-----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, QMhQuX3/o15z6hHsmmJdK6B5cge/0mnaLbXmDm3t3Hjhu8uhY2PmqiBFMwpVn5vx MBjGXhUt4nUGT636u+x67w== 0001144204-08-010864.txt : 20080220 0001144204-08-010864.hdr.sgml : 20080220 20080220170935 ACCESSION NUMBER: 0001144204-08-010864 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20071130 FILED AS OF DATE: 20080220 DATE AS OF CHANGE: 20080220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARTS WAY MANUFACTURING CO INC CENTRAL INDEX KEY: 0000007623 STANDARD INDUSTRIAL CLASSIFICATION: FARM MACHINERY & EQUIPMENT [3523] IRS NUMBER: 420920725 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-05131 FILM NUMBER: 08630455 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 10KSB 1 v104461_10ksb.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-KSB
 

 
x
Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
For the fiscal year ended November 30, 2007
 
o
Transition report under Section 13 or 15(d) of the Exchange Act.
 
Commission file number 0-5131
 
ART’S-WAY MANUFACTURING CO., INC.
(Name of small business issuer in its charter)

Delaware
 
42-0920725
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
5556 Highway 9
Armstrong, Iowa 50514
(Address of principal executive offices)

(712) 864-3131
(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:

Common stock $.01 par value

Securities registered under Section 12(g) of the Exchange Act:

None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No


 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No

State issuer’s revenues for its most recent fiscal year. $25,517,750

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity as of a specified date written the past 60 days: The average bid and asked prices of our common stock were $27.50 and $28.99, respectively, on January 7, 2008.

As of January 4, 2008, there were 1,985,176 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement for the registrant’s 2008 Annual Meeting of Stockholders to be filed within 120 days of November 30, 2007, are incorporated by reference into Part III of this Form 10-KSB.
 
Transitional Small Business Disclosure Format (Check one): o Yes x No


 
Art’s-Way Manufacturing Co., Inc.
Index to Annual Report on Form 10-KSB

Part I
 
Page
     
 
Item 1. DESCRIPTION OF BUSINESS
4
 
Item 1A. RISK FACTORS
10
 
Item 2. DESCRIPTION OF PROPERTY
13
 
Item 3. LEGAL PROCEEDINGS
13
 
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
14
     
Part II
   
     
 
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
14
 
Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS
16
 
Item 7. FINANCIAL STATEMENTS
22
  Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
38
 
Item 8A. CONTROLS AND PROCEDURES
38
 
Item 8B. OTHER INFORMATION
38
     
Part III
   
     
 
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
38
 
Item 10. EXECUTIVE COMPENSATION
38
 
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
38
 
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
39
 
Item 13. EXHIBITS
39
 
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
39

3

 
FORWARD LOOKING STATEMENTS

Some of the statements in this report may contain forward-looking statements that reflect our current view on future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. Many of these forward-looking statements are located in this report under “Item 1. DESCRIPTION OF BUSINESS;” “Item 2. “DESCRIPTION OF PROPERTY” and “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS,” but they may appear in other sections as well.

You should read this report thoroughly with the understanding that our actual results may differ materially from those set forth in the forward-looking statements for many reasons, including events beyond our control and assumptions that prove to be inaccurate or unfounded. We cannot provide any assurance with respect to our future performance or results. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
 
PART I

Item 1. DESCRIPTION OF BUSINESS.

General

Art’s-Way Manufacturing Co., Inc., a Delaware corporation, began operations as a farm equipment manufacturer in 1956. Since that time, we have become a major worldwide manufacturer of agricultural equipment. Our principal manufacturing plant is located in Armstrong, Iowa.

Art’s-Way Manufacturing manufactures farm equipment under our own and private labels. Art’s-Way Manufacturing has two wholly-owned operating subsidiaries. Art’s-Way Vessels manufactures pressure vessels and Art’s-Way Scientific manufactures modular buildings for various uses, commonly animal containment and research laboratories.

Art’s-Way Manufacturing manufactures a variety of specialized farm machinery under our own label, including: 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 stalk shredders; sugar beet and potato harvesting equipment; and a line of land maintenance equipment, edible bean equipment, moldboard plows and grain drill equipment. We sell our labeled products through independent farm equipment dealers throughout the United States. In addition, we manufacture moldboard plows and supply hay blowers under an original equipment manufacturer (OEM) agreement with Case New Holland (CNH). Sales under our OEM agreement with CNH accounted for 7.6% of our consolidated sales for the fiscal year ended November 30, 2007.

4

 
Business of Our Subsidiaries

Business of Art’s-Way Vessels

Art’s-Way Vessels is an Iowa corporation with its principal place of business located in Dubuque, Iowa. Art’s-Way Vessels produces and sells pressurized vessels, both American Society of Mechanical Engineers (ASME) code and non-code. Art's-Way Vessels provides a combination of services as a manufacturer and supplier of steel vessels and steel containment systems. We build in carbon steel and stainless steel, ranging from atmospheric (0 PSI) storage vessels up to any PSI pressure rating required. We provide vessels ranging in size from 4-inches to 168-inches in diameter and in various lengths as our customers require. The vessels are primarily sold to manufacturing facilities that will use the vessel as a component part of their end product. We primarily serve the following industries: water treatment, air receivers, refineries, co-generation, chemical, petrochemical, storage tanks, agriculture, marine, refrigeration, hydropneumatic, heavy equipment, pharmaceuticals and mining. In addition to our role as a fabricator of vessels, we provide services including: custom CAD drawing, welding, interior linings and exterior finishing, passivation of stainless steel, hydrostatic and pneumatic testing, design, build and finishing of skids, installation of piping, non-destructive examination and heat treating.

Business of Art’s-Way Scientific
 
Art’s-Way Scientific is an Iowa corporation with its principal place of business located in Monona, Iowa.
Art’s-Way Scientific produces and sells modular buildings. The buildings are custom designed to meet the research needs of our customers. Buildings commonly produced range from basic swine buildings to complex containment research laboratories. In 2008, we plan to focus on providing research facilities for academic research institutions, government research and diagnostic centers, public health institutions and private research and pharmaceutical companies, as those are our primary market sectors. Art’s-Way Scientific provides services from start to finish by designing, manufacturing, delivering and installing our building units.

Material Asset Purchases

In October 2005, we purchased certain assets of Vessel Systems Inc., a manufacturer of pressurized tanks and vessels, located in Dubuque, Iowa. We purchased the inventory, fixed assets and accounts receivable, and we operate this new business through our wholly-owned subsidiary, Art’s-Way Vessels, Inc.

