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, 1996 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
definite 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, 1996: $4,441,649.
Number of common shares outstanding on August 11, 1996: 1,086,631.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy
Statement for the Registrant's 1996 Annual Meeting of Stockholders
to be filed within 120 days of May 31, 1996 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 5
Security Holders
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 7 thru 9
of Financial Condition and Results of Operations
Item 8 - Consolidated Financial Statements 9
and Supplemental Data
Item 9 - Changes in and Disagreements with Accountants 9
on Accounting and Financial Disclosure
Part III
Item 10 - Directors and Executive Officers of 10
the Registrant
Item 11 - Executive Compensation 10
Item 12 - Security Ownership of Certain Beneficial 10
Owners and Management
Item 13 - Certain Relationships and Related Transactions10
Part IV
Item 14 - Exhibits, Financial Statement Schedules and 11
Reports on Form 8-K
2
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 and
garden and recreational products 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; a line of land management
equipment; and lawn, garden and recreational products,
primarily small wagons and trailers.
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 22%, 18% and 17% of total sales for the
fiscal years 1996, 1995 and 1994, 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 to some extent 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 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.
3
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 1996, 1995 and 1994
sales to J. I. Case aggregated approximately 15%, 15%
and 16% of total sales, respectively.
The backlog of orders on May 31, 1996 compared to that
of May 31, 1995 was as follows: beet harvesting equipment
was $837,000 compared to $0, potato harvesting equipment
was $421,000 compared to $0, and other agricultural
products were $717,000 compared to $738,000. The increase
of backlog orders for beet harvesting equipment was
primarily due to later shipments in the 1996 year than
in the 1995 year. The backlog of potato harvesting
equipment at May 31, 1996 reflects orders for equipment
that was not manufactured the previous year. 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 50%. 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 the following: a new line of feed
processing products, consumer utility wagons and
trailers and continuing the 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 1996, the Company had peak employment of
172 full-time employees. Of this total 131 were factory
and production employees, 7 were engineers and engineering
draftsman, 21 were administrative employees and 13 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 1996, 1995 and 1994.
4
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.
Item 3. Legal Proceedings
(See Note 9 to Consolidated Financial Statements.)
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
5
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, 1996 May 31, 1995
High Low High Low
First Quarter 6 5/8 5 10 1/8 7
Second Quarter 5 3/4 5 8 3/4 7 1/2
Third Quarter 5 3/8 4 1/4 8 1/4 5
Fourth Quarter 5 1/4 4 1/4 6 1/2 5 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 August 5, 1996
Common Stock, $.01
Par Value 300
(c) Dividend Policy
Holders of Common Stock of Art's-Way Manufacturing Co., Inc.
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 four years.
Item 6. Selected Financial Statement Data
The following tables set forth certain information concerning
the Income Statement and Balance Sheet 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 28, May 29, May 30,
1996 1995 1994 1993 1992
Net Sales $13,830 $20,298 $20,473 $20,308 $19,440
Net Income (Loss) $ (772) $(1,058) $ 623 $ 356 $ 107
Income (Loss) Per
Share (1) $ (.72) $ (.99) $ .58 $ .34 $ .10
(1) Based on weighted average number of shares outstanding of
1,077,359 in 1996, 1,070,391 in 1995,1,064,898 in 1994,
1,054,559 in 1993, and 1,030,849 in 1992.
6
(a) Selected Balance Sheet Data (In Thousands of Dollars,
Except Per Share Amounts)
May 31, May 31, May 28, May 29, May 30,
1996 1995 1994 1993 1992
Total Assets $11,886 $14,903 $17,261 $14,866 $11,758
Long-Term Debt $ 1,846 $ 1,573 $ 2,173 $ 2,723 $ -0-
Dividends Per Share $ .00 $ .00 $ .00 $ .00 $ .30
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 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. In August 1996, 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 (9.75% at May 31, 1996) and two percent on the Letter
of Credit sub-facility (10.25% at May 31,1996). 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 installments of $35,500 for twenty-four months with
the final payment due at the twenty fourth month unless the
revolving credit facility is renewed. In the event that the
term of the revolving credit facility is subsequently extended
the term loan shall continue toamortize 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 (9.75% at May 31, 1996).
