-----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, P8Z+IQT2Op7HZsEYDwFqYU/i8xdmICSDzN/u6qBGHiXz6oWC9CYv0kbV4PK48D3F sMx99AP4PC8jTsfCtDgHsQ== 0000007623-98-000003.txt : 19980302 0000007623-98-000003.hdr.sgml : 19980302 ACCESSION NUMBER: 0000007623-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980227 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: SEC FILE NUMBER: 000-05131 FILM NUMBER: 98551746 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 Six-Month Period Ended November 30, 1997 Commission File No. 0-5131 ART'S-WAY MANUFACTURING CO., INC. DELAWARE 42-0920725 ____________________________ __________________________ State of Incorporation I.R.S. Employee Identification No. Armstrong, Iowa 50514 Address of principal executive offices Zip Code Registrant's telephone number, including area code: (712) 864-3131 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act Common stock $.01 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or informational statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant on February 10, 1998: $8,895,608 Number of common shares outstanding on February 13, 1998: 1,245,931. DOCUMENTS INCORPORATED BY REFERENCE: None Art's-Way Manufacturing Co., Inc. Index to Annual Report on Form 10-K Page Part I Item 1 - Description of Business 3 thru 4 Item 2 - Properties 5 Item 3 - Legal Proceedings 5 Item 4 - Submission of Matters to a Vote of Security Holders 5 Part II Item 5 - Market for the Registrant's Common Stock and Related Security Holder Matters 6 Item 6 - Selected Financial Statement Data 6 & 7 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 thru 10 Item 7A -Quantitative and Qualitative Disclosures About Market Risk 10 Item 8 - Consolidated Financial Statements and Supplemental Data 10 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 Part III Item 10- Directors and Executive Officers of the Registant 11 Item 11- Executive Compensation 12 Item 12- Security Ownership of Certain Beneficial Owners and Management 13 Item 13- Certain Relationships and Related Transactions 14 Part IV Item 14- Exhibits, Financial Statement Schedules and Reports on Form 8-K 15 Note: This Form 10(k) is being filed as a result of a change in the Company's fiscal year from May 31 to November 30, effective November 30, 1997. PART I Item 1. Description of Business (a) General Development of Business Art's-Way Manufacturing Co., Inc. (the "Company" or "Art's-Way") began operations as a farm equipment manufacturer in 1956. Its manufacturing plant is located in Armstrong, Iowa. During the past five years, the business of the Company ha remained substantially the same. (b) Financial Information About Industry Segments In accordance with generally accepted accounting principles, Art's-Way has only one industry segment, metal fabrication. (c) Narrative Description of Business The Company manufactures specialized farm machinery under its own and private labels. Equipment manufactured by the Company under its own label includes: portable and stationary animal feed processing equipment and related attachments used to mill and mix feed grains into custom animal feed rations; a high bulk mixing wagon to mix animal feeds containing silage, hay and grain; a line of mowers, cutters and stalk shredders; minimum till seed bed preparation equipment; sugar beet and potato harvesting equipment; and a line of land management equipment. Research and development efforts have been put forth in the development of the Company's product lines, both in the development of new products and the upgrading of existing lines. The expenditures should result in increased future sales. Private label manufacturing of farm equipment accounted for 8%, 20%, 22% and 18% of total sales for the six-month period ended November 30, 1997 and each of the years ended May 31, 1997, 1996 and 1995, respectively. The Company expects private label manufacturing for the next twelve months to be approximately 25% of sales. Art's-Way labeled products are sold through farm equipment dealers throughout the United States. There is no contractual relationship with these dealers to distribute our products and dealers may sell a competitor's product line but are discouraged from doing so. Raw materials are acquired from domestic sources and normally are readily available. The Company maintains patents and manufacturing rights on several of its products covering unique aspects of design and has trademarks covering product identification. Royalties are paid by the Company for use of certain manufacturing rights. The validity of its patents has not been judicially determined and no assurance can be given as to the extent of the protection which the patents afford. In the opinion of the Company, its patents, trademarks and licenses are of value in securing and retaining business. The Company currently has six patents which expire in various years beginning in 1998 through 2012. The Company's agricultural products are seasonal; however, with recent additional product purchases and the development of mowers, cutters, shredders, beet and potato harvesting machinery, coupled with private labeled products, the impact of seasonality has been decreased because the peak periods occur at different times. In common with other manufacturers in the farm equipment industry, the Company's business is affected by factors peculiar to the farm equipment field. Items such as fluctuations in farm income resulting from crop damage caused by weather and insects, by government farm programs, and by other unpredictable variables such as interest rates. The farm equipment industry has a history of carrying significant inventory at dealers locations. The Company's beet, shredder and potato product lines are sold with extended terms, however, the remainder of the product lines are normally sold with 30 day terms. The Company has a supplier agreement with Case Corporation. Under the agreement the Company has agreed to supply Case's requirements for certain feed processing, tillage equipment and service parts under Case's label. The agreement has no minimum requirements and can be cancelled upon certain conditions. For the six-month period ended November 30, 1997 and each of the years ended May 31, 1997, 1996 and 1995 sales to Case aggregated approximately 5%,10%, 15% and 15% of total sales, respectively. The backlog of orders on January 28, 1998 was approximately $7,000,000 compared to approximately $2,000,000 a year ago. The increase is primarily tillage equipment for Case Corporation. The balance of the order backlog consists of various Company branded products. The order backlog is expected to be shipped during the current fiscal year. The Company currently does no business with any local, state or federal government agencies. The feed processing products, including private labeled units, compete with similar products of many other manufacturers. There are estimated to be more than 20 competitors producing similar products and total market statistics are not available. The Company's products are competitively priced with greater diversity than most competitor product lines. Beet harvesting equipment is manufactured by 4 companies which have a significant impact on the market. The Company's share of this market is estimated to be about 55%. Other products such as mowers, cutters and shredders are manufactured by approximately 25 other companies with total market statistics unavailable; however, the Company believes its products are competitively priced and their quality and performance are above average in a market where price, product