In August 2006, we purchased certain assets of Techspace, Inc., a manufacturer of modular laboratories, located in Monona, Iowa. We purchased the inventory, fixed assets and accounts receivable, and we operate this business through our wholly-owned subsidiary, Art’s-Way Scientific, Inc.

In September 2007, we purchased certain assets of Miller-St. Nazianz, Inc., specifically portions of its Miller Pro and Badger lines of agricultural products. These product lines are hay and forage lines, and our purchase generally included all customer lists, inventories, tooling and other proprietary rights to these product lines. Under the purchase agreement, Miller-St. Nazianz also granted us a license to use the Badger product line trademark in connection with the sale and production of the Badger product line which consists of forage boxes, forage blowers, running gears, dump boxes and options for any of those products. We can only use the Badger trademark on any of those products that we sell; any other products that are manufactured or marketed using the Badger trade name or trademark were not included in our asset purchase. We also purchased the entire Miller Pro product line except for pole-type sprayers marketed under the Miller Pro brand and products manufactured by Ziegler. The Miller Pro product line consists of forage boxes, receiver boxes, running gears and tires, forage blowers, dump boxes, rotary rakes, finger-wheel rakes, Miller produced hay-mergers and all “Hay Buddy” equipment and options for any of those products. In addition to purchasing rights to certain trade names and goodwill relating to those names, we purchased the Hay Buddy trademark, the Miller Pro trademark and a patent.

In addition, our purchase included all distribution agreements with manufacturers pertaining to the product lines. Further, the purchase agreement included all dealership agreements; as such, Miller Pro and Badger dealers are now Art’s-Way distributors. Currently, both names appear on the hay and forage products. We moved the production of the lines to our main manufacturing facility in Armstrong, Iowa, as the purchased lines were incorporated into our existing Art’s-Way Manufacturing business.

Miller-St. Nazianz and its President, John Miller, agreed to sign non-compete agreements in consideration for the purchase of the product lines. For a period of five years after the closing, Miller-St. Nazianz and Mr. Miller agreed not to compete with the products or activities of the purchased assets.

We will continue to seek acquisitions as they fit into our strategic plans and goals. At this time, however, we are not actively pursuing any material asset purchases outside of our current product lines, and no significant dispositions of assets are planned.

5

 
Our Principal Products

From our beginnings as a producer of portable grinder mixers, we have grown through developing several new products. Today, our products include an array of feed processing, forage blending, land management and sugar beet harvesting equipment. We also maintain a high volume of OEM work for the industry’s leading manufacturers. Our brand names include Art’s-Way, Peerless Rollermills, SupRaMix vertical tub mixer and Eversman land management equipment.

Grinder mixer line. The grinder mixer line represents our original product line. Our founder, Arthur Luscombe, designed the original PTO powered grinder-mixer prior to the company’s inception. The grinder mixer line was expanded to include doing OEM work for companies such as Case New Holland. Grinder mixers are used to grind grain and mix in proteins for animal feed. They have several agricultural applications, and are commonly used in livestock operations. Our grinder mixers have wide swing radiuses to allow users to reposition the discharge tube from one side of the tank to the other in one step. Our PM25 grinder mixer offers a 105-bushel tank with a 20-inch hammermill, and it was recently upgraded to our new 5105 grinder mixer model. Our 5165 grinder mixer is the largest in the industry, with a 165-bushel tank and a 26-inch hammermill.

Feed grain processing line. We offer stationary hammermills and rollermills. Our Cattle Maxx products offer consistent feed grain rations for beef and dairy operations and are available in 105-bushel and 165-bushel capacities. Harvesting leaves various amounts of extraneous materials that must be removed through processing the seeds. Hammermills are aggressive pre-cleaners that are designed to remove appendages, awns and other chaff from seeds by vigorously scraping the seed over and through the screen. The screen has holes that are big enough to let the seed pass through undamaged, but are small enough to catch and remove the appendages. Our rollermills roll the feed grain to minimize dust, and they fracture the outside hull to release the digestive juices more rapidly. Rolling feed provides more palatable and digestible feed for use in animal feeding operations.

Forage blending line. Our no-till drills are farm implements designed to plant seed and spread fertilizer in one operation and are generally used by farmers to plant or improve their pastures. Art’s-Way shredders assure maximum crop shredding and destroy insect habitats. The shredded crop material allows for faster decomposition and restores nutrients to the soil more quickly while providing ground cover to reduce wind and water erosion.

Land management line. Land planes are used to ensure even distribution of rainfall or irrigation by eliminating water pockets, furrows and implement scars in fields. Our land planes have a patented Art’s-Way floating hitch design. Our moldboard plows are designed to slice and invert the soil to leave a rough surface exposed, and they are primarily used on clean-tilled cropland with high amounts of crop residue. We offer pull-type graders to help our customers perform many tasks such as maintaining terraces and waterways, leveling ground, cleaning ditches and removing snow. The pull-type graders follow close to the back of a tractor for leveling uneven areas or for turning in smaller spaces. Because of the wide array of depths and widths available, our adjustable ditchers are ideal for digging irrigation or drainage channels. Optional models of our ditchers can be adjusted from inside the tractor for added convenience.

Sugar beet harvesting line. Our sugar beet defoliators and harvesters are innovative products in the industry because we continuously improve our products, both in reaction to customer requests and in anticipation of our customers’ needs. Our machines can do six, eight, or twelve rows at one time, and we were the first manufacturer to introduce a larger, 12-row harvester. We have obtained patents on certain components of our sugar beet harvesting line. Our sugar beet defoliators cut and remove the leaves of the sugar beets without damaging them, and the leaf particles are then incorporated back into the soil. Our sugar beet harvesters use digger wheels to lift the beets out of the ground.

Product Distribution and Markets

We distribute our products primarily through a network of approximately 1,650 U.S. and Canadian independent dealers whose customers require specialized agricultural machinery. We have sales representation in 47 states and seven Canadian provinces; however, many dealers sell only service parts for our products. The company’s dealers sell our products to various agricultural and commercial customers. We also maintain a local sales force in our Armstrong, Iowa facility to provide oversight services for our distribution network, communicate with end users and recruit and train dealers on the uses of our products. Our local service parts staff is available to help customers and dealers with their service parts needs.

6

 
We began exporting new products during the latter part of 2006, and we currently export products to six foreign countries. In July 2006, we exported our newly-designed sugar beet harvesters and defoliators. In September 2006, our first shipment of grinder mixers sold internationally left our Armstrong facility. At the Agritechnica 2007 exhibition in Germany, we met with prospective European distributors. We look forward to strengthening these relationships and developing new international markets as well.

