SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Six-Month Period Ended November 30, 1997 Commission File No. 0-5131
ART'S-WAY MANUFACTURING CO., INC.
DELAWARE 42-0920725
____________________________ __________________________
State of Incorporation I.R.S. Employee Identification No.
Armstrong, Iowa 50514
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (712) 864-3131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common stock $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or informational statements incorporated by reference in Part III of
this Form 10-K or any amendment to this form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of
the Registrant on February 10, 1998: $8,895,608
Number of common shares outstanding on February 13, 1998: 1,245,931.
DOCUMENTS INCORPORATED BY REFERENCE: None
Art's-Way Manufacturing Co., Inc.
Index to Annual Report
on Form 10-K
Page
Part I
Item 1 - Description of Business 3 thru 4
Item 2 - Properties 5
Item 3 - Legal Proceedings 5
Item 4 - Submission of Matters to a Vote of Security Holders 5
Part II
Item 5 - Market for the Registrant's Common Stock and
Related Security Holder Matters 6
Item 6 - Selected Financial Statement Data 6 & 7
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 thru 10
Item 7A -Quantitative and Qualitative Disclosures
About Market Risk 10
Item 8 - Consolidated Financial Statements and
Supplemental Data 10
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 10
Part III
Item 10- Directors and Executive Officers of the Registant 11
Item 11- Executive Compensation 12
Item 12- Security Ownership of Certain Beneficial Owners
and Management 13
Item 13- Certain Relationships and Related Transactions 14
Part IV
Item 14- Exhibits, Financial Statement Schedules and
Reports on Form 8-K 15
Note: This Form 10(k) is being filed as a result of a change in the
Company's fiscal year from May 31 to November 30, effective November 30,
1997.
PART I
Item 1. Description of Business
(a) General Development of Business
Art's-Way Manufacturing Co., Inc. (the "Company" or "Art's-Way")
began operations as a farm equipment manufacturer in 1956. Its
manufacturing plant is located in Armstrong, Iowa.
During the past five years, the business of the Company ha
remained substantially the same.
(b) Financial Information About Industry Segments
In accordance with generally accepted accounting principles,
Art's-Way has only one industry segment, metal fabrication.
(c) Narrative Description of Business
The Company manufactures specialized farm machinery under its own
and private labels.
Equipment manufactured by the Company under its own label includes:
portable and stationary animal feed processing equipment and related
attachments used to mill and mix feed grains into custom animal
feed rations; a high bulk mixing wagon to mix animal feeds
containing silage, hay and grain; a line of mowers, cutters and
stalk shredders; minimum till seed bed preparation equipment; sugar
beet and potato harvesting equipment; and a line of land management
equipment.
Research and development efforts have been put forth in the
development of the Company's product lines, both in the development
of new products and the upgrading of existing lines. The expenditures
should result in increased future sales.
Private label manufacturing of farm equipment accounted for 8%, 20%,
22% and 18% of total sales for the six-month period ended November
30, 1997 and each of the years ended May 31, 1997, 1996 and 1995,
respectively. The Company expects private label manufacturing for
the next twelve months to be approximately 25% of sales.
Art's-Way labeled products are sold through farm equipment dealers
throughout the United States. There is no contractual relationship
with these dealers to distribute our products and dealers may sell
a competitor's product line but are discouraged from doing so.
Raw materials are acquired from domestic sources and normally are
readily available.
The Company maintains patents and manufacturing rights on several
of its products covering unique aspects of design and has trademarks
covering product identification. Royalties are paid by the Company
for use of certain manufacturing rights. The validity of its patents
has not been judicially determined and no assurance can be given as
to the extent of the protection which the patents afford. In the
opinion of the Company, its patents, trademarks and licenses are of
value in securing and retaining business. The Company currently has
six patents which expire in various years beginning in 1998 through
2012.
The Company's agricultural products are seasonal; however, with
recent additional product purchases and the development of mowers,
cutters, shredders, beet and potato harvesting machinery, coupled
with private labeled products, the impact of seasonality has been
decreased because the peak periods occur at different times. In
common with other manufacturers in the farm equipment industry,
the Company's business is affected by factors peculiar to the farm
equipment field. Items such as fluctuations in farm income resulting
from crop damage caused by weather and insects, by government farm
programs, and by other unpredictable variables such as interest
rates.
The farm equipment industry has a history of carrying significant
inventory at dealers locations. The Company's beet, shredder and
potato product lines are sold with extended terms, however, the
remainder of the product lines are normally sold with 30 day terms.
The Company has a supplier agreement with Case Corporation. Under
the agreement the Company has agreed to supply Case's requirements
for certain feed processing, tillage equipment and service parts
under Case's label. The agreement has no minimum requirements and
can be cancelled upon certain conditions. For the six-month period
ended November 30, 1997 and each of the years ended May 31, 1997,
1996 and 1995 sales to Case aggregated approximately 5%,10%, 15%
and 15% of total sales, respectively.
The backlog of orders on January 28, 1998 was approximately
$7,000,000 compared to approximately $2,000,000 a year ago. The
increase is primarily tillage equipment for Case Corporation.
The balance of the order backlog consists of various Company branded
products. The order backlog is expected to be shipped during the
current fiscal year.
The Company currently does no business with any local, state or
federal government agencies.
The feed processing products, including private labeled units,
compete with similar products of many other manufacturers. There
are estimated to be more than 20 competitors producing similar
products and total market statistics are not available. The
Company's products are competitively priced with greater diversity
than most competitor product lines. Beet harvesting equipment is
manufactured by 4 companies which have a significant impact on the
market. The Company's share of this market is estimated to be
about 55%. Other products such as mowers, cutters and shredders
are manufactured by approximately 25 other companies with total
market statistics unavailable; however, the Company believes its
products are competitively priced and their quality and performance
are above average in a market where price, product performance and
quality are principal elements.
The Company is engaged in experimental work on a continual basis
to improve the present products and create new products. Research
costs were primarily expended on a new line of feed processing
products and continuous development of beet harvesting equipment.
All research costs are expensed as incurred. Such costs approximated
$193,000 for the six months ended November 30, 1997, and $301,000,
$224,000 and $239,000 for the years ended May 31, 1997, May 31, 1996
and May 31, 1995, respectively. (See also Note 1 to the Consolidated
Financial Statements).
The Company is subject to various federal, state and local laws and
regulations pertaining to environmental protection and the discharge
of materials into the environment. The Company does not anticipate
that future expenses or capital expenditures relating to compliance
with such regulations will be material.
During the six month period ended November 30, 1997, the Company
had peak employment of 211 full-time employees. Of this total 163
were factory and production employees, 15 were engineers and
engineering draftsman, 18 were administrative employees and 15 were
in sales and sales management. Because of the seasonal nature of the
Company's business, the number of employees fluctuates.
The Company's employees are not unionized. There has been no work
stoppage in the Company's history and no stoppage is, or has been,
threatened. The Company believes its relationship with its employees
is good.