performance and quality are principal elements. The Company is engaged in experimental work on a continual basis to improve the present products and create new products. Research costs were primarily expended on a new line of feed processing products and continuous development of beet harvesting equipment. All research costs are expensed as incurred. Such costs approximated $193,000 for the six months ended November 30, 1997, and $301,000, $224,000 and $239,000 for the years ended May 31, 1997, May 31, 1996 and May 31, 1995, respectively. (See also Note 1 to the Consolidated Financial Statements). The Company is subject to various federal, state and local laws and regulations pertaining to environmental protection and the discharge of materials into the environment. The Company does not anticipate that future expenses or capital expenditures relating to compliance with such regulations will be material. During the six month period ended November 30, 1997, the Company had peak employment of 211 full-time employees. Of this total 163 were factory and production employees, 15 were engineers and engineering draftsman, 18 were administrative employees and 15 were in sales and sales management. Because of the seasonal nature of the Company's business, the number of employees fluctuates. The Company's employees are not unionized. There has been no work stoppage in the Company's history and no stoppage is, or has been, threatened. The Company believes its relationship with its employees is good. (d) Financial Information about Foreign and Domestic Operation and Export Sales The Company has no foreign operations; its export sales, primarily to Canada, accounted for less than 1% of sales and less than 1% of operating income (loss) in the six-month period ended November 30, 1997 and each of the years May 31, 1997, 1996 and 1995. Item 2. Properties The existing executive offices, production and warehousing facilities of Art's-Way are built of hollow clay block/concrete and contain approximately 240,000 square feet of usable space. Most of these facilities have been constructed since 1965 and are in good condition. The Company owns approximately 140 acres of land west of Armstrong, Iowa, which includes the factory and inventory storage space. The Company currently leases excess land to third parties for farming. Item 3. Legal Proceedings Various legal actions and claims are pending against the Company consisting of ordinary routine litigation incidental to the business. In the opinion of management and outside counsel, appropriate provisions have been made in the accompanying consolidated financial statements for all pending legal actions and other claims. (See also Note 9 to Consolidated Financial Statements.) Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters (a) Price Range of Common Stock Per Share Common Stock Bid Prices by Quarter Period Ended Six-Months Ended Year Ended Year Ended November 30, 1997 May 31, 1997 May 31, 1996 High Low High Low High Low First Quarter 5 1/2 4 1/2 6 5/8 5 Second Quarter 5 1/2 4 1/4 5 3/4 5 Third Quarter 8 1/2 6 1/4 6 1/4 4 3/4 5 3/8 4 1/4 Fourth Quarter 13 1/2 7 3/4 6 3/4 6 5 1/4 4 1/4 The Common Stock is traded in the over-the-counter market and the range of closing bid prices shown above is as reported by NASDAQ. The quotations shown reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. (b) Approximate Number of Equity Security Holders Approximate number of Title of Class Record Holders as of February 16,1998 Common Stock, $.01 Par Value 268 (c) Dividend Policy Holders of Common Stock of the Company are entitled to a pro rata share of any dividends as may be declared from time to time from funds available and to share pro rata in any such distributions available for holders of Common Stock upon liquidation of the Company. The Company has not paid a dividend during the past five years. Item 6. Selected Financial Statement Data The following tables set forth certain information concerning the Income Statements and Balance Sheets of the Company and should be read in conjunction with the Consolidated Financial Statements and the notes thereto appearing elsewhere in this Report. (a) Selected Income Statement Data (In Thousands of Dollars, Except Per Share Amounts) Six Months Year Year Year Year Year Ended Ended Ended Ended Ended Ended November 30, May 31 May 31 May 31 May 28 May 29 1997 1997 1996 1995 1994 1993 Net Sales $11,137 $16,440 $13,830 $20,298 $20,473 $20,308 Net Income (Loss)$ 491 $ 80 $ (772) $(1,058)$ 623 $ 356 Income (Loss) Per Share (1) $ .39 $ .07 $ (.72) $ (.99)$ .58 $ .34 (1) Based on weighted average number of shares outstanding of 1,244,620 for the six months ended November 30, 1997 and 1,197,452, 1,077,359, 1,070,391, 1,064,898, 1,054,559 for the years ended May 31, 1997, May 31, 1996, May 31, 1995, May 31, 1994 and May 31, 1993. (a) Selected Balance Sheet Data (In Thousands of Dollars, Except Per Share Amounts) November 30, May 31 May 31 May 31 May 28 May 29 1997 1997 1996 1995 1994 1993 Total Assets $15,322 $15,214 $11,886 $14,903 $17,261 $14,866 Long-Term Debt $ 1,935 $ 2,170 $ 1,846 $ 1,573 $ 2,173 $ 2,723 Dividends Per Share $ .00 $ .00 $ .00 $ .00 $ .00 $ .00 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of financial condition and results of operations of the Company and its subsidiary is based on the Consolidated Financial Statements and the notes thereto included herein. (a) and (b) Liquidity and Capital Resources Six-months ended November 30, 1997 For the six-months ended November 30, 1997, the Company's main source of funds resulted from net income plus depreciation. This source was offset by an increase in inventories and a decrease in customer deposits. The inventory increase results from a higher production load at November 30, 1997 due primarily from Case tillage equipment. Customer deposits are from down payments on beet equipment. This equipment was shipped during the six-month period, consequently the decrease in customer deposits. Comparison of year ended May 31, 1997 with May 31, 1996 In fiscal year 1997, the Company used $277,000 of cash from operations compared to generating $1,199,000 cash from operations in fiscal year 1996. The decrease in cash from operations in fiscal year 1997 reflects an increase in inventories and receivables, offset in part by increased net income and payables. In fiscal year 1997, major capital expenditures included two acquisitions. The first acquisition was a line of potato farming equipment and associated service parts. The second acquisition was a line of grain wagons and associated service parts. The acquisitions, which included fixed assets and inventory, were financed by the issuance of 145,000 shares of Art's-Way common stock, loans from the State of Iowa and local sources obtained through the State of Iowa Community Development Block Grant program and borrowings under the Company's short term line of credit. Comparison of year ended May 31, 1996 with May 31, 1995 Cash provided by operations was used to reduce bank debt. There were no major capital expenditures during the 1996 fiscal year. Cash generated from reductions in inventory and accounts receivable was used to reduce trade accounts payable. The reduction in inventory and accounts receivable reflects the lower level of sales in the 1996 fiscal year as compared to the fiscal year 1995. The Company continues its emphasis on inventory reductions. Capital Resources In August 1995, the Company refinanced its existing senior indebtedness with a new bank. This new agreement provides for a revolving credit facility of up to $6,200,000 for operating needs based on a percentage of the Company's accounts receivable and inventory and allows within the revolving credit facility for the issuance of Letters of Credit in an aggregate amount not exceeding $300,000. The interest on this credit facility is one and one-half percent per annum in excess of the bank's referenced rate and two percent on the Letter of Credit sub-facility (10% and 10.5% respectively at November 30, 1997). Management believes this credit line will allow the Company to facilitate new product growth and provide for ongoing working capital needs. Future capital needs of the Company will be met by cash from operations and additional borrowing. The agreement also provides for a term loan in the principal amount of $2,130,000. The principal amount is repayable in monthly installments of $35,500 for twenty-four months with the final payment due at the twenty fourth month unless the revolving credit facility is renewed. In the event that the term of the revolving credit facility is subsequently extended, the term loan shall continue to amortize based upon the payment schedule outlined above. The interest rate on this credit facility is one and one-half percent in excess of the bank's reference rate. All loans, advances and other obligations, liabilities and indebtedness of the Company are secured by all present and future assets. The Company's current ratio during the three preceding fiscal years and its working capital are as shown in the following table: November 30, May 31, May 31, May 31, 1997 1997 1996 1995 Current Assets $12,486,599 $12,210,992 $9,578,494 $12,040,740 Current Liabilities$ 6,621,214 $ 6,821,525 $4,593,848 $ 7,309,511 Working Capital $ 5,865,385 $ 5,389,467 $4,984,646 $ 4,731,299 Current Ratio 1.9 1.8 1.9 1.6 The Company believes its liquidity, capital resources, and borrowing capacity are adequate for its current and intended operations. (c) Results of Operations Six-months ended November 30, 1997 Sales increased due mainly to strength in sugar beet harvesting equipment and related service parts. Other strong areas included corn stalk shredders, where the Company enjoyed its best season since 1994, the SupRaMix vertical feed mixer and our traditional grinder mixer products. Two areas of weakness in sales were the termination of our OEM contract to make frames for a local fiberglass body manufacturer and our deliberate scaling back of Logan potato equipment production in view of a dramatic downturn in potato prices and customer demand. Gross profits increased due to improved production efficiencies, a product mix of higher margin products and improved purchasing of raw materials. Warranty expenses were impacted adversely by $160,000 due to unanticipated problems with our new model beet harvester. The Company encountered learning curve expenses associated with the new tillage production for Case. Operating expenses are up as the Company added staff in engineering and sales to support our new product lines and to enhance our position in the beet and feed processing business and due to the reinstatement of the Company's contribution to the employee 40l(k) retirement plan. Interest costs were up as the higher sales volumes required higher working capital requirements. Comparison of year ended May 31, 1997 with May 31, 1996 Sales revenues for FY 1997 rose 19% due to the acquisitions described above and returning strength in other areas of our existing business. Sales from the acquisitions exceeded $2,000,000, the feed processing business was up 22%, and sales gains were made in our land maintenance line. Sales declined in the sugar beet equipment line as we deliberately delayed production beyond May 31, 1997 to minimize working capital, make manufacturing room for our new products, and to allow more time for the development of new features. Gross profit for FY 1997 rose 46% on the higher sales volume, however fiscal year 1996 gross profit was impacted by a $350,000 inventory write-down. The ratio of cost of goods sold to net sales improved to 73.4% from last year's 78.4% (75.9% prior to the write-down). This improvement in FY 1997 resulted from lower raw material costs and reduced warranty expense. Operating expenses were 7% higher than FY 1996. The two acquisitions accounted for most of the increase, which included amortization of purchase costs and additional employees to support the acquisitions. In addition, the Company strengthened our beet equipment resources in the engineering area. The 10% wage reduction implemented in June 1995 was progressively restored which further increased operating expenses. The ratio of expenses to sales fell from 25.7% in FY 1996 to 23.1% in FY 1997. Interest expense was 29% lower in FY 1997 when compared to FY 1996. Improved manufacturing flow reduced working capital requirements throughout the year. Comparison of year ended May 31, 1996 with May 31, 1995 Sales for FY 1996 were down $6,468,000 from FY 1995 sales. This 32% reduction in sales was in the company's two major areas of business-sugar beet equipment and feed processing equipment. Sales of sugar beet equipment fell 48% as the Company adjusted dealer inventories from a wholesale sales push in 1995. Feed processing sales were off 36% due to extremely high cost of feed, primarily corn, which severely crimped the Company's customers' ability to purchase new machines. Sales of the Company's other products, including service parts declined a more modest 10%. Gross profit for FY 1996 fell 30% on the lower sales volume, including a $350,000 inventory market write-down taken in the fourth quarter. Without this write-down, gross profit would have been down approximately 23%. The percent of cost of goods sold to net sales declined to 76.9% from 77.5% in FY 1995, including the impact of the inventory write-down. Before the inventory write-down the percent of cost of goods sold was 74.3%. The improvement came about through significant improvements in manufacturing efficiencies and purchasing. Operating expenses were reduced almost 34% from FY 1995. With the completion of the major new product initiative undertaken in FY 1994 and FY 1995, engineering expenses were scaled back significantly, particularly in the area of prototype expense. Other major cut-backs occurred in all areas of the Company, resulting in the number of indirect and salaried employees at May 31, 1996 to be 73 vs 105 for the prior year. Operating expenses as a percent of net sales were 27% and 28% in FY 1996 and FY 1995. The reduction in expenses and improvement in the cost of goods sold percent has enabled the loss from operations to be reduced 48% from FY 1995. Interest expense fell 18% from FY 1995, as production schedules, inventories and accounts receivable were reduced. Other expenses were up significantly due to fees associated with the new loan agreement. The effective income tax rate was (32.4%) for fiscal year 1996 compared to (35.7%) for fiscal year 1995. Changes in the rate are due almost entirely to research and development credits. Utilization of Deferred Tax Assets In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the reversal of deferred tax liabilities and projected future taxable income, management believes it is more likely than not the Company will realize the benefits of these deductible differences at November 30, 1997. See also Note 8 to the Consolidated Financial Statements. Year 2000 Issues Many computer systems and software programs, including several used by the Company require modification and conversion to allow data code fields to accept dates beginning