Backlog. Our backlogs of orders vary on a daily basis. As of February 6, 2008, Art’s-Way Vessels had $100,699 of backlog, Art’s-Way Scientific had approximately $4,987,224 of backlog and Art’s-Way Manufacturing had a backlog of $10,318,226.  We expect that our order backlogs will continue to fluctuate as orders are received and filled.

Recent Product Developments

In November 2007, we introduced our 5105 and 5165 Grinder Mixers at the Agritechnica 2007 show in Hanover, Germany. Agritechnica is the world’s largest agricultural equipment exhibition. We featured the 5105 grinder mixer, which has a 105-bushel tank and a 20-inch hammermill. The 5105 model is an upgraded version of our PM25 grinder mixer. In addition, our portable, 165-bushel 5165 model was highlighted at the exhibition and is the largest grinder mixer in the industry.

During the 2005 sugar beet harvesting season, we field tested a new single pass defoliator and placed this product in production and in the field for the 2006 sugar beet harvest. This year, we upgraded the sugar beet defoliator to make it high-speed. The new high-speed defoliator is in production and went in the field for the 2007 harvest season. We also tested a new exportable sugar beet harvester in 2006. The export unit is designed off of our model 6812 but down-sized to fit in a cargo container for shipping. In July 2006, we exported our newly-designed sugar beet harvester and defoliator, and we exported units during our 2007 fiscal year as well.

Competition, Our Competitive Position and Strategies

Competition. The agricultural equipment industry is highly competitive. We compete with larger manufacturers and suppliers that have broader product offerings and significant resources at their disposal; however, we believe that our competitive strengths allow us to compete effectively in our market.

Management believes that grain and livestock producers, as well as those who provide services to grain and livestock operations, are the primary purchasers of agricultural equipment. Many factors influence a buyer’s choice for agricultural equipment. Any one or all factors may be determinative, but they include brand loyalty, the relationship with the company’s dealers, product quality and performance, product innovation, product availability, parts and warranty programs, price and customer service. While our larger competitors may have resources greater than ours, we believe we compete effectively in the farm equipment industry by serving smaller markets rather than directly competing with larger competitors across an extensive range of products.

We expect continued competition from Art’s-Way Scientific’s existing competitors as well as competition from new entrants into the modular building market. To some extent, we believe barriers to entry in the modular building industry limit the competition we face in the industry. Barriers to entry in the market consist primarily of access to capital, access to a qualified labor pool, and the bidding process that accompanies many jobs in the health and education markets. Despite these barriers, manufacturers who have a skilled work force and adequate production facilities could adapt their manufacturing facilities to produce modular structures. We expect that the threat of entry posed by other manufacturers is strongest during economic downturns in the manufacturing industry.

To continue sales growth in the pressurized vessel industry, Art’s-Way Vessels must offer quality tanks at competitive prices. The company believes that competition in the industry is intense. However, management believes our competitive strengths will allow us to compete effectively in the industry.

7

 
Competitive Strengths. The company believes that our competitive strengths include competitive pricing, product quality and performance, diversified revenues, a network of worldwide and domestic distributors and our strong market share for many of our products.

Art’s-Way Manufacturing caters to niche markets in the agricultural industry. We do not have a direct competitor that has the same product offerings that we do; instead, each of our product lines for Art’s-Way Manufacturing competes with similar products of many other manufacturers. Some of our product lines face greater competition than others, but we believe that our products are competitively priced with greater diversity than most competitor product lines. Other companies produce feed processing equipment, sugar beet harvesting and defoliating equipment, grinders, shredders and other products similar to ours; therefore, we focus on providing the best product available at a reasonable price. Overall, we believe our products are competitively priced with above average quality and performance, in a market where price, product performance and quality are principal elements.

Management believes that our purchase of the Miller Pro hay and forage product lines from Miller-St. Nazianz, Inc. benefited the company in a number of ways. We believe we will be able to capitalize on the use of the Miller Pro name and its popularity in the agricultural community. In addition, the asset purchase led to an increase in the number of dealers who sell our products, as the Miller Pro dealers continue to sell the Miller Pro products, but with the Art’s-Way Manufacturing name attached.

We believe our company has a diversified revenue base due to its various product lines and those of its subsidiaries, geography, and customer base. We have numerous product lines produced under our label and private labels. In addition, we provide after market service parts which are available to keep our branded and OEM-produced equipment operating to the satisfaction of the customer. Our subsidiaries produce and sell pressurized vessels and tanks and modular buildings, which allows us to have diversified revenues rather than solely relying on the agricultural machinery sector. We also have a diversified revenue base due to geography. We sell products to customers in the United States and six foreign countries through a network of approximately 1,650 independent dealers in the United States and Canada, as well as overseas dealers in the United Kingdom and Australia. Although we have a material license agreement with Case New Holland, no single customer or product class represented more than 10% of the company’s sales over the past two fiscal years.

We believe the main competitive strength of Art’s-Way Vessels is the company’s ability to provide products and services under one entity. Often, the services provided by Art’s-Way Vessels are handled by two or more of our competing suppliers. We have the ability to fabricate pressurized vessels to our customers’ specifications, and we also provide a variety of services before and after installation. Our high quality products and services save our customers time in an industry where time and quality are of utmost importance.

We believe the competitive strength of Art’s-Way Scientific is the company’s ability to design and produce high-tech modular buildings in a fraction of the time of conventional design/build firms. Conventional design/build construction may take two to five years, while our modular laboratories can be delivered in as little as six months. As one of the few companies in the industry to supply turnkey modular buildings and laboratories, the company manages to provide high quality buildings at reasonable prices to meet our customers’ time, flexibility and security expectations. No single customer or product class of Art’s-Way Scientific represented more than 10% of the company’s consolidated sales over the past two fiscal years.

Raw Materials, Principal Suppliers and Customers

Raw materials for Art’s-Way Manufacturing, Art’s-Way Vessels and Art’s-Way Scientific are acquired from domestic and foreign sources and normally are readily available. In the past, the lifter wheels used to manufacture our sugar beet harvesters were bought only from China. However, we have located domestic sources for lifter wheels and no longer import them solely from China.

We have an original equipment manufacturer (OEM) supplier agreement with Case New Holland (CNH). Under the OEM agreement, we have agreed to supply CNH’s requirements for certain feed processing and service parts, primarily blowers, under CNH’s label. The agreement has no minimum requirements and can be cancelled upon certain conditions. For the years ended November 30, 2007 and 2006, sales under the CNH label aggregated approximately 7.6% and 8% of consolidated sales, respectively, demonstrating CNH’s value as a major customer.