(d) Financial Information about Foreign and Domestic Operation
and Export Sales
The Company has no foreign operations; its export sales, primarily
to Canada, accounted for less than 1% of sales and less than 1%
of operating income (loss) in the six-month period ended November
30, 1997 and each of the years May 31, 1997, 1996 and 1995.
Item 2. Properties
The existing executive offices, production and warehousing
facilities of Art's-Way are built of hollow clay block/concrete
and contain approximately 240,000 square feet of usable space.
Most of these facilities have been constructed since 1965 and
are in good condition. The Company owns approximately 140
acres of land west of Armstrong, Iowa, which includes the factory
and inventory storage space. The Company currently leases excess
land to third parties for farming.
Item 3. Legal Proceedings
Various legal actions and claims are pending against the Company
consisting of ordinary routine litigation incidental to the
business. In the opinion of management and outside counsel,
appropriate provisions have been made in the accompanying
consolidated financial statements for all pending legal actions
and other claims. (See also Note 9 to Consolidated Financial
Statements.)
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
(a) Price Range of Common Stock
Per Share Common Stock Bid Prices by Quarter
Period Ended
Six-Months Ended Year Ended Year Ended
November 30, 1997 May 31, 1997 May 31, 1996
High Low High Low High Low
First Quarter 5 1/2 4 1/2 6 5/8 5
Second Quarter 5 1/2 4 1/4 5 3/4 5
Third Quarter 8 1/2 6 1/4 6 1/4 4 3/4 5 3/8 4 1/4
Fourth Quarter 13 1/2 7 3/4 6 3/4 6 5 1/4 4 1/4
The Common Stock is traded in the over-the-counter market and the range of
closing bid prices shown above is as reported by NASDAQ. The quotations
shown reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
(b) Approximate Number of Equity Security Holders
Approximate number of
Title of Class Record Holders as of February 16,1998
Common Stock, $.01
Par Value 268
(c) Dividend Policy
Holders of Common Stock of the Company are entitled to a pro rata share of
any dividends as may be declared from time to time from funds available and
to share pro rata in any such distributions available for holders of
Common Stock upon liquidation of the Company. The Company has not paid a
dividend during the past five years.
Item 6. Selected Financial Statement Data
The following tables set forth certain information concerning the Income
Statements and Balance Sheets of the Company and should be read in
conjunction with the Consolidated Financial Statements and the notes
thereto appearing elsewhere in this Report.
(a) Selected Income Statement Data (In Thousands of Dollars,
Except Per Share Amounts)
Six Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
November 30, May 31 May 31 May 31 May 28 May 29
1997 1997 1996 1995 1994 1993
Net Sales $11,137 $16,440 $13,830 $20,298 $20,473 $20,308
Net Income (Loss)$ 491 $ 80 $ (772) $(1,058)$ 623 $ 356
Income (Loss)
Per Share (1) $ .39 $ .07 $ (.72) $ (.99)$ .58 $ .34
(1) Based on weighted average number of shares outstanding of 1,244,620
for the six months ended November 30, 1997 and 1,197,452, 1,077,359,
1,070,391, 1,064,898, 1,054,559 for the years ended May 31, 1997,
May 31, 1996, May 31, 1995, May 31, 1994 and May 31, 1993.
(a) Selected Balance Sheet Data (In Thousands of Dollars, Except Per
Share Amounts)
November 30, May 31 May 31 May 31 May 28 May 29
1997 1997 1996 1995 1994 1993
Total Assets $15,322 $15,214 $11,886 $14,903 $17,261 $14,866
Long-Term Debt $ 1,935 $ 2,170 $ 1,846 $ 1,573 $ 2,173 $ 2,723
Dividends Per
Share $ .00 $ .00 $ .00 $ .00 $ .00 $ .00
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of financial condition and results of
operations of the Company and its subsidiary is based on the Consolidated
Financial Statements and the notes thereto included herein.
(a) and (b) Liquidity and Capital Resources
Six-months ended November 30, 1997
For the six-months ended November 30, 1997, the Company's main source of
funds resulted from net income plus depreciation. This source was offset
by an increase in inventories and a decrease in customer deposits. The
inventory increase results from a higher production load at November 30,
1997 due primarily from Case tillage equipment. Customer deposits are
from down payments on beet equipment. This equipment was shipped during
the six-month period, consequently the decrease in customer deposits.
Comparison of year ended May 31, 1997 with May 31, 1996
In fiscal year 1997, the Company used $277,000 of cash from operations
compared to generating $1,199,000 cash from operations in fiscal year
1996. The decrease in cash from operations in fiscal year 1997 reflects
an increase in inventories and receivables, offset in part by increased
net income and payables.
In fiscal year 1997, major capital expenditures included two acquisitions.
The first acquisition was a line of potato farming equipment and associated
service parts. The second acquisition was a line of grain wagons and
associated service parts. The acquisitions, which included fixed assets
and inventory, were financed by the issuance of 145,000 shares of Art's-Way
common stock, loans from the State of Iowa and local sources obtained
through the State of Iowa Community Development Block Grant program and
borrowings under the Company's short term line of credit.
Comparison of year ended May 31, 1996 with May 31, 1995
Cash provided by operations was used to reduce bank debt. There were no
major capital expenditures during the 1996 fiscal year. Cash generated
from reductions in inventory and accounts receivable was used to reduce
trade accounts payable.
The reduction in inventory and accounts receivable reflects the lower level
of sales in the 1996 fiscal year as compared to the fiscal year 1995.
The Company continues its emphasis on inventory reductions.
Capital Resources
In August 1995, the Company refinanced its existing senior indebtedness
with a new bank. This new agreement provides for a revolving credit
facility of up to $6,200,000 for operating needs based on a percentage
of the Company's accounts receivable and inventory and allows within the
revolving credit facility for the issuance of Letters of Credit in an
aggregate amount not exceeding $300,000. The interest on this credit
facility is one and one-half percent per annum in excess of the bank's
referenced rate and two percent on the Letter of Credit sub-facility
(10% and 10.5% respectively at November 30, 1997). Management believes
this credit line will allow the Company to facilitate new product growth
and provide for ongoing working capital needs. Future capital needs of
the Company will be met by cash from operations and additional borrowing.
The agreement also provides for a term loan in the principal amount of
$2,130,000. The principal amount is repayable in monthly installments
of $35,500 for twenty-four months with the final payment due at the twenty
fourth month unless the revolving credit facility is renewed. In the event
that the term of the revolving credit facility is subsequently extended,
the term loan shall continue to amortize based upon the payment schedule
outlined above. The interest rate on this credit facility is one and
one-half percent in excess of the bank's reference rate.
All loans, advances and other obligations, liabilities and indebtedness
of the Company are secured by all present and future assets.