with the year 2000. Major system failures or erroneous calculations can result if computer systems are not year 2000 compliant. The Company is currently assessing its year 2000 issues, and is being advised by a substantial majority of its vendors and suppliers that certain of their products are year 2000 compliant or can be upgraded or will not be affected by the year 2000 problem. The Company's business could be materially adversely affected if the Company's computer-based systems are not year 2000 compliant in a timely manner, the Company incurs significant additional expenses pursuing year 2000 compliant products, the Company's vendors do not provide in a timely manner year 2000 compliant products, or the Company is subject to warranty or other claims by the Company's clients related to product failures caused by the year 2000 problem. Recently Issued Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which revises the calculation and presentation provisions of Accounting Principle Board Opinion No. 15 and related interpretations. Statement No. 128 is effective for the fiscal year 1998. The Company believes the adoption of Statement No. 128 will not have a significant effect on its reported earnings per share. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not Applicable Item 8. Consolidated Financial Statements and Supplemental Data Consolidated Financial Statements and Supplemental Data for the six-month period ended November 30, 1997 and for each of the years ended May 31, 1997, 1996, and 1995 are presented in a separate section of this Report following Part IV. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. PART III Item 10. Directors and Executive Officers Directors JAMES L. KOLEY, age 68, Omaha, Nebraska. Chairman of the Board of Directors since 1987 and Member of the Executive Committee and Compensation and Stock Option Committee. Chairman of the Board of the law firm of Koley, Jessen, Daubman & Rupiper, P.C., Omaha, Nebraska since February 1988. Director of Dover Corporation, New York, New York. Mr. Koley has been a director since 1976. GEORGE A. CAVANAUGH, JR., age 77, Ocala, Florida. Retired since 1981; formerly President of Cavanaugh & Associates, Inc., Manufacturers Representative, Southfield, Michigan. Chairman of the Compensation and Stock Option Committee and member of the Audit Committee. Mr. Cavanaugh has been a director since 1972. DONALD A. CIMPL, age 66, Omaha, Nebraska. Business consultant since 1989. For more than five years prior to that time, partner with Coopers and Lybrand. Chairman of the Audit Committee and member of the Executive Committee. Mr. Cimpl has been a director since 1990. HERBERT H. DAVIS, JR., age 74, Omaha, Nebraska. Owner of Miracle Hills Golf and Tennis Center, Omaha, Nebraska since 1987. For more than five years prior to that time, Chairman of the Board, Kirkpatrick, Pettis, Smith, Polian, Inc., Investment Bankers, Omaha, Nebraska. Chairman of the Executive Committee and Member of the Audit Committee. Director of KPM Funds, Inc., Omaha, Nebraska. Mr. Davis was first elected as a director in 1970. DOUGLAS McCLELLAN, age 48, Clarence, New York. President of Filtration Unlimited, Akron, New York, where he has held various positions for more than five years. Member of the Compensation and Stock Option Committee and Audit Committee. Mr. McClellan has been a director since 1987. J. DAVID PITT, age 50, Armstrong, Iowa. Joined the Company and was elected President on March 26, 1996. For more than five years prior to that time, President and General Manager of Massey-Ferguson, Inc., Des Moines, Iowa. Mr. Pitt was elected a director in 1996. J. WARD MCCONNELL, Jr., age 67, Kinston, North Carolina. Private investor for more than five years. Mr. McConnell was elected a director in 1996. Executive Officers J. David Pitt, age 50, President. Mr. Pitt joined and was elected President of the Company on March 26, 1996 and appointed to the Board of Directors on September 3, 1996. From 1987 to 1996 he was President and General Manager of Massey-Ferguson, Inc., Des Moines, Iowa. William T. Green, age 55, Executive Vice President, Finance and Administration, Secretary and Treasurer. Mr. Green was appointed Executive Vice President, Finance and Administration, Secretary & Treasurer on April 7, 1995. Prior to April 7, 1995, Mr. Green served as Controller for the Company for more than five years. Item 11. Executive Compensation Summary Compensation Table The following table sets forth the aggregate cash and cash equivalent forms of remuneration accrued by the Company and its subsidiaries to, or for, the benefit of (i) the Chief Executive Officer and (ii) the four most highly compensated executive officers, other than the CEO, whose remuneration exceeded $100,000. Long Term Compensation Annual Compensation Awards Name and All Other Principal Position Year Salary($) Bonus ($) Compensation Options J. David Pitt, 1997* $60,000 $65,000 - President 1997 $120,000 - - 20,000 1996 $ 22,302 - - 21,052 *For the six-month period ended November 30, 1997. Option Exercises and Fiscal Year-End Values The following table sets forth the aggregated option exercises and year-end option value to (i) the Chief Executive Officer and (ii) the four most highly compensated executive officers, other than the CEO, whose remuneration exceeded $100,000. Number of Securities Value of Securities Underlying Underlying Unexercised Unexercised Options at 11/30/97 In-the-Money Options at 11/30/97 Shares Value Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable Exercise (#) ($) (#) (#) ($) ($) - - 15,526 25,526 86,084 139,834 J. David Pitt President Compensation of Directors Each director, other than the Chairman of the Board, who is not an employee of the Company or a subsidiary, receives $4,500 per year plus $900 for attendance at each of the meetings of the Board, as well as $788 for attendance at each meeting of a standing committee on which he serves. The Chairman of a standing committee receives $1,035 for each meeting attended. The Chairman of the Board receives $46,800 per year and is eligible for a discretionary bonus. Item 12. Security Ownership of Certain Beneficial Owners and Management Voting Securities and Ownership By Certain Beneficial Owners The following table sets forth the names of the persons known to the Company who beneficially own more than 5% of the issued and outstanding shares of Common Stock of the Company as of February 17, 1998. Name and Address Type of Number Percent of Ownership of Shares Outstanding Arthur Luscombe Of Record 126,325 10.14% RR and beneficially Dolliver, Iowa 50531 Franklin Resources, Inc. Beneficially 82,500 6.62% 777 Mariners Island Blvd. San Mateo, California 94404 Royce & Associates, Inc. Beneficially 94,000 (1) 7.54% 1414 Avenue of the Americas New York, New York 10019 J. Ward McConnell, Jr. Beneficially 136,450 (2) 10.95% P.O. Box 6246 Kinston, North Carolina 28501 James L. Koley Of Record 76,000 (3) 6.10% 1125 South 103 Street and beneficially Omaha, Nebraska 68124 (1) These shares are the total of a group filing on Schedule 13G by Royce & Associates, Inc. and Charles M. Royce. Mr. Royce disclaims beneficial ownership of the 94,000 shares held by Royce & Associates, Inc. (2) Includes 1,250 shares which Mr. McConnell, Jr. is entitled to purchase under the Director Stock Option Plan(1991). (3) Includes 5,000 shares which Mr. Koley is entitled to purchase under the Director Stock Option Plan(1991). Voting Securities Owned by Executive Officers and Directors The following table shows certain information with respect to the Company's