8

 
Intellectual Property

We maintain manufacturing rights on several products covering unique aspects of design and have trademarks covering product identification. We believe our trademarks and licenses help us to retain existing business and secure new relationships with customers. We currently have no pending applications for intellectual property rights.

We pay royalties for our use of certain manufacturing rights. We entered into a material OEM and royalty agreement on moldboard plows and hay blowers with Case New Holland (CNH) on September 30, 2003. Under the agreement, CNH sold us the license to manufacture, sell and distribute certain plow products designed by CNH and their replacement and component parts. We pay semi-annual royalty payments based on the invoiced price of each licensed product and service part we sell. The agreement with CNH ran through September 2006, but the agreement continues in force until terminated or cancelled. We have not terminated or cancelled the agreement as of November 30, 2007.

Research and Development Activities

Art’s-Way Manufacturing is continually engaged in research and development activities to improve and enhance our existing products. We perform research and development activities internally, and the cost of our research and development activities is not borne by our customers. Our research and development expenses are cyclical; in one year, they may be high, and then the next year we tend to see lower research and development expenses and an increase in production expenses as our new ideas are manufactured. Research and development expenses during our 2007 fiscal year accounted for $178,000 of our overall engineering expenses. For more information please see “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS.”

Art’s-Way Vessels produces custom tanks and vessels that are manufactured in accordance with specifications provided by our customers. Similarly, Art’s-Way Scientific engineers modular buildings in accordance with customer specifications. Art’s-Way Vessels and Art’s-Way Scientific did not incur any research and development costs in 2007.
 
Government Relationships and Regulations; Environmental Compliance

Art’s-Way Scientific must design, manufacture and install its modular buildings in accordance with state building codes, and the company has been able to achieve the code standards in all instances. Except for building our modular buildings up to state building code standards, we currently do not do business with any local, state or federal government agencies that must approve our products.

We are subject to various federal, state and local laws and regulations pertaining to environmental protection and the discharge of materials into the environment. In 2006, Art’s-Way Manufacturing completed the installation of a liquid paint system for our whole goods which significantly improved the quality of our paint, in terms of luster, hardness and longevity. The paint system is situated in a new location within the plant, and we redesigned our workflow to optimize productivity. We obtained the necessary permits that allowed us to change the paint system and we remain in compliance with all applicable laws and regulations. During our 2007 fiscal year, we expended $2,787 on environmental compliance.

Employees

During the fiscal year ended November 30, 2007, we employed 107 employees at Art’s-Way Manufacturing, five of whom were employed on a part-time basis. For the same period, we had 22 full-time employees and one part-time employee at Art’s-Way Vessels. In addition,Art’s-Way Scientific employed 35 employees, one of whom was a part-time employee. Employee levels fluctuate based upon the seasonality of the product line, and the numbers provided above represent our peak employment during our 2007 fiscal year. In addition, the number of employees at Art’s-Way Vessels decreased substantially following the expiration of our lease in Dubuque. See “Item 2. DESCRIPTION OF PROPERTY.”

9

 
Item 1A. RISK FACTORS.

Risks Related to Our Shares

Our stock is publicly traded, but the trading volume and price is subject to change and you may not be able to resell your shares on favorable terms. The bid price of our common stock ranged from $6.19 to $26.78 per share during our 2007 fiscal year. In our 2006 fiscal year, it ranged from $4.74 to $9.19 per share. Our stock price may fluctuate in response to the risk factors set forth below or in response to a number of other factors. These factors include variations in our financial results, recommendations made by analysts, stock performance of other companies and the general strength of the economy.

Future sales of our common stock may depress the market price of our common stock. Future sales of substantial amounts of our common stock could depress the prevailing market price and impair our ability to raise capital through additional sales of our securities. If we or our existing shareholders undertake to sell a significant amount of our stock in the public market, or if there is a public perception that these sales may occur, the market price of our stock could decline.

You may experience dilution due to the future issuance of additional shares of our common stock. As of January 4, 2008, we have 3,014,824 previously authorized and unissued shares of common stock, and 1,985,176 shares issued and outstanding. If we issue these shares in the future, it will result in dilution of the ownership interests of our current shareholders. In addition, we have additional shares available for grant under our 2007 Non-Employee Directors’ Stock Option Plan and 2007 Employee Stock Option Plan. Additional stock options or other compensation plans or amendments to our existing plans may be adopted. We may also issue additional shares of our common stock for other business purposes such as acquisitions or hiring of personnel, or we may choose to conduct a future private or public offering to raise additional capital. This would result in further dilution to our existing shareholders.

There is no assurance that we will declare dividends or have cash available to pay them. We do not declare and pay dividends on a consistent basis, and there is no guarantee that we will declare dividends in the future or that funds will be available for this purpose. Our declaration and payment of dividends is conditioned by the terms of our loan agreement and revolving line of credit agreement with West Bank. We may issue dividends without the permission of West Bank if we meet all of our financial covenants which include, but are not limited to, providing financial statements to the bank, maintaining our primary deposit accounts at West Bank and meeting certain financial performance ratios.

One of our shareholders owns a significant amount of our common stock, and his interests may conflict with those of our other shareholders. J. Ward McConnell, Jr., our Executive Chairman, owns approximately 40% of our outstanding common stock. As a result, he may be able to significantly influence the direction of our company, the election of our Board of Directors and any other matter requiring shareholder approval. His interests may conflict with the interests of our other shareholders.

Risks Related to Our Business

A downturn in the economy may negatively impact our results of operations and financial condition. The profitability and success of our business depends on the overall demand for our products. Our sales revenues are subject to general economic conditions. Consumers are generally less likely to purchase farm equipment, vessels or modular buildings during periods of economic uncertainty. Levels of interest rates also affect our customers’ buying decisions. A downturn in the general economy or the economy of a particular region containing a large part of our customer base could result in fewer customers purchasing our products and would adversely affect our financial results.

Our success depends on our ability to enhance our existing product lines through research and development. The long-term financial success of our business depends on our ability to introduce and market new products successfully, which requires significant expenditures on research and development, production and marketing. As we refine our existing products, our success will depend upon a number of factors that are largely beyond our control. These factors include customer acceptance, the availability of component parts from our suppliers, the strength of our dealer system, the intensity of competition in the industry and the economy in general. To continue our strategy to introduce new versions of our products, we expect to use a substantial amount of capital. Such expenditures could adversely affect our financial condition.

10

 
We depend on suppliers for our raw materials and component parts for our products, and any failure of our suppliers to meet our demands will harm our ability to manufacture and sell our products on a timely basis. Our products are made from component parts that are manufactured by others. At any particular time, we depend on a number of suppliers so that we may efficiently manufacture our products, develop enhancements to existing products and deliver products to our dealers and customers. The failure of our suppliers to meet our expectations will result in fewer products being manufactured and sold, and our financial results could be negatively impacted.