The Company's current ratio during the three preceding fiscal years and
its working capital are as shown in the following table:
November 30, May 31, May 31, May 31,
1997 1997 1996 1995
Current Assets $12,486,599 $12,210,992 $9,578,494 $12,040,740
Current Liabilities$ 6,621,214 $ 6,821,525 $4,593,848 $ 7,309,511
Working Capital $ 5,865,385 $ 5,389,467 $4,984,646 $ 4,731,299
Current Ratio 1.9 1.8 1.9 1.6
The Company believes its liquidity, capital resources, and borrowing
capacity are adequate for its current and intended operations.
(c) Results of Operations
Six-months ended November 30, 1997
Sales increased due mainly to strength in sugar beet harvesting equipment
and related service parts. Other strong areas included corn stalk shredders,
where the Company enjoyed its best season since 1994, the SupRaMix vertical
feed mixer and our traditional grinder mixer products. Two areas of weakness
in sales were the termination of our OEM contract to make frames for a local
fiberglass body manufacturer and our deliberate scaling back of Logan potato
equipment production in view of a dramatic downturn in potato prices and
customer demand.
Gross profits increased due to improved production efficiencies, a product
mix of higher margin products and improved purchasing of raw materials.
Warranty expenses were impacted adversely by $160,000 due to unanticipated
problems with our new model beet harvester. The Company encountered learning
curve expenses associated with the new tillage production for Case.
Operating expenses are up as the Company added staff in engineering and
sales to support our new product lines and to enhance our position in the
beet and feed processing business and due to the reinstatement of the
Company's contribution to the employee 40l(k) retirement plan.
Interest costs were up as the higher sales volumes required higher
working capital requirements.
Comparison of year ended May 31, 1997 with May 31, 1996
Sales revenues for FY 1997 rose 19% due to the acquisitions described
above and returning strength in other areas of our existing business.
Sales from the acquisitions exceeded $2,000,000, the feed processing
business was up 22%, and sales gains were made in our land maintenance
line. Sales declined in the sugar beet equipment line as we deliberately
delayed production beyond May 31, 1997 to minimize working capital, make
manufacturing room for our new products, and to allow more time for the
development of new features.
Gross profit for FY 1997 rose 46% on the higher sales volume, however
fiscal year 1996 gross profit was impacted by a $350,000 inventory
write-down. The ratio of cost of goods sold to net sales improved to
73.4% from last year's 78.4% (75.9% prior to the write-down). This
improvement in FY 1997 resulted from lower raw material costs and reduced
warranty expense.
Operating expenses were 7% higher than FY 1996. The two acquisitions
accounted for most of the increase, which included amortization of purchase
costs and additional employees to support the acquisitions. In addition,
the Company strengthened our beet equipment resources in the engineering
area. The 10% wage reduction implemented in June 1995 was progressively
restored which further increased operating expenses. The ratio of expenses
to sales fell from 25.7% in FY 1996 to 23.1% in FY 1997.
Interest expense was 29% lower in FY 1997 when compared to FY 1996. Improved
manufacturing flow reduced working capital requirements throughout the year.
Comparison of year ended May 31, 1996 with May 31, 1995
Sales for FY 1996 were down $6,468,000 from FY 1995 sales. This 32%
reduction in sales was in the company's two major areas of business-sugar
beet equipment and feed processing equipment. Sales of sugar beet equipment
fell 48% as the Company adjusted dealer inventories from a wholesale sales
push in 1995. Feed processing sales were off 36% due to extremely high cost
of feed, primarily corn, which severely crimped the Company's customers'
ability to purchase new machines. Sales of the Company's other products,
including service parts declined a more modest 10%.
Gross profit for FY 1996 fell 30% on the lower sales volume, including a
$350,000 inventory market write-down taken in the fourth quarter. Without
this write-down, gross profit would have been down approximately 23%.
The percent of cost of goods sold to net sales declined to 76.9% from 77.5%
in FY 1995, including the impact of the inventory write-down. Before the
inventory write-down the percent of cost of goods sold was 74.3%. The
improvement came about through significant improvements in manufacturing
efficiencies and purchasing.
Operating expenses were reduced almost 34% from FY 1995. With the
completion of the major new product initiative undertaken in FY 1994
and FY 1995, engineering expenses were scaled back significantly,
particularly in the area of prototype expense. Other major cut-backs
occurred in all areas of the Company, resulting in the number of indirect
and salaried employees at May 31, 1996 to be 73 vs 105 for the prior year.
Operating expenses as a percent of net sales were 27% and 28% in FY 1996
and FY 1995. The reduction in expenses and improvement in the cost of goods
sold percent has enabled the loss from operations to be reduced 48% from
FY 1995.
Interest expense fell 18% from FY 1995, as production schedules, inventories
and accounts receivable were reduced. Other expenses were up significantly
due to fees associated with the new loan agreement.
The effective income tax rate was (32.4%) for fiscal year 1996 compared
to (35.7%) for fiscal year 1995. Changes in the rate are due almost
entirely to research and development credits.
Utilization of Deferred Tax Assets
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Based upon the reversal of deferred tax liabilities and projected future
taxable income, management believes it is more likely than not the Company
will realize the benefits of these deductible differences at November 30,
1997. See also Note 8 to the Consolidated Financial Statements.
Year 2000 Issues
Many computer systems and software programs, including several used by the
Company require modification and conversion to allow data code fields to
accept dates beginning with the year 2000. Major system failures or
erroneous calculations can result if computer systems are not year 2000
compliant. The Company is currently assessing its year 2000 issues, and
is being advised by a substantial majority of its vendors and suppliers
that certain of their products are year 2000 compliant or can be upgraded
or will not be affected by the year 2000 problem. The Company's business
could be materially adversely affected if the Company's computer-based
systems are not year 2000 compliant in a timely manner, the Company incurs
significant additional expenses pursuing year 2000 compliant products, the
Company's vendors do not provide in a timely manner year 2000 compliant
products, or the Company is subject to warranty or other claims by the
Company's clients related to product failures caused by the year 2000
problem.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which revises the calculation and presentation
provisions of Accounting Principle Board Opinion No. 15 and related
interpretations. Statement No. 128 is effective for the fiscal year 1998.
The Company believes the adoption of Statement No. 128 will not have a
significant effect on its reported earnings per share.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8. Consolidated Financial Statements and Supplemental Data
Consolidated Financial Statements and Supplemental Data for the six-month
period ended November 30, 1997 and for each of the years ended May 31, 1997,
1996, and 1995 are presented in a separate section of this Report following
Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers
Directors
JAMES L. KOLEY, age 68, Omaha, Nebraska. Chairman of the Board of Directors
since 1987 and Member of the Executive Committee and Compensation and Stock
Option Committee. Chairman of the Board of the law firm of Koley, Jessen,
Daubman & Rupiper, P.C., Omaha, Nebraska since February 1988. Director of
Dover Corporation, New York, New York. Mr. Koley has been a director since
1976.