common stock beneficially owned by directors and executive officers as of February 17, 1998. The shares shown as beneficially owned include shares which executive officers and directors are entitled to acquire pursuant to outstanding stock options. Name Type of Beneficial Number of Percent of Ownership Shares Class James L. Koley of record and Beneficially 76,000 (1) 6.10% George A. Cavanaugh, Jr. of record and Beneficially 5,500 (1) * Donald A. Cimpl of record and Beneficially 42,500 (1) 3.41% Herbert H. Davis, Jr. of record and Beneficially 48,200 (1) 3.87% Douglas McClellan of record and Beneficially 20,500 (1) 1.65% J. Ward McConnell, Jr. of record and Beneficially 136,450 (2) 10.95% J. David Pitt of record and Beneficially 17,729 (3) 1.42% William T. Green of record and Beneficially 15,375 (4) 1.23% Directors and Executive Officers as a Group (8 persons) of record and Beneficially 373,304 29.96% * Less than 1% (1) Includes 5,000 shares which can be purchased by each individual pursuant to stock options. (2) Includes 1,250 shares which can be purchased pursuant to stock options (3) Includes 15,526 shares which can be purchased pursuant to stock options and 1,703 shares which is the allocable portion of the shares in the Company's 401(k) Plan. (4) Includes 15,375 shares which can be purchased pursuant to stock options. Item 13. Certain Relationships and Related Transactions Not Applicable PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K: (a) Index to Financial Statements and Schedules See index to financial statements and supporting schedules on page F-2. (b) Reports on Form 8-K No current Reports on Form 8-K have been filed during the last fiscal quarter of the period covered by this Report. (c) Index to Exhibits Any exhibits filed with Securities and Exchange Commission will be supplied upon written request of William T. Green, Vice President, Finance, Art's-Way Manufacturing Co., Inc., Highway 9 West, Armstrong, Iowa 50514. A charge will be made to cover copying costs. See Exhibit Index below. Exhibits Required to be Filed Number Exhibit Description 2 Agreement and Plan of Merger for Reincorporation of Company in Delaware. Incorporated by reference to Exhibit 2 of Annual Report on Form 10-K for the year ended May 27, 1989. 3 Certificate of Incorporation and By-laws for Art's-Way Manufacturing Co., Inc. Incorporated by reference to Exhibit 3 of Annual Report on Form 10-K for the year ended May 27, 1989. 10 Incorporated by reference are the Material Contracts filed as Exhibit 10 of the Annual Report on Form 10-K for the fiscal year ended May 30, 1981. 10.1 Art's-Way Manufacturing Co., Inc. 401 (k) Savings Plan. Incorporated by reference to Exhibit 28 (a) to the Art's-Way Manufacturing Co., Inc. Registration Statement on Form S-8 filed on October 23, 1992. 10.2 Art's-Way Manufacturing Co., Inc. Employee Stock Option Plan (1991). Incorporated by reference to Exhibit "A" to Proxy Statement for Annual Meeting of Stockholders held on October 15, 1991. 10.3 Art's-Way Manufacturing Co., Inc. Director Stock Option Plan (1991). Incorporated by reference to Exhibit "B" to Proxy Statement for Annual Meeting of Stockholders held on October 15, 1991. 10.4 Asset Purchase Agreement between the Company and J. Ward McConnell, Jr., and Logan Harvesters, Inc. Incorporated by reference to Current Report on Form 8-K dated September 6, 1996. INDEPENDENT AUDITORS' REPORT The Board of Directors Art's-Way Manufacturing Co., Inc.: We have audited the accompanying consolidated financial statements of Art's-Way Manufacturing Co., Inc. and subsidiary as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule bases on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Art's-Way Manufacturing Co., Inc. and subsidiary at November 30, 1997 and May 31, 1997 and the results of their operations and their cash flows for the six-month period ended November 30, 1997 and each of the years ended May 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Omaha, Nebraska January 9, 1998 ART'S-WAY MANUFACTURING CO., INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Operations - Six months ended November 30, 1997 and years ended May 31, 1997, 1996 and 1995............... F-3 Consolidated Balance Sheets - November 30, 1997 and May 31, 1997........................ F4 - F-5 Consolidated Statements of Stockholders' Equity - Six months ended November 30, 1997 and years ended May 31, 1997, 1996 and 1995............... F-6 Consolidated Statement of Cash Flows - Six months ended November 30, 1997 and years ended May 31, 1997, 1996 and 1995................ F-7 Notes to Consolidated Financial Statements - Six months ended November 30, 1997 and years ended May 31, 1997, 1996 and 1995................ F-8 - F-16 SCHEDULE SUPPORTING CONSOLIDATED FINANCIAL STATEMENTS Schedule VII - Valuation and Qualifying Accounts......... S-1 All other schedules have been omitted as the required information is not applicable or the information is included in the consolidated financial statements or related notes. ART'S-WAY MANUFACTURING CO., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED YEARS ENDED November 30, May 31, May 31, May 31, 1997 1997 1996 1995 NET SALES $ 11,137,092 $16,440,194 $13,830,471 $20,298,140 COST OF GOODS SOLD 7,783,751 12,075,488 10,492,375 15,972,492 INVENTORY MARKET WRITE-DOWN - - 350,000 - GROSS PROFIT 3,353,341 4,364,706 2,988,096 4,325,648 EXPENSES: Engineering 269,473 353,814 278,426 551,739 Selling 759,787 1,372,910 1,495,415 2,201,531 General and administrative 1,192,045 2,068,615 1,781,417 2,663,361 Total expenses 2,221,305 3,795,339 3,555,258 5,416,631 INCOME (LOSS) FROM OPERATIONS 1,132,036 569,367 (567,162) (1,090,983) OTHER INCOME (DEDUCTIONS): Interest expense (264,939) (327,089) (459,066) (558,321) Other (111,268) (117,033) (115,750) 4,215 Net deductions (376,207) (444,122) (574,816) (554,106) INCOME (LOSS) BEFORE INCOME TAXES 755,829 125,245 (1,141,978) (1,645,089) INCOME TAX EXPENSE (BENEFIT) (Note 8) 265,140 45,222 (370,051) (586,601) NET INCOME (LOSS) $ 490,689 $ 80,023 $(771,927)$(1,058,488) NET INCOME (LOSS) PER SHARE $0.39 $0.07 ($0.72) ($0.99) See accompanying notes to consolidated financial statements. ART'S-WAY MANUFACTURING CO., INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS November 30, May 31, ASSETS 1997 1997 CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 8,692 $ 25,297 Accounts receivable-customers, net of allowance for doubtful accounts of $31,000 and $25,000 in November and May, respectively (Notes 5 and 9) 3,005,837 2,943,404 Inventories (Notes 2 and 5) 8,754,469 8,437,569 Deferred income taxes (Note 8) 464,426 644,053 Income tax receivable 99,000 - Other current assets 154,175 160,669 Total current assets 12,486,599 12,210,992 PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 3 and 5) 10,323,374 10,340,107 Less accumulated depreciation 7,488,142 7,337,110 Net property, plant and equipment 2,835,232 3,002,997 TOTAL $15,321,831 $15,213,989 See accompanying notes to consolidated financial statements. November 30, May 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997 CURRENT LIABILITIES: Notes payable to bank (Note 5) $ 3,172,296 $ 2,652,433 Current portion of long-term debt (Note 5) 483,157 462,146 Accounts payable 2,069,584 2,130,946 Customer deposits 106,793 810,780 Accrued expenses (Note 4) 789,384 765,220 Total current liabilities 6,621,214 6,821,525 LONG-TERM DEBT, excluding current portion (Note 5) 1,451,794 1,707,854 DEFERRED INCOME TAXES (Note 8) 115,129 94,101 Total liabilities 8,188,137 8,623,480 STOCKHOLDERS' EQUITY: Common stock - $.01 