10-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended November 30, 2000 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 8, 2001: $2,710,540 Number of common shares outstanding on February 8, 2001: 1,256,351. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of Stockholders to be filed within 120 days of November 30, 2000 are incorporated by reference into Part III. Art's-Way Manufacturing Co., Inc. Index to Annual Report on Form 10-K Part I Page Item 1 - Description of Business 3 thru 5 Item 2 - Properties 5 Item 3 - Legal Proceedings 5 Item 4 - Submission of Matters to a Vote of Security Holders 5 Part II Item 5 - Market for the Registrant's Common Stock and Related Security Holder Matters 6 Item 6 - Selected Financial Statement Data 7 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 thru 12 Item 7A -Quantitative and Qualitative Disclosures About Market Risk 12 Item 8 - Financial Statements and Supplemental Data 12 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 12 Part III Item 10- Directors and Executive Officers of the Registant 13 Item 11- Executive Compensation 13 Item 12- Security Ownership of Certain Beneficial Owners and Management 13 Item 13- Certain Relationships and Related Transactions 13 Part IV Item 14- Exhibits, Financial Statement Schedules and Reports on Form 8-K 14 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 accounting principles, generally accepted in the United States of America, Art's-Way has only one industry segment, metal fabrication. (c) Narrative Description of Business The Company manufactures specialized farm machinery under its own and private labels. Equipment manufactured by the Company under its own label includes: portable and stationary animal feed processing equipment and related attachments used to mill and mix feed grains into custom animal feed rations; a high bulk mixing wagon to mix animal feeds containing silage, hay and grain; a line of mowers, stalk shredders; minimum till seed bed preparation equipment; sugar beet and potato harvesting equipment; a line of land maintenance equipment, a line of grain wagons, edible bean equipment, grain drill equipment and hi-dump wagons. Private label manufacturing of farm equipment accounted for 31%, 30%, and 43% of total sales for the years ended November 30, 2000, 1999 and 1998 respectively. The Company estimates private label manufacturing for the next twelve months to be approximately 28% of sales. Art's-Way labeled products are sold through farm equipment dealers throughout the United States. There is no contractual relationship with these dealers to distribute our products and dealers may sell a competitor's product line but are discouraged from doing so. Raw materials are acquired from domestic sources and normally are readily available. The Company maintains patents and manufacturing rights on several of its products covering unique aspects of design and has trademarks covering product identification. Royalties are paid by the Company for use of certain manufacturing rights. The validity of its patents has not been judicially determined and no assurance can be given as to the extent of the protection that the patents afford. In the opinion of the Company, its patents, trademarks and licenses are of value in securing and retaining business. The Company currently has three patents that expire in various years beginning in 2001 through 2012. The Company believes that patents expiring in 2001 will have no effect on the Company's business. The Company's agricultural products are seasonal; however, with recent additional product purchases and the development of mowers, shredders, beet and potato harvesting machinery, coupled with private labeled products, the impact of seasonality has been decreased because the peak periods occur at different times. In common with other manufacturers in the farm equipment industry, the Company's business is affected by factors peculiar to the farm equipment field, including items such as fluctuations in farm income resulting from commodity prices, crop damage caused by weather and insects, government farm programs, and other unpredictable variables such as interest rates. The farm equipment industry has a history of carrying significant inventory at dealers locations. The Company's beet, shredder and potato product lines are sold with extended payment terms, however, the remainder of the product lines are normally sold with 30 day terms. The Company has an OEM supplier agreement with Case Corporation. Under the OEM agreement the Company has agreed to supply Case's requirements for certain feed processing, tillage equipment and service parts under Case's label. The agreement has no minimum requirements and can be cancelled upon certain conditions. For the years ended November 30, 2000, 1999 and 1998, sales to Case aggregated approximately 22%, 30%, and 40% of total sales, respectively. The backlog of orders on February 9, 2001 was approximately $1,900,000 compared to approximately $5,000,000 a year ago. The decrease is a combination of Art's-Way branded products and OEM products. The order backlog is expected to be shipped during the current fiscal year. The Company currently does no business with any local, state or federal government agencies. The feed processing products, including private labeled units, compete with similar products of many other manufacturers. There are estimated to be more than 20 competitors producing similar products although total market statistics are not available. The Company's products are competitively priced with greater diversity than most competitor product lines. Beet harvesting equipment is manufactured by four companies that have a significant impact on the market. The Company's share of this market is estimated to be about 55%. Other products such as mowers, shredders, grain drills and grain wagons are manufactured by approximately 25 other companies; however, the Company believes its products are competitively priced and their quality and performance are above average in a market where price, product performance and quality are principal elements. The Company is engaged in experimental work on a continual basis to improve the present products and create new products. Research costs for the current fiscal year were primarily expended on the development of a new potato harvester and the continuing development of beet harvesting equipment. All research costs are expensed as incurred. Such costs approximated $302,000, $310,000 and $385,000 for the years ended November 30, 2000, 1999 and 1998, respectively. (See also Note 1 to the Financial Statements). The Company is subject to various federal, state and local laws and regulations pertaining to environmental protection and the discharge of materials into the environment. The Company does not anticipate that they will have future expenses or capital expenditures relating to compliance with such regulations. During the year ended November 30, 2000, the Company had peak employment of 137 full-time employees,of which 107 were factory and production employees, 10 were engineers and engineering draftsman, 17 were administrative employees and 3 were in sales and sales management. Employee levels tend to fluctuate based upon the seasonality of the product line. The Company's employees are not unionized. There has been no work stoppage in the Company's history and no stoppage is, or has been, threatened. The Company believes its relationship with its employees is good. (d) Financial Information about Foreign and Domestic Operation and Export Sales The Company has no foreign operations; its export sales, primarily to Canada, accounted for less than 1% of sales and less than 1% of operating loss in the years ended November 30, 2000, 1999 and 1998. 