GEORGE A. CAVANAUGH, JR., age 77, Ocala, Florida. Retired since 1981;
formerly President of Cavanaugh & Associates, Inc., Manufacturers
Representative, Southfield, Michigan. Chairman of the Compensation
and Stock Option Committee and member of the Audit Committee. Mr.
Cavanaugh has been a director since 1972.
DONALD A. CIMPL, age 66, Omaha, Nebraska. Business consultant since 1989.
For more than five years prior to that time, partner with Coopers and
Lybrand. Chairman of the Audit Committee and member of the Executive
Committee. Mr. Cimpl has been a director since 1990.
HERBERT H. DAVIS, JR., age 74, Omaha, Nebraska. Owner of Miracle Hills Golf
and Tennis Center, Omaha, Nebraska since 1987. For more than five years
prior to that time, Chairman of the Board, Kirkpatrick, Pettis, Smith,
Polian, Inc., Investment Bankers, Omaha, Nebraska. Chairman of the
Executive Committee and Member of the Audit Committee. Director of
KPM Funds, Inc., Omaha, Nebraska. Mr. Davis was first elected as a
director in 1970.
DOUGLAS McCLELLAN, age 48, Clarence, New York. President of Filtration
Unlimited, Akron, New York, where he has held various positions for more
than five years. Member of the Compensation and Stock Option Committee
and Audit Committee. Mr. McClellan has been a director since 1987.
J. DAVID PITT, age 50, Armstrong, Iowa. Joined the Company and was elected
President on March 26, 1996. For more than five years prior to that time,
President and General Manager of Massey-Ferguson, Inc., Des Moines, Iowa.
Mr. Pitt was elected a director in 1996.
J. WARD MCCONNELL, Jr., age 67, Kinston, North Carolina. Private investor
for more than five years. Mr. McConnell was elected a director in 1996.
Executive Officers
J. David Pitt, age 50, President. Mr. Pitt joined and was elected President
of the Company on March 26, 1996 and appointed to the Board of Directors on
September 3, 1996. From 1987 to 1996 he was President and General Manager
of Massey-Ferguson, Inc., Des Moines, Iowa.
William T. Green, age 55, Executive Vice President, Finance and
Administration, Secretary and Treasurer. Mr. Green was appointed
Executive Vice President, Finance and Administration, Secretary &
Treasurer on April 7, 1995. Prior to April 7, 1995, Mr. Green served
as Controller for the Company for more than five years.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth the aggregate cash and cash equivalent forms
of remuneration accrued by the Company and its subsidiaries to, or for, the
benefit of (i) the Chief Executive Officer and (ii) the four most highly
compensated executive officers, other than the CEO, whose remuneration
exceeded $100,000.
Long Term
Compensation
Annual Compensation Awards
Name and All Other
Principal Position Year Salary($) Bonus ($) Compensation Options
J. David Pitt, 1997* $60,000 $65,000 -
President 1997 $120,000 - - 20,000
1996 $ 22,302 - - 21,052
*For the six-month period ended November 30, 1997.
Option Exercises and Fiscal Year-End Values
The following table sets forth the aggregated option exercises and year-end
option value to (i) the Chief Executive Officer and (ii) the four most
highly compensated executive officers, other than the CEO, whose
remuneration exceeded $100,000.
Number of Securities Value of Securities
Underlying Underlying
Unexercised Unexercised
Options at 11/30/97 In-the-Money
Options at 11/30/97
Shares Value
Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Exercise (#) ($) (#) (#) ($) ($)
- - 15,526 25,526 86,084 139,834
J. David Pitt
President
Compensation of Directors
Each director, other than the Chairman of the Board, who is not an employee
of the Company or a subsidiary, receives $4,500 per year plus $900 for
attendance at each of the meetings of the Board, as well as $788 for
attendance at each meeting of a standing committee on which he serves.
The Chairman of a standing committee receives $1,035 for each meeting
attended.
The Chairman of the Board receives $46,800 per year and is eligible for
a discretionary bonus.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Voting Securities and Ownership By Certain Beneficial Owners
The following table sets forth the names of the persons known to the
Company who beneficially own more than 5% of the issued and outstanding
shares of Common Stock of the Company as of February 17, 1998.
Name and Address Type of Number Percent of
Ownership of Shares Outstanding
Arthur Luscombe Of Record 126,325 10.14%
RR and beneficially
Dolliver, Iowa 50531
Franklin Resources, Inc. Beneficially 82,500 6.62%
777 Mariners Island Blvd.
San Mateo, California 94404
Royce & Associates, Inc. Beneficially 94,000 (1) 7.54%
1414 Avenue of the Americas
New York, New York 10019
J. Ward McConnell, Jr. Beneficially 136,450 (2) 10.95%
P.O. Box 6246
Kinston, North Carolina 28501
James L. Koley Of Record 76,000 (3) 6.10%
1125 South 103 Street and beneficially
Omaha, Nebraska 68124
(1) These shares are the total of a group filing on Schedule 13G by
Royce & Associates, Inc. and Charles M. Royce. Mr. Royce disclaims
beneficial ownership of the 94,000 shares held by Royce & Associates, Inc.
(2) Includes 1,250 shares which Mr. McConnell, Jr. is entitled
to purchase under the Director Stock Option Plan(1991).
(3) Includes 5,000 shares which Mr. Koley is entitled to purchase
under the Director Stock Option Plan(1991).
Voting Securities Owned by Executive Officers and Directors
The following table shows certain information with respect to the
Company's common stock beneficially owned by directors and executive
officers as of February 17, 1998. The shares shown as beneficially
owned include shares which executive officers and directors are
entitled to acquire pursuant to outstanding stock options.
Name Type of Beneficial Number of Percent of
Ownership Shares Class
James L. Koley of record and Beneficially 76,000 (1) 6.10%
George A. Cavanaugh, Jr. of record and Beneficially 5,500 (1) *
Donald A. Cimpl of record and Beneficially 42,500 (1) 3.41%
Herbert H. Davis, Jr. of record and Beneficially 48,200 (1) 3.87%
Douglas McClellan of record and Beneficially 20,500 (1) 1.65%
J. Ward McConnell, Jr. of record and Beneficially 136,450 (2) 10.95%
J. David Pitt of record and Beneficially 17,729 (3) 1.42%
William T. Green of record and Beneficially 15,375 (4) 1.23%
Directors and Executive
Officers as a Group
(8 persons) of record and Beneficially 373,304 29.96%
* Less than 1%
(1) Includes 5,000 shares which can be purchased by each individual
pursuant to stock options.
(2) Includes 1,250 shares which can be purchased pursuant to stock
options
(3) Includes 15,526 shares which can be purchased pursuant to stock
options and 1,703 shares which is the allocable portion of the
shares in the Company's 401(k) Plan.
(4) Includes 15,375 shares which can be purchased pursuant to stock options.
Item 13. Certain Relationships and Related Transactions
Not Applicable
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K:
(a) Index to Financial Statements and Schedules
See index to financial statements and supporting schedules on page F-2.