par value. Authorized 5,000,000 shares; issued 1,340,778 shares 13,408 13,408 Additional paid-in capital 1,618,453 1,637,887 Retained earnings 6,411,582 5,920,893 8,043,443 7,572,188 Less cost of common shares in treasury of 94,847 in November and 102,347 in May 909,749 981,679 Total stockholders' equity 7,133,694 6,590,509 CONTINGENCIES (Note 9) TOTAL $15,321,831 $15,213,989 ART'S-WAY MANUFACTURING CO., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED NOVEMBER 30, 1997 AND YEARS ENDED MAY 31, 1997, 1996 AND 1995 Additional Number of Stated/ Paid-In Retained Treasury Shares Par Value Capital Earnings Stock Total BALANCE, MAY 29, 1994 1,066,831 $ 13,408 $2,374,575 $7,671,285 $(2,627,341)$7,431,927 Net loss - - - (1,058,488) - (1,058,488) Common treasury shares issued 6,100 - (17,786) - 58,503 40,717 BALANCE, MAY 28,1995 1,072,931 13,408 2,356,789 6,612,797 (2,568,838) 6,414,156 Net loss - - (771,927) - (771,927) Common treasury shares issued 13,700 - (61,700) - 131,393 69,693 BALANCE, MAY 31,1996 1,086,631 13,408 2,295,089 5,840,870 (2,437,445) 5,711,922 Net income - 80,023 - 80,023 Common treasury shares issued 151,800 - (657,202) - 1,455,766 798,564 BALANCE, MAY 31,1997 1,238,431 13,408 1,637,887 5,920,893 (981,679) 6,590,509 Net income - - 490,689 - 490,689 Common treasury shares issued 7,500 - (19,434) - 71,930 52,496 BALANCE, NOVEMBER 30, 1997 1,245,931 $13,408 $1,618,453 $6,411,582 $ (909,749) $7,133,694 See accompanying notes to consolidated financial statements. ART'S-WAY MANUFACTURING CO., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED YEARS ENDED Nov. 30 May 31, May 31, May 31, 1997 1997 1996 1995 CASH FLOWS FROM OPERATIONS: Net income (loss) $ 490,689 $ 80,023 $(771,927) $(1,058,488) Adjustments to reconcile net income (loss) to net cash provided Depreciation and amortization 280,700 586,152 572,109 621,809 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (62,433) (479,163) 946,384 517,249 Inventories (316,900)(2,236,826) 1,227,500 1,790,429 Other current assets 6,494 (73,194) (46,343) 185,215 Increase (decrease) in: Accounts payable (61,362) 1,624,034 (1,427,404) (810,196) Customer deposits (703,987) 438,979 276,187 (267,749) Accrued expenses 24,164 (242,106) 127,745 (155,982) Income taxes, net 101,655 24,532 294,471 (783,112) Net cash provided (used) by operating activities (240,980) (277,569) 1,198,722 39,175 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (151,134)(1,300,788) (19,568) (216,531) Proceeds from sale of property, plant and equipment - net 38,199 18,953 2,140 15,786 Net cash used in investing activities (112,935)(1,281,835) (17,428) (200,745) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments of) notes payable to bank 519,863 370,624 (1,518,191) 700,000 Proceeds from long-term debt - 750,000 2,130,000 - Principal payments on long-term debt (235,049) (426,000) (1,857,334) (600,000) Proceeds from issuance of common stock from treasury 52,496 798,564 69,693 40,717 Net cash provided by (used in) financing activities 337,310 1,493,188 (1,175,832) 140,717 Net increase (decrease) in cash and cash equivalents (16,605) (66,216) 5,462 (20,853) Cash and cash equivalents at beginning of period 25,297 91,513 86,051 106,904 Cash and cash equivalents at end of period $ 8,692 $ 25,297 $ 91,513 $ 86,051 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 264,939 $ 333,108 $ 490,876 $ 514,376 Income taxes 162,985 22,267 6,992 196,511 See accompanying notes to consolidated financial statements. ART'S-WAY MANUFACTURING CO., INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Art's-Way Manufacturing Co., Inc. ("Company" or "Art's-Way") and its subsidiary, A-W Transportation Co. All material intercompany balances and transactions have been eliminated in consolidation. As of August 4, 1995, A-W Transportation Co. was administratively dissolved. CHANGE IN YEAR END The Company changed its fiscal year end to November 30 in order to coincide with seasonality of the agriculture industry. As a result, the accompanying financial statements include the six-month transition period ended November 30, 1997, and comparative unaudited financial information for the six-months ended November 30, 1997 is presented in note 13. INVENTORIES Inventories are stated at the lower of cost or market, and cost is determined using the first-in, first-out (FIFO) method or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. Depreciation of plant and equipment is provided using the straight-line method, based on estimated useful lives of the assets which range from three to thirty-three years. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. RESEARCH AND DEVELOPMENT Research and development costs are expensed when incurred. Such costs approximated $193,000 for the six months ended November 30, 1997, and $301,000, $224,000 and $239,000 for the years ended May 31, 1997, May 31, 1996 and May 31, 1995, respectively. 1., Continued INCOME (LOSS) PER SHARE Income (loss) per common share is based on the weighted average number of shares outstanding and equivalent common shares from dilutive stock options of 1,244,620 shares for the six months ended November 30, 1997, 1,197,452, 1,077,359 and 1,070,391 shares for the years ended May 31, 1997, May 31, 1996 and May 31, 1995, respectively. The difference between primary and fully diluted income (loss) per share is not material. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" which revises the calculation and presentation provisions of Accounting Principles Board Opinion 15 and related interpretations. Statement No. 128 is effective for the Company's periods ending after December 15, 1997(the Company's quarter ended February 28, 1998). Retroactive application will be required. The Company believes the adoption of Statement No. 128 will not have significant effect on its reported earnings per share. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 2. INVENTORIES Major classes of inventory are: November 30, May 31, 1997 1997 Raw materials $1,593,469 $1,691,733 Work in process 3,340,641 3,891,197 Finished goods 3,916,359 3,014,639 Inventory market write-down (96,000) (160,000) Total $8,754,469 $8,437,569 3. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant and equipment, at cost, are: November 30, May 31, 1997 1997 Land $ 180,909 $ 180,909 Buildings and improvements 2,615,573 2,601,250 Manufacturing machinery and equipment 7,257,729 7,288,785 Trucks and automobiles 148,817 148,817 Furniture and fixtures 120,346 120,346 Total $ 10,323,374 $ 10,340,107 4. ACCRUED EXPENSES Major components of accrued expenses are: November 30, May 31, 1997 1997 Salaries, wages and commissions $ 285,806 $ 303,388 Provision for pending claims 9,255 40,000 Other 453,751 421,832 Total $ 789,384 $ 765,220 5. LOAN AND CREDIT AGREEMENTS Line of Credit In August 1995, the Company refinanced its existing senior indebtedness with a new bank. This new agreement provides for a revolving credit facility of up to $6,200,000 for operating needs based on a percentage of the Company's accounts receivable and inventory and allows within the revolving credit facility for the issuance of letters of credit in an aggregate amount not exceeding $300,000. The interest on this credit facility is one and one-half percent per annum in excess of the bank's referenced rate (10.00% at November 30, 1997) and two percent on the letter of credit sub-facility (10.50% at November 30, 1997). At November 30, 1997, borrowings under the revolving line of credit were $3,172,296 and the bank had issued $100,000 in letters of credit which guaranteed obligations carried on the consolidated balance sheet. The agreement also provides for a term loan in the principal amount of $2,130,000. The principal amount is repayable in monthly installments of $35,500 with the final payment due August 1998 unless the revolving credit facility is renewed. In the event that the term of the revolving credit facility is subsequently extended, the term loan shall continue to amortize based upon the payment schedule outlined above. The Company and the bank expect to extend the current agreement before the current facility expires. All loans, advances and other obligations, liabilities and indebtedness of the Company are secured by all present and future assets. Unused borrowings under the revolving line of credit were $206,378 at November 30, 1997. The Company pays an unused line fee equal to three-eighths of one percent of the unused portion of the revolving loan facility. 