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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 Fiscal Year Ended May 31, 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 August 5, 1997: $7,505,809.
Number of common shares outstanding on August 11, 1997: 1,280,151.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement
for the Registrant's 1997 Annual Meeting of Stockholders to be filed
within 120 days of May 31, 1997 are incorporated by reference into
Part III. Exhibits in Registrant's Registration Statement on Form S-8
filed on October 23, 1992, its Annual Report on Form 10-K for the fiscal
years ended, May 30, 1981, and May 27, 1989, its Quarterly Report on Form
10-Q for the quarter ended February 24, 1990, its Current Report on Form
8-K dated October 27, 1989 and its Proxy Statement for its 1991 and 1993
Annual Meetings are incorporated by reference to the exhibit index attached
hereto.
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 9
Item 8 - Consolidated Financial Statements
and Supplemental Data 9
Item 9 - Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 9
Part III
Item 10 - Directors and Executive Officers of the
Registrant 10
Item 11 - Executive Compensation 10
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 10
Item 13 - Certain Relationships and Related
Transactions 10
Part IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K 11
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 has
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 20%,
22% and 18% of total sales for the fiscal years 1997, 1996 and
1995, respectively.
Art's-Way labeled products are sold through equipment dealers.
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'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.
In addition to sales under its own trademarks, the Company
manufactures feed processing products, forage blowers and service
parts for J. I. Case under its label. For the fiscal years 1997,
1996 and 1995 sales to J. I. Case aggregated approximately 10%,
15% and 15% of total sales, respectively.
The backlog of orders on May 31, 1997 compared to that of May 31,
1996 was as follows: beet harvesting equipment was $4,905,000
compared to $837,000, potato harvesting equipment was $633,000
compared to $421,000 and other agricultural products were
$1,329,000 compared to $717,000. The increase of backlog orders
for beet harvesting equipment and other agricultural products was
primarily due to a decision to provide equipment closer to the
season of use. The increase in backlog of potato harvesting
equipment is primarily due to the acquisition of a potato harvesting
line of equipment in August 1996. The backlog of orders is expected
to be filled 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 (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 fiscal 1997, the Company had peak employment of 190
full-time employees. Of this total 143 were factory and production
employees, 14 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 each of the fiscal years 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 thrid parties for farming.
Item 3. Legal Proceedings
(See Note 9 to Consolidated Financial Statements.)
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
4
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
Fiscal Year Ended
May 31, 1997 May 31, 1996
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 6 1/4 4 3/4 5 3/8 4 1/4
Fourth Quarter 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 July 31, 1997
Common Stock, $.01
Par Value 294
(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)
Fiscal Year Ended
May 31, May 31, May 31, May 28, May 29,
1997 1996 1995 1994 1993
Net Sales $16,440 $13,830 $ 20,298 $20,473 $20,308
Net Income(Loss) $ 80 $ (772) $(1,058) $ 623 $ 356
Income(Loss)Per Share (1) $ .07 $ (.72) $ (.99) $ .58 $ .34
(1) Based on weighted average number of shares outstanding of
1,197,452 in 1997, 1,077,359 in 1996, 1,070,391 in 1995,
1,064,898 in 1994, and 1,054,559 in 1993.
(a) Selected Balance Sheet Data (In Thousands of Dollars, Except Per Share
Amounts)
May 31, May 31, May 31, May 28, May 29,
1997 1996 1995 1994 1993
Total Assets $15,214 $11,886 $14,903 $17,261 $14,866
Long-Term Debt $ 2,170 $ 1,846 $ 1,573 $ 2,173 $ 2,723
Dividends Per Share $ .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
Comparison of FY 1997 with FY 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 FY 1996 with FY 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. This new banking
relationship will allow the Company a greater borrowing base to
facilitate new product growth and to 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
installmentsof $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:
May 31, 1997 May 31, 1996 May 31, 1995
Current Assets $12,210,992 $ 9,578,494 $12,040,740
Current Liabilities $ 6,821,525 $ 4,593,848 $ 7,309,511
Working Capital $ 5,389,467 $ 4,984,646 $ 4,731,299
Current Ratio 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
Comparison of FY 1997 with FY 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 FY 1996 with FY 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 May 31, 1997. See also Note 8 to the Consolidated
Financial Statements.
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 8. Consolidated Financial Statements and Supplemental Data
Consolidated Financial Statements and Supplemental Data for the
three years ended May 31, 1997 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.
