-----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, SAMqeS8FwlkxikB5sDQ2HcSeEbPfs5phJE5WYiXFTZrOVC0oExQK4rqS7CEdmChD s+P3zD/eiF37RN6jvjh9sA== 0000007623-99-000002.txt : 19990301 0000007623-99-000002.hdr.sgml : 19990301 ACCESSION NUMBER: 0000007623-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990226 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: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05131 FILM NUMBER: 99551108 BUSINESS ADDRESS: STREET 1: P O BOX 288 CITY: ARMSTRONG STATE: IA ZIP: 50514 BUSINESS PHONE: 7128643131 MAIL ADDRESS: STREET 1: P O BOX 288 CITY: ARMSTRONG STATE: IA ZIP: 50514 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended November 30, 1998 Commission File No. 0-5131 ART'S-WAY MANUFACTURING CO., INC. DELAWARE 42-0920725 ____________________________ __________________________ State of Incorporation I.R.S. Employee Identification No. Armstrong, Iowa 50514 Address of principal executive offices Zip Code Registrant's telephone number, including area code: (712) 864-3131 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act Common stock $.01 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or informational statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant on February 9, 1999: $4,830,471 Number of common shares outstanding on February 9, 1999: 1,245,931. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of Stockholders to be filed within 120 days of November 30, 1998 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 6 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 thru 11 Item 7A -Quantitative and Qualitative Disclosures About Market Risk 12 Item 8 - Consolidated Financial Statements and Supplemental Data 12 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 12 Part III Item 10- Directors and Executive Officers of the Registant 12 Item 11- Executive Compensation 12 Item 12- Security Ownership of Certain Beneficial Owners and Management 12 Item 13- Certain Relationships and Related Transactions 12 Part IV Item 14- Exhibits, Financial Statement Schedules and Reports on Form 8-K 13 PART I Item 1. Description of Business (a) General Development of Business Art's-Way Manufacturing Co., Inc. (the "Company" or "Art's-Way") began operations as a farm equipment manufacturer in 1956. Its manufacturing plant is located in Armstrong, Iowa. During the past five years, the business of the Company has remained substantially the same. (b) Financial Information About Industry Segments In accordance with generally accepted accounting principles, Art's-Way has only one industry segment, metal fabrication. (c) Narrative Description of Business The Company manufactures specialized farm machinery under its own and private labels. Equipment manufactured by the Company under its own label includes: portable and stationary animal feed processing equipment and related attachments used to mill and mix feed grains into custom animal feed rations; a high bulk mixing wagon to mix animal feeds containing silage, hay and grain; a line of mowers, stalk shredders; minimum till seed bed preparation equipment; sugar beet and potato harvesting equipment; a line of land maintenance equipment and a line of grain wagons. In November, 1998, the Company entered into an agreement to purchase certain assets relating to the manufacture and distribution of grain drill 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 43%, 8%, 20%, and 22% of total sales for the year ended November 30, 1998, the six-month period ended November 30, 1997 and each of the years ended May 31, 1997, and 1996 respectively. The Company expects private label manufacturing for the next twelve months to be approximately 32% 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 five patents which expire in various years beginning in 1999 through 2012. 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. 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 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 year ended November 30, 1998, the six-month period ended November 30, 1997 and each of the years ended May 31, 1997,and 1996 sales to Case aggregated approximately 40%, 5%, 10%, and 15% of total sales, respectively. The backlog of orders on February 9, 1999 was approximately $1,700,000 compared to approximately $7,000,000 a year ago. The decrease 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, shredders, grain drills and grain wagons 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 $385,000 for the year ended November 30, 1998, $193,000 for the six months ended November 30, 1997 and $301,000 and $224,000 for the years ended May 31, 1997, and May 31, 1996 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 year ended November 30, 1998, the Company had peak employment of 215 full-time employees,of which 164 were factory and production employees, 19 were engineers and engineering draftsman, 19 were administrative employees and 13 were in sales and sales management. Employee levels tend to fluctuate based upon the seasonality of the product line. The Company's employees are not unionized. There has been no work stoppage in the Company's history and no stoppage is, or has been, threatened. The Company believes its relationship with its employees is good. (d) Financial Information about Foreign and Domestic Operation and Export Sales The Company has no foreign operations; its export sales, primarily to Canada, accounted for less than 1% of sales and less than 1% of operating income (loss) in the year ended November 30, 1998, the six-month period ended November 30, 1997 and each of the years May 31, 1997 and 1996. 