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 132 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, adequate provisions have been made in the accompanying financial statements for all pending legal actions and other claims. (See also Note 10 to Financial Statements.) Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters (a) Price Range of Common Stock Per Share Common Stock Bid Prices by Quarter Year Ended Year Ended November 30,2000 November 30, 1999 High Low High Low First Quarter 4.219 3.500 5.875 5.000 Second Quarter 4.125 3.000 5.250 4.000 Third Quarter 4.000 3.250 5.375 3.750 Fourth Quarter 3.500 3.000 4.250 3.000 The Common Stock trades on The NASDAQ Small Cap Stock Market under the symbol ARTW. The range of closing bid prices shown above is as reported by Small Cap NASDAQ.The quotations shown reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. (b) Approximate Number of Equity Security Holders Approximate number of Title of Class Round Lot Shareholders as of February 12,2001 Common Stock, $.01 Par Value 400 (c) Dividend Policy Holders of Common Stock of the Company are entitled to a pro rata share of any dividends as may be declared from time to time from funds available and to share pro rata in any such distributions available for holders of Common Stock upon liquidation of the Company. The Company has not paid a dividend during the past five years. Item 6. Selected Financial Statement Data The following tables set forth certain information concerning the Income Statements and Balance Sheets of the Company and should be read in conjunction with the Financial Statements and the notes thereto appearing elsewhere in this Report. (a) Selected Income Statement Data (In Thousands of Dollars, Except Per Share Amounts) Year Year Year Ended Ended Ended Nov. 30 Nov. 30, Nov. 30, 2000 1999 1998 Net Sales $14,229 $17,227 $23,633 Net Income (Loss) $(2,166) $ (630) $ (324) Income (Loss) Per Share: Basic $ (1.72) $ (.50) $ (.26) Diluted $ (1.72) $ (.50) $ (.26) Common Shares and Equivalents Outstanding: Basic 1,256,351 1,248,456 1,245,931 Diluted 1,256,351 1,248,456 1,245,931 (a) Selected Balance Sheet Data (In Thousands of Dollars, Except Per Share Amounts) Nov.30, Nov.30 Nov.30 2000 1999 1998 Total Assets $10,707 $15,078 $16,854 Long-Term Debt $ 345 $ 420 $ 2,160 Dividends Per Share $ .00 $ .00 $ .00 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis of Financial Condition and Results of Operations may be deemed to include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risk and uncertainty. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. The important factors that could cause actual results to differ materially from those in the forward-looking statements below ("Cautionary Statements") include the Company's degree of financial leverage, the factors described in Item 1(c) of this report, risks associated with acquisitions and in the integration thereof, risks associated with supplier/OEM agreements, dependence upon the farm economy and the impact of competitive services and pricing, as well as other risks referenced from time to time in the Company's filings with the SEC. All subsequent written and oral forward- looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. The Company does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. The following discussion and analysis of financial condition and results of operations of the Company are based on the Financial Statements and the notes thereto included herein. (a) and (b) Liquidity and Capital Resources Twelve months ended November 30, 2000 The Company's main source of funds was a reduction in accounts receivable and inventories. The accounts receivable decrease results primarily from the lower sales volume. The decrease in inventories results from the lower sales volume combined with concentrated efforts to reduce inventory levels. The positive cash flow from operations allowed for the reduction in bank borrowings. There were no capital expenditures during the fiscal year ended November 30, 2000. Twelve months ended November 30, 1999 The Company's main source of funds was a reduction in accounts receivable and inventories. The accounts receivable decrease results primarily from the lower sales volume. The decrease in inventories results from the lower sales volume offset partially by the acquisition of new product lines in fiscal year 1999. The positive cash flow from operations allowed for the reduction in bank borrowings. Capital expenditures were entirely for production equipment. Twelve months ended November 30, 1998 The Company's main source of funds was additional bank borrowings. The main uses of funds by operating activities were increases in accounts receivable and inventory. The accounts receivable increase results from a slower payment pattern for our own branded equipment which increased the days outstanding from 54 days to 58 days. Inventory increased due primarily to Case tillage equipment production scheduled for December 1998. Expenditures for capital equipment were $518,000 including $300,000 to upgrade computer hardware and software. The balance of the expenditures was spent on production equipment. Capital Resources The Company has a loan agreement with a bank that provides for a revolving line of credit and a long-term loan. The revolving line of credit allows for borrowings up to $4,500,000 subject to borrowing base percentages on the Company's accounts receivable and inventory, and allowing for letters of credit for $100,000. At November 30, 2000 the Company has borrowed $2,552,183 and has $100,000 in outstanding letters of credit. At November 30, 1999 the Company had borrowed $3,648,888 and had $100,000 in outstanding letters of credit. At November 30, 2000 and 1999, $212,000 and $182,000 were available for borrowings, respectively. The interest rate is based on the bank's referenced rate and is variable based upon certain performance objectives with a maximum of plus 3.00% of the referenced rate and a minimum of plus zero (12.50% at November 30, 2000). The long-term loan was for an original principal amount of $1,991,000. The