9
PART III
Item 10. Directors and Executive Officers
The information required by Item 10 is incorporated by reference
from the definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after May 31, 1997 which is included
as Exhibit 99.1 hereto and incorporated herein by this reference.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference
from the definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days after May 31, 1997 which is included as Exhibit
99.1 hereto and incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from
the definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after May 31, 1997 which is included as Exhibit
99.1 hereto and incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from
the definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after May 31, 1997 which is included as Exhibit
99.1 hereto and incorporated herein by this reference.
10
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 Agreement between the Company and FWH, Inc. dated October
27, 1989. Incorporated by reference to Current Report on
Form 8-K dated October 27, 1989.
10.2 Agreement between the Company and FWH, Inc. dated March 7,
1990. Incorporated by reference to Quarterly Report on
Form 10-Q for the quarter ended February 24, 1990.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
99.1 Proxy Statement for 1997 Annual Meeting to be filed on or
before 120 days after May 31, 1997.
11
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 May 31, 1997 and
May 31, 1996, and the results of their operations and their cash flows
for each of the years in the three-year period ended May 31, 1997, 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
July 11, 1997
ART'S-WAY MANUFACTURING CO., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations -
Three years ended May 31, 1997........................ F-3
Consolidated Balance Sheets -
May 31, 1997 and May 31, 1996........................... F4 - F-5
Consolidated Statements of Stockholders' Equity -
Three years ended May 31, 1997........................ F-6
Consolidated Statement of Cash Flows -
Three years ended May 31, 1997........................ F-7
Notes to Consolidated Financial Statements -
Three years ended May 31, 1997......................... F-8 - F-15
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.
F-2
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
May 31, May 31, May 31,
1997 1996 1995
NET SALES $16,440,194 $13,830,471 $20,298,140
COST OF GOODS SOLD 12,075,488 10,492,375 15,972,492
INVENTORY MARKET WRITE-DOWN - 350,00 0 -
GROSS PROFIT 4,364,706 2,988,096 4,325,648
EXPENSES:
Engineering 353,814 278,426 551,739
Selling 1,372,910 1,495,415 2,201,531
General and administrative 2,068,615 1,781,417 2,663,361
Total expenses 3,795,339 3,555,258 5,416,631
INCOME (LOSS) FROM OPERATIONS 569,367 (567,162) (1,090,983)
OTHER INCOME (DEDUCTIONS):
Interest expense (327,089) (459,066) (558,321)
Other (117,033) (115,750) 4,215
Net deductions (444,122) (574,816) (554,106)
INCOME (LOSS) BEFORE INCOME TAXES 125,245 (1,141,978) (1,645,089)
INCOME TAX EXPENSE (BENEFIT) (Note 8)45,222 (370,051) (586,601)
NET INCOME (LOSS) $ 80,023 $ (771,927) $(1,058,488)
NET INCOME (LOSS) PER SHARE $0.07 ($0.72) ($0.99)
See accompanying notes to consolidated financial statements.
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
May 31, May 31,
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents (Note1) $ 25,297 $ 91,513
Accounts receivable-customers,
net of allowance for doubtful accounts
of $25,000 and $26,975 in 1997 and 1996,
respectively (Notes 5 and 10) 2,943,404 2,464,241
Inventories (Notes 2 and 5) 8,437,569 6,200,743
Deferred income taxes (Note 8) 644,053 734,522
Other current assets 160,669 87,475
Total current assets 12,210,992 9,578,494
PROPERTY, PLANT AND EQUIPMENT,
at cost (Notes 3 and 5) 10,340,107 9,091,255
Less accumulated depreciation 7,337,110 6,783,941
Net property, plant and equipment 3,002,997 2,307,314
TOTAL $15,213,989 $11,885,808
See accompanying notes to consolidated financial statements.
May 31, May 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Notes payable to bank (Note 5) $ 2,652,433 $ 2,281,809
Current portion of long-term debt (Note 5) 462,146 426,000
Accounts payable 2,130,946 506,912
Customer deposits 810,780 371,801
Accrued expenses (Note 4) 765,220 1,007,326
Total current liabilities 6,821,525 4,593,848
LONG-TERM DEBT, excluding current portion
(Note 5) 1,707,854 1,420,000
DEFERRED INCOME TAXES (Note 8) 94,101 160,038
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 1,637,887 2,295,089
Retained earnings 5,920,893 5,840,870
7,572,188 8,149,367
Less cost of common shares in treasury of
102,347 in 1997 and 254,147 in 1996 981,679 2,437,445
Total stockholders' equity 6,590,509 5,711,922
CONTINGENCIES (Note 9)
TOTAL $ 15,213,989 $11,885,808
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED MAY 31, 1997
Additional
Number Stated/ Paid -In Retained Treasury
of Shares ParValue 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
See accompanying notes to consolidated financial statements.
