108,381
0
0
<COMMON> 322,798
<OTHER-SE> 6,248,890
<TOTAL-LIABILITY-AND-EQUITY> 11,385,478
<SALES> 13,802,266
<TOTAL-REVENUES> 13,802,266
<CGS> 9,236,027
<TOTAL-COSTS> 12,296,956
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (31,208)
<INTEREST-EXPENSE> 185,048
<INCOME-PRETAX> 1,339,651
<INCOME-TAX> 482,275
<INCOME-CONTINUING> 857,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 857,376
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS
TO DIFFER FROM THOSE PROJECTED IN
FORWARD-LOOKING STATEMENTS
The following factors could affect the Company's actual results, including its
revenues, expenses and net income, and could cause them to differ from any
forward-looking statements made by or on behalf of the Company:
o The Company competes with a large number of other agricultural
equipment manufacturers and suppliers who distribute sprayers, liquid
manure equipment, grain handling equipment and related parts. Although
the Company believes that its products are sufficiently different from
other products to enable it to establish and maintain a market for such
products, many of the Company's principal competitors are larger than
the Company and have substantial resources. There can be no assurance
that competitors will not be able to take actions, including developing
new products or offering reduced pricing, which could materially
adversely affect the sales revenues of the Company.
o The Company has warranted the products it manufactures to be free from
defects in material and workmanship under normal use and service for a
period ranging from twelve to twenty-four months after date of
purchase. Although the Company carries product liability insurance and
casualty insurance customary for manufacturing operations of its type,
there are certain types of losses which are uninsurable or not
economically insurable. There can be no guaranty against uninsured
losses of any kind.
o The continued success of the Company will depend upon the efforts and
abilities of certain key officers and employees, particularly Steven R.
Lind, its President and Chief Executive Officer. The Company could be
adversely affected if for any reason such officers and employees should
no longer be active in the Company's operations. Steven R. Lind,
President and Chief Executive Officer of the Company, has entered into
an employment agreement with the Company.
o The Company's executive officers and directors as a group beneficially
own approximately 39% of the outstanding shares of the Company's common
stock. Accordingly, these officers and directors acting together have
effective voting control of the Company, including the election of all
of the Company's directors and on any other matter being voted on by
the Company's shareholders. There are no provisions for cumulative
voting by stockholders in the Company's Articles of Incorporation.
These facts may tend to discourage attempts to acquire control of the
Company by persons other than those holders.