The price and availability of raw materials, component parts and fuel are subject to price fluctuations which can increase our production costs and negatively impact our financial results. We have no control over price fluctuations in, for example, the price of steel and fuel. Additionally, although we are typically able to procure our supplies from a network of domestic and foreign suppliers, we could experience disruptions in the availability of our supplies for a number of reasons and may have to obtain the supplies from a higher-priced supplier. We may not be able to offset increased production costs by passing these costs on to our customers. A significant increase in the price or change in the availability of any raw material, component part or fuel could adversely affect our profitability.

Our businesses operate in highly competitive industries, and many of our competitors have greater resources that may enable them to compete more effectively. We compete with several large domestic and international companies that offer a broader range of products than us, in addition to local and regional manufacturers that supply a more limited product range. Some of our competitors have greater resources than we do, and having greater resources at their disposal may enable them to compete more effectively. Our competitors may devote their resources to developing and marketing products that will directly compete with our product lines, and new competitors may enter the market. Our inability to compete with existing companies and new entrants to the markets in which we operate will have a negative impact on our business and financial condition.

The markets that we serve vary, and we face a challenge in adequately meeting each market’s needs. We offer products for a number of markets, including agricultural equipment, modular building and scientific research laboratories, and pressurized vessels. Because we operate in multiple markets, we must work constantly to understand the needs, standards and technical requirements of several different industries and must devote significant resources to developing products for these industries. If we do not accurately predict our customers’ needs, we may expend valuable resources in developing products that do not achieve broad acceptance across the markets. If we fail to adequately meet our customers’ needs and our product offerings in any particular market are not competitive, our business and results of operations would be harmed.

Like other manufacturers, we are subject to an ongoing risk of product liability claims. We may be exposed to product liability claims in the event that any of our products results, or is claimed to have resulted in, bodily injury or property damage. We cannot provide assurance that we will not suffer material losses due to product liability claims in the future, and we may incur significant costs in order to defend against such claims. Our insurance may be insufficient to cover these claims; as such, significant product liability claims may damage our reputation and harm our financial condition.

We are subject to environmental, health and safety and employment laws and regulations which lead to significant compliance costs. Like other manufacturers, our business is heavily regulated with regard to hazardous substances, waste materials, workplace safety and equal employment opportunities. We have incurred and will continue to incur expenses associated with complying with the laws and regulations that impact our operations. These laws and regulations are continually subject to change, and we cannot predict the cost of future compliance. If we face unexpected obligations or are unable or unwilling to comply with these laws and regulations, our business and financial condition could suffer.

11

 
If we do not retain key personnel and hire highly skilled employees, our business will suffer. Our ability to maintain and improve our financial results will depend on, among other things, the efforts and skills of our management and employees. We depend primarily on our executive officers to move forward with our business plans and strategies, and we also depend on our ability to attract and retain qualified technical, manufacturing and sales personnel. We do not maintain “key person” life insurance for any of our employees or management, and all of our employees and management are employed at will. The loss of a key member of management or key employees could have an adverse effect on our business and financial results.

Although we have no planned acquisitions at this time, our strategy in acquiring businesses or product lines in the future may adversely affect our business. We intend to evaluate the possibility of acquiring additional product lines or businesses in the future as opportunities arise. We cannot provide assurance that we will be able to identify targets, obtain financing for acquisitions on favorable terms, or successfully acquire and integrate target companies or product lines. Competition for acquisitions may prevent us from following through with acquisition plans. Once acquired, integration of product lines into our existing operations may lead to substantial costs, delays and other challenges. We may not be able to successfully produce and distribute new product lines in a cost-effective manner. In addition, acquisitions may divert our management’s time and expertise away from production. Any one or all of these factors may adversely affect our financial condition.

We have incurred substantial amounts of long-term debt with West Bank which could have adverse consequences to our financial results. Our indebtedness to West Bank requires us to divert a substantial portion of our cash flow from operations to payments on our indebtedness. These payments may reduce our available cash flow for working capital, capital expenditures, acquisitions and pursuing other business opportunities. Indebtedness could also increase our susceptibility to downturns in the industry and the economy in general. Our failure to maintain financial performance ratios or to meet certain financial covenants in our loan and credit agreements with West Bank may require us to request West Bank’s permission to pay dividends. Finally, indebtedness could place us at a competitive disadvantage compared to our competitors that may have less indebtedness.

Risks Related to the Production of Agricultural Equipment

Our financial results for our Art’s-Way Manufacturing segment primarily depend upon the agricultural industry, and factors that adversely affect the agricultural industry may also negatively impact our business. Sales of agricultural equipment are closely tied to the well-being of the agricultural industry. Historically, the agricultural industry has been cyclical and is often impacted by factors beyond our control, including general economic conditions, weather patterns and legislation. Adverse weather conditions, crop pest or animal disease outbreaks during important sales seasons may dramatically impact our business. In the United States, legislation such as the 2007 Farm Bill may significantly affect commodity prices and our customers’ ability to purchase our products. Our business will likely be subject to fluctuations in the farm industry, and we expect downturns in the industry to negatively impact our financial results.

The continuing globalization of the agricultural industry may alter our business in unpredictable and potentially negative ways. Our competition, customer base and products may change significantly due to the globalization of the agricultural industry. To some extent, our success depends on the development of the global agricultural market, and we may have to adapt quickly in order to maintain our position in the industry. Our failure to keep pace with the globalization of the industry may adversely impact our financial condition.

The agricultural equipment industry is seasonal, and seasonal fluctuations in our operations may negatively impact our financial results. Sales often fluctuate as a result of our customers’ tax planning considerations, planting and harvest times and dealer incentives. As a result, our quarterly results and available cash flow fluctuates due to the seasonality of our agricultural equipment sales.

Changing demand for farm outputs could affect the demand for our agricultural equipment. Worldwide demand for food coupled with increased demand for crop-based renewable fuels could have an effect on prices and demand for farm commodities. As such, the demand for our agricultural equipment may experience fluctuations along with the demand for agricultural products. As with other factors impacting the agricultural industry, we have no control over demand for farm outputs, and our business is subject to both positive and negative changes in demand.