5., Continued Long-term Debt A summary of the Company's long-term debt is as follows: November 30, May 31, 1997 1997 Installment promissory note dated August 31, 1995, in the original principal sum of $2,130,000, payable in monthly installments of $35,500 plus interest at one and one-half percent over the bank's national money market rate, secured (a) $ 1,207,000 $ 1,420,000 State of Iowa Community Development Block Grant promissory notes at zero percent interest, maturity 2006 with quarterly principal payments to begin October 1997 (b) 488,889 500,000 State of Iowa Community Development Block Grant local participation promissory notes at 4% interest, maturity 2006. Interest is payable quarterly beginning in November 1996 and principal payments begin in November 1997 239,062 250,000 Total long-term debt 1,934,951 2,170,000 Less current portion of long-term debt 483,157 462,146 Long-term debt, excluding current portion $ 1,451,794 $ 1,707,854 (a) The installment promissory note payable bears interest at one and one-half percent over the bank's referenced rate (10% at November 30 and May 31, 1997). All borrowings under the installment note payable are secured by the cash, accounts receivable, inventories and property, plant and equipment of the Company. The agreement requires the Company to maintain minimum levels of tangible net worth and specified ratios, as defined, of debt-to-tangible net worth and net cash income to current maturities. The Company was in compliance with, or has obtained waivers for, all applicable covenants. Retained earnings of $6,343,261 are restricted and are not available for the payment of dividends. (b) $100,000 of this debt will be forgiven upon the satisfactory completion of certain performance target obligations at the contract expiration date of June 30, 1998 and the first year anniversary of this date, June 30, 1999. A summary of the minimum maturities of long-term debt follows: Year Amount 1998 $483,157 1999 $501,462 2000 $430,701 2001 $75,023 2002 $72,474 Thereafter $372,134 6. EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution 401(k) savings plan which covers substantially all full-time employees who must meet eligibility requirements. Participating employees may contribute as salary reductions a minimum of 4% of their compensation up to the limit prescribed by the Internal Revenue Code. The Company may make matching contributions at a discretionary percent upon the approval from the Board of Directors. Company contributions approximated $54,000 for the six months ended November 30, 1997, $0 for each of the years ended May 31, 1997 and 1996 and $165,000 for the year ended May 31, 1995. 7. STOCK OPTION PLANS Under the 1991 Employee Option Plan, stock options may be granted to key employees to purchase shares of common stock of the Company at a price not less than its fair market value at the date the options are granted. Options granted may be either nonqualified or incentive stock options. The option price, vesting period and term are set by the Compensation Committee of the Board of Directors of the Company. Options for an aggregate of 100,000 shares of common stock may be granted. Each option will be for a period of ten years and may be exercised at a rate of 25% at the date of grant and 25% on the first, second and third anniversary date of the grant on a cumulative basis. At November 30, 1997, the Company had approximately 49,000 shares available for issuance pursuant to subsequent grants. Under the 1991 Director Option Plan, options may be granted to nonemployee directors at a price not less than fair market value at the date the options are granted. Nonemployee directors who have served for at least one year are automatically granted options to purchase 5,000 common shares. Options granted are nonqualified stock options. The option price, vesting period and term are set by the Compensation Committee of the Board of Directors of the Company. Options for an aggregate of 45,000 common shares may be granted under the Plan. Each option will be for a period of ten years and may be exercised at a rate of 25% at the date of grant and 25% on the first, second and third anniversary date of the grant on a cumulative basis. At November 30, 1997, the Company had approximately 15,000 shares available for issuance pursuant to subsequent grants. A summary of changes in the stock option plans is as follows: November 30, May 31, May 31, May 31, 1995 1995 1995 1995 Options outstanding at beginning of period 87,552 78,763 77,988 109,685 Granted 5,000 20,000 35,563 34,294 Exercised - - - (2,000) Canceled or other disposition - (11,211) (34,788)(63,991) Options outstanding at end of period 92,552 87,552 78,763 77,988 Options price range for the period $4.750 $4.750 $4.750 $6.750 to to to to 10.375 $10.375 $11.125 $11.125 Options exercisable at end of period 60,151 57,701 48,115 56,662 At November 30, 1997, the weighted-average remaining contractual life of options outstanding was 6.7 years and the weighted average exercise price was $6.87. 7., Continued The Company accounts for stock options in accordance with the provisions of the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market priceof the underlying stock exceeded the exercise price. Accordingly, the Company has not recognized compensation expense for its options granted in the six-month period ended November 30, 1997 and each of the years ended May 31, 1995, 1996 and 1997. In 1997, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. FASB Statement No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and income per share disclosure for employee stock option grants made in 1996 and future years as if the fair-value-based method defined in FASB Statement No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of FASB Statement No. 123. The per share weighted-average fair value of stock options granted during the six-month period ended November 30, 1997 and each of the years ended May 31, 1997 and May 31, 1996 was $6.874, $7.179 and $6.799, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: November 30, 1997- expected dividend yield 0.0%, risk-free interest rate of 5.86%, expected volatility factor of 36.87%, and an expected life of 10 years; May 31,1997 - expected dividend yield 0.0%, risk-free interest rate of 6.75%, expected volatility factor of 36.70%, and an expected life of 10 years; May 31, 1996 - expected dividend yield 0.0%, risk-free interest rate of 6.74%, expected volatility factor of 38.50%, and an expected life of 10 years. Since the Company applies APB Opinion No. 25 in accounting for its plans, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company recorded compensation cost based on the fair value at