-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U6GFJWivDBEuUCzel6B0nV7OcwGHgS6VAexbcsrJRkNkDF1RJ2lGY2QHyGTHE1Mu jD4vAHK1v69sG0zOjctMRg== 0000007623-97-000003.txt : 19970505 0000007623-97-000003.hdr.sgml : 19970505 ACCESSION NUMBER: 0000007623-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19970502 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARTS WAY MANUFACTURING CO INC CENTRAL INDEX KEY: 0000007623 STANDARD INDUSTRIAL CLASSIFICATION: FARM MACHINERY & EQUIPMENT [3523] IRS NUMBER: 420920725 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-05131 FILM NUMBER: 97594633 BUSINESS ADDRESS: STREET 1: P O BOX 288 CITY: ARMSTRONG STATE: IA ZIP: 50514 BUSINESS PHONE: 7128643131 MAIL ADDRESS: STREET 1: P O BOX 288 CITY: ARMSTRONG STATE: IA ZIP: 50514 10-K 1 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 -----END PRIVACY-ENHANCED MESSAGE-----