principal amount is repayable in monthly installments of $23,700 with the remaining balance due April 2001. All loans, advances and other obligations, liabilities and indebtedness of the Company are secured by all present and future assets. The Company pays an unused line fee equal to three-eighths of one percent of the unused portion of the revolving line of credit. During 1999 the Company was notified by its lender that the Company does not fit the lender's customer profile and was requested to relocate its financing needs. At November 30, 2000 and 1999, the Company was in default of a loan covenant, the fixed maturity coverage, of their credit facility and installment promissory note. The lender notified the Company that the current loan agreement provided that the lender may, as a result of any event of default, accelerate the payment of all obligations. As a result, all long-term borrowings associated with this lender had been classified as current. The lender did not call for the acceleration of the payment of all obligations, but retained the right to do so at any time. The initial term of the loan agreement ended on August 31, 2000. In a letter dated May 26, 2000 the Company was notified that the lender did not intend to extend the term of the loan agreement beyond the termination date. Therefore, all of the obligations outstanding under the credit agreement and long term loan amounting to $4,383,825 at August 31, 2000 were due and payable on August 31, 2000. On August 31, 2000 the loan agreement was amended and the lender agreed not to exercise its rights and remedies under the loan agreement until October 15, 2000 and to extend the maturity date of the loan agreement to October 15, 2000. Effective October 15, 2000 the loan agreement was amended. As part of this amendment, the lender agreed not to exercise its rights and remedies under the loan agreement unless there was a future event of default or January 15, 2001 passed, whichever occured earlier. The amendment also extended the maturity date of the loan agreement to January 15, 2001. Effective January 15, 2001 the loan agreement was amended. As part of this amendment, the lender agreed not to exercise its rights and remedies under the loan agreement unless there was a future event of default or February 15, 2001 passed, whichever occurred earlier. The amendment also extended the maturity date of the loan agreement to February 15, 2001. Effective February 15, 2001 the loan agreement was amended. As part of this amendment, the lender agreed not to exercise its rights and remedies under the loan agreement unless there is a future event of default or April 15, 2001 passes, whichever occurs earlier. The amendment also extended the maturity date of the loan agreement to April 15, 2001. The Company continues to pursue financing with other lending institutions and explore different alternate financing arrangements. Lending institutions are reluctant to expand their loan portfolios in the agriculture sector of the economy until the depressed state of the farm economy improves. In addition, the size of the loan is difficult to place as the loan required is too large and specialized for many local lenders and too small for the regional and national lenders. While the Company believes a new credit facility will be obtained, there is no assurance of such. If the Company is unable to obtain a new credit facility prior to the expiration of its existing facility on April 15, 2001, it will be unable to repay its out- standing balance due April 15, 2001. The Company's current ratio and its working capital are as shown in the following table: November 30, November 30, November 30, 2000 1999 1998 Current Assets $8,610,676 $11,910,297 $14,131,370 Current Liabilities $6,308,381 $ 8,438,446 $ 7,884,736 Working Capital $2,302,295 $ 3,471,851 $ 6,246,634 Current Ratio 1.4 1.4 1.8 The Company believes the funding expected to be generated from operations and provided by the new credit facility when established, and its existing borrowing capacity will be sufficient to meet working capital and capital investment needs. (c) Results of Operations Twelve months ended November 30, 2000 compared to the twelve months ended November 30, 1999 Revenue decreased 17% to $14,229,000 from $17,227,000 while the Company recorded a net loss of $2,166,000 ($1.72 per share) compared to a net loss of $630,000 ($.50 per share) in the prior year. Revenues from Art's-Way branded products were down 18% while OEM sales decreased 16%. The reduction in sales reflects the continuing weakness in the farm economy. The agricultural niche markets the Company serves were all hit very hard by declining prices in both livestock and commodities. The sugar beet industry has suffered from over production and increasing competition from the sugar cane industry and competition from foreign sources. These market situations and a general lack of confidence by U.S. farmers in the direction the U.S. agricultural industry will move has adversely affected the Company. The one main area of good activity was the cattle industry where increased demand for beef caused an increase in beef cattle prices, which resulted in good demand for our feed processing equipment. Gross profit as a percent of sales decreased from 23% for the year ended November 30, 1999 to 17% for the year ended November 30, 2000. This decrease was primarily due to selling old inventory at distressed prices and a $780,000 inventory valuation writedown to realign the inventory values to current market conditions in the agricultural industry. Manufacturing costs were approximately $1,000,000 lower in fiscal year 2000 than in 1999 due to the cost reduction measures implemented December 1, 1999. Operating expenses were down $675,000 from the previous year even after recognizing approximately $189,000 in bad debt expense associated with customers struggling or going out of business in the distressed agriculture economy. This reduction in operating expenses was due to the cost reduction measures implemented December 1, 1999. Other deductions decreased slightly from the previous year. Interest on lower bank borrowings was offset by higher interest rates. Lower costs on the Company's program to offer floor plan financing to our larger dealers reflects the reduced sales levels. The Company has implemented cost reduction programs that have reduced its work force from 123 to 97, which, when combined with other cost reductions, will reduce manufacturing and operating overhead by approximately $1,200,000. Other cost reductions include reduced manufacturing costs accomplished through manufacturing efficiency improvement programs, reduced warranty costs accomplished through quality programs and other variable cost controlling initiatives. The Company is now structured to be more market responsive and profitable. Additionally, there are opportunities to supply major OEM's with their branded products and to build