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 Per Share Common Stock Bid Prices by Quarter Year Ended Six-Months Ended Year Ended Nov.30,1998 Nov. 30, 1997 May 31, 1997 High Low High Low High Low First Quarter 10-1/2 9 5-1/2 4-1/2 Second Quarter 9-1/2 8-1/2 5-1/2 4-1/4 Third Quarter 8-3/4 7-5/8 8-1/2 6-1/4 6-1/4 4-3/4 Fourth Quarter 8 5-3/4 13-1/2 7-3/4 6-3/4 6 The Common Stock trades on The NASDAQ Stock Market under the symbol ARTW. The range of closing bid prices shown above is as reported by NASDAQ.The quotations shown reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. (b) Approximate Number of Equity Security Holders Approximate number of Title of Class Round Lot Shareholders as of February 10,1999 Common Stock, $.01 Par Value 451 (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) Year Six Months Year Year Year Year Ended Ended Ended Ended Ended Ended Nov. 30, Nov. 30, May 31, May 31, May 31, May 28, 1998 1997 1997 1996 1995 1994 Net Sales $23,633 $11,137 $16,440 $13,830 $20,298 $20,473 Net Income (Loss)$ (324) $ 491 $ 80 $ (772) $(1,058)$ 623 Income (Loss) Per Share: Basic $ (.26) $ .39 $ .07 $ (.72) $ (.99) $ .58 Diluted $ (.26) $ .39 $ .07 $ (.72) $ (.99) $ .57 Common Shares and Equivalents Outstanding: Basic 1,245,931 1,244,620 1,197,452 1,077,359 1,070,391 1,064,898 Diluted 1,245,931 1,261,911 1,199,871 1,077,359 1,070,391 1,087,846 (a) Selected Balance Sheet Data (In Thousands of Dollars, Except Per Share Amounts) Nov. 30, Nov. 30 May 31 May 31 May 31 May 28 1998 1997 1997 1996 1995 1994 Total Assets $16,995 $15,322 $15,214 $11,886 $14,903 $17,261 Long-Term Debt $ 2,160 $ 1,452 $ 2,170 $ 1,846 $ 1,573 $ 2,173 Dividends Per Share $ .00 $ .00 $ .00 $ .00 $ .00 $ .00 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis of Financial Condition and Results of Operations may be deemed to include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risk and uncertainty. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. The important factors that could cause actual results to differ materially from those in the forward-looking statements below ("Cautionary Statements") include the Company's degree of financial leverage, the factors described in Item 1(c) of this report, risks associated with acquisitions and in the integration thereof, risks associated with supplier/OEM agreements, dependence upon the farm economy and the impact of competitive services and pricing, as well as other risks referenced from time to time in the Company's filings with the SEC. All subsequent written and oral forward- looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. The Company does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. The following discussion and analysis of financial condition and results of operations of the Company and its subsidiary is based on the Consolidated Financial Statements and the notes thereto included herein. (a) and (b) Liquidity and Capital Resources Twelve months ended November 30, 1998 The Company's main source of funds was additional bank borrowings. The main use of funds by operating activities were increases in accounts receivable and inventory. The accounts receivable increase results from a slower payment pattern for our own branded equipment which increased the days outstanding from 54 days to 58 days. Inventory increased due primarily to Case tillage equipment production scheduled for December 1998. Expenditures for capital equipment were $518,000 including $300,000 to upgrade computer hardware and software. The balance of the expenditures was spent on production equipment. Six-months ended November 30, 1997 For the six-months ended November 30, 1997, the Company's main source of funds resulted from net income plus depreciation. This source was offset by an increase in inventories and a decrease in customer deposits. The inventory increase resulted from a higher production load at November 30, 1997 due primarily from Case tillage equipment. Customer deposits were from down payments on beet equipment. This equipment was shipped during the six-month period, consequently the decrease in customer deposits. 