All loans, advances and other obligations, liabilities and
indebtedness of the Company are secured by all present and
future assets.
Comparison of FY 1995 with FY 1994
Cash provided by operations and financing activities was
used for the acquisition of property, plant and equipment.
Inventory and accounts receivable decreases were offset
by decreases in accounts payable and a net loss.
7
The reduction in inventory resulted from a curtailment of
production activity as the level of sales activity decreased.
The lower accounts receivable at FY 1995 year end compared
to that at FY 1994 year end was due to lower sales in May 1995
than May 1994.
Accounts payable at FY 1995 year end was $810,000 lower than
at FY 1994 year end as the level of material purchases were
reduced during the fourth quarter of FY 1995 in line with the
curtailment of production.
The cash used for acquisition of property, plant and equipment
was primarily for normal additions and replacements of
manufacturing machinery and equipment.
The cash provided by financing activities was obtained from
additional short-term borrowings under the existing line of
credit. The Company was in compliance with, or has obtained
waivers for all applicable covenants under the existing line
of credit.
The Company's current ratio during the three preceding fiscal
years and its working capital are as shown in the following
table:
May 31, 1996 May 31, 1995 May 28, 1994
Current Assets $ 9,578,494 $12,040,740 $13,977,807
Current Liabilities $ 4,593,848 $ 7,309,511 $ 8,069,035
Working Capital $ 4,984,646 $ 4,731,299 $ 5,908,772
Current Ratio 1.9 1.6 1.7
(c) Results of Operations
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 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% a year ago, including
the impact of the inventory write-down. Before the inventory
write-down the percent of cost of goods sold was 74.3%. The
3.2 percentage point improvement is encouraging because the
market conditions pertaining to most of the Company's products
allowed little if any room for price increases. The
improvement came about through significant improvements in
manufacturing efficiencies and purchasing.
Operating expenses were reduced almost 34% from 1995. With
the completion of the major new product initiative undertaken
in 1994 and 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 a year ago.Operating expenses
as a percent of net sales were 27%, 28% and 28% in fiscal1996,
1995 and 1994. The reduction in expenses and improvement in
the cost of goods sold percent has enabled the loss from
operations to be reduced 48% from 1995.
Interest expense fell 18% from 1995, as production schedules,
inventories and accounts receivable were reduced. Other
expenses were up significantly due to fees associated with
the new loan agreement.
8
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.
Comparison of FY 1995 with FY 1994
Sales for FY 1995 were down $175,000 over FY 1994 sales. This
small decrease was the difference between a $297,000 decrease
in Art's-Way brand product sales and an increase of $122,000
in OEM sales.
Gross profit as a percentage of sales was 22.5% in FY 1995 and
33.6% in FY 1994. This decrease in gross margin was due
primarily to start up costs associated with new products.
Operating expenses decreased $150,000 in FY 1995 from FY 1994.
Engineering expenses decreased $151,000 primarily due to lower
product development costs. Selling expenses increased $135,000
as new employees were hired to expand our distribution.General
and administrative expenses decreased $134,000 due to the non
recurring expenses of defeating a unionization attempt in FY
1994.
The effective income tax rate was (35.7%) for fiscal year 1995
compared to 25.1% for fiscal year 1994.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, projected
future taxable income and tax planning strategies, management
believes it is more likely than not the Company will realize
the benefits of these deductible differences at May 31, 1996.
See also Note 8 to the Consolidated Financial Statements.
Item 8. Consolidated Financial Statements and Supplemental Data
Consolidated Financial Statements and Supplemental Data
for the three years ended May 31, 1996 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, 1996 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, 1996 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, 1996 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, 1996 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.