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
May 31 May 31 May 31
1997 1996 1995
CASH FLOWS FROM OPERATIONS:
Net income (loss) $ 80,023 $ (771,927) $(1,058,488)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization 586,152 572,109 621,809
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (479,163) 946,384 517,249
Inventories (2,236,826) 1,227,500 1,790,429
Other current assets (73,194) (46,343) 185,215
Increase (decrease) in:
Accounts payable 1,624,034 (1,427,404) (810,196)
Customer deposits 438,979 276,187 (267,749)
Accrued expenses (242,106) 127,745 (155,982)
Income taxes, net 24,532 294,471 (783,112)
Net cash provided (used)
by operating activities (277,569) 1,198,722 39,175
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (1,300,788) (19,568) (216,531)
Proceeds from sale of property,
plant and equipment - net 18,953 2,140 15,786
Net cash used in investing
activities (1,281,835) (17,428) (200,745)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) notes
payable to bank 370,624 (1,518,191) 700,000
Proceeds from long term debt 750,000 2,130,000 -
Principal payments on long term debt (426,000) (1,857,334) (600,000)
Proceeds from issuance of common
stock from treasury 798,564 69,693 40,717
Net cash provided by (used in)
financing activities 1,493,188 (1,175,832) 140,717
Net increase (decrease) in cash and
cash equivalents (66,216) 5,462 (20,853)
Cash and cash equivalents at
beginning of year 91,513 86,051 106,904
Cash and cash equivalents at
end of year $ 25,297 $ 91,513 $ 86,051
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $ 333,108 $ 490,876 $ 514,376
Income taxes 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
THREE-YEAR PERIOD ENDED MAY 31, 1997
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.
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 $301,000 in 1997, $224,000 in 1996 and $239,000
in 1995.
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 1,197,452 shares in 1997, 1,077,359
shares in 1996 and 1,070,391 shares in 1995. The difference
between primary and fully diluted income (loss) per share is
not material.
RECLASSIFICATIONS
Certain 1996 and 1995 balances have been reclassified to conform
to the 1997 presentation.
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:
1997 1996
Raw materials $ 1,691,733 $ 631,354
Work in process 3,891,197 2,235,737
Finished goods 3,014,639 3,683,652
Inventory market write-down (160,000) (350,000)
Total $ 8,437,569 $ 6,200,743
3. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are:
1997 1996
Land $ 180,909 $ 180,909
Buildings 2,601,250 2,601,250
Manufacturing machinery and equipment 7,288,785 6,064,364
Trucks and automobiles 148,817 124,387
Furniture and fixtures 120,346 120,345
Total $10,340,107 $9,091,255
4. ACCRUED EXPENSES
Major components of accrued expenses are:
1997 1996
Salaries, wages and commissions $ 303,388 $ 305,413
Provision for pending claims 40,000 160,000
Other 421,832 541,913
Total $ 765,220 $1,007,326
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 May 31, 1997) and two percent on the letter of credit sub-
facility (10.50% at May 31, 1997).
At May 31, 1997, borrowings under the revolving line of credit were
$2,652,433 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.
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 $960,000
at May 31, 1997. The Company pays an unused line fee equal to
three-eighths of one percent of the unused portion of the revolving
loan facility.
Long-term Debt
A summary of the Company's long-term debt is as follows at
May 31, 1997 and 1996:
1997 1996
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) $ 1,420,000 $ 1,846,000
State of Iowa Community Development Block
Grant promissory notes at zero percent
interest, maturity 2006 with quarterly
principal payments to begin October 1997 (b) 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 250,000 -
Total long-term debt 2,170,000 1,846,000
Less current portion of long-term debt 462,146 426,000
Long-term debt, excluding current
portion $1,707,854 $1,420,000
(a) The installment promissory notes payable bear interest at
one and one-half percent over the bank's national money market
rate (10% and 9.75% at May 31, 1997 and 1996, respectively).
All borrowings under the installment notes 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 $5,920,893 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.