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. Capital Resources In April 1998, the Company amended its revolving line of credit agreement. The agreement allows for borrowings up to $6,000,000 based upon a percentage of the Company's accounts receivable and inventory and allows for letters of credit up to an aggregate amount of $300,000. At November 30, 1998 the Company has borrowed $4,368,303 and has $100,000 in outstanding letters of credit. The interest rate is based on the bank's referenced rate and is variable based upon certain performance objectives with a maximum of plus .50% of the referenced rate and a minimum of plus zero (8.25% at November 30, 1998). The amendment also provides for a restructured long-term loan in the principal amount of $1,991,000. The principal amount is repayable in monthly installments of $23,700 with the final payment due August 2000 unless the revolving credit facility is renewed. In the event that the term of the revolving line of credit is subsequently extended, the term loan shall continue to amortize, based upon the payment schedule outlined above. 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 its working capital are as shown in the following table: November 30, November 30, May 31, May 31, 1998 1997 1997 1996 Current Assets $14,131,370 $12,486,599 $12,210,992 $9,578,494 Current Liabilities$ 7,884,736 $ 6,621,214 $ 6,821,525 $4,593,848 Working Capital $ 6,246,634 $ 5,865,385 $ 5,389,467 $4,984,646 Current Ratio 1.8 1.9 1.8 1.9 The Company believes its liquidity, capital resources, and borrowing capacity are adequate for its current and intended operations. (c) Results of Operations Twelve months ended November 30, 1998 compared to the twelve months ended November 30, 1997 The following proforma unaudited information is presented for the twelve months ending November 30, 1997 in order to facilitate the analysis for the twelve months ending November 30, 1998: Unaudited November 30, 1997 Net sales $20,302,000 Gross profit $ 5,972,000 Operating expenses $ 4,302,000 Interest expense $ 417,000 Net income $ 689,000 Revenue increased 16% to $23,600,000 from $20,300,000, while the Company recorded a net loss of $324,000 ($.26 per share) compared to a net income of $689,000 ($.56 per share) in the prior year. The loss was all in the fourth quarter, where revenues were 13% higher at $6,290,000 from $5,550,000. The increase in sales revenue was due to our new contract to provide tillage equipment and related service parts to Case Corporation. Total sales arising from the contract were $7,200,000. The Company also benefited from a new agreement with New Holland to supply a forage blower similar to that provided to other OEM customers. This major increase in OEM business more than offset a 25% decline in demand for the Company's branded products. A collapse in potato prices, low hog prices and a poor farm economy in the Red River Valley region, all contributed to the decline in demand. Gross profit decreased from 29.4% for the twelve months ended November 30, 1997 to 21.6% for the twelve months ended November 30, 1998. This dramatic change of 7.5 percentage points results primarily from a change in product mix from 15% OEM, 85% Art's-Way brands in 1997 to 40% OEM, 60% Art's-Way brands in 1998. OEM business inherently is less profitable. This product mix impact reduced our gross margin by 5 percentage points. Problems incurred in the start-up of the new tillage products due to late vendor delivery of components and absorbing new manufacturing processes resulted in scheduling problems for all products. This resulted in significant overtime to catch up, with a consequent deterioration in production efficiency. Warranty costs increased $173,000 due to startup problems with a new model beet harvester. Operating expenses were up 11% from last year. The full year impact of the restoration of the Company contribution to the employee 401(k) plan impacted expenses by $122,000. Group insurance to cover employee medical costs rose $236,000. New product introduction costs were $148,000. $80,000 was spent on outside consultants to determine the cause of our deteriorating manufacturing performance. Bad debt reserves were increased by $162,000 to cover the adverse potato market conditions. Overall, operating expenses as a percentage of sales dropped from 21.2% in 1997 to 20.3% in 1998. Higher inventory levels throughout the year caused an increase in interest expense by 34%. Other financing expenses include $80,000 charge in the fourth quarter to be in compliance with FASB 125 on the accounting treatment for sales of accounts receivable. Six-months ended November 30, 1997 Sales increased due mainly to strength in sugar beet harvesting equipment and related service parts. Other strong areas included corn stalk shredders, where the Company enjoyed its best season since 1994, the SupRaMix vertical feed mixer and our traditional grinder mixer products. Two areas of weakness in sales were the termination of our OEM contract to make frames for a local fiberglass body manufacturer and our deliberate scaling back of Logan potato equipment production in view of a dramatic downturn in potato prices and customer demand. Gross profits increased due to improved production efficiencies, a product mix of higher margin products and improved purchasing of raw materials. Warranty expenses were impacted adversely by $160,000 due to unanticipated problems with our new model beet harvester. The Company encountered learning curve expenses associated with the new tillage production for Case. Operating expenses are up as the Company added staff in engineering and sales to support our new product lines and to enhance our position in the beet and feed processing business and due to the reinstatement of the Company's contribution to the employee 401(k) retirement plan. Interest costs were up, as the higher sales volumes required higher working capital requirements. 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. Utilization of Deferred Tax Assets In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the reversal of deferred tax liabilities, projected future taxable income and considering the expiration dates of tax credits and carryforwards, management believes it is more likely than not the Company will realize the benefits of these deductible differences at November 30, 1998. See also Note 8 to the Consolidated Financial Statements. Year 2000 Issues In 1998 the Company began preparing its computer-based systems for year 2000 ("Y2K") computer software compliance issues. Historically, certain computer programs were written using two digits rather than four to define the applicable year. As a result, software may recognize a date using the two digits "00" as 1900 rather than the year 2000. Computer programs that do not recognize the proper date could generate erroneous data or cause systems to fail. The Company's Y2K project covers its significant computer programs and certain equipment, which contain microprocessors and is divided into five major phases-assessment, planning, conversion, implementation and testing. The Company has completed the assessment and planning phases and is currently in the conversion, implementation and testing phases. Systems which have been determined not to be Y2K compliant are being either replaced or reprogrammed, and thereafter tested for Y2K compliance. The Company expects the conversion, implementation and testing phases to be complete by mid-1999. The Company's Y2K project also considers the readiness of significant customers and vendors. The Company is in the process of identifying and contacting critical suppliers and customers regarding their plans and progress in addressing their Y2K issues. The Company has received varying information from such parties on the state of compliance or expected compliance. The non-compliance of such vendors could impair the ability of the Company to obtain necessary products or to sell or provide services to its customers. Disruptions of the computer systems of the Company's vendors could have a material adverse effect on the Company's financial condition and results of operations for the period of such disruption. Contingency plans are being developed in the event that any critical supplier or customer is not compliant. The Company has incurred approximately $300,000 of Y2K project expense to date. Future expenses are estimated to be approximately $5,000. Such cost estimates are based upon presently available information and may change as the Company continues with its Y2K project. The Company believes that its internal operating systems will be Year 2000 compliant before December 31, 1999. Therefore, the Company believes that the most reasonably likely worst-case scenario will be that one or more of third parties with which the Company has a material business relationship will not have successfully dealt with its Year 2000 issues. A critical third party failure (such as telecommunication, utilities or financial institutions) could have a material adverse affect on the Company by eliminating the Company's ability to order and pay for products from suppliers and receive orders and payments from customers. It is also possible that one or more of the internal operating systems will not function properly and make it difficult to complete routine tasks, such as accounting and other record keeping duties. Based on information currently available, the Company does not believe there will be any long-term operating systems failures. However, the Company will continue to monitor these issues as part of its Year 2000 project and will concentrate its efforts on minimizing their impact. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not Applicable Item 8. Consolidated Financial Statements and Supplemental Data Consolidated Financial Statements and Supplemental Data for the year ended November 30, 1998, the six-month period ended November 30, 1997 and for each of the years ended May 31, 1997 and 1996, are presented in a separate section of this Report following Part IV. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. 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, 1998 which 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, 1998 which is included as Exhibit 99.1 hereto and incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 10 is incorporated by reference from the definitive Proxy Statement to be filed pursuant to Regulation 14A, within 120 days after November 30, 1998 which is included as Exhibit 99.1 hereto and incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions The information required by Item 10 is incorporated by reference from the definitive Proxy Statement to be filed pursuant to Regulation 14A, within 120 days after November 30, 1998 which 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, 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 1998 Annual Meeting to be filed on or before 120 days after November 30, 1998. 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, 1998 and November 30, 1997 and the results of their operations and their cash flows for the year ended November 30, 1998 and the six-month period ended November 30, 1997 and each of the years ended May 31, 1997 and 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Omaha, Nebraska January 15, 1999 ART'S-WAY MANUFACTURING CO., INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Operations - Year ended November 30, 1998, six months ended November 30, 1997 and years ended May 31, 1997 and 1996 ..................................... F-3 Consolidated Balance Sheets - November 30, 1998 and November 30, 1997....................... F-4 - F-5 Consolidated Statements of Stockholders' Equity - Year ended November 30, 1998, six months ended November 30, 1997 and years ended May 31, 1997, 1996 ....... F-6 Consolidated Statement of Cash Flows - Year ended November 30, 1998, six months ended November 30, 1997 and years ended May 31, 1997,and 1996..... F-7 Notes to Consolidated Financial Statements - Year ended November 30, 1998, six months ended November 30, 1997 and years ended May 31, 1997 and 1996..... 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 YEAR SIX MONTHS ENDED ENDED YEARS ENDED November 30, November 30, May 31, May 31, 1998 1997 1997 1996 NET SALES $ 23,632,927 $11,137,092 $16,440,194 $13,830,471 COST OF GOODS SOLD 18,576,010 7,783,751 12,075,488 10,842,375 GROSS PROFIT 5,056,917 3,353,341 4,364,706 2,988,096 EXPENSES: Engineering 632,541 269,473 353,814 278,426 Selling 1,463,497 759,787 1,372,910 1,495,415 General and administrative 2,692,817 1,192,045 2,068,615 1,781,417 Total expenses 4,788,855 2,221,305 3,795,339 3,555,258 INCOME (LOSS) FROM OPERATIONS 268,062 1,132,036 569,367 (567,162) OTHER INCOME (DEDUCTIONS): Interest expense (558,988) (264,939) (327,089) (459,066) Other (270,397) (111,268) (117,033) (115,750) Net deductions (829,385) (376,207) (444,122) (574,816) INCOME (LOSS) BEFORE INCOME TAXES (561,323) 755,829 125,245 (1,141,978) INCOME TAX EXPENSE (BENEFIT) (237,435) 265,140 45,222 (370,051) NET INCOME (LOSS) $(323,888) $ 490,689 $ 80,023 $(771,927) INCOME PER SHARE Basic $ (0.26) $ 0.39 $ 0.07 $ (0.72) Diluted (0.26) 0.39 0.07 (0.72) COMMON SHARES AND EQUIVALENT OUTSTANDING: Basic 1,245,931 1,244,620 1,197,452 1,077,359 Diluted 1,245,931 1,261,911 1,199,871 1,077,359 See accompanying notes to consolidated financial statements. ART'S-WAY MANUFACTURING CO., INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS November 30, November 30, 1998 1997 ASSETS CURRENT ASSETS: Cash $ 13,743 $ 8,692 Accounts receivable-customers, net of allowance for doubtful accounts of $205,000 and $31,000 respectively 3,755,831 3,005,837 Inventories 9,388,261 8,754,469 Deferred income taxes 649,391 464,426 Income tax receivable 49,000 99,000 Other current assets 275,144 154,175 Total current assets 14,131,370 12,486,599 PROPERTY, PLANT AND EQUIPMENT, at cost 10,418,307 10,323,374 Less accumulated depreciation 7,554,454 7,488,142 Net property, plant and equipment 2,863,853 2,835,232 TOTAL $ 16,995,223 $15,321,831 See accompanying notes to consolidated financial statements. November 30, November 30, 1998 1997 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to bank $ 4,368,303 $ 3,172,296 Current portion of long-term debt 359,862 483,157 Accounts payable 1,880,398 2,069,584 Customer deposits 111,902 106,793 Accrued expenses 1,164,271 789,384 Total current liabilities 7,884,736 6,621,214 LONG-TERM DEBT, excluding current portion 2,159,732 1,451,794 DEFERRED INCOME TAXES 140,949 115,129 Total liabilities 10,185,417 8,188,137 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 1,618,453 Retained earnings 6,087,694 6,411,582 7,719,555 8,043,443 Less cost of common shares in treasury of 94,847 in 1998 AND 1997 909,749 909,749 Total stockholders' equity 6,809,806 7,133,694 TOTAL $16,995,223 $15,321,831 See accompanying notes to consolidated financial statements. ART'S-WAY MANUFACTURING CO., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEAR ENDED NOVEMBER 30, 1998, SIX MONTHS ENDED NOVEMBER 30, 1997 AND YEARS ENDED MAY 31, 1997 AND 1996 Additional Number of Stated/ Paid-In Retained Treasury Shares Par Value Capital Earnings Stock Total 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 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 See accompanying notes to consolidated financial statements. ART'S-WAY MANUFACTURING CO., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR SIX MONTHS ENDED ENDED YEARS ENDED November 30, November 30, May 31, May 31, 1998 1997 1997 1996 CASH FLOWS FROM OPERATIONS: Net income (loss) $(323,888) $ 490,689 $ 80,023 $(771,927) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Loss on sale of property, plant and equipment 6,798 16,852 13,553 2,140 Depreciation and amortization 481,176 280,700 586,152 572,109 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (749,994) (62,433) (479,163) 946,384 Inventories (633,792) (316,900)(2,236,826) 1,227,500 Other current assets (120,969) 6,494 (73,194) (46,343) Increase (decrease) in: Accounts payable (189,186) (61,362) 1,624,034 (1,427,404) Customer deposits 5,109 (703,987) 438,979 276,187 Accrued expenses 374,887 24,164 (242,106) 127,745 Income taxes (recoverable) 50,000 (99,000) - 668,742 Deferred taxes (159,145) 200,655 24,532 (374,271) Net cash provided (used) by operating activities (1,259,004) (224,128) (264,016) 1,200,862 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (518,445) (151,134)(1,300,788) (19,568) Proceeds from sale of property, plant and equipment 1,850 21,347 5,400 - Net cash used in investing activities (516,595) (129,787)(1,295,388) (19,568) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments of) notes payable to bank 1,196,007 519,863 370,624 (1,518,191) Proceeds from long-term debt 1,008,800 - 750,000 2,130,000 Principal payments on long-term debt (424,157) (235,049) (426,000) (1,857,334) Proceeds from issuance of common stock from treasury - 52,496 798,564 69,693 Net cash provided by (used in) financing activities 1,780,650 337,310 1,493,188 (1,175,832) Net increase (decrease) in cash 5,051 (16,605) (66,216) 5,462 Cash at beginning of period 8,692 25,297 91,513 86,051 Cash at end of period $ 13,743 $ 8,692 $ 25,297 $ 91,513 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 558,988 $ 264,939 $ 333,108 $ 490,876 Income taxes 2,094 162,985 22,267 6,992 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 During 1997, 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 consolidated financial statements include the six-month transition period ended November 30, 1997, and comparative unaudited financial information for the six-months ended November 30, 1996 is presented in note 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 consolidated 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 $385,000 for the year ended November 30, 1998, $193,000 for the six months ended November 30,1997, and $301,000 and $224,000 for the years ended May 31,1997 and May 31,1996 respectively. 1., Continued INCOME (LOSS) PER SHARE The Company has adopted SFAS 128 Earnings Per Share (SFAS 128), which has changed the method for calculating income per share. SFAS 128 requires the presentation of "basic" and "diluted" income per share on the face of the income statement. Prior period income per share data has been restated in accordance with SFAS 128. Income per common share is computed by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during each period. 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 1998 and the year ended May 31, 1996, the anti-dilutive effect of the Company's stock option plans is not included in the calculation of diluted earnings per share for those periods. The only reconcil- ing item between the shares used in the computation of basic and diluted earnings per share for the six months ended November 30, 1997 and the year ended May 31, 1997, is the effect of stock options of 17,291 and 2,419, respectively. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities provides accounting and reporting standards for transfers and servicing of financial assets and based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. The Company has entered into an agreement whereby it can sell accounts receivable to a financial institution. The agreement provides for the Company to pay monthly interest on the face amount of each invoice at a rate of 2.75% over the prime rate from the date of the invoice for 180 days, or the date of customer payment, whichever occurs first. The buyer is responsible for servicing the receivables, and has recourse to the Company for receivables outstanding greater than 180 days. Under SFAS No. 125, the sales of the receivables are reflected as a reduction of trade accounts receivable. At November 30, 1998, there were $1,824,000 of receivables outstanding which the Company has sold relating to this agreement. 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, November 30, 1998 1997 Raw materials $ 1,503,784 $1,593,469 Work in process 4,147,554 3,340,641 Finished goods 3,736,923 3,820,359 Total $9,388,261 $8,754,469 3. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant and equipment, at cost, are: November 30, November 30, 1998 1997 Land $ 180,909 $ 180,909 Buildings and improvements 2,615,573 2,615,573 Manufacturing machinery and equipment 7,346,289 7,257,729 Trucks and automobiles 155,654 148,817 Furniture and fixtures 119,882 120,346 Total $ 10,418,307 $ 10,323,374 4. ACCRUED EXPENSES Major components of accrued expenses are: November 30, November 30, 1998 1997 Salaries, wages and commissions $ 337,682 $ 285,806 Other 826,589 503,578 Total $1,164,271 $ 789,384 5. LOAN AND CREDIT AGREEMENTS Line of Credit In April 1998, the Company amended its revolving line of credit agreement. The agreement allows for borrowings up to $6,000,000 based upon a percentage of the Company's accounts receivable and inventory and allows for letters of credit up to an aggregate amount of $300,000. At November 30, 1998, the Company has borrowed $4,368,303 and has $100,000 in outstanding letters of credit. The interest rate is based on the bank's referenced rate and is variable based upon certain performance objectives with a maximum of plus .50% of the referenced rate and a minimum of plus zero (8.25% at November 30, 1998). The amendment also provides for a restructured long-term loan in the principal amount of $1,991,000. The principal amount is repayable in monthly installments of $23,700 with the final payment due August 2000 unless the revolving credit facility is renewed. In the event that the term of the revolving line of credit is subsequently extended, the term loan shall continue to amortize based upon the payment schedule outlined above. 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 $393,646 at November 30, 1998. The Company pays an unused line fee equal to three-eighths of one percent of the unused portion of the revolving line of credit. 5., Continued Long-term Debt A summary of the Company's long-term debt is as follows: November 30, November 30, 1998 1997 Installment promissory note dated April 23, 1998, in the original principal sum of $1,991,000,payable in monthly installments of $23,700 plus interest at one-half percent over the bank's national money market rate, (8.25%), secured (a) $ 1,848,800 $ 1,207,000 State of Iowa Community Development Block Grant promissory notes at zero percent interest, maturity 2006 with quarterly principal payments of $11,111 (b) 444,444 488,889 State of Iowa Community Development Block Grant local participation promissory notes at 4% interest, maturity 2006, with quarterly payments of $7,814. 226,350 239,062 Total long-term debt 2,519,594 1,934,951 Less current portion of long-term debt 359,862 483,157 Long-term debt, excluding current portion $2,159,732 $ 1,451,794 (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. The Company was in compliance with all applicable covenants at November 30, 1998,except for covenants pertaining to the fixed charge coverage ratio and capital expenditures. The Company has received waivers of these covenants from the Bank. Retained earnings of $6,087,694 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 1999 $359,862 2000 $1,640,100 2001 $75,023 2002 $72,474 2003 $72,750 Thereafter $299,384 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 $170,000 for the year ended November 30, 1998, $54,000 for the six months ended November 30, 1997 and $0 for each of the years ended May 31, 1997 and 1996. 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, 1998, the Company had approximately 38,000 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, 1998, the Company had approximately 15,000 shares available for issuance pursuant to subsequent grants. A summary of changes in the stock option plans is as follows: Nov. 30, Nov. 30, May 31, May 31, 1998 1997 1997 1996 Options outstanding at beginning of period 92,552 87,552 78,763 77,988 Granted 10,526 5,000 20,000 35,563 Canceled or other disposition - - (11,211) (34,788) Options outstanding at end of period 103,078 92,552 87,552 78,763 Options price range for the period $4.750 $4.750 $4.750 $4.750 to to to to $10.375 $10.375 $10.375 $11.125 Options exercisable at end of period 77,420 60,151 57,701 48,115 At November 30, 1998 and 1997,the weighted-average remaining contractual life of options outstanding was 6.1 years and 6.7 years respectively and the weighted average exercise price was $7.14 and $6.87 respectively. The weighted average exercise price for options exercisable at November 30, 1998 was $7.31. 