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 November 30, 1999 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 9, 2000: $3,646,185
Number of common shares outstanding on February 9, 2000: 1,256,351.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement
for the Registrant's 1999 Annual Meeting of Stockholders to be filed
within 120 days of November 30, 1999 are incorporated by reference
into Part III.
Art's-Way Manufacturing Co., Inc.
Index to Annual Report
on Form 10-K
Part I Page
Item 1 - Description of Business 3 thru 5
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 7
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 thru 11
Item 7A -Quantitative and Qualitative Disclosures
About Market Risk 12
Item 8 - Consolidated Financial Statements and
Supplemental Data 12
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 12
Part III
Item 10- Directors and Executive Officers of the Registant 12
Item 11- Executive Compensation 12
Item 12- Security Ownership of Certain Beneficial Owners
and Management 12
Item 13- Certain Relationships and Related Transactions 12
Part IV
Item 14- Exhibits, Financial Statement Schedules and
Reports on Form 8-K 13
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, stalk shredders;
minimum till seed bed preparation equipment; sugar beet and potato
harvesting equipment; a line of land maintenance equipment,
a line of grain wagons, edible bean equipment, grain drill equipment
and hi-dump wagons.
Private label manufacturing of farm equipment accounted for 30%, 43%,
8%, and 20% of total sales for the years ended November 30, 1999 and
1998, the six-month period ended November 30, 1997 and the year ended
May 31, 1997, respectively. The Company expects private label
manufacturing for the next twelve months to be approximately 22% 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 that 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
three patents that expire in various years beginning in 2000 through
2012. Patents expiring in 2000 will have no effect on the Company's
business.
The Company's agricultural products are seasonal; however, with
recent additional product purchases and the development of mowers,
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, including items such as fluctuations in farm
income resulting from commodity prices, crop damage caused by
weather and insects, government farm programs, and 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 payment terms, however,
the remainder of the product lines are normally sold with 30 day
terms.
The Company has an OEM supplier agreement with Case Corporation.
Under the OEM 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 years ended November 30, 1999 and 1998, the six-month
period ended November 30, 1997 and the year ended May 31, 1997,
sales to Case aggregated approximately 30%, 40%, 5% and 10%
of total sales, respectively.
The backlog of orders on February 9, 2000 was approximately
$5,000,000 compared to approximately $1,700,000 a year ago. The
increase is a combination of Art's-Way branded products and
OEM 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 although 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 four companies that 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, shredders, grain drills
and grain wagons are manufactured by approximately 25 other companies;
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 for the current fiscal year were primarily expnded on the
development of a new potato harvester and the continuing development
of beet harvesting equipment. All research costs are expensed as
incurred. Such costs approximated $310,000 and $385,000 for the
years ended November 30, 1999 and 1998, respectively, $193,000 for
the six months ended November 30, 1997 and $301,000 for the year
ended May 31, 1997 (See also Note 1 to the 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 they will have future expenses or capital expenditures relating
to compliance with such regulations.
During the year ended November 30, 1999, the Company had peak
employment of 204 full-time employees,of which 155 were factory
and production employees, 17 were engineers and engineering draftsman,
21 were administrative employees and 11 were in sales and sales
management. Employee levels tend to fluctuate based upon the
seasonality of the product line.
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 years ended November 30, 1999
and 1998, the six-month period ended November 30, 1997 and the year
ended May 31, 1997.
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,
adequate provisions have been made in the accompanying
financial statements for all pending legal actions
and other claims. (See also Note 10 to 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
Year Ended Year Ended
November 30,1999 November 30, 1998
High Low High Low
First Quarter 5 7/8 5 10 1/2 9
Second Quarter 5 1/4 4 9 1/2 8 1/2
Third Quarter 5 3/8 3 3/4 8 3/4 7 5/8
Fourth Quarter 4 1/4 3 8 5 3/4
The Common Stock trades on The NASDAQ Small Cap Stock Market under the
symbol ARTW. The range of closing bid prices shown above is as reported
by Small Cap NASDAQ.The quotations shown reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily
represent actual transactions.
(b) Approximate Number of Equity Security Holders
Approximate number of
Title of Class Round Lot Shareholders as of February 10,2000
Common Stock, $.01
Par Value 421
(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 Financial Statements and the notes thereto
appearing elsewhere in this Report.