component parts for other manufacturing companies. These actions will serve to return the Company to profitability in fiscal year 2001. The Company believes the current farm economy has reduced the number of our competitors, our core business has bottomed out and, with our diversification efforts, feel we are now positioned to move back to a growth mode. Twelve months ended November 30, 1999 compared to the twelve months ended November 30, 1998 Revenue decreased 27% to $17,200,000 from $23,600,000 while the Company recorded a net loss of $630,000 ($.50 per share) compared to a net loss of $324,000 ($.26 per share) in the prior year. Revenues from Art's-Way branded products were down 12% while OEM sales decreased 93%. The Art's-Way reduction in revenue resulted from lower demand for Art's-Way branded products. The OEM reduction in revenue was primarily the result of the Company's large OEM customer instituting inventory reduction programs due to the distressed agriculture economy. Gross profit percent improved from 21% in 1998 to 24% in 1999 mainly due to the higher proportion of Art's-Way branded products, which generally carry a higher standard margin, combined with improved manufacturing efficiencies. Operating expenses were down $590,000 from the previous year. Lower engineering expenses reflect less new product development costs, lower selling expenses reflect lower level of sales, while lower general and administrative expenses in 1999 reflect a significant increase in bad debt reserve in 1998 to cover the adverse potato market conditions. Overall, operating expenses as a percentage of sales increased from 20% in 1998 to 24% in 1999. A lower level of borrowings resulted in lower interest costs. Other expenses decreased $74,000. Higher costs on the Company's program to offer floor plan financing to our larger dealers through a third party was offset by a debt forgiveness on some of the Company's State of Iowa Community Development Block Grant loans. The EDSA loan agreement provided that if the Company met certain contract obligations in regard to job creation/retention, demonstrating 51% benefit to low and moderate-income individuals and investment, $100,000 of the debt would be forgiven. Upon compliance with this provision during 1999, the Company's long-term borrowings of $100,000 were forgiven and included in other income. Utilization of Deferred Tax Assets The Company has established a deferred tax asset valuation allowance of approximately $1,258,000 and $166,000 at November 30, 2000 and 1999 respectively, due to the uncertainty of realizing various NOL and tax credit carryforwards. There was no valuation allowance for deferred tax assets at November 30, 1998. In assessing the realizability of deferred tax assets for these years, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the reversal of deferred tax liabilities, the expiration dates of tax credits and carry- forwards and projected future taxable income, management believes it is more likely than not the Company will realize the benefits of the November 30, 2000 net deferred tax assets. See also Note 9 to the Financial Statements. (d) Effect of New Accounting Standards The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities, as amended," which establishes accounting and reporting standards for derivative instruments. SFAS 133 requires that all derivatives be recognized in the balance sheet and measured at fair value, and is not effective for the Company until January 1, 2001. The Company is in the process of evaluating the potential impact of this standard, but believes that it will be immaterial to its financial position and results of operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk, primarily from changes in interest rates, associated with the variable rates on its debt and its accounts receivable financing. Item 8. Financial Statements and Supplemental Data Financial Statements and Supplemental Data for the years ended November 30, 2000, 1999 and 1998, are presented in a separate section of this Report following Part IV. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. PART III Item 10. Directors and Executive Officers The information required by Item 10 is incorporated by reference from the definitive Proxy Statement to be filed, pursuant to Regulation 14A, within 120 days after November 30, 2000 and is included as Exhibit 99.1 hereto and incorporated herein by this reference. Item 11. Executive Compensation The information required by Item 10 is incorporated by reference from the definitive Proxy Statement to be filed pursuant to Regulation 14A, within 120 days after November 30, 2000 and 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 10 is incorporated by reference from the definitive Proxy Statement to be filed pursuant to Regulation 14A, within 120 days after November 30, 2000 and 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 10 is incorporated by reference from the definitive Proxy Statement to be filed pursuant to Regulation 14A, within 120 days after November 30, 2000 and is included as Exhibit 99.1 hereto and incorporated herein by this reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K: (a) Index to Financial Statements and Schedules See index to financial statements and supporting schedules on page F-2. (b) Reports on Form 8-K No current Reports on Form 8-K have been filed during the last fiscal quarter of the period covered by this Report. (c) Index to Exhibits Any exhibits filed with Securities and Exchange Commission will be supplied upon written request of William T. Green, Executive Vice President, Finance, Art's-Way Manufacturing Co., Inc., Highway 9 West, Armstrong, Iowa 50514. A charge will be made to cover copying costs. See Exhibit Index below. Exhibits Required to be Filed Number Exhibit Description 2 Agreement and Plan of Merger for Reincorporation of Company in Delaware. Incorporated by reference to Exhibit 2 of Annual Report on Form 10-K for the year ended May 27, 1989. 3 Certificate of Incorporation and By-laws for Art's-Way Manufacturing Co., Inc. Incorporated by reference to Exhibit 3 of Annual Report on Form 10-K for the year ended May 27, 1989. 10 Incorporated by reference are the Material Contracts filed as Exhibit 10 of the Annual Report on Form 10-K for the fiscal year ended May 30, 1981. 10.1 Art's-Way Manufacturing Co., Inc. 401 (k) Savings Plan. Incorporated by reference to Exhibit 28 (a) to the Art's-Way Manufacturing Co., Inc. Registration Statement on Form S-8 filed on October 23, 1992. 10.2 Art's-Way Manufacturing Co., Inc. Employee Stock Option Plan (1991). Incorporated by reference to Exhibit "A" to Proxy Statement for Annual Meeting of Stockholders held on October 15, 1991. 10.3 Art's-Way Manufacturing Co., Inc. Director Stock Option Plan (1991). Incorporated by reference to Exhibit "B" to Proxy Statement for Annual Meeting of Stockholders held on October 15, 1991. 