12

 
We recently began exporting our agricultural machinery internationally, which will expose us to the risks of doing business abroad. Selling our products to other countries exposes us to various risks, including: import and export restrictions, tariffs and quotas; uncertain political environments, economic conditions and foreign business cycles; changes in laws and policies; cultural differences; and changes in currency exchange rates. Political developments and policies, such as changes in farm subsidies, could directly impact the demand for our products. Further, our profitability is affected by fluctuations in the value of the U.S. dollar as compared to the currencies of countries in which we sell our products. Significant fluctuations in exchange rates could prevent us from realizing the advantages of exporting our products. Our lack of experience in exporting may impact our ability to adapt to these risks which could adversely affect our success as an exporter.

Our failure to accurately predict and maintain adequate inventory to meet our customers’ demands may reduce our profitability. The modular building and research laboratory industry is somewhat cyclical in nature, mainly due to the budgeting processes of health centers and educational institutions. We cannot reliably forecast the timing and size of our customers’ orders. In order to meet expected demand, we order raw materials and build a quantity of inventory to anticipate purchase orders. Our financial results could be harmed if we do not accurately estimate our customers’ demands and are unable to adapt to the cyclical nature of our business.
 
Item 2. DESCRIPTION OF PROPERTY.
 
Our executive offices are located in Armstrong, Iowa along with our production and warehousing facilities. The facilities in Armstrong are constructed of hollow clay block and concrete and contain approximately 240,000 square feet of usable space. These facilities were constructed after 1965 and remain in good condition. We own approximately 127 acres of land west of Armstrong, on which the factory and inventory storage space is constructed. We currently lease excess land to third parties for farming.
 
We leased a facility from Markee in Dubuque, Iowa, to accommodate the manufacturing for Art's-Way Vessels. This lease expired in October 2007, and we have started construction on a new facility for Art’s-Way Vessels. The new facility will be located in the same industrial park in Dubuque, and construction is expected to be completed in February 2008. The facility will be 34,450 square feet, steel-framed, and will have a sprinkler system and crane inside. In the time period between the expiration of our lease and the completion of construction, our Art’s-Way Vessels business slowed, but we were able to cut expenses significantly. Due to the slowdown in our business, Art’s-Way Vessels lost a significant number of employees; however, we expect to add staff when we move into the new facility in February. We intend to add staff as we begin to receive purchase orders, and we expect to have between six and 23 employees, which is the same amount of employees we had prior to the expiration of our lease.
 
The facility in Monona, Iowa, which housed the manufacturing for Art's-Way Scientific, was stick built with steel siding. The main manufacturing facility contained approximately 36,000 square feet of usable space, and was constructed in 1969. This structure was totally destroyed by fire on January 16, 2007. There is also a warehouse at this location that is approximately 5,000 square feet and that was constructed in 1994. We temporarily operated in this facility during the construction of our replacement production facility. We began operations in our new production facility in November 2007. The new Monona manufacturing facility is custom-designed to meet our production needs, has approximately 50,000 square feet constructed of a steel frame with steel siding, and it also accommodates a sprinkler system and crane.
 
Our real property is subject to mortgages granted to West Bank as security for our long-term debt. See “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS  Capital Resources and Credit Facilities” for more information.

Item 3. LEGAL PROCEEDINGS.

From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the directors that could result in the commencement of material legal proceedings.

13

 
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

We did not submit any matter to a vote of our shareholders through the solicitation of proxies or otherwise during the fourth fiscal quarter of 2007. However, as of the date of this report, we will submit election of directors, approval of our auditors and approval of our 2007 Non-Employee Directors’ Stock Option Plan to a vote of our shareholders through the solicitation of proxies. The information required by Item 4 for solicitations, which will be submitted during the second quarter of fiscal year 2008, is incorporated by reference to our definitive proxy statement relating to our 2008 annual shareholders’ meeting. In accordance with Regulation 14A, we will be filing our proxy statement no later than 120 days after the end of the last fiscal year. The 2008 annual meeting, at which voting on the proposed matters and election of directors will take place, is scheduled for April 24, 2008.

PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

Our common stock trades on the NASDAQ Capital Market® under the symbol “ARTW.” The ranges of closing bid prices for each quarter, as reported by NASDAQ, are shown below. The quotations represent inter-dealer prices, without retail mark-up, mark-down or commission, and may not accurately represent actual transactions.

   
Common Stock High and Low Bid Prices Per Share by Quarter
 
   
Fiscal Year Ended November 30, 2007
 
Fiscal Year Ended November 30, 2006
 
   
High
 
Low
 
High
 
Low
 
First Quarter
 
$
8.90
 
$
6.19
 
$
6.70
 
$
4.74
 
Second Quarter
 
$
9.74
 
$
7.02
 
$
9.19
 
$
5.47
 
Third Quarter
 
$
19.99
 
$
8.51
 
$
7.35
 
$
4.87
 
Fourth Quarter
 
$
26.78
 
$
15.77
 
$
7.85
 
$
5.01
 

Shareholders

We have one class of $0.01 par value common stock. As of November 30, 2007, we had approximately 129 shareholders of record. As of January 4, 2008, we have approximately 141 shareholders of record.

Dividends

On November 13, 2007, we declared a dividend of $0.10 per share that was paid on November 30, 2007 to stockholders of record as of November 15, 2007. This was the first time that our board of directors has declared a $0.10 per share dividend, as our dividends were typically $0.05 per share in the past. On October 26, 2006, our Board of Directors declared a dividend of $0.05 per share to be paid on November 30, 2006 to stockholders of record as of November 15, 2006. We obtained a waiver from our lender of the loan covenants regarding the payment of dividends for our 2006 dividend. In 2007, our debt was restructured on different terms, and we did not have to obtain a waiver from our lender. If we maintain certain financial performance ratios and meet other financial covenants in a given fiscal year, we may declare dividends without obtaining West Bank’s permission. We expect that the payment of and the amount of any future dividends will depend on our financial condition at that time, and we may have to request permission from our lender to declare dividends in the future.

14

 
Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information
For the Fiscal Year Ended November 30, 2007(1)
 
Plan Category
 
Securities to be Issued
upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
 
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
 
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities in Column (a))
(c)
 
Equity Compensation Plans Approved by Security Holders
   
16,000
 
$
21.14
   
84,000
 
Equity Compensation Plans Not Approved by Security Holders
   
11,000
(2)
$
6.56
   
93,000
 
TOTAL
   
27,000
 
$
15.20
   
177,000
 

(1) Please refer to Note 10 of our financial statements.
(2) The 11,000 shares to be issued upon the exercise of outstanding options represents the total of 6,000 options granted during our 2007 fiscal year and 5,000 options granted in previous years under our 2001 Director Stock Option Plan.