the grant date for its stock options under FASB Statement No. 123, the Company's net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below: November 30 May 31, May 31, 1997 1997 1996 Net income (loss) As reported $490,689 $80,023 $(771,927) Pro forma $464,005 $52,803 $(797,380) Primary income (loss) As reported $.39 $.07 $(.72) per share Pro forma $.37 $.04 $(.73) 8. INCOME TAXES Total income tax expense (benefit) for the six-month period ended November 30, 1997 and for each of the years ended May 31, 1997, 1996, and 1995 consists of the following: November 30, May 31, May 31, May 31, 1995 1995 1995 1995 Current: Federal $ 64,485 $ 9,453 $ - $(772,792) State - 11,237 4,220 (18,536) 64,485 20,690 4,220 (791,328) Deferred: Federal 200,655 33,544 (320,210) 198,227 State - (9,012) (54,061) 6,500 200,655 24,532 (374,271) 204,727 $ 265,140 $45,222 $(370,051)$(586,601) The reconciliation of the statutory Federal income tax rate and the effective tax rate are as follows: November 30, May 31, May 31, May 31, 1995 1995 1995 1995 Statutory Federal income tax rate 34.0% 34.0% (34.0%) (34.0%) Increase(decrease)dueto: State income taxes, net of Federal income tax benefit - 1.1 (2.9) (1.5) Research and development credit (1.3) - - (1.6) Other-net 2.4 1.0 4.5 1.4 35.1% 36.1% (32.4%) (35.7%) Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liability at November 30, 1997 and May 31, 1997, 1996 and 1995 are presented below: November 30, May 31, May 31, May 31, 1995 1995 1995 1995 Deferred tax assets: Net operating loss carryforward $ - $ 56,122 $134,187 $ 96,232 Tax credits 16,034 35,552 - 26,354 Accrued expenses not deducted until paid 50,053 95,419 138,530 44,738 Inventory capitalization 302,945 274,067 191,106 226,715 Asset reserves 95,394 182,893 260,313 10,395 Other - - 10,386 1,513 Total deferred tax assets 464,426 644,053 734,522 405,947 Deferred tax liability Depreciation 115,129 94,101 160,038 205,734 Net deferred tax assets $349,297 $549,952 $574,484 $200,213 8., Continued There was no valuation allowance for deferred tax assets at November 30, 1997 and May 31, 1997, 1996 and 1995. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the reversal of deferred tax liabilities and projected future taxable income, management believes it is more likely than not the Company will realize the benefits of these deductible differences at November 30, 1997. The Company has available approximately $16,000 of Iowa Jobs Tax Credits which will expire in the year 2007 and 2008. 9. LITIGATION AND CONTINGENCIES Various legal actions and claims are pending against the Company. In the opinion of management and outside counsel, appropriate provisions have been made in the accompanying consolidated financial statements for all pending legal actions and other claims. The Company has entered into agreements whereby it can sell accounts receivable to financial institutions. One agreement provides for the Company to pay monthly interest on the face amount of each invoice at a rate of 3.25% over the prime rate from the date of the invoice for 180 days, or the date of customer payment, whichever occurs first. Under the terms of the second agreement, the financial institution purchases the accounts receivable at 95.5% of invoice value. Under the agreements, the financial institutions, in effect, purchase such accounts receivable with recourse in the event the customer returns the equipment. At November 30, 1997, receivables relating to these agreements, for which the Company had a contingent liability, approximated $944,000. 10. ACQUISITIONS On August 30, 1996, the Company acquired certain fixed assets and inventories from Logan Harvesters, Inc. relating to the manufacture and distribution of potato farm equipment. The total purchase price was approximately $2,750,000. The Company issued 145,000 shares of the Company's common stock, with the balance of the purchase price in cash. Annual revenues from the potato equipment product line are expected to be approximately $5,000,000. On September 23, 1996, the Company acquired certain fixed assets and inventories from DMI, Inc. relating to the manufacture and distribution of grain wagons. The total cash purchase price was approximately $290,000. Annual revenues from the grain wagon product line are expected to be approximately $1,000,000. 11. INDUSTRY SEGMENT INFORMATION The Company is primarily engaged in metal fabrication and the sale of its products in the agricultural sector of the economy. Major products include animal feed processing products, sugar beet and potato products, and land maintenance products. The Company's sales to one major original equipment manufacturer were $609,554 for the six-month period ended November 30, 1997 and $1,581,553, $2,119,020 and $3,101,120 for each of the years ended May 31, 1997, 1996 and 1995, respectively. Accounts receivable from this customer are unsecured. Accounts receivable from this customer were $209,805 at November 30, 1997 and $94,986, $54,637 and $269,086 at May 31, 1997, 1996 and 1995, respectively of the accounts receivable balance. 12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, defines fair value of a financial instrument at the amount at which the instrument could be exchanged in a current transaction between willing parties. At November 30, 1997 and May 31, 1997, the carrying amount approximates fair value for cash and cash equivalents, accounts receivable, accounts payable, notes payable to bank, long-term debt and other current liabilities. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, notes payable to bank and accrued expenses approximates fair value because of the short maturity of these instruments. The fair values of each of the Company's long-term debt instruments also approximate fair value because the interest rate is variable as it is tied to the bank's national money market rate. 13. TRANSITION PERIOD REPORTING REQUIREMENT As required by the change in year end explained in footnote 1, the Company's unaudited financial information for the six-month period ended November 30, 1996 is as follows. Unaudited November 30, 1996 Net Sales $7,275,685 Gross Profit 1,741,649 Income Tax Benefit 64,107 Net Loss $ 119,056 Loss Per Share $ .10 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 25,1998 ART'S-WAY MANUFACTURING CO., INC. By: __________________________________ By: _______________________ J. David Pitt William T. Green President Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. ______________________________ February 25,1998 James L. Koley Chairman of the Board Date and Director ______________________________ February 25,1998 J. David Pitt President and Director Date ______________________________ February 25,1998 George A. Cavanaugh, Jr. Director Date ______________________________ February 25,1998 Donald A. Cimpl Director Date ______________________________ February 25,1998 Herbert H. Davis, Jr. Director Date ______________________________ February 25,1998 Douglas McClellan Director Date _____________________________ February 25,1998 J. Ward McConnell, Jr. Director Date ART'S-WAY MANUFACTURING CO., INC. Schedule VII AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Accounts Balance, May 29, 1995 $ 27,000 Additions: Charged to Operating Expenses 12,000 Deduct: Accounts Charged Off 12,025 Balance, May 31, 1996 $ 26,975 Additions: Charged to Operating Expenses 2,834 Deduct: Accounts Charged Off 4,809 Balance, May 31, 1997 $ 25,000 Additions: Charged to Operating Expenses 6,000 Deduct: Accounts Charged Off - Balance, November 30, 1997 $ 31,000 -----END PRIVACY-ENHANCED MESSAGE-----