(a) Selected Income Statement Data (In Thousands of Dollars,
Except Per Share Amounts)
Year Year Six Months Year Year Year
Ended Ended Ended Ended Ended Ended
Nov. 30 Nov. 30, Nov. 30, May 31, May 31, May 31,
1999 1998 1997 1997 1996 1995
Net Sales $17,227 $23,633 $11,137 $16,440 $13,830 $20,298
Net Income (Loss) $ (630) $ (324) $ 491 $ 80 $ (772) $(1,058)
Income (Loss)
Per Share:
Basic $ (.50) $ (.26) $ .39 $ .07 $ (.72) $ (.99)
Diluted $ (.50) $ (.26) $ .39 $ .07 $ (.72) $ (.99)
Common Shares
and Equivalents
Outstanding:
Basic 1,248,456 1,245,931 1,244,620 1,197,452 1,077,359 1,070,391
Diluted 1,248,456 1,245,931 1,261,911 1,199,871 1,077,359 1,070,391
(a) Selected Balance Sheet Data (In Thousands of Dollars, Except Per
Share Amounts)
Nov.30, Nov.30 Nov.30 May 31 May 31 May 31
1999 1998 1997 1997 1996 1995
Total Assets $15,078 $16,854 $15,322 $15,214 $11,886 $14,903
Long-Term Debt $ 420 $ 2,160 $ 1,452 $ 2,170 $ 1,846 $ 1,573
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 Management's Discussion and Analysis of Financial Condition
and Results of Operations may be deemed to include forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, that involve risk and uncertainty. Although the
Company believes that its expectations are based on reasonable assumptions,
it can give no assurance that its expectations will be achieved.
The important factors that could cause actual results to differ
materially from those in the forward-looking statements below
("Cautionary Statements") include the Company's degree of financial
leverage, the factors described in Item 1(c) of this report, risks
associated with acquisitions and in the integration thereof, risks
associated with supplier/OEM agreements, dependence upon the farm
economy and the impact of competitive services and pricing, as
well as other risks referenced from time to time in the Company's
filings with the SEC. All subsequent written and oral forward-
looking statements attributable to the Company or persons acting
on its behalf are expressly qualified in their entirety by the
Cautionary Statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking
statements to reflect events or circumstances after the date
of this report or to reflect the occurrence of unanticipated events.
The following discussion and analysis of financial condition
and results of operations of the Company is based on the
Financial Statements and the notes thereto included herein.
(a) and (b) Liquidity and Capital Resources
Twelve months ended November 30, 1999
The Company's main source of funds was a reduction in accounts
receivable and inventories. The accounts receivable decrease
results primarily from the lower sales volume. The decrease in
inventories results from the lower sales volume offset partially
by the acquisition of new product lines in fiscal year 1999.
The positive cash flow from operations allowed for the reduction
in bank borrowings. Capital expenditures were entirely for
production equipment.
Twelve months ended November 30, 1998
The Company's main source of funds was additional bank borrowings. The
main uses of funds by operating activities were increases in accounts
receivable and inventory. The accounts receivable increase results from
a slower payment pattern for our own branded equipment which increased
the days outstanding from 54 days to 58 days. Inventory increased due
primarily to Case tillage equipment production scheduled for December
1998. Expenditures for capital equipment were $518,000 including
$300,000 to upgrade computer hardware and software. The balance of the
expenditures was spent on production equipment.
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 resulted from a higher production
load at November 30, 1997 due primarily from Case tillage equipment.
Customer deposits were from down payments on beet equipment. This
equipment was shipped during the six-month period, consequently
the decrease in customer deposits.
Twelve months ended May 31, 1997
Cash used by operations of $264,000 resulted from an increase in
inventories and receivables, offset in part by increased 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.
Capital Resources
In April 1998, the Company amended its revolving line of credit agreement
which also includes provisions related to the installment promissory
note.
The agreement allows for borrowings up to $6,000,000 based upon a
percentage of the Company's accounts receivable and inventory and
allows for letters of credit up to an aggregate amount of $300,000.
At November 30, 1999 the Company has borrowed $3,648,888 and has
$100,000 in outstanding letters of credit. The interest rate is
based on the bank's referenced rate and is variable based upon certain
performance objectives with a maximum of plus 2.50% of the referenced
rate and a minimum of plus zero (11.00% at November 30, 1999).
The amendment also provides for a restructured long-term loan with
an original principal amount of $1,991,000. The principal amount is
repayable in monthly installments of $23,700 with the final payment
due August 2000.
At November 30, 1999 the Company is in default of a covenant, the
fixed maturity coverage ratio, of their credit facility and installment
promissory note. The lender has notified the Company via letter dated
October 20, 1999, that the current loan agreeement provides that the
lender may, as a result of any event of default, accelerate the
payment of all obligations. The lender has not called for this
acceleration, but has the right to do so at any time. The lender
has assessed an additional 2.5% interest factor to its credit
facility.
During 1999, the Company was notified by its lender that the
Company does not fit the lender's customer profile and was
requested to relocate its financing needs. The company has
continued to represent to the lender that they are in the process
of obtaining alternate financing. As a result, the lender has
not accelerated the payment of all obligations at this time,
even though the lender has the right to do so. As a result,
all long-term borrowing associated with this lender has been
classified as current.
The Company is currently negotiating with another financial
institution in order to establish a new credit facility.
The Company anticipates that this new credit facility will
be finalized during the second quarter of fiscal year 2000.