(b) Reports on Form 8-K
No current Reports on Form 8-K have been filed during the last fiscal
quarter of the period covered by this Report.
(c) Index to Exhibits
Any exhibits filed with Securities and Exchange Commission will be
supplied upon written request of William T. Green, Vice President,
Finance, Art's-Way Manufacturing Co., Inc., Highway 9 West,
Armstrong, Iowa 50514. A charge will be made to cover copying costs.
See Exhibit Index below.
Exhibits Required to be Filed
Number Exhibit Description
2 Agreement and Plan of Merger for Reincorporation of
Company in Delaware. Incorporated by reference to
Exhibit 2 of Annual Report on Form 10-K for the year
ended May 27, 1989.
3 Certificate of Incorporation and By-laws for Art's-Way
Manufacturing Co., Inc. Incorporated by reference to
Exhibit 3 of Annual Report on Form 10-K for the year
ended May 27, 1989.
10 Incorporated by reference are the Material Contracts
filed as Exhibit 10 of the Annual Report on Form 10-K
for the fiscal year ended May 30, 1981.
10.1 Art's-Way Manufacturing Co., Inc. 401 (k) Savings Plan.
Incorporated by reference to Exhibit 28 (a) to the
Art's-Way Manufacturing Co., Inc. Registration Statement
on Form S-8 filed on October 23, 1992.
10.2 Art's-Way Manufacturing Co., Inc. Employee Stock Option
Plan (1991). Incorporated by reference to Exhibit "A"
to Proxy Statement for Annual Meeting of Stockholders
held on October 15, 1991.
10.3 Art's-Way Manufacturing Co., Inc. Director Stock Option
Plan (1991). Incorporated by reference to Exhibit "B"
to Proxy Statement for Annual Meeting of Stockholders
held on October 15, 1991.
10.4 Asset Purchase Agreement between the Company and J. Ward
McConnell, Jr., and Logan Harvesters, Inc. Incorporated
by reference to Current Report on Form 8-K dated September
6, 1996.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Art's-Way Manufacturing Co., Inc.:
We have audited the accompanying consolidated financial statements of
Art's-Way Manufacturing Co., Inc. and subsidiary as listed in the
accompanying index. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and
financial statement schedule bases 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 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
Art's-Way Manufacturing Co., Inc. and subsidiary at November 30, 1997
and May 31, 1997 and the results of their operations and their cash
flows for the six-month period ended November 30, 1997 and each of the
years ended May 31, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Omaha, Nebraska
January 9, 1998
ART'S-WAY MANUFACTURING CO., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations -
Six months ended November 30, 1997
and years ended May 31, 1997, 1996 and 1995............... F-3
Consolidated Balance Sheets -
November 30, 1997 and May 31, 1997........................ F4 - F-5
Consolidated Statements of Stockholders' Equity -
Six months ended November 30, 1997
and years ended May 31, 1997, 1996 and 1995............... F-6
Consolidated Statement of Cash Flows -
Six months ended November 30, 1997
and years ended May 31, 1997, 1996 and 1995................ F-7
Notes to Consolidated Financial Statements -
Six months ended November 30, 1997
and years ended May 31, 1997, 1996 and 1995................ F-8 - F-16
SCHEDULE SUPPORTING CONSOLIDATED
FINANCIAL STATEMENTS
Schedule VII - Valuation and Qualifying Accounts......... S-1
All other schedules have been omitted as the required information is not
applicable or the information is included in the consolidated financial
statements or related notes.
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS
ENDED YEARS ENDED
November 30, May 31, May 31, May 31,
1997 1997 1996 1995
NET SALES $ 11,137,092 $16,440,194 $13,830,471 $20,298,140
COST OF GOODS SOLD 7,783,751 12,075,488 10,492,375 15,972,492
INVENTORY MARKET
WRITE-DOWN - - 350,000 -
GROSS PROFIT 3,353,341 4,364,706 2,988,096 4,325,648
EXPENSES:
Engineering 269,473 353,814 278,426 551,739
Selling 759,787 1,372,910 1,495,415 2,201,531
General and
administrative 1,192,045 2,068,615 1,781,417 2,663,361
Total expenses 2,221,305 3,795,339 3,555,258 5,416,631
INCOME (LOSS)
FROM OPERATIONS 1,132,036 569,367 (567,162) (1,090,983)
OTHER INCOME (DEDUCTIONS):
Interest expense (264,939) (327,089) (459,066) (558,321)
Other (111,268) (117,033) (115,750) 4,215
Net deductions (376,207) (444,122) (574,816) (554,106)
INCOME (LOSS) BEFORE
INCOME TAXES 755,829 125,245 (1,141,978) (1,645,089)
INCOME TAX EXPENSE
(BENEFIT) (Note 8) 265,140 45,222 (370,051) (586,601)
NET INCOME (LOSS) $ 490,689 $ 80,023 $(771,927)$(1,058,488)
NET INCOME (LOSS)
PER SHARE $0.39 $0.07 ($0.72) ($0.99)
See accompanying notes to consolidated financial statements.
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
November 30, May 31,
ASSETS 1997 1997
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 8,692 $ 25,297
Accounts receivable-customers,
net of allowance for doubtful accounts
of $31,000 and $25,000
in November and May,
respectively (Notes 5 and 9) 3,005,837 2,943,404
Inventories (Notes 2 and 5) 8,754,469 8,437,569
Deferred income taxes (Note 8) 464,426 644,053
Income tax receivable 99,000 -
Other current assets 154,175 160,669
Total current assets 12,486,599 12,210,992
PROPERTY, PLANT AND EQUIPMENT,
at cost (Notes 3 and 5) 10,323,374 10,340,107
Less accumulated depreciation 7,488,142 7,337,110
Net property, plant and equipment 2,835,232 3,002,997
TOTAL $15,321,831 $15,213,989
See accompanying notes to consolidated financial statements.
November 30, May 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
CURRENT LIABILITIES:
Notes payable to bank (Note 5) $ 3,172,296 $ 2,652,433
Current portion of long-term debt
(Note 5) 483,157 462,146
Accounts payable 2,069,584 2,130,946
Customer deposits 106,793 810,780
Accrued expenses (Note 4) 789,384 765,220
Total current liabilities 6,621,214 6,821,525
LONG-TERM DEBT, excluding current
portion (Note 5) 1,451,794 1,707,854
DEFERRED INCOME TAXES (Note 8) 115,129 94,101
Total liabilities 8,188,137 8,623,480
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value.