Description of 2007 Stock Option Plans

2007 Non-Employee Directors’ Stock Option Plan. On January 25, 2007, the Board of Directors adopted the 2007 Non-Employee Directors’ Stock Option Plan. The purpose of the plan is to enable the company to provide incentives to non-employee directors so that they will be encouraged to serve on the board of directors. Management believes these incentives correlate with increases in shareholder value, as the non-employee directors have motivation to act in the shareholders’ best interests.

Under the plan, non-qualified stock options (“NQSOs”) may be granted to non-employee directors to purchase shares of the company’s common stock at a price not less than fair market value at the date the NQSOs are granted. The maximum aggregate number of shares that may be issued under the plan is 100,000 shares, subject to adjustment for changes in the company’s capital structure or similar events as described in the plan. The fair market value is the average of the high and low bid prices for the company’s common stock on the date the NQSOs are granted or the next reporting date. At November 30, 2007, the weighted-average exercise price for the options outstanding under the Non-Employee Directors’ Stock Option Plan was $6.56. On the beginning date of each year of the plan, which is marked by the date of the annual meeting, non-employee directors are automatically granted NQSOs to purchase 1,000 shares of common stock. Options to purchase a total of 7,000 shares were granted during our 2007 fiscal year under this plan. With respect to a non-employee director who first becomes a director after the beginning date of the year of the plan, the NQSO to purchase 1,000 shares is granted automatically on the next business day following his or her election. Additional NQSOs may be granted to any non-employee director by the board of directors in its sole discretion. The NQSOs are immediately vested and exercisable at the time they are granted. The term of each NQSO is five years from the date of its grant unless terminated earlier. The NQSOs cannot be granted on or after January 25, 2017.

In the event that a non-employee director is removed from the board of directors for cause, all unexercised NQSOs immediately expire. In the event that a non-employee director ceases to be a member of the board for any other reason or a non-employee director becomes an officer or employee of Art’s-Way or one of our subsidiaries, all NQSOs which have vested prior to such time will expire 12 months thereafter unless they expire sooner by their terms.

2007 Employee Stock Option Plan. On February 5, 2007, the Board of Directors adopted the 2007 Employee Stock Option Plan which was approved by the shareholders at their annual meeting on April 26, 2007. On October 1, 2007, the Board of Directors granted options to purchase a total of 16,000 shares under this plan. The weighted-average exercise price for the options outstanding under the Employee Stock Option Plan was $21.14.

15

 
Options Exercised. On October 15, 2007, our director, Marc McConnell, exercised options to purchase a total of 6,000 shares. Of that amount, 1,000 shares were granted under our 2007 Non-employee Directors’ Stock Option Plan, and 5,000 had been granted under our 2001 Director Stock Option Plan. There are no remaining shares available for issuance under the 2001 Director Stock Option Plan. The exercise price of 1,000 shares issued under our 2007 Non-employee Directors’ Stock Option Plan was $7.68 per share, and the exercise price for the remaining 5,000 shares was $2.75 per share. The total exercise price of Mr. McConnell’s options was $21,430, which was paid in cash to the company. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as a transaction by the issuer not involving any public offering.

Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS.
 
This report contains forward-looking statements that involve significant risks and uncertainties. The following discussion, which focuses on our results of operations contains forward-looking information and statements. Actual events or results may differ materially from those indicated or anticipated, as discussed in the section entitled “Forward Looking Statements.” The following discussion of our financial condition and results of operations should also be read in conjunction with our financial statements and notes to financial statements contained in this report.

Financial Position

Management believes that our consolidated balance sheet indicates a strong financial position. The company’s growth has caused us to incur higher salary expenses, as we have hired more employees and have begun to offer wages that are competitive in the industry. Despite our recent success, our amount of cash is significantly lower for the fiscal year ended 2007. This lower cash position is due to the acquisition of the Miller-St. Nazianz product lines and capital expenditures related to the construction of new manufacturing facilities in Monona, Iowa and Dubuque, Iowa, and management believes this lower cash position reflects the company’s growth. The Miller-St. Nazianz acquisition caused our amount of inventory to increase by approximately $1.5 million from our 2006 fiscal year. In prior years, Art’s-Way Manufacturing has not purchased a significant amount of inventory in the fourth quarter; however, recent growth of the business led us to purchase inventory steadily throughout our 2007 fiscal year which also caused increased inventory levels in 2007 on a consolidated basis. The increase in inventory for Art’s-Way Manufacturing, coupled with the growth of Art’s-Way Scientific since its acquisition in 2006, led to a significant increase in our consolidated accounts payable.

The addition of Art’s-Way Scientific led to long-term construction contract disclosures to our consolidated balance sheet. For purposes of our financial statement presentation, we estimate a percentage of revenue earned based on percentage of completion. The outcome for 2007 is an asset representing our cost and profit in excess of billing, and a liability representing our billings in excess of cost and profit.

As discussed earlier in “Item 2. DESCRIPTION OF PROPERTY,” our Monona facility for Art’s-Way Scientific was completely destroyed by fire in January 2007. We are still in the process of negotiating with our insurance company; as such, we may receive insurance proceeds in the future, but we cannot accurately estimate how much we may receive.

Results of Operations

Fiscal Year Ended November 30, 2007 Compared to Fiscal Year Ended November 30, 2006

On a consolidated basis, our sales, gross profit and operating income increased during our 2007 fiscal year. Our consolidated net sales totaled $25,517,750 for the period ended November 30, 2007 which represents a 28.5% increase from our consolidated net sales of $19,853,812 in 2006. Our gross profit increased by approximately 35% between our 2006 and 2007 fiscal years, from $5,705,025 to $7,680,720, respectively. Our consolidated expenses decreased by less than 1%, from $3,932,185 to $3,923,870. Art’s-Way Manufacturing represented $2,811,730 of our operating expenses, while Art’s-Way Vessels and Art’s-Way Scientific represented $517,767 and $594,373 of the total, respectively. Finally, our total income from operations more than doubled between our 2006 and 2007 fiscal year. For the year ended November 30, 2006, our consolidated total income from operations totaled $1,772,840, and it totaled $3,756,850 for the 2007 fiscal year. Art’s-Way Manufacturing was responsible for $1,686,158 of our consolidated income from operations, while $1,154,323 and $916,369 was contributed by Art’s-Way Scientific and Art’s-Way Vessels, respectively.

16

 
Art’s-Way Manufacturing. Art’s-Way Manufacturing’s sales revenue in our 2007 fiscal year totaled $14,257,471 which represented a 5.1% decrease in revenues from our 2006 total of $15,025,126. Art’s-Way Manufacturing had a lower cost of goods sold amount in our 2007 fiscal year; as such, gross profit increased by 9.6%. Total expenses in our 2007 fiscal year totaled $2,811,730 for Art’s-Way Manufacturing, representing approximately 20% of net sales and a less than 1% decrease from the prior year. Finally, total income from operations for Art’s-Way Manufacturing increased from $1,280,111 in our 2006 fiscal year to $1,686,158, representing a 32% increase for our 2007 fiscal year.