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 and its working capital are as shown in the
following table:
November 30, November 30, November 30, May 31,
1999 1998 1997 1997
Current Assets $11,910,297 $14,131,370 $12,486,599 $12,210,992
Current Liabilities$ 8,438,446 $ 7,884,736 $ 6,621,214 $ 6,821,525
Working Capital $ 3,471,851 $ 6,246,634 $ 5,865,385 $ 5,389,467
Current Ratio 1.4 1.8 1.9 1.8
The Company believes the funding expected to be generated from operations
and provided by the new credit facility when established, and its
existing borrowing capacity will be sufficient to meet working capital
and capital investment needs.
(c) Results of Operations
Twelve months ended November 30, 1999 compared to the twelve months
ended November 30, 1998
Revenue decreased 27% to $17,200,000 from $23,600,000 while the
Company recorded a net loss of $630,000 ($.50 per share) compared
to a net loss of $324,000 ($.26 per share) in the prior year.
Revenues from Art's-Way branded products were down 12% while
OEM sales decreased 93%. The Art's-Way reduction in revenue resulted
from lower demand for Art's-Way branded products. The OEM reduction
in revenue was primarily the result of the Company's large OEM customer
instituting inventory reduction programs due to the distressed
agriculture economy.
Gross profit percent improved from 21% in 1998 to 24% in 1999 mainly
due to the higher proportion of Art's-Way branded products, which
generally carry a higher standard margin, combined with improved
manufacturing efficiencies.
Operating expenses were down $590,000 from the previous year. Lower
engineering expenses reflect less new product development costs,
lower selling expenses reflect lower level of sales, while lower
general and administrative expenses in 1999 reflect a significant
increase in bad debt reserve in 1998 to cover the adverse potato
market conditions. Overall, operating expenses as a percentage of
sales increased from 20% in 1998 to 24% in 1999.
A lower level of borrowings resulted in lower interest costs. Other
expenses decreased $74,000. Higher costs on the Company's program
to offer floor plan financing to our larger dealers through a
third party was offset by a debt forgiveness on some of the
Company's EDSA loans. The EDSA loan agreement provided that if the
Company met certain contract obligations in regard to job creation/
retention, demonstrating 51% benefit to low and moderate-income
individuals and investment, $100,000 of the debt would be forgiven.
Upon compliance with this provision during 1999, the Company's
long-term borrowings of $100,000 were forgiven and included in
other income.
Twelve months ended November 30, 1998 compared to the twelve
months ended November 30, 1997
The following proforma unaudited information is presented for the
twelve months ending November 30, 1997 in order to facilitate the
analysis for the twelve months ending November 30, 1998:
Unaudited
November 30, 1997
Net sales $20,302,000
Gross profit $ 5,972,000
Operating expenses $ 4,302,000
Interest expense $ 417,000
Net income $ 689,000
Revenue increased 16% to $23,600,000 from $20,300,000, while the
Company recorded a net loss of $324,000 ($.26 per share) compared
to a net income of $689,000 ($.56 per share) in the prior year.
The increase in sales revenue was due to our new contract to provide
tillage equipment and related service parts to Case Corporation.
Total sales arising from the contract were $7,200,000. The Company
also benefited from a new agreement with New Holland to supply a
forage blower similar to that provided to other OEM customers.
This major increase in OEM business more than offset a 25% decline
in demand for the Company's branded products. A collapse in potato
prices, low hog prices and a poor farm economy in the Red River
Valley region, all contributed to the decline in demand for the
Company's branded products.
Gross profit decreased from 29.4% for the twelve months ended
November 30, 1997 to 21.6% for the twelve months ended November 30,
1998. This dramatic change of 7.5 percentage points results primarily
from a change in product mix from 15% OEM, 85% Art's-Way brands in
1997 to 40% OEM, 60% Art's-Way brands in 1998. OEM business inherently
is less profitable. This product mix impact reduced our gross margin
by 5 percentage points. Problems incurred in the start-up of the new
tillage products due to late vendor delivery of components and
absorbing new manufacturing processes resulted in scheduling problems
for all products. This resulted in significant overtime to
catch up, with a consequent deterioration in production efficiency.
Warranty costs increased $173,000 due to startup problems
with a new model beet harvester.
Operating expenses were up 11% from last year. The full year impact
of the restoration of the Company contribution to the employee
401(k) plan impacted expenses by $122,000. Group insurance
to cover employee medical costs rose $236,000. New product
introduction costs were $148,000. $80,000 was spent on outside
consultants to determine the cause of our deteriorating
manufacturing performance. Bad debt reserves were increased
by $162,000 to cover the adverse potato market conditions.
Overall, operating expenses as a percentage of sales dropped
from 21% in 1997 to 20% in 1998.
Higher inventory levels throughout the year caused a 34% increase
in interest expense. Other financing expenses include an
$80,000 charge in the fourth quarter to be in compliance with
FASB 125 on the accounting treatment for sales of accounts receivable.