99.1 Proxy Statement for 1996 Annual Meeting to be filed
on or before 120 days after May 31, 1996.
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, 1996 and May 31, 1995, and the results of their
operations and their cash flows for each of the years in the
three-year period ended May 31, 1996 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.
As discussed in Notes 1 and 8 to the consolidated financial
statements, the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in 1994.
KPMG PEAT MARWICK LLP
Omaha, Nebraska
July 10, 1996, except as to
Note 12, which is as of
August 23, 1996
F-1
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, 1996..................... F-3
Consolidated Balance Sheets -
May 31, 1996 and May 31, 1995........................ F4 - F-5
Consolidated Statements of Stockholders' Equity -
Three years ended May 31, 1996..................... F-6
Consolidated Statement of Cash Flows -
Three years ended May 31, 1996..................... F-7
Notes to Consolidated Financial Statements -
Three years ended May 31, 1996....................... F-8 - F-14
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 28,
1996 1995 1994
NET SALES $13,830,471 $20,298,140 $20,472,821
COST OF GOODS SOLD 10,289,375 15,723,406 13,595,885
INVENTORY MARKET WRITE-DOWN 350,000 - -
GROSS PROFIT 3,191,096 4,574,734 6,876,936
EXPENSES:
Engineering 278,426 551,739 703,101
Selling 1,495,415 2,201,531 2,066,824
General and administrative1,984,417 2,912,447 3,046,019
Total expenses 3,758,258 5,665,717 5,815,944
INCOME (LOSS) FROM OPERATIONS(567,162) (1,090,983) 1,060,992
OTHER INCOME (DEDUCTIONS):
Interest expense (459,066) (558,321) (288,955)
Other (115,750) 4,215 59,762
Net deductions (574,816) (554,106) (229,193)
INCOME (LOSS) BEFORE (1,141,978) (1,645,089) 831,799
INCOME TAXES
INCOMETAX EXPENSE (370,051) (586,601) 208,905
(BENEFIT)(Note 8)
NET INCOME (LOSS) $(771,927) $(1,058,488) $622,894
NET INCOME (LOSS) PER SHARE ($0.72) ($0.99) $0.58
See accompanying notes to consolidated financial statements.
F-3
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
May 31, May 31,
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents (Note1) $ 91,513 $ 86,051
Accounts receivable-customers,
net of allowance for doubtful accounts
of $26,975 and $27,000 in 1996 and 1995,
respectively (Notes 5 and 10) 2,464,241 3,410,625
Inventories (Notes 2 and 5) 6,200,743 7,428,243
Current recoverable income tax - 668,742
Deferred income taxes (Note 8) 734,522 405,947
Other current assets 87,475 41,132
Total current assets 9,578,494 2,040,740
PROPERTY, PLANT AND EQUIPMENT,
at cost (Notes 3 and 5) 9,091,255 9,094,448
Less accumulated depreciation 6,783,941 6,232,453
Net property, plant and equipment 2,307,314 2,861,995
TOTAL $11,885,808 $14,902,735
See accompanying notes to consolidated financial statements.
May 31, May 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
CURRENT LIABILITIES:
Notes payable to bank (Note 5) $2,281,809 $3,200,000
Short term note - 600,000
Current portion of long-term debt (Note 5) 426,000 600,000
Accounts payable 506,912 1,934,316
Customer deposits 371,801 95,614
Accrued expenses (Note 4) 1,007,326 879,581
Income taxes payable - -
Total current liabilities 4,593,848 7,309,511
LONG-TERM DEBT,excluding current portion 1,420,000 973,334
(Note 5)
DEFERRED INCOME TAXES (Note 8) 160,038 205,734
Total liabilities 6,173,886 8,488,579
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 2,295,089 2,356,789
Retained earnings 5,840,870 6,612,797
8,149,367 8,982,994
Less cost of common shares in treasury of
254,147 in 1996 and 267,847 in 1995 2,437,445 2,568,838
Total stockholders' equity 5,711,922 6,414,156
CONTINGENCIES (Note 9)
TOTAL $11,885,808 $14,902,735
F-5
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED MAY 31, 1996
Additional
Number of Stated Paid -In Retained Treasury
BALANCE, Shares Par Value Capital Earnings Stock Total
MAY 29, 1993 1,061,128 13,408 2,390,775 7,048,391 (2,682,037) 6,770,537
Net income - - - 622,894 - 622,894
Common treasury 5,703 - (16,200) - 54,696 38,496
shares issued
BALANCE,
MAY 28,1994 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 6,100 (17,786) 58,503 40,717
shares issued
BALANCE,
MAY 31,1995 1,072,931 13,408 2,356,789 6,612,797 (2,568,838) 6,414,156
Net loss (771,927) (771,927)
Com. treasury 13,700 (61,700) 131,393 69,693
shares issued
BALANCE,
MAY 31,1996 1,086,631 13,408 2,295,089 5,840,870 (2,437,445) 5,711,922
See accompanying notes to consolidated financial statements.
F-6
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
May 31, May 31, May 28,
1996 1995 1994
CASH FLOWS FROM OPERATIONS:
Net income (loss) $(771,927) $(1,058,488) $622,894
Adjustments to reconcile net income
(loss) to net cash used by operations:
Depreciation 572,109 621,809 606,886
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 946,384 517,249 580,375
Inventories 1,227,500 1,790,429(2,453,571)
Other current assets (46,343) 185,215 (43,430)
Increase (decrease) in:
Accounts payable (1,427,404) (810,196) 333,262
Customer deposits 276,187 (267,749) 123,861
Accrued expenses 127,745 (155,982) 43,006
Income taxes, net 294,471 (783,112) (120,556)
Total adjustments 1,970,649 1,097,663 (930,167)
Net cash provided (used)
by operations 1,198,722 39,175 (307,273)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant (19,568) 216,531)(1,134,590)
and equipment
Proceeds from sale of property, plant
and equipment - net 2,140 15,786 124,430
Net cash used in investing (17,428) 200,745)(1,010,160)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease)in bank debt(1,245,525) 100,000 1,250,000
Proceeds from issuance of common stock
from treasury 69,693 40,717 38,496
Net cash (used) provided by (1,175,832) 140,717 1,288,496
financing activities
Net increase (decrease) in cash and cash
equivalents 5,462 (20,853) (28,937)
Cash and cash equivalents at
beginning of year 86,051 106,904 135,841
Cash and cash equivalents at
end of year $91,513 $86,051 $106,904
Supplemental disclosures of cash
flow information:
Interest $490,876 $514,376 $270,922
Income taxes 6,992 196,511 329,461
See accompanying notes to consolidated financial statements.
F-7
ART'S-WAY MANUFACTURING CO., INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 1996
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 Tansportation Co.
was administratively dissolved.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
DEPRECIATION
Depreciation of plant and equipment is provided using the
straight-line method, based on estimated useful lives of the
assets.
PROPERTY, PLANT AND EQUIPMENT
When assets are sold, abandoned or otherwise disposed of, the
cost of the asset and the related accumulated depreciation are
removed from the applicable accounts; any resulting gain or
loss is recognized in earnings.
Maintenance and repairs are charged to expense as incurred.
Renewals and betterments are capitalized and depreciated over
their estimated useful lives.
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.
F-8
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
Such costs approximated $224,000 in 1996, $239,000 in 1995
and $495,000 in 1994.
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 of1,077,359 shares in 1996,
1,070,391 shares in 1995 and 1,064,898 shares in 1994. The
difference between primary and fully diluted earnings (loss)
per share is not material.
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.
2. INVENTORIES
Major classes of inventory are: 1996 1995
Raw materials $631,354 $245,200
Work in process 2,235,737 2,520,625
Finished goods 3,683,652 4,662,418
Inventory market write-down (350,000) -
Total $6,200,743 $7,428,243
3. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are:
1996 1995
Land $ 180,909 $ 180,909
Buildings 2,601,250 2,601,250
Machinery and equipment 5,905,768 5,906,551
Patterns and dies 158,596 158,596
Trucks and automobiles 124,387 126,797
Furniture and fixtures 120,345 120,345
Total $9,091,255 $9,094,448
4. ACCRUED EXPENSES
Major components of accrued expenses are:
1996 1995
Salaries, wages and commissions $ 305,413 $ 403,329
Provision for pending claims 160,000 100,000
Other 541,913 376,252
Total $ 1,007,326 $ 879,581
F-9
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 per-
cent per annum in excess of the bank's referenced rate
(9.75% at May 31, 1996) and two percent on the Letter of
Credit sub-facility (10.25% at May 31,1996).
At May 31, 1996, borrowings under the revolving line of
credit were $2,281,809 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 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 (9.75% at May 31, 1996).
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
$502,000 at May 31, 1996. The Company pays an unused line
fee equal to three-eighths of one percent of the unused
portion of the revolving loan facility .
F-10
Long-Term Debt
A summary of the Company's long-term debt is as follows at
May 31, 1996 and May 31, 1995:
1996 1995
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
(9.75% at May 31,1996), secured $1,846,000 -
Installment promissory note dated August 12,1992,
in the original principal sum of $600,000,
payable in 60 monthly installments of
$10,000 plus interest due September 1, 1997,
secured - $ 280,000
Installment promissory note dated
December 11,1992, in the original principal
sum of $2,000,000,payable in 60 monthly
installments of $33,333 plus interest
due January 1, 1998, secured - 1,066,676
Installment promissory note dated
February 26, 1993, in the original principal
sum of $400,000, payable in 60 monthly
installments of $6,667 plus interest
due March 1, 1998, secured - 226,658
Total long-term debt 1,846,000 1,573,334
Less current portion of long-term debt 426,000 600,000
Long-term debt, excluding current portion $1,420,000 $973,334
The installment promissory notes payable bear interest at one and
one-half percent over the bank's national money market rate
(9.75% at May 31, 1996).
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 $5,840,870 are restricted and are not available for the payment
of dividends.
A summary of the minimum maturities of long-term debt follows:
Year Amount
1997 $426,000
1998 $426,000
1999 $426,000
2000 $142,000
F-11
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) savings plan which covers
substantially all full-time employees. Participating employees
are required to contribute as salary reductions a minimum of
4% of their compensation,and any Company match is discretionary
at the approval of the Board of Directors.Company contributions
approximated $0 in 1996, $165,000 in 1995 and $178,000 in 1994.
7. STOCK OPTION PLANS
Incentive Stock Option Plans have been adopted by the Company
whereby 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 for an aggregate of 250,000 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.
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 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.
A summary of changes in the stock option plans are as follows:
1996 1995 1994
Options outstanding beginning of year 77,988 109,685 98,314
Granted 35,563 34,294 27,777
Exercised - (2,000) (5,703)
Canceled or other disposition (34,788) (63,991) (10,703)
Options outstanding end of year 78,763 77,988 109,685
Options price range for the year $4.750 $6.750 $6.750
to to to
$11.125 $11.125 $11.125
Options exercisable at end of year 48,115 56,662 66,083
F-12
8. INCOME TAXES
Total income tax expense (benefit) for the years ended
May 31,1996, 1995, and 1994 consists of the following:
Income tax expense (benefit) consists of the following:
1996 1995 1994
Current:
Federal $ - $(772,792) $271,545
State 4,221 (18,536) 25,000
4,221 (791,328) 296,545
Deferred:
Federal (320,210) 198,227 (74,490)
State (54,060) 6,500 (13,150)
(374,270) 204,727 (87,640)
$(370,051) $(586,601) $208,905
The reconciliation of the statutory Federal income tax rate and
the effective tax rate are as follows:
1996 1995 1994
Statutory Federal income tax rate (34.0%) (34.0%) 34.0%
Increase (decrease) due to:
State income taxes, net of
Federal income tax benefit (2.9) (1.5) 2.0
Research and development credit - (1.6) (11.2)
Other-net 4.5 1.4 .3
(32.4%) (35.7%) 25.1%
Tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at
May 31, 1996, May 31, 1995 and May 28, 1994 are presented below:
May 31, May 31, May 28,
1996 1995 1994
Deferred tax assets:
Net operating loss carryforward $134,187 $ 96,232 $ -
R & D Tax Credit - 26,354 -
Accrued expenses not deducted
until paid 138,530 44,738 117,477
Inventory capitalization 191,106 226,715 349,137
Valuation reserves 260,313 10,395 29,883
Other 10,386 1,513 1,513
Total deferred tax assets 734,522 405,947 498,010
Deferred tax liability:
Depreciation 160,038 205,734 186,570
Net deferred tax asset $574,484 $200,213 $311,440
F-13
There was no valuation allowance for deferred tax assets at
May 31, 1996 and 1995. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible.
Based upon the reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies, management
believes it is more likely than not the Company will realize
the benefits of these deductible differences at May 31, 1996.
The Company has a net operating loss carryforward of
approximately $349,000 which will expire in the year 2011.
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.
As of May 29, 1993, the Company did not carry commercial product
liability insurance. Effective September 1, 1993, the Company
acquired commercial product liability insurance coverage.
10. 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
harvesting products, land maintenance products and lawn garden
and recreational products, primarily small wagons and trailers.
The Company's sales to one major original equipment manufacturer
were $2,119,020, $3,101,120, and $3,234,613 in 1996, 1995
and 1994, respectively. Accounts receivable from this customer
are unsecured. Accounts receivable from this customer were
$54,637, $269,086, and $401,520 of the accounts receivable
balance at May 31,1996, May 31, 1995 and May 28, 1994,
respectively.
11. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board's 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, 1996 and 1995,the carrying amount
approximates fair value for cash and cash equivalents,
accounts receivable, accounts payable-trade, 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 banks 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.
12. SUBSEQUENT EVENTS
On August 30, 1996, the Company entered into an agreement to
purchase certain production assets,inventories and related
assets from a company engaged in manufacturing agricultural
equipment in exchange for cash, stock and certain future
payments. The agreement provides for a $250,000 cash payment,
145,000 shares of common stock and future payments for
raw material and work-in-process inventories of
approximately $400,000.
F-14
ART'S-WAY MANUFACTURING CO., INC. Schedule VII
AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MAY 31, 1996
Allowance for Doubtful Accounts
Balance, May 30, 1993 $45,000
Additions:
Charged to Operating Expenses $39,913
Recovered from Prior Write-Offs 87
Deduct:
Accounts Charged Off 7,383
Balance, May 29, 1994 $77,617
Additions:
Charged to Operating Expenses 42,552
Deduct:
Accounts Charged Off 93,169
Balance, May 31, 1995 $27,000
Additions:
Charged to Operating Expenses 12,000
Deduct:
Accounts Charged Off 12,025
Balance, May 31, 1996 $26,975
S-1
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 28, 1996.
ART'S-WAY MANUFACTURING CO., INC.
By: /s/ James L. Koley By: /s/ William T. Green
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.
_______/s/ James L. Koley_______ August 28, 1996
James L. Koley Chairman of the Board Date
and Director
_________s/ J. David Pitt________ August 28, 1996
J. David Pitt President Date
___/s/ George A. Cavanaugh, Jr.__ August 28, 1996
George A. Cavanaugh, Jr. Director Date
_______/s/ Donald A. Cimpl______ August 28, 1996
Donald A. Cimpl Director Date
_____/s/ Herbert H. Davis, Jr.____ August 28, 1996
Herbert H. Davis, Jr. Director Date
______/s/ Douglas McClellan____ August 28, 1996
Douglas McClellan Director Date