10.4 Asset Purchase Agreement between the Company and J. Ward McConnell, Jr., and Logan Harvesters, Inc. Incorporated by reference to Current Report on Form 8-K dated September 6, 1996. 99.1 Proxy Statement for 2000 Annual Meeting to be filed on or before 120 days after November 30, 2000. INDEPENDENT AUDITORS' REPORT The Board of Directors Art's-Way Manufacturing Co., Inc.: We have audited the accompanying financial statements of Art's-Way Manufacturing Co., Inc. (the Company) as listed in the accompanying index on page F-2. In connection with our audits of the financial statements, we have also audited the financial statement schedules as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at November 30, 2000 and 1999, and the results of its operations and its cash flows for the years ended November 30, 2000, 1999 and 1998, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has suffered recurring losses from operations and has an approaching debt maturity date that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP Omaha, Nebraska January 12, 2001, except as to note 14, which is as of February 23, 2001 ART'S-WAY MANUFACTURING CO., INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE FINANCIAL STATEMENTS Statements of Operations - Years ended November 30, 2000, 1999 and 1998, ................. F-3 Balance Sheets - November 30, 2000 and 1999 .................................... F-4 - F-5 Statements of Stockholders' Equity - Years ended November 30, 2000, 1999and 1998 ................... F-6 Statement of Cash Flows - Years ended November 30, 2000,1999 and 1998 ................... F-7 Notes to Financial Statements - Years ended November 30, 2000, 1999 and 1998................... F-8 - F-17 SCHEDULE SUPPORTING FINANCIAL STATEMENTS Schedule VII - Valuation and Qualifying Accounts............. S-1 All other schedules have been omitted as the required information is not applicable or the information is included in the financial statements or related notes. ART'S-WAY MANUFACTURING CO., INC. STATEMENTS OF OPERATIONS YEARS ENDED November 30, November 30, November 30, 2000 1999 1998 NET SALES $14,229,178 $ 17,226,760 $23,632,927 COST OF GOODS SOLD 11,867,404 13,299,177 18,636,315 GROSS PROFIT 2,361,774 3,927,583 4,996,612 EXPENSES: Engineering 439,511 439,666 632,541 Selling 701,289 1,234,599 1,463,497 General and administrative 2,128,164 2,269,710 2,632,512 Total expenses 3,268,964 3,943,975 4,728,550 LOSS FROM OPERATIONS (907,190) (16,392) 268,062 OTHER DEDUCTIONS: Interest expense (559,785) (525,237) (558,988) Other (148,454) (196,544) (270,397) Net deductions (708,239) (721,781) (829,385) LOSS BEFORE INCOME TAXES (1,615,429) (738,173) (561,323) INCOME TAX EXPENSE (BENEFIT) 550,557 (108,247) (237,435) NET LOSS $(2,165,986) $(629,926) $(323,888) LOSS PER SHARE Basic $ (1.72) $ (0.50) $ (0.26) Diluted (1.72) (0.50) (0.26) COMMON SHARES AND EQUIVALENT OUTSTANDING: Basic 1,256,351 1,248,456 1,245,931 Diluted 1,256,351 1,248,456 1,245,931 See accompanying notes to financial statements. ART'S-WAY MANUFACTURING CO., INC. BALANCE SHEETS November 30, November 30, 2000 1999 ASSETS CURRENT ASSETS: Cash $ 4,375 $ 273,303 Accounts receivable-customers, net of allowance for doubtful accounts of $76,303 and $223,696 in 2000 and 1999 respectively 1,331,308 2,461,502 Inventories 7,184,324 9,074,812 Other current assets 90,669 100,680 Total current assets 8,610,676 11,910,297 PROPERTY, PLANT AND EQUIPMENT, at cost 10,603,061 10,627,792 Less accumulated depreciation 8,569,234 8,073,069 Net property, plant and equipment 2,033,827 2,554,723 DEFERRED INCOME TAXES 62,900 613,457 TOTAL $ 10,707,403 $ 15,078,477 See accompanying notes to financial statements. November 30, November 30, 2000 1999 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to bank $ 2,552,183 $ 3,648,888 Current portion of long-term debt 1,355,023 1,640,101 Accounts payable 1,286,643 2,113,168 Customer deposits 127,196 119,861 Accrued expenses 987,336 916,428 Total current liabilities 6,308,381 8,438,446 LONG-TERM DEBT, excluding current portion 344,609 419,632 Total liabilities 6,652,990 8,858,078 STOCKHOLDERS' EQUITY: Common stock - $.01 par value. Authorized 5,000,000 shares; issued 1,340,778 shares 13,408 13,408 Additional paid-in capital 1,559,037 1,559,037 Retained earnings 3,291,782 5,457,768 4,864,227 7,030,213 Less cost of common shares in treasury of 84,427 809,814 809,814 Total stockholders' equity 4,054,413 6,220,399 TOTAL $10,707,403 $15,078,477 See accompanying notes to financial statements. ART'S-WAY MANUFACTURING CO., INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 Additional Number of Stated/ Paid-In Retained Treasury Shares Par Value Capital Earnings Stock Total BALANCE, NOVEMBER 30, 1997 1,245,931 $13,408 $1,618,453 $6,411,582 $(909,749)$7,133,694 Net Loss - - (323,888) - (323,888) BALANCE, NOVEMBER 30, 1998 1,245,931 13,408 1,618,453 6,087,694 (909,749) 6,809,806 Net Loss - - (629,926) - (629,926) Shares reissued from treasury 10,420 - (59,416) - 99,935 40,519 BALANCE, NOVEMBER 30, 1999 1,256,351 $13,408 $1,559,037 $5,457,768 $(809,814)$6,220,399 Net loss - - (2,165,986) - (2,165,986) BALANCE NOVEMBER 30, 2000 1,256,351 $13,408 $1,559,037 $3,291,782 $(809,814)$4,054,413 See accompanying notes to financial statements. ART'S-WAY MANUFACTURING CO., INC. STATEMENTS OF CASH FLOWS YEARS ENDED Nov.30, Nov.30, Nov.30, 2000 1999 1998 CASH FLOWS FROM OPERATIONS: Net loss $ (2,165,986) $(629,926) $(323,888) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: (Gain)loss on sale of property, plant and equipment (6,616) (6,650) 6,798 Depreciation and amortization 517,462 579,931 481,176 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable 1,130,194 1,294,329 (749,994) Inventories 1,890,488 313,449 (633,792) Income taxes recoverable - 49,000 50,000 Other current assets 10,011 174,464 (120,969) Increase (decrease) in: Accounts payable (826,525) 232,770 (189,186) Customer deposits 7,335 7,959 5,109 Accrued expenses 70,908 (247,843) 374,887 Deferred income taxes 550,557 (105,015) (159,145) Net cash provided (used) by operating activities 1,177,828 1,662,468 (1,259,004) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment - (270,801) (518,445) Proceeds from sale of property, plant and equipment 10,050 6,650 1,850 Net cash provided by (used in) investing activities 10,050 (264,151) (516,595) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments of) notes payable to bank (1,096,705) (719,415) 1,196,007 Proceeds from long-term debt - - 1,008,800 Principal payments on long-term debt (360,101) (459,861) (424,157) Proceeds from issuance of common stock from treasury - 40,519 - Net cash provided by (used in) financing activities (1,456,806) (1,138,757) 1,780,650 Net increase (decrease) in cash (268,928) 259,560 5,051 Cash at beginning of period 273,303 13,743 8,692 Cash at end of period $ 4,375 273,303 $ 13,743 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 559,785 $ 525,237 $ 558,988 Income taxes 4,790 3,952 2,094 See accompanying notes to financial statements. ART'S-WAY MANUFACTURING CO., INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS 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. INVENTORIES Inventories are stated at the lower of cost or market, and cost is determined using the first-in, first-out (FIFO) method or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. Depreciation of plant and equipment is provided using the straight-line method, based on estimated useful lives of the assets which range from three to thirty-three years. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized. RESEARCH AND DEVELOPMENT Research and development costs are expensed when incurred. Such costs approximated $302,000, $310,000 and $385,000 for the years ended November 30, 2000, 1999 and 1998 respectively. INCOME (LOSS) PER SHARE Basic income per common share is computed on the basis of weighted average number of common shares. Diluted income per share is computed on the basis of weighted average number of common shares plus equivalent shares assuming exercise of stock options. The difference in shares utilized in calculating basic and diluted earnings per share represents the number of shares issued under the Company's stock option plans less shares assumed to be purchased with proceeds from the exercise of the stock options. Due to the net loss in 2000, 1999 and 1998, the anti-dilutive effect of the Company's stock option plans is not included in the calculation of diluted earnings per share for those periods. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES The Company has entered into an agreement whereby it can sell accounts receivable to a financial institution. The agreement provides for the Company to pay monthly interest on the face amount of each invoice at a rate of 2.75% over the prime rate from the date of the invoice for 180 days, or the date of customer payment, whichever occurs first. The buyer is responsible for servicing the receivables, and has recourse to the Company for receivables outstanding greater than 180 days. Under SFAS No. 125, the sale of the receivables are reflected as a reduction of trade accounts receivable. At November 30, 2000 and 1999, there were $863,000 and $1,419,000, respectively, of receivables outstanding which the Company has sold relating to this agreement. STOCK BASED COMPENSATION The Company accounts for stock options in accordance with the provisions of APB Opinion No. 25, Accounting for Stock issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Accordingly, the Company has not recognized compensation expense for its options granted in the years ended November 30, 2000, 1999 and 1998. SFAS Statement No. 123, Accounting for Stock- Based Compensation, permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. FASB Statement No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and income per share disclosure for employee stock option grants made in 1996 and future years as if the fair-value-based method defined in FASB Statement No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of FASB Statement No. 123. See note 7 for additional discussion and pro-forma disclosures. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions related to the reported amount of assets and liabilities, reported amount of revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts in prior year's financial statements and related notes have been reclassified to conform to the 2000 presentation. 2. INVENTORIES Major classes of inventory are: November 30, November 30, 2000 1999 Raw materials $ 1,054,509 $1,146,456 Work in process 2,070,323 3,362,003 Finished goods 4,059,492 4,566,353 Total $7,184,324 $9,074,812 3. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant and equipment, at cost, are: November 30, November 30, 2000 1999 Land $ 180,909 $ 180,909 Buildings and improvements 2,615,573 2,615,573 Manufacturing machinery and equipment 7,555,774 7,555,774 Trucks and automobiles 130,923 155,654 Furniture and fixtures 119,882 119,882 Total $ 10,603,061 $ 10,627,792 4. ACCRUED EXPENSES Major components of accrued expenses are: November 30, November 30, 2000 1999 Salaries, wages and commissions $ 419,941 $ 337,611 Accrued warranty expense 106,667 100,000 Other 460,728 478,817 Total $ 987,336 $ 916,428 5. LOAN AND CREDIT AGREEMENTS Line of Credit The Company has a credit agreement with a bank which allows for borrowings up to $4,500,000 subject to borrowing base limitations related to the Company's accounts receivable and inventory, and allowing for letters of credit for $100,000. At November 30, 2000 the Company has borrowed $2,552,183 and has $100,000 in outstanding letters of credit. At November 30, 1999 the Company had borrowed $3,648,888 and had $100,000 in outstanding letters of credit. At November 30, 2000 and 1999, $212,000 and $182,000 were available for borrowings, respectively. The interest rate is based on the bank's referenced rate and is variable based upon certain performance objectives with a maximum of plus 3.00% of the referenced rate and a minimum of plus zero (12.50% at November 30, 2000). The Company also has a long-term loan with the same bank with an original principal amount of $1,991,000. The principal amount is repayable in monthly installments of $23,700 with the remaining balance due February 2001. All loans, advances and other obligations, liabilities and indebtedness of the Company are secured by all present and future assets. The Company pays an unused line fee equal to three-eighths of one percent of the unused portion of the revolving line of credit. During 1999 the Company was notified by its lender that the Company does not fit the lender's customer profile and was requested to relocate its financing needs. At November 30, 2000 and 1999, the Company was in default of a loan covenant, the fixed maturity coverage, of their credit facility and installment promissory note. The lender notified the Company that the current loan agreement provided that the lender may, as a result of any event of default, accelerate the payment of all obligations. As a result, all long-term borrowings associated with this lender had been classified as current. The lender did not call for the acceleration of the payment of all obligations, but had the right to do so at any time. The initial term of the loan expired on August 31, 2000. In a letter dated May 26, 2000 the Company was notified that the lender did not intend to extend the term of the loan agreement beyond the termination date. Therefore, all of the obligations outstanding under the credit agreement and long term loan amounting to $4,383,825 at August 31, 2000 were due and payable on August 31, 2000. On August 31, 2000 the loan agreement was amended and the lender agreed not to exercise its rights and remedies under the loan agreement until October 15, 2000 and to extend the maturity date of the loan agreement to October 15, 2000. Effective