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
401(k) retirement plan.
Interest costs were up, as the higher sales volumes required
higher working capital requirements.
Utilization of Deferred Tax Assets
The Company has established a deferred tax asset valuation
allowance of approximately $166,000 at November 30, 1999,
due to the uncertainty of realizing various NOL and tax credit
carryforwards. There was no valuation allowance for deferred
tax assets at November 30, 1998 and 1997 and May 31, 1997. In
assessing the realizability of deferred tax assets for these
years, 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, the expiration dates of tax credits and carry-
forwards and projected future taxable income, management
believes it is more likely than not the Companmy will realize
the benefits of the November 30, 1999 net deferred tax assets.
See also Note 9 to the Financial Statements.
Year 2000 Issues
The Company did not have any internal operating systems failures
or any external negative impacts from failure of its vendors or
suppliers in dealing with Year 2000 issues. The Company will
continue to monitor any Year 2000 issues as part of its Year 2000
project and will concentrate its efforts on minimizing their
impact.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8. Financial Statements and Supplemental Data
Financial Statements and Supplemental Data for the years ended
November 30, 1999 and 1998, the six-month period ended
November 30, 1997 and the year 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.
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 November 30, 1999 is included as Exhibit 99.1
hereto and incorporated herein by this reference.
Item 11. Executive Compensation
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 November 30, 1999 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 10 is incorporated by reference from
the definitive Proxy Statement to be filed pursuant to Regulation 14A,
within 120 days after November 30, 1999 included as Exhibit
99.1 hereto and incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
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 November 30, 1999 included as Exhibit
99.1 hereto and incorporated herein by this reference.
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, Executive
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.
99.1 Proxy Statement for 1999 Annual Meeting to be filed on or
before 120 days after November 30, 1999.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Art's-Way Manufacturing Co., Inc.:
We have audited the accompanying financial statements of
Art's-Way Manufacturing Co., Inc. (the Company) as listed in the
accompanying index on page F-2. In connection with our audits of
the financial statements, we have also audited the financial statement
schedules as listed in the accompanying index. These financial
statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
the Company at November 30, 1999 and 1998, and the results of its
operations and its cash flows for the years ended November 30, 1999
and 1998, the six-month period ended November 30, 1997 and
the year 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 financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Omaha, Nebraska
January 14, 2000
ART'S-WAY MANUFACTURING CO., INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
Statements of Operations -
Years ended November 30, 1999 and 1998, six months ended
November 30, 1997 and year ended
May 31, 1997 ..................................... F-3
Balance Sheets -
November 30, 1999 and 1998 .................................. F-4 - F-5
Statements of Stockholders' Equity -
Years ended November 30, 1999and 1998, six months ended
November 30, 1997 and year ended May 31, 1997 .............. F-6
Statement of Cash Flows -
Years ended November 30, 1999 and 1998, six months ended
November 30, 1997 and year ended May 31, 1997 ............... F-7
Notes to Financial Statements -
Years ended November 30, 1999 and 1998, six months ended
November 30, 1997 and year ended May 31, 1997 ............... F-8 - F-17
SCHEDULE SUPPORTING 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 financial statements
or related notes.
ART'S-WAY MANUFACTURING CO., INC.
STATEMENTS OF OPERATIONS
SIX MONTHS
YEARS ENDED ENDED YEAR ENDED
November 30, November 30, November 30, May 31,
1999 1998 1997 1997
NET SALES $17,226,760 $ 23,632,927 $11,137,092 $16,440,194
COST OF GOODS SOLD 13,045,652 18,576,010 7,783,751 12,075,488
GROSS PROFIT 4,181,108 5,056,917 3,353,341 4,364,706
EXPENSES:
Engineering 439,666 632,541 269,473 353,814
Selling 1,234,599 1,463,497 759,787 1,372,910
General and
administrative 2,523,235 2,692,817 1,192,045 2,068,615
Total expenses 4,197,500 4,788,855 2,221,305 3,795,339
INCOME (LOSS)
FROM OPERATIONS (16,392) 268,062 1,132,036 569,367
OTHER INCOME (DEDUCTIONS):
Interest expense (525,237) (558,988) (264,939) (327,089)
Other (196,544) (270,397) (111,268) (117,033)
Net deductions (721,781) (829,385) (376,207) (444,122)
INCOME (LOSS) BEFORE
INCOME TAXES (738,173) (561,323) 755,829 125,245
INCOME TAX EXPENSE
(BENEFIT) (108,247) (237,435) 265,140 45,222
NET INCOME (LOSS) $(629,926) $(323,888) $ 490,689 $ 80,023
INCOME (LOSS) PER SHARE
Basic $ (0.50) $ (0.26) $ 0.39 $ 0.07
Diluted (0.50) (0.26) 0.39 0.07
COMMON SHARES AND
EQUIVALENT OUTSTANDING:
Basic 1,248,456 1,245,931 1,244,620 1,197,452
Diluted 1,248,456 1,245,931 1,261,911 1,199,871
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
BALANCE SHEETS
November 30, November 30,
1999 1998
ASSETS
CURRENT ASSETS:
Cash $ 273,303 $ 13,743
Accounts receivable-customers,
net of allowance for doubtful accounts
of $223,696 and $205,000
in 1999 and 1998
respectively 2,461,502 3,755,831
Inventories 9,074,812 9,388,261
Income tax receivable -0- 49,000
Other current assets 100,680 275,144
Total current assets 11,910,297 13,481,979
PROPERTY, PLANT AND EQUIPMENT,
at cost 10,627,792 10,418,307
Less accumulated depreciation 8,073,069 7,554,454
Net property, plant and equipment 2,554,723 2,863,853
DEFERRED INCOME TAXES 613,457 508,442
TOTAL $ 15,078,477 $ 16,854,274
See accompanying notes to financial statements.