7., Continued The Company accounts for stock options in accordance with the provisions of the (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 year ended November 30, 1998, the six month period ended November 30, 1997 and each of the years ended May 31, 1996 and 1997. In 1997, the Company adopted (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 year ended November 30, 1998, the six-month period ended November 30, 1997 and each of the years ended May 31, 1997 and May 31, 1996 was $4.07, $4.11, $4.06 and $4.47, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: November 30, 1998- expected dividend yield 0.0%, risk-free interest rate of 4.83%, expected volatility factor of 36.55%, and an expected life of 10 years; November 30,1997 - expected dividend yield 0.0%, risk-free interest rate of 5.86%, expected volatility factor of 36.87%, and an expected life of 10 years; 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 November 30 May 31, May 31, 1998 1997 1997 1996 Net income (loss) As reported $(323,888) $490,689 $80,023 $(771,927) Pro forma $(355,947) $464,005 $52,803 $(797,380) Diluted income(loss) per share As reported $(.26) $.39 $.07 $(.72) Pro forma $(.29) $.37 $.04 $(.73) 8. INCOME TAXES Total income tax expense (benefit) for the year ended November 30, 1998 the six-month period ended November 30, 1997 and for each of the years ended May 31, 1997, and 1996,consists of the following: November 30, November 30, May 31, May 31, 1998 1997 1997 1996 Current: Federal $ (78,290) $ 64,485 $ 9,453 $ - State - - 11,237 4,220 (78,290) 64,485 20,690 4,220 Deferred: Federal (159,145) 200,655 33,544 (320,210) State - - (9,012) (54,061) (159,145) 200,655 24,532 (374,271) $(237,435) $ 265,140 $45,222 $(370,051) The reconciliation of the statutory Federal income tax rate and the effective tax rate are as follows: November 30, November 30, May 31, May 31, 1998 1997 1997 1996 Statutory Federal income tax rate (34.0%) 34.0% 34.0% (34.0%) Increase(decrease)due to: State income taxes, net of Federal income tax benefit - - 1.1 (2.9) Research development and state tax credits (12.1) (1.3) - - Other-net 3.8 2.4 1.0 4.5 (42.3%) 35.1% 36.1% (32.4%) Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liability at November 30, 1998 and 1997,and May 31, 1997 and 1996 are presented below: November 30, November 30, May 31, May 31, 1998 1997 1997 1996 Deferred tax assets: Net operating loss carryforward $41,608 $ - $ 56,122 $134,187 Tax credits 117,278 16,034 35,552 - Accrued expenses not deducted until paid 129,336 50,053 95,419 138,530 Inventory capitalization 274,536 302,945 274,067 191,106 Asset reserves 86,633 95,394 182,893 260,313 Other - - - 10,386 Total deferred tax assets 649,391 464,426 644,053 734,522 Deferred tax liability Depreciation 140,949 115,129 94,101 160,038 Net deferred tax assets $508,442 $349,297 $549,952 $574,484 8., Continued There was no valuation allowance for deferred tax assets at November 30, 1998 and 1997, and May 31, 1997 and 1996. 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 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, 1998 deferred tax assets. The Company has available approximately $92,000 of research and development credits and $25,000 of Iowa Jobs Tax Credits which will expire beginning in the year 2007 and 2008, respectively. The Company also has approximately $122,000 of net operating loss carryforwards which will expire in 2013. 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. 10. ACQUISITIONS On November 25, 1998 the Company entered into an agreement to purchase certain fixed assets, accounts receivable and inventory from United Farm Tools, Inc. relating to the manufacture and distribution of grain drill equipment. The total purchase is approximately $1,086,000. As of November 30, 1998 the Company had purchased approximately $239,000 of accounts receivable. The remaining assets will be delivered and recorded in Fiscal 1999. 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. 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. 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 $9,569,238 for the year ended November 30, 1998, $609,554 for the six-month period ended November 30, 1997 and $1,581,553, and $2,119,020 for each of the years ended May 31, 1997 and 1996 respectively. Accounts receivable from this customer are unsecured. Accounts receivable from this customer were $1,449,944 at November 30, 1998, $209,805 at November 30, 1997 and $94,986, and $54,637 at May 31, 1997 and 1996 respectively. 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, 1998 and 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 approximates 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 Basic and diluted loss per share $ .10 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 25,1999 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 25,1999 James L. Koley Chairman of the Board Date and Director ______________________________ February 25,1999 J. David Pitt President and Director Date ______________________________ February 25,1999 George A. Cavanaugh, Jr. Director Date ______________________________ February 25,1999 Donald A. Cimpl Director Date ______________________________ February 25,1999 Herbert H. Davis, Jr. Director Date ______________________________ February 25,1999 Douglas McClellan Director Date _____________________________ February 25,1999 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 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 Additions: Charged to Operating Expenses 174,000 Deduct: Accounts Charged Off - Balance, November 30, 1998 $ 205,000 -----END PRIVACY-ENHANCED MESSAGE-----