October 15, 2000 the loan agreement was amended. As part of this amendment, the lender agreed not to exercise its rights and remedies under the loan agreement unless there was a future event of default or January 15, 2001 passed, whichever occured earlier. The amendment also extended the maturity date of the loan agreement to January 15, 2001. Effective January 15, 2001 the loan agreement was amended. As part of this amendment, the lender agreed not to exercise its rights and remedies under the loan agreement unless there was a future event of default or February 15, 2001 passed, whichever occurred earlier. The amendment also extended the maturity date of the loan agreement to February 15, 2001. Effective February 15, 2001 the loan agreement was amended. As part of this amendment, the lender agreed not to exercise its rights and remedies under the loan agreement unless there is a future event of default or April 15, 2001 passes, whichever occurs earlier. The amendment also extended the maturity date of the loan agreement to April 15, 2001. While the Company believes a new credit facility will be obtained, there is no assurance of such. If the Company is unable to obtain a new credit facility prior to the expiration of its existing facility on April 15, 2001, it will be unable to repay its outstanding balance due April 15, 2001. Long-term Debt A summary of the Company's long-term debt is as follows: November 30, November 30, 2000 1999 Installment promissory note payable in monthly installments of $23,700 plus interest at two and one-half percent over the bank's national money market rate, (11.00%), secured (a) $ 1,280,000 $ 1,564,400 State of Iowa Community Development Block Grant promissory notes at zero percent interest, maturity 2006 with quarterly principal payments of $11,111 255,556 300,000 State of Iowa Community Development Block Grant local participation promissory notes at 4% interest, maturity 2006, with quarterly payments of $7,814. 164,076 195,333 Total long-term debt 1,699,632 2,059,733 Less current portion of long-term debt 1,355,023 1,640,101 Long-term debt, excluding current portion $ 344,609 $ 419,632 (a) All borrowings under the installment note payable are secured by the cash, accounts receivable, inventories and property, plant and equipment of the Company. The agreement requires the Company to maintain specified ratios, as defined, of debt-to-tangible net worth and net cash income to current maturities. Retained earnings of $3,291,782 are restricted and are not available for the payment of dividends. A summary of the minimum maturities of long-term debt follows: Year Amount 2001 $1,335,023 2002 $72,475 2003 $72,750 2004 $73,034 2005 $73,334 Thereafter $53,016 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. No contributions were made by the Company in the year ended November 30, 2000. Company contributions were approximatly $32,000 and $170,000 for the years ended November 30, 1999 and 1998 respectively. 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, 2000, the Company had approximately 72,000 shares available for issuance pursuant to subsequent grants. Under the 1991 Director Option Plan, options may be granted to nonemployee directors at a price not less than fair market value at the date the options are granted. Nonemployee directors who have served for at least one year are automatically granted options to purchase 5,000 common shares. Options granted are nonqualified stock options. The option price, vesting period and term are set by the Compensation Committee of the Board of Directors of the Company. Options for an aggregate of 45,000 common shares may be granted under the Plan. Each option will be for a period of ten years and may be exercised at a rate of 25% at the date of grant and 25% on the first, second and third anniversary date of the grant on a cumulative basis. At November 30, 2000, the Company had approximately 20,000 shares available for issuance pursuant to subsequent grants. A summary of changes in the stock option plans is as follows: Nov. 30, Nov. 30, Nov. 30, 2000 1999 1998 Options outstanding at beginning of period 51,500 103,078 92,552 Granted - - 10,526 Canceled or other disposition (5,000) (51,578) - Options outstanding at end of period 46,500 51,500 103,078 Options price range for the period $6.000 $6.000 $4.750 to to to $10.375 $10.375 $10.375 Options exercisable at end of period 46,500 50,250 77,420 At November 30, 2000 and 1999,the weighted-average remaining contractual life of options outstanding was 2.4 years and 3.2 years respectively and the weighted average exercise price was $8.27 and $8.47 respectively. The weighted average exercise price for options exercisable at November 30, 2000 was $8.27. The per share weighted-average fair value of stock options granted during the years ended November 30, 2000, 1999 and 1998, was $4.73, $4.64, and $4.07 respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: November 30, 2000 - expected dividend yield 0.0%, risk-free interest rate of 5.65%, expected volatility factor of 29.36%, and an expected life of 10 years; November 30, 1999 - expected dividend yield 0.0%, risk-free interest rate of 6.10%, expected volatility factor of 37.02% and an expected life of 10 years; November 30, 1998 - expected dividend yield 0.0%, risk-free interest rate of 4.83%, expected volatility factor of 36.55% and an expected life of 10 years. Since the Company applies APB Opinion No. 25 in accounting for its plans, no compensation cost has been recognized for its stock options in the financial statements. Had the Company recorded compensation cost based on the fair value at the grant date for its stock options under SFAS Statement No. 123, the Company's net loss and loss per share would have been reduced to the pro forma amounts indicated below: November 30, November 30, November 30, 2000 1999 1998 Net loss As reported $(2,165,986) $(629,926) $(323,888) Pro forma $(2,169,855) $(633,630) $(355,947) Diluted loss per share As reported $(1.72) $(.50) $(.26) Pro forma $(1.73) $(.51) $(.29) 8. LEASES The Company has several noncancelable operating leases, primarily for warehouse facilities, that expire over the next five years. These leases generally contain renewal options for one-year periods. Rental expense for operating leases during 2000, 1999 and 1998 was $34,192, $25,959 and $24,138, respectively. Future minimum lease payments under noncancelable operating leases as of November 30, 2000 are: Year ending November 30, 2001 $ 45,242 2002 5,943 2003 6,207 2004 2,586 In the ordinary course of business, the Company expects to renew or replace these leases as they expire. 9. INCOME TAXES Total income tax expense (benefit) for the years ended November 30, 2000, 1999 and 1998, consists of the following: November 30, November 30, November 30, 2000 1999 1998 Current: Federal $ - (3,232) $ (78,290) State - - - - (3,232) (78,290) Deferred: Federal $ 550,557 (105,015) (159,145) State - - - 550,557 (105,015) (159,145) $ 550,557 (108,247) $(237,435) The reconciliation of the statutory Federal income tax rate and the effective tax rate are as follows: Nov. 30, Nov. 30, Nov. 30, 2000 1999 1998 Statutory Federal income tax rate (34.0%) (34.0%) (34.0%) Increase(decrease)due to: State income taxes, net of Federal income tax benefit - - - Research development and state tax credits - (1.0) (12.1) Change in valuation allowance 67.6 22.5 - Other-net .5 (2.2) 3.8 34.1% (14.7%) (42.3%) Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liability at November 30, 2000, 1999 and 1998 are presented below: Nov. 30, Nov. 30, Nov. 30, 2000 1999 1998 Deferred tax assets: Net operating loss carryforward $526,301 217,039 $41,608 Tax credits 150,969 154,417 117,278 Accrued expenses 121,522 128,495 129,336 Inventory capitalization 275,779 333,570 274,536 Asset reserves 365,565 89,384 86,633 Total deferred tax assets 1,440,136 922,905 649,391 Less valuation allowance 1,257,819 166,356 - Net deferred tax assets 182,317 756,549 649,391 Deferred tax liability Depreciation 119,417 143,092 140,949 Net deferred tax assets $ 62,900 613,457 $508,442 For tax purposes, the Company has available at November 30, 2000 net operating loss ("NOL") carryforwards of approximately $1,665,797 which will begin to expire in the year 2013. The Company also has approximately $110,000 of research and development credits and $40,000 of state tax credits which begin to expire in the year 2007 and 2008, respectively. The Company has established a deferred tax asset valuation allowance of approximately $1,258,000 at November 30, 2000, due to the uncertainty of realizing the majority of the 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, the expiration dates of tax credits and carryforwards and projected future taxable income, management believes it is more likely than not the Company will realize the benefits of the November 30, 2000 net deferred tax assets. 10. LITIGATION AND CONTINGENCIES Various legal actions and claims are pending against the Company. In the opinion of management and outside counsel, adequate provisions have been made in the accompanying financial statements for all pending legal actions and other claims. 11. ASSET ACQUISITIONS During 1999, the Company entered into an agreement to purchase certain fixed assets and inventory from United Farm Tools, Inc. relating to the manufacture and distribution of shredders, edible bean cutters and hi dump wagons. The total purchase was approximately $384,000. 12. CREDIT CONCENTRATION The Company is primarily engaged in metal fabrication and the sale of its products in the agricultural sector of the economy. Major products include animal feed processing products, sugar beet and potato products, and land maintenance products. The Company's sales to one major original equipment manufacturer were $3,192,642, $4,169,508 and $8,116,655 for the years ended November 30, 2000, 1999 and 1998, respectively. Accounts receivable from this customer are unsecured. Accounts receivable from this customer were $217,180, $637,798 and $1,449,944 at November 30, 2000, 1999 and 1998, respectively. 13. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures about Fair Value of Financial Instruments, defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. At November 30, 2000 and 1999, the carrying amount approximates fair value for cash and cash equivalents, accounts receivable, accounts payable, notes payable to bank, long-term debt and other current liabilities. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, notes payable to bank and accrued expenses approximates fair value because of the short maturity of these instruments. The fair values of each of the Company's long-term debt instruments also approximates fair value because the interest rate is variable as it is tied to the bank's national money market rate. 14. SUBSEQUENT EVENT The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in note 5, the Company has significant borrowings that require compliance with a financial covenant, the fixed maturity coverage ratio ("covenant"), at year-end November 30, 2000, and these same borrowings have a maturity date subsequent to year-end of February 15, 2001. As a result of annual recurring net losses, the Company is not in compliance with the covenant at years ended November 30, 2000 and 1999, and the Company has not been able to secure any new financing alternatives with other lenders. However, at February 15, 2001 the Company has requested and received from the bank a waiver of the covenant and an extension of the loan maturity date to April 15, 2001. If the Company is unable to secure new financing before this extended date of April 15, 2001, the Company will be unable to pay its outstanding balance due unless the current lender grants another extension. Lending institutions are reluctant to expand their loan portfolios in the agriculture sector of the economy until the depressed state of the farm economy improves. In addition, the size of the loan is difficult to place as the loan required is too large and specialized for many local lenders and too small for the regional and national lenders. The Board of Directors and Management have been and continue to explore various financing alternatives including, but not limited to, asset based lending arrangments, convertible debentures and venture capitalist arrangements. Although no assurances can be given, the Company expects that a financing alternative will be negotiated and completed during the fiscal year 2001. The continuation as a going concern is dependent upon the ability to successfully establish the necessary financing arrangement and to comply with the terms thereof. 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 23, 2001 ART'S-WAY MANUFACTURING CO., INC. By: James L. Koley By: William T. Green Chairman of the Board Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. ______________________________ February 23,2001 James L. Koley Chairman of the Board Date and Director ______________________________ February 23,2001 David R. Castle Director Date ______________________________ February 23,2001 George A. Cavanaugh, Jr. Director Date ______________________________ February 23,2001 Donald A. Cimpl Director Date ______________________________ February 23,2001 Douglas McClellan Director Date _____________________________ February 23,2001 J. Ward McConnell, Jr. Director Date ART'S-WAY MANUFACTURING CO., INC. Schedule VII VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Accounts Balance, November 30, 1997 $ 31,000 Additions: Charged to Operating Expenses $174,000 Deduct: Accounts Charged Off - Balance, November 30, 1998 $ 205,000 Additions: Charged to Operating Expenses 64,000 Deduct: Accounts Charged Off 45,304 Balance, November 30, 1999 $ 223,696 Additions: Charged to Operating Expenses 188,689 Deduct: Accounts Charged Off 336,082 Balance, November 30, 2000 $ 76,303