November 30, November 30,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ 3,648,888 $ 4,368,303
Current portion of long-term debt 1,640,101 359,862
Accounts payable 2,113,168 1,880,398
Customer deposits 119,861 111,902
Accrued expenses 916,428 1,164,271
Total current liabilities 8,438,446 7,884,736
LONG-TERM DEBT, excluding current
portion 419,632 2,159,732
Total liabilities 8,858,078 10,044,468
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 1,559,037 1,618,453
Retained earnings 5,457,768 6,087,694
7,030,213 7,719,555
Less cost of common shares in treasury of
84,427 in 1999 and 94,847 in 1998 809,814 909,749
Total stockholders' equity 6,220,399 6,809,806
TOTAL $15,078,477 $16,854,274
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1999 AND 1998
SIX MONTHS ENDED NOVEMBER 30, 1997 AND
YEAR ENDED MAY 31, 1997
Additional
Number of Stated/ Paid-In Retained Treasury
Shares Par Value Capital Earnings Stock Total
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
Net loss - - (323,888) - (323,888)
BALANCE NOVEMBER 30, 1998
1,245,931 $13,408 $1,618,453 $6,087,694 $(909,749)$6,809,806
Net loss - - (629,926) - (629,926)
Common treasury shares issued
10,420 - (59,416) - 99,935 40,519
BALANCE, NOVEMBER 30, 1999
1,256,351 $13,408 $1,559,037 $5,457,768 $(809,814)$6,220,399
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS
YEARS ENDED ENDED YEAR ENDED
Nov.30, Nov.30, Nov.30, May 31,
1999 1998 1997 1997
CASH FLOWS FROM OPERATIONS:
Net income (loss) $ (629,926) $(323,888) $ 490,689 $ 80,023
Adjustments to reconcile net
income (loss) to net cash provided
(used) by operating activities:
(Gain)loss on sale of property, plant
and equipment (6,650) 6,798 16,852 13,553
Depreciation and amortization 579,931 481,176 280,700 586,152
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,294,329 (749,994) (62,433) (479,163)
Inventories 313,449 (633,792) (316,900) (2,236,826)
Income taxes recoverable 49,000 50,000 (99,000) -
Other current assets 174,464 (120,969) 6,494 (73,194)
Increase (decrease) in:
Accounts payable 232,770 (189,186) (61,362) 1,624,034
Customer deposits 7,959 5,109 (703,987) 438,979
Accrued expenses (247,843) 374,887 24,164 (242,106)
Deferred taxes (105,015) (159,145) 200,655 24,532
Net cash provided (used)
by operating activities 1,662,468 (1,259,004) (224,128) (264,016)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (270,801) (518,445) (151,134)(1,300,788)
Proceeds from sale of property,
plant and equipment 6,650 1,850 21,347 5,400
Net cash used in investing
activities (264,151) (516,595) (129,787)(1,295,388)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of)
notes payable to bank (719,415) 1,196,007 519,863 370,624
Proceeds from long-term debt - 1,008,800 - 750,000
Principal payments on
long-term debt (459,861) (424,157) (235,049) (426,000)
Proceeds from issuance of common
stock from treasury 40,519 - 52,496 798,564
Net cash provided by (used in)
financing activities (1,138,757) 1,780,650 337,310 1,493,188
Net increase (decrease) in cash 259,560 5,051 (16,605) (66,216)
Cash at beginning of period 13,743 8,692 25,297 91,513
Cash at end of period $ 273,303 $ 13,743 $ 8,692 $ 25,297
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 525,237 $ 558,988 $ 264,939 $ 333,108
Income taxes 3,952 2,094 162,985 22,267
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN YEAR-END
During 1997, the Company changed its fiscal year-end to November 30
in order to coincide with the 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, 1996 is presented in note 14.
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.
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 $310,000 and $385,000 for the years ended
November 30, 1999 and 1998,respectively, $193,000 for the six months
ended November 30,1997, and $301,000 for the year ended May 31,1997.