Authorized 5,000,000 shares;
issued 1,340,778 shares 13,408 13,408
Additional paid-in capital 1,618,453 1,637,887
Retained earnings 6,411,582 5,920,893
8,043,443 7,572,188
Less cost of common shares in
treasury of 94,847 in November
and 102,347 in May 909,749 981,679
Total stockholders' equity 7,133,694 6,590,509
CONTINGENCIES (Note 9)
TOTAL $15,321,831 $15,213,989
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED NOVEMBER 30, 1997 AND YEARS ENDED MAY 31, 1997, 1996 AND 1995
Additional
Number of Stated/ Paid-In Retained Treasury
Shares Par Value Capital Earnings Stock Total
BALANCE, MAY 29, 1994
1,066,831 $ 13,408 $2,374,575 $7,671,285 $(2,627,341)$7,431,927
Net loss - - - (1,058,488) - (1,058,488)
Common treasury
shares issued 6,100 - (17,786) - 58,503 40,717
BALANCE, MAY 28,1995
1,072,931 13,408 2,356,789 6,612,797 (2,568,838) 6,414,156
Net loss - - (771,927) - (771,927)
Common treasury shares issued
13,700 - (61,700) - 131,393 69,693
BALANCE, MAY 31,1996
1,086,631 13,408 2,295,089 5,840,870 (2,437,445) 5,711,922
Net income - 80,023 - 80,023
Common treasury shares issued
151,800 - (657,202) - 1,455,766 798,564
BALANCE, MAY 31,1997
1,238,431 13,408 1,637,887 5,920,893 (981,679) 6,590,509
Net income - - 490,689 - 490,689
Common treasury shares issued
7,500 - (19,434) - 71,930 52,496
BALANCE, NOVEMBER 30, 1997
1,245,931 $13,408 $1,618,453 $6,411,582 $ (909,749) $7,133,694
See accompanying notes to consolidated financial statements.
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS
ENDED YEARS ENDED
Nov. 30 May 31, May 31, May 31,
1997 1997 1996 1995
CASH FLOWS FROM OPERATIONS:
Net income (loss) $ 490,689 $ 80,023 $(771,927) $(1,058,488)
Adjustments to reconcile net
income (loss) to net cash provided
Depreciation and amortization 280,700 586,152 572,109 621,809
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (62,433) (479,163) 946,384 517,249
Inventories (316,900)(2,236,826) 1,227,500 1,790,429
Other current assets 6,494 (73,194) (46,343) 185,215
Increase (decrease) in:
Accounts payable (61,362) 1,624,034 (1,427,404) (810,196)
Customer deposits (703,987) 438,979 276,187 (267,749)
Accrued expenses 24,164 (242,106) 127,745 (155,982)
Income taxes, net 101,655 24,532 294,471 (783,112)
Net cash provided (used)
by operating activities (240,980) (277,569) 1,198,722 39,175
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (151,134)(1,300,788) (19,568) (216,531)
Proceeds from sale of property,
plant and equipment - net 38,199 18,953 2,140 15,786
Net cash used in investing
activities (112,935)(1,281,835) (17,428) (200,745)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of)
notes payable to bank 519,863 370,624 (1,518,191) 700,000
Proceeds from long-term debt - 750,000 2,130,000 -
Principal payments on
long-term debt (235,049) (426,000) (1,857,334) (600,000)
Proceeds from issuance of common
stock from treasury 52,496 798,564 69,693 40,717
Net cash provided by (used in)
financing activities 337,310 1,493,188 (1,175,832) 140,717
Net increase (decrease) in cash
and cash equivalents (16,605) (66,216) 5,462 (20,853)
Cash and cash equivalents at
beginning of period 25,297 91,513 86,051 106,904
Cash and cash equivalents at
end of period $ 8,692 $ 25,297 $ 91,513 $ 86,051
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 264,939 $ 333,108 $ 490,876 $ 514,376
Income taxes 162,985 22,267 6,992 196,511
See accompanying notes to consolidated financial statements.
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of
Art's-Way Manufacturing Co., Inc. ("Company" or "Art's-Way")
and its subsidiary, A-W Transportation Co. All material
intercompany balances and transactions have been eliminated in
consolidation. As of August 4, 1995, A-W Transportation Co. was
administratively dissolved.
CHANGE IN YEAR END
The Company changed its fiscal year end to November 30 in order
to coincide with seasonality of the agriculture industry. As a
result, the accompanying financial statements include the six-month
transition period ended November 30, 1997, and comparative unaudited
financial information for the six-months ended November 30, 1997 is
presented in note 13.
INVENTORIES
Inventories are stated at the lower of cost or market, and cost is
determined using the first-in, first-out (FIFO) method or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation of
plant and equipment is provided using the straight-line method,
based on estimated useful lives of the assets which range from three
to thirty-three years.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating losses.
Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. Such
costs approximated $193,000 for the six months ended November 30,
1997, and $301,000, $224,000 and $239,000 for the years ended
May 31, 1997, May 31, 1996 and May 31, 1995, respectively.
1., Continued
INCOME (LOSS) PER SHARE
Income (loss) per common share is based on the weighted average
number of shares outstanding and equivalent common shares from
dilutive stock options of 1,244,620 shares for the six months
ended November 30, 1997, 1,197,452, 1,077,359 and 1,070,391 shares
for the years ended May 31, 1997, May 31, 1996 and May 31, 1995,
respectively. The difference between primary and fully diluted
income (loss) per share is not material. In February 1997, the
Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" which revises the calculation and presentation
provisions of Accounting Principles Board Opinion 15 and related
interpretations. Statement No. 128 is effective for the Company's
periods ending after December 15, 1997(the Company's quarter ended
February 28, 1998). Retroactive application will be required.
The Company believes the adoption of Statement No. 128 will not
have significant effect on its reported earnings per share.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
2. INVENTORIES
Major classes of inventory are:
November 30, May 31,
1997 1997
Raw materials $1,593,469 $1,691,733
Work in process 3,340,641 3,891,197
Finished goods 3,916,359 3,014,639
Inventory market write-down (96,000) (160,000)
Total $8,754,469 $8,437,569
3. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant
and equipment, at cost, are: November 30, May 31,
1997 1997
Land $ 180,909 $ 180,909
Buildings and improvements 2,615,573 2,601,250
Manufacturing machinery and
equipment 7,257,729 7,288,785
Trucks and automobiles 148,817 148,817
Furniture and fixtures 120,346 120,346
Total $ 10,323,374 $ 10,340,107
4. ACCRUED EXPENSES
Major components of accrued expenses are:
November 30, May 31,
1997 1997
Salaries, wages and commissions $ 285,806 $ 303,388
Provision for pending claims 9,255 40,000
Other 453,751 421,832
Total $ 789,384 $ 765,220
5. LOAN AND CREDIT AGREEMENTS
Line of Credit
In August 1995, the Company refinanced its existing senior
indebtedness with a new bank. This new agreement provides for a
revolving credit facility of up to $6,200,000 for operating needs
based on a percentage of the Company's accounts receivable and
inventory and allows within the revolving credit facility for
the issuance of letters of credit in an aggregate amount not
exceeding $300,000. The interest on this credit facility is one
and one-half percent per annum in excess of the bank's referenced
rate (10.00% at November 30, 1997) and two percent on the letter
of credit sub-facility (10.50% at November 30, 1997).
At November 30, 1997, borrowings under the revolving line of credit
were $3,172,296 and the bank had issued $100,000 in letters of
credit which guaranteed obligations carried on the consolidated
balance sheet.
The agreement also provides for a term loan in the principal amount
of $2,130,000. The principal amount is repayable in monthly
installments of $35,500 with the final payment due August 1998
unless the revolving credit facility is renewed. In the event that
the term of the revolving credit facility is subsequently extended,
the term loan shall continue to amortize based upon the payment
schedule outlined above. The Company and the bank expect to extend
the current agreement before the current facility expires.
All loans, advances and other obligations, liabilities and
indebtedness of the Company are secured by all present and
future assets.
Unused borrowings under the revolving line of credit were $206,378
at November 30, 1997. The Company pays an unused line fee equal to
three-eighths of one percent of the unused portion of the revolving
loan facility.
5., Continued
Long-term Debt
A summary of the Company's long-term debt is as follows:
November 30, May 31,
1997 1997
Installment promissory note dated
August 31, 1995, in the original
principal sum of $2,130,000, payable
in monthly installments of $35,500
plus interest at one and one-half
percent over the bank's national
money market rate, secured (a) $ 1,207,000 $ 1,420,000
State of Iowa Community Development
Block Grant promissory notes at
zero percent interest, maturity
2006 with quarterly principal
payments to begin October 1997 (b) 488,889 500,000
State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity 2006. Interest is payable
quarterly beginning in November 1996
and principal payments begin in
November 1997 239,062 250,000
Total long-term debt 1,934,951 2,170,000
Less current portion of
long-term debt 483,157 462,146
Long-term debt, excluding
current portion $ 1,451,794 $ 1,707,854
(a) The installment promissory note payable bears interest at one
and one-half percent over the bank's referenced rate (10% at
November 30 and May 31, 1997).
All borrowings under the installment note payable are secured by
the cash, accounts receivable, inventories and property, plant and
equipment of the Company. The agreement requires the Company to
maintain minimum levels of tangible net worth and specified ratios,
as defined, of debt-to-tangible net worth and net cash income to
current maturities. The Company was in compliance with, or has
obtained waivers for, all applicable covenants. Retained earnings
of $6,343,261 are restricted and are not available for the payment
of dividends.
(b) $100,000 of this debt will be forgiven upon the satisfactory
completion of certain performance target obligations at the contract
expiration date of June 30, 1998 and the first year anniversary of
this date, June 30, 1999.
A summary of the minimum maturities of long-term debt follows:
Year Amount
1998 $483,157
1999 $501,462
2000 $430,701
2001 $75,023
2002 $72,474
Thereafter $372,134
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) savings plan
which covers substantially all full-time employees who must meet
eligibility requirements. Participating employees may contribute
as salary reductions a minimum of 4% of their compensation up to
the limit prescribed by the Internal Revenue Code. The Company may
make matching contributions at a discretionary percent upon the
approval from the Board of Directors. Company contributions
approximated $54,000 for the six months ended November 30, 1997,
$0 for each of the years ended May 31, 1997 and 1996 and $165,000
for the year ended May 31, 1995.
7. STOCK OPTION PLANS
Under the 1991 Employee Option Plan, stock options may be granted
to key employees to purchase shares of common stock of the Company
at a price not less than its fair market value at the date the
options are granted. Options granted may be either nonqualified
or incentive stock options. The option price, vesting period and
term are set by the Compensation Committee of the Board of Directors
of the Company. Options for an aggregate of 100,000 shares of common
stock may be granted. Each option will be for a period of ten years
and may be exercised at a rate of 25% at the date of grant and 25%
on the first, second and third anniversary date of the grant on a
cumulative basis. At November 30, 1997, the Company had
approximately 49,000 shares available for issuance pursuant to
subsequent grants.
Under the 1991 Director Option Plan, options may be granted to
nonemployee directors at a price not less than fair market value
at the date the options are granted. Nonemployee directors who have
served for at least one year are automatically granted options to
purchase 5,000 common shares. Options granted are nonqualified stock
options. The option price, vesting period and term are set by the
Compensation Committee of the Board of Directors of the Company.
Options for an aggregate of 45,000 common shares may be granted
under the Plan. Each option will be for a period of ten years and
may be exercised at a rate of 25% at the date of grant and 25% on
the first, second and third anniversary date of the grant on a
cumulative basis. At November 30, 1997, the Company had
approximately 15,000 shares available for issuance pursuant to
subsequent grants.
A summary of changes in the stock option plans is as follows:
November 30, May 31, May 31, May 31,
1995 1995 1995 1995
Options outstanding at
beginning of period 87,552 78,763 77,988 109,685
Granted 5,000 20,000 35,563 34,294
Exercised - - - (2,000)
Canceled or other disposition - (11,211) (34,788)(63,991)
Options outstanding at
end of period 92,552 87,552 78,763 77,988
Options price range
for the period $4.750 $4.750 $4.750 $6.750
to to to to
10.375 $10.375 $11.125 $11.125
Options exercisable at end
of period 60,151 57,701 48,115 56,662
At November 30, 1997, the weighted-average remaining contractual life of
options outstanding was 6.7 years and the weighted average exercise price
was $6.87.
7., Continued
The Company accounts for stock options in accordance with the
provisions of the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant
only if the current market priceof the underlying stock exceeded the
exercise price. Accordingly, the Company has not recognized
compensation expense for its options granted in the six-month period
ended November 30, 1997 and each of the years ended May 31, 1995, 1996
and 1997. In 1997, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant. FASB
Statement No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and
income per share disclosure for employee stock option grants made in
1996 and future years as if the fair-value-based method defined in
FASB Statement No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of FASB Statement No. 123.
The per share weighted-average fair value of stock options granted
during the six-month period ended November 30, 1997 and each of the
years ended May 31, 1997 and May 31, 1996 was $6.874, $7.179 and
$6.799, respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
November 30, 1997- expected dividend yield 0.0%, risk-free interest
rate of 5.86%, expected volatility factor of 36.87%, and an expected
life of 10 years; May 31,1997 - expected dividend yield 0.0%, risk-free
interest rate of 6.75%, expected volatility factor of 36.70%, and an
expected life of 10 years; May 31, 1996 - expected dividend yield 0.0%,
risk-free interest rate of 6.74%, expected volatility factor of 38.50%,
and an expected life of 10 years.
Since the Company applies APB Opinion No. 25 in accounting for its
plans, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company recorded
compensation cost based on the fair value at the grant date for its
stock options under FASB Statement No. 123, the Company's net income
(loss) and income (loss) per share would have been reduced to the
pro forma amounts indicated below:
November 30 May 31, May 31,
1997 1997 1996
Net income (loss) As reported $490,689 $80,023 $(771,927)
Pro forma $464,005 $52,803 $(797,380)
Primary income
(loss) As reported $.39 $.07 $(.72)
per share Pro forma $.37 $.04 $(.73)
8. INCOME TAXES
Total income tax expense (benefit) for the six-month period ended
November 30, 1997 and for each of the years ended May 31, 1997, 1996,
and 1995 consists of the following:
November 30, May 31, May 31, May 31,
1995 1995 1995 1995
Current:
Federal $ 64,485 $ 9,453 $ - $(772,792)
State - 11,237 4,220 (18,536)
64,485 20,690 4,220 (791,328)
Deferred:
Federal 200,655 33,544 (320,210) 198,227
State - (9,012) (54,061) 6,500
200,655 24,532 (374,271) 204,727
$ 265,140 $45,222 $(370,051)$(586,601)
The reconciliation of the statutory Federal income tax rate and the
effective tax rate are as follows:
November 30, May 31, May 31, May 31,
1995 1995 1995 1995
Statutory Federal
income tax rate 34.0% 34.0% (34.0%) (34.0%)
Increase(decrease)dueto:
State income taxes,
net of Federal income
tax benefit - 1.1 (2.9) (1.5)
Research and development
credit (1.3) - - (1.6)
Other-net 2.4 1.0 4.5 1.4
35.1% 36.1% (32.4%) (35.7%)
Tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at
November 30, 1997 and May 31, 1997, 1996 and 1995 are presented
below:
November 30, May 31, May 31, May 31,
1995 1995 1995 1995
Deferred tax assets:
Net operating loss
carryforward $ - $ 56,122 $134,187 $ 96,232
Tax credits 16,034 35,552 - 26,354
Accrued expenses not
deducted until paid 50,053 95,419 138,530 44,738
Inventory
capitalization 302,945 274,067 191,106 226,715
Asset reserves 95,394 182,893 260,313 10,395
Other - - 10,386 1,513
Total deferred
tax assets 464,426 644,053 734,522 405,947
Deferred tax
liability
Depreciation 115,129 94,101 160,038 205,734
Net deferred
tax assets $349,297 $549,952 $574,484 $200,213
8., Continued
There was no valuation allowance for deferred tax assets at
November 30, 1997 and May 31, 1997, 1996 and 1995. In assessing
the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible.
Based upon the reversal of deferred tax liabilities and projected
future taxable income, management believes it is more likely than
not the Company will realize the benefits of these deductible
differences at November 30, 1997.
The Company has available approximately $16,000 of Iowa Jobs Tax
Credits which will expire in the year 2007 and 2008.
9. LITIGATION AND CONTINGENCIES
Various legal actions and claims are pending against the Company.
In the opinion of management and outside counsel, appropriate
provisions have been made in the accompanying consolidated
financial statements for all pending legal actions and other claims.
The Company has entered into agreements whereby it can sell accounts
receivable to financial institutions. One agreement provides for the
Company to pay monthly interest on the face amount of each invoice at
a rate of 3.25% over the prime rate from the date of the invoice for
180 days, or the date of customer payment, whichever occurs first.
Under the terms of the second agreement, the financial institution
purchases the accounts receivable at 95.5% of invoice value. Under
the agreements, the financial institutions, in effect, purchase such
accounts receivable with recourse in the event the customer returns
the equipment. At November 30, 1997, receivables relating to these
agreements, for which the Company had a contingent liability,
approximated $944,000.
10. ACQUISITIONS
On August 30, 1996, the Company acquired certain fixed assets and
inventories from Logan Harvesters, Inc. relating to the manufacture
and distribution of potato farm equipment. The total purchase price
was approximately $2,750,000. The Company issued 145,000 shares of
the Company's common stock, with the balance of the purchase price
in cash. Annual revenues from the potato equipment product line
are expected to be approximately $5,000,000.
On September 23, 1996, the Company acquired certain fixed assets
and inventories from DMI, Inc. relating to the manufacture and
distribution of grain wagons. The total cash purchase price was
approximately $290,000. Annual revenues from the grain wagon product
line are expected to be approximately $1,000,000.
11. INDUSTRY SEGMENT INFORMATION
The Company is primarily engaged in metal fabrication and the sale
of its products in the agricultural sector of the economy. Major
products include animal feed processing products, sugar beet and
potato products, and land maintenance products.
The Company's sales to one major original equipment manufacturer
were $609,554 for the six-month period ended November 30, 1997 and
$1,581,553, $2,119,020 and $3,101,120 for each of the years
ended May 31, 1997, 1996 and 1995, respectively. Accounts receivable
from this customer are unsecured. Accounts receivable from this
customer were $209,805 at November 30, 1997 and $94,986, $54,637 and
$269,086 at May 31, 1997, 1996 and 1995, respectively of the accounts
receivable balance.
12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, defines fair value of a financial instrument at the
amount at which the instrument could be exchanged in a current
transaction between willing parties. At November 30, 1997 and
May 31, 1997, the carrying amount approximates fair value for cash
and cash equivalents, accounts receivable, accounts payable, notes
payable to bank, long-term debt and other current liabilities.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, notes payable to bank and accrued expenses
approximates fair value because of the short maturity of these
instruments. The fair values of each of the Company's long-term debt
instruments also approximate fair value because the interest rate
is variable as it is tied to the bank's national money market rate.
13. TRANSITION PERIOD REPORTING REQUIREMENT
As required by the change in year end explained in footnote 1,
the Company's unaudited financial information for the six-month
period ended November 30, 1996 is as follows.
Unaudited
November 30,
1996
Net Sales $7,275,685
Gross Profit 1,741,649
Income Tax Benefit 64,107
Net Loss $ 119,056
Loss Per Share $ .10
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on
February 25,1998
ART'S-WAY MANUFACTURING CO., INC.
By: __________________________________ By: _______________________
J. David Pitt William T. Green
President Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
______________________________ February 25,1998
James L. Koley Chairman of the Board Date
and Director
______________________________ February 25,1998
J. David Pitt President and Director Date
______________________________ February 25,1998
George A. Cavanaugh, Jr. Director Date
______________________________ February 25,1998
Donald A. Cimpl Director Date
______________________________ February 25,1998
Herbert H. Davis, Jr. Director Date
______________________________ February 25,1998
Douglas McClellan Director Date
_____________________________ February 25,1998
J. Ward McConnell, Jr. Director Date
ART'S-WAY MANUFACTURING CO., INC. Schedule VII
AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
Balance, May 29, 1995 $ 27,000
Additions:
Charged to Operating Expenses 12,000
Deduct:
Accounts Charged Off 12,025
Balance, May 31, 1996 $ 26,975
Additions:
Charged to Operating Expenses 2,834
Deduct:
Accounts Charged Off 4,809
Balance, May 31, 1997 $ 25,000
Additions:
Charged to Operating Expenses 6,000
Deduct:
Accounts Charged Off -
Balance, November 30, 1997 $ 31,000