A summary of the minimum maturities of long-term debt follows:
Year Amount
1998 $462,146
1999 $1,069,144
2000 $76,827
2001 $77,081
2002 and beyond $484,802
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 $0 in 1997, $0 in 1996 and $165,000 in 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 May 31, 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 May
31, 1997, the Company had approximately 20,000 shares available
for issuance pursuant to subsequent grants.
A summary of changes in the stock option plans is as follows:
1997 1996 1995
Options outstanding at
beginning of year 78,763 77,988 109,685
Granted 20,000 35,563 34,294
Exercised - - (2,000)
Canceled or other disposition (11,211) (34,788) (63,991)
Options outstanding at end
of year 87,552 78,763 77,988
Options price range for the
year $4.750 $4.750 $6.750
to to to
$10.375 $11.125 $11.125
Options exercisable at end
of year 57,701 48,115 56,662
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 price of the underlying
stock exceeded the exercise price. Accordingly, the Company has not
recognized compensation expense for its options granted in 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 1997 and 1996 was $7.179 and $6.799, respectively, on the
date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions: 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;
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 and income per share would have been reduced
to the pro forma amounts indicated below:
1997 1996
Net income (loss) As reported $80,023 $(771,927)
Pro forma $52,803 $(797,380)
Primary income (loss) As reported $.07 $(.72)
per share Pro forma $.04 $(.73)
8. INCOME TAXES
Total income tax expense (benefit) for the years ended May 31, 1997,
1996, and 1995 consists of the following:
1997 1996 1995
Current:
Federal $ 9,453 $ - $(772,792)
State 11,237 4,220 (18,536)
20,690 4,220 (791,328)
Deferred:
Federal 33,544 (320,210) 198,227
State (9,012) (54,061) 6,500
24,532 (374,271) 204,727
$ 45,222 $(370,049) $(586,601)
The reconciliation of the statutory Federal income tax rate and the
effective tax rate are as follows:
1997 1996 1995
Statutory Federal income tax rate 34.0% (34.0%) (34.0%)
Increase (decrease) due to:
State income taxes, net of Federal
income tax benefit 1.1 (2.9) (1.5)
Research and development credit - - (1.6)
Other-net 1.0 4.5 1.4
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 May 31, 1997,
1996 and 1995 are presented below:
1997 1996 1995
Deferred tax asset:
Net operating loss carryforward $ 56,122 $134,187 $ 96,232
Tax credits 35,552 - 26,354
Accrued expenses not deducted
until paid 95,419 138,530 44,738
Inventory capitalization 274,067 191,106 226,715
Valuation reserves 182,893 260,313 10,395
Other - 10,386 1,513
Total deferred tax asset 644,053 734,522 405,947
Deferred tax liability:
Depreciation 94,101 160,038 205,734
Net deferred tax asset $549,952 $574,484 $200,213
There was no valuation allowance for deferred tax assets at May 31, 1997
and 1996. 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 May 31, 1997.
The Company has a net operating loss carryforward of approximately
$146,000 which will expire in the year 2011, and various tax credits
of approximately $36,000 which will expire in the years 2007 through
2012.
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 May 31, 1997, receivables relating to these agreements,
for which the Company had a contingent liability, approximated $1,173,000.
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
$1,581,553, $2,119,020, and $3,101,120 in 1997, 1996 and 1995,
respectively. Accounts receivable from this customer are unsecured.
Accounts receivable from this customer were $94,986, $54,637, and
$269,086 of the accounts receivable balance at May 31, 1997, 1996 and 1995,
respectively.
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 May 31, 1997 and 1996, 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.
ART'S-WAY MANUFACTURING CO., INC. Schedule VII
AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MAY 31, 1997
Allowance for Doubtful Accounts
Balance, May 30, 1994 $ 77,617
Additions:
Charged to Operating Expenses $42,552
Deduct:
Accounts Charged Off 93,169
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
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
August 29, 1997.
ART'S-WAY MANUFACTURING CO., INC.
By: __________________________________ By: _________________________
James L. Koley William T. Green
Chairman of the Board Executive Vice President,
Treasurer and Secretary
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.
_____________________________ August 29, 1997
James L. Koley Chairman of the Board Date
and Director
_____________________________ August 29, 1997
J. David Pitt President and Director Date
_____________________________ August 29, 1997
George A. Cavanaugh, Jr. Director Date
______________________________ August 29, 1997
Donald A. Cimpl Director Date
______________________________ August 29, 1997
Herbert H. Davis, Jr. Director Date
______________________________ August 29, 1997
Douglas McClellan Director Date
_____________________________
J. Ward McConnell, Jr. Director August 29, 1997
Date