1., Continued
INCOME (LOSS) PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128
Earnings Per Share requires the presentation of "basic" and
"diluted" income per share on the face of the income statement.
Basic income per common share is computed on the basis of
weighted average number of common shares. Diluted income per
share is computed on the basis of weighted average number
of common shares plus equivalent shares assuming exercise
of stock options.
The difference in shares utilized in calculating basic and
diluted earnings per share represents the number of shares
issued under the Company's stock option plans less shares
assumed to be purchased with proceeds from the exercise of
the stock options. Due to the net loss in 1999 and 1998,
the anti-dilutive effect of the Company's stock option plans
is not included in the calculation of diluted earnings per
share for those periods. The only reconciling item between
the shares used in the computation of basic and diluted
earnings per share for the six months ended November 30, 1997
and the year ended May 31, 1997, is the effect of stock
options of 17,291 and 2,419, respectively.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
SFAS 125,Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities provides accounting and reporting
standards for transfers and servicing of financial assets and is
based on consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured
borrowings.
The Company has entered into an agreement whereby it can sell
accounts receivable to a financial institution. The agreement
provides for the Company to pay monthly interest on the face
amount of each invoice at a rate of 2.75% over the prime rate
from the date of the invoice for 180 days, or the date of customer
payment, whichever occurs first. The buyer is responsible for
servicing the receivables, and has recourse to the Company for
receivables outstanding greater than 180 days. Under SFAS No. 125,
the sales of the receivables are reflected as a reduction of
trade accounts receivable. At November 30, 1999 and 1998, there
were $1,419,000 and $1,824,000, respectively, of receivables
outstanding which the Company has sold relating to this agreement.
STOCK BASED COMPENSATION
The Company accounts for stock options in accordance with the
provisions of 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 the years ended November 30, 1999
and 1998, the six-month period ended November 30, 1997 and the year
ended May 31, 1997. SFAS Statement No. 123, Accounting for Stock-
Based Compensation, 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. See note 7 for
additional discussion and pro-forma disclosures.
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 financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in prior year's financial statements and related
notes have been reclassified to conform to the 1999 presentation.
2. INVENTORIES
Major classes of inventory are: November 30, November 30,
1999 1998
Raw materials $ 1,146,456 $1,503,784
Work in process 3,362,003 4,147,554
Finished goods 4,566,353 3,736,923
Total $9,074,812 $9,388,261
3. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant
and equipment, at cost, are: November 30, November 30,
1999 1998
Land $ 180,909 $ 180,909
Buildings and improvements 2,615,573 2,615,573
Manufacturing machinery and
equipment 7,555,774 7,346,289
Trucks and automobiles 155,654 155,654
Furniture and fixtures 119,882 119,882
Total $ 10,627,792 $ 10,418,307
4. ACCRUED EXPENSES
Major components of accrued expenses are:
November 30, November 30,
1999 1998
Salaries, wages and commissions $ 337,611 $ 337,682
Other 578,817 826,589
Total $ 916,428 $1,164,271
5. LOAN AND CREDIT AGREEMENTS
Line of Credit
In April 1998, the Company amended its revolving line of credit
agreement which also includes provisions related to the
installment promissory note presented in long-term debt below.
The agreement allows for borrowings up to $6,000,000 based on
a percentage of the Company's accounts receivable and inventory
and allows for letters of credit up to an aggregate amount of
$300,000. At November 30, 1999, the Company has borrowed $3,648,888
and has $100,000 in outstanding letters of credit. The interest rate
is based on the bank's referenced rate and is variable based upon
certain performance objectives with a maximum of plus 2.50% of the
referenced rate and a minimum of plus zero (11.00% at November 30,
1999).
The amendment also provides for a restructured long-term loan
with an original principal amount of $1,991,000. The principal
amount is repayable in monthly installments of $23,700 with the
final payment due August 2000. As discussed below, the Company
is in default with one of its loan covenants at November 30,
1999 and is in the process of obtaining alternative financing.
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 $182,703 at November 30, 1999. The Company pays an unused
line fee equal to three-eighths of one percent of the unused
portion of the revolving line of credit.
5., Continued
Long-term Debt
A summary of the Company's long-term debt is as follows:
November 30, November 30,
1999 1998
Installment promissory note
payable in monthly installments
of $23,700 plus interest at
two and one-half percent
over the bank's national money market
rate, (11.00%), secured (a) $ 1,564,400 $ 1,848,800
State of Iowa Community Development
Block Grant promissory notes at
zero percent interest, maturity
2006 with quarterly principal
payments of $11,111 (b) 300,000 444,444
State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity 2006, with quarterly
payments of $7,814. 195,333 226,350
Total long-term debt 2,059,733 2,519,594
Less current portion of
long-term debt 1,640,101 359,862
Long-term debt, excluding
current portion $ 419,632 $ 2,159,732
(a) 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 specified ratios, as defined, of debt-to-tangible net worth
and net cash income to current maturities. Retained earnings of
$5,457,768 are restricted and are not available for the payment of
dividends.
At November 30, 1999 the Company is in default of a covenant, the
fixed maturity coverage ratio, of their credit facility and
installment promissory note. The lender has notified the Company
via letter dated October 20, 1999 that the current loan agreement
provides that the lender may, as a result of any event of default,
accelerate the payment of all obligations. The lender has not
called for this acceleration, but has the right to do so at any
time. The lender has assessed an additional 2.5% interest factor
to its credit facility.
During 1999, the Company was noified by its lender that the
Company does not fit the lender's customer proile and was requested
to relocate its financing needs. The Company has continued to
represent to the lender that they are in the process of obtaining
alternate financing. As a result, the lender has not accelerated
the payment of all obligations at this time, even though the
lender has the right to do so. The lender has decided to allow
the company to proceed under the terms of the loan agreement. As
a result, all long-term borrowing associated with this lender
have been classified as current.
The Company is currently negotiating with another financial
institution in order to establish a new credit facility. The
Company anticipates that this new credit facility will be
finalized during the second quarter of fiscal year 2000.
(b) The agreement provided that if the Company met certain
contractual obligations in regard to job creation/retention,
demonstrating 51% benefit to low and moderate-income
individuals and investment, $100,000 of the debt would be forgiven .
Upon compliance with this provision in the third quarter ended
August 31, 1999 $100,000 of the long-term debt was forgiven.
A summary of the minimum maturities of long-term debt follows:
Year Amount
2000 $1,640,101
2001 $75,023
2002 $72,475
2003 $72,750
2004 $73,034
Thereafter $126,350
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 were
approximatly $32,000 and $170,000 for the years ended November 30,
1999 and 1998,respectively, $54,000 for the six months ended
November 30, 1997 and $0 for the year ended May 31, 1997.
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, 1999, the Company had
approximately 72,000 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, 1999, 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:
Nov. 30, Nov. 30, Nov. 30, May 31,
1999 1998 1997 1997
Options outstanding at
beginning of period 103,078 92,552 87,552 78,763
Granted - 10,526 5,000 20,000
Canceled or other disposition (51,578) - - (11,211)
Options outstanding at
end of period 51,500 103,078 92,552 87,552
Options price range
for the period $6.000 $4.750 $4.750 $4.750
to to to to
$10.375 $10.375 $10.375 $10.375
Options exercisable at end
of period 50,250 77,420 60,151 57,701
At November 30, 1999 and 1998,the weighted-average remaining contractual life of
options outstanding was 3.2 years and 6.1 years respectively and the weighted
average exercise price was $8.47 and $7.14 respectively. The weighted average
exercise price for options exercisable at November 30, 1999 was $8.48.
The per share weighted-average fair value of stock options granted during the
years ended November 30, 1999 and 1998, the six-month period ended November 30,
1997 and the year ended May 31, 1997 was $4.64, $4.07, $4.ll and $4.06
respectively, on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: November 30, 1999 -
expected dividend yield 0.0%, risk-free interest rate of 6.10%, expected
volatility factor of 37.02%, and an expected life of 10 years; November 30,
1998 - expected dividend yield 0.0%, risk-free interest rate of 4.83%,
expected volatility factor of 36.55% and an expected life of 10 years;
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 and 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.
7., Continued
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 financial statements. Had the Company recorded compensation
cost based on the fair value at the grant date for its
stock options under SFAS 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, November 30, November 30, May 31,
1999 1998 1997 1997
Net income (loss)
As reported $(629,926) $(323,888) $490,689 $80,023
Pro forma $(633,630) $(355,947) $464,005 $52,803
Diluted income(loss)
per share
As reported $(.50) $(.26) $.39 $.07
Pro forma $(.51) $(.29) $.37 $.04
8. LEASES
The Company has several noncancelable operating leases, primarily for
warehouse facilities, that expire over the next five years. These
leases generally contain renewal options for one-year periods. Rental
expense for operating leases during 1999 and 1998 was $25,959 and
$24,138, respectively.
Future minimum lease payments under noncancelable operating leases
as of November 30, 1999 are:
Year ending November 30,
2000 $26,550
2001 5,943
2002 6,207
2003 6,207
2004 2,586
Thereafter -
9. INCOME TAXES
Total income tax expense (benefit) for the years ended November 30, 1999
and 1998, the six-month period ended November 30, 1997 and for the year
ended May 31, 1997, consists of the following:
November 30, November 30, November 30, May 31,
1999 1998 1997 1997
Current:
Federal $ (3,232) $ (78,290) $ 64,485 $ 9,453
State - - - 11,237
(3,232) (78,290) 64,485 20,690
Deferred:
Federal (105,015) (159,145) 200,655 33,544
State - - - (9,012)
(105,015) (159,145) 200,655 24,532
$(108,247) $ (237,435) $265,140 $45,222
The reconciliation of the statutory Federal income tax rate and the
effective tax rate are as follows:
Nov. 30, Nov. 30, Nov. 30, May 31,
1999 1998 1997 1997
Statutory Federal
income tax rate (34.0%) (34.0%) 34.0% 34.0%
Increase(decrease)due to:
State income taxes,
net of Federal income
tax benefit - - - 1.1
Research development
and state tax
credits (1.0) (12.1) (1.3) -
Establishment of
valuation allowance 22.5 - - -
Other-net (2.2) 3.8 2.4 1.0
(14.7%) (42.3%) 35.1% 36.1%
Tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at
November 30, 1999, 1998 and 1997,and May 31, 1997 are presented
below:
Nov. 30, Nov. 30, Nov. 30, May 31,
1999 1998 1997 1997
Deferred tax assets:
Net operating loss
carryforward $217,039 $41,608 $ - $ 56,122
Tax credits 154,417 117,278 16,034 35,552
Accrued expenses 128,495 129,336 50,053 95,419
Inventory
capitalization 333,570 274,536 302,945 274,067
Asset reserves 89,384 86,633 95,394 182,893
Total deferred
tax assets 922,905 649,391 464,426 644,053
Less valuation
allowance 166,356 - - -
Net deferred tax
assets 756,549 649,391 464,426 644,053
Deferred tax
liability
Depreciation 143,092 140,949 115,129 94,101
Net deferred
tax assets $613,457 $508,442 $349,297 $549,952
For tax purposes, the Company has available at November 30, 1999
net operating loss ("NOL") carryforwards of approximately $217,000
which will begin to expire in the year 2013. The Company also
has approximately $114,000 of research and development credits
and $40,000 of state tax credits which begin to expire in the
year 2007 and 2008, respectively.
The Company has established a deferred tax asset valuation
allowance of approximately $166,000 at November 30, 1999, due
to the uncertainty of realizing various NOL and tax credit
carryforwards. There was no valuation allowance for deferred
tax assets at November 30, 1998 and 1997, and May 31, 1997.
In assessing the realizability of deferred tax assets for these
years, 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, the expiration
dates of tax credits and carryforwards and projected future taxable
income, management believes it is more likely than not the
Company will realize the benefits of the November 30, 1999 net
deferred tax assets.
10. LITIGATION AND CONTINGENCIES
Various legal actions and claims are pending against the Company.
In the opinion of management and outside counsel, adequate
provisions have been made in the accompanying financial statements
for all pending legal actions and other claims.
11. ASSET ACQUISITIONS
During 1999, the Company entered into an agreement to purchase
certain fixed assets and inventory from United Farm Tools, Inc.
relating to the manufacture and distribution of shredders,
edible bean cutters and hi dump wagons. The total purchase was
approximately $384,000.
On November 25, 1998 the Company entered into an agreement to
purchase certain fixed assets, accounts receivable and inventory
from United Farm Tools, Inc. relating to the manufacture and
distribution of grain drill equipment. The total purchase was
approximately $1,086,000.
12. BUSINESS SEGMENT INFORMATION AND CREDIT CONCENTRATION
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 $5,194,787 AND $9,569,238 for the years ended November 30, 1999
and 1998, respectively, $609,554 for the six-month period ended
November 30, 1997 and $1,581,553 the year ended May 31, 1997.
Accounts receivable from this customer are unsecured.
Accounts receivable from this customer were $637,798 and $1,449,944
at November 30,1999 and 1998, respectively, $209,805 at November 30,
1997 and $94,986 at May 31, 1997.
13. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, defines fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties. At November 30, 1999 and
1998, 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 approximates fair value because the interest rate
is variable as it is tied to the bank's national money market rate.
14. 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
Basic and diluted 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, 2000
ART'S-WAY MANUFACTURING CO., INC.
By: James L. Koley By: William T. Green
Chairman of the Board 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 25,2000
James L. Koley Chairman of the Board Date
and Director
______________________________ February 25,2000
George A. Cavanaugh, Jr. Director Date
______________________________ February 25,2000
Donald A. Cimpl Director Date
______________________________ February 25,2000
Herbert H. Davis, Jr. Director Date
______________________________ February 25,2000
Douglas McClellan Director Date
_____________________________ February 25,2000
J. Ward McConnell, Jr. Director Date
ART'S-WAY MANUFACTURING CO., INC. Schedule VII
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
Balance, May 31, 1997 $ 25,000
Additions:
Charged to Operating Expenses 6,000
Deduct:
Accounts Charged Off -
Balance, November 30, 1997 $ 31,000
Additions:
Charged to Operating Expenses 174,000
Deduct:
Accounts Charged Off -
Balance, November 30, 1998 $ 205,000
Additions:
Charged to Operating Expenses 64,000
Deduct:
Accounts Charged Off 45,304
Balance, November 30, 1999 $ 223,696