Art’s-Way Vessels. Art’s-Way Vessels experienced a 12.5% increase in net sales for the fiscal year ended November 30, 2007, increasing from $3,796,924 to $4,272,035. In addition, gross profit increased by 4%, from $1,376,084 to $1,434,136 during the 2006 and 2007 fiscal year, respectively. Operating expenses for Art’s-Way Vessels decreased by 38% in the 2007 fiscal year and operating expenses represented 12% of net sales. Finally, income from operations totaled $916,369 for the 2007 fiscal year, representing a 71% increase from the previous year.

Art’s-Way Scientific. Art’s-Way Scientific experienced drastic growth during the 2007 fiscal year. 2007 was the first full fiscal year for Art’s-Way Scientific. Net sales increased from $1,031,762 in 2006 to $6,988,244 in 2007. Similarly, gross profit increased dramatically from $226,721 to $1,748,696. Operating expenses increased from $268,521 for the fiscal year ended November 30, 2006 to $594,373 for the fiscal year ended November 30, 2007. In 2007, operating expenses represented 8.5% of net sales for Art’s-Way Scientific. Income from operations totaled $1,154,323 for the 2007 fiscal year, as compared to a $41,800 operating loss for the previous fiscal year.

Fiscal Year Ended November 30, 2006 Compared to Fiscal Year Ended November 30, 2005

On a consolidated basis, our sales, gross profit, operating expenses and operating income increased during our 2006 fiscal year. Our consolidated net sales totaled $19,853,812 for the period ended November 30, 2006, representing a 35.8% increase from our consolidated net sales of $14,618,904 in 2005. Our gross profit also increased by approximately 29.5% between our 2005 and 2006 fiscal years, from $4,404,953 to $5,705,025, respectively. In addition, our consolidated expenses increased by approximately 44.8%, from $2,715,263 to $3,932,185. Finally, our total income from operations experienced a modest increase of approximately 4.9% between our 2005 and 2006 fiscal year. For the year ended November 30, 2005, our consolidated total income from operations totaled $1,689,690, and it totaled $1,772,840 for the 2006 fiscal year.

Art’s-Way Manufacturing. Art’s-Way Manufacturing’s sales revenue in our 2006 fiscal year totaled $15,025,126 which represented a 5.4% increase in revenues from our 2005 total of $14,260,756. Art’s-Way Manufacturing’s gross profit decreased slightly, from $4,274,569 in 2005 to $4,102,220 in 2006. Total expenses in our 2006 fiscal year totaled $2,822,109 for Art’s-Way Manufacturing, representing an 8.9% increase from the prior year. However, engineering expenses decreased by approximately $56,000 due to a decrease in research and development during 2006 because our development expenses associated with the exportable beet harvester and defoliator and the domestic defoliator decreased. Finally, total income from operations for Art’s-Way Manufacturing went from $1,682,526 in our 2005 fiscal year to $1,280,111, representing a 24% decrease for our 2006 fiscal year. Significant changes were made during the 2006 fiscal year to our manufacturing facility in Armstrong, Iowa. We transitioned from a batch process to a continuous flow process for the production of our grinder mixer line. We also had a number of products that went into production during 2006, and we struggled to maintain efficiencies in the move from the design stage to the manufacturing process.

17

 
Art’s-Way Vessels. We began operating Art’s-Way Vessels in October 2005; as such, our fiscal year 2005 results only reflect our first two months of operations. To demonstrate, Art’s-Way Vessels experienced a $3,438,776 increase in net sales for the fiscal year ended November 30, 2006 and gross profit increased ten-fold. Operating expenses for Art’s-Way Vessels increased by five times in the 2006 fiscal year, as the 2005 fiscal year included only general and administrative expenses. Finally, income from operations totaled $534,529 for the 2006 fiscal year, representing a dramatic increase from $7,164 the previous year. The comparison of our 2005 and 2006 fiscal years for Art’s-Way Vessels is not a strong indicator of our financial results due to the short time frame of Art’s-Way Vessels’ operation during our 2005 fiscal year. For a comparison of full fiscal years of operations, see “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS - Results of Operations - Fiscal Year Ended November 30, 2007 Compared to Fiscal Year Ended November 30, 2006.”

Items Affecting Comparability

Management believes the company’s overall growth in its income from operations over the 2007 fiscal year was largely driven by Art’s-Way Scientific. The assets of Tech Space, Inc., were purchased in August 2006 and is operated by Art’s-Way Scientific. Management believes that meeting the remaining contractual obligations of Tech Space, Inc. after its acquisition led to an operating loss for Art’s-Way Scientific during our 2006 fiscal year. Art’s-Way offered liquidity for Art’s-Way Scientific’s sales and marketing activities, and management believes that these efforts resulted in a surge of growth in its business. In addition to agricultural confinement facilities, Art’s-Way Scientific plans to focus its efforts in 2008 on providing research labs for government entities, universities and hospitals in response to the country’s ever-expanding need for health care and research facilities. Management expects Art’s-Way Scientific to experience solid growth in 2008.

Art’s-Way Manufacturing experienced a minor decrease in sales during our 2007 fiscal year. The Miller-St. Nazianz acquisition was completed in the last quarter of our 2007 fiscal year; as such, management expects to see increased sales for Art’s-Way Manufacturing in 2008.

Art’s-Way Vessels has completed two full years of operations since its acquisition in October 2005, but our 2006 fiscal year is likely the best representation of Art’s-Way Vessel’s business due to our lack of a facility in late 2007. Operating expenses for Art’s-Way Vessels decreased by 35% in the 2007 fiscal year. This sharp decrease in operating expenses was due the expiration of the lease for our Dubuque facility in October 2007 and our transition into a smaller temporary facility. We expect to begin hiring additional employees in January 2008 to staff our new facility that is scheduled for completion in February 2008. Therefore, we anticipate that our 2008 operating expenses will increase and be near the operating expenses of our 2006 fiscal year if we are able to retain customers and attract new ones. Management believes that Art’s-Way Vessels may face challenges in 2008 in its efforts to obtain purchase orders for its products. As such, Art’s-Way Vessels may experience a decline in its income from operations in 2008.

Trends and Uncertainties

We are subject to a number of trends and uncertainties that may affect our short-term or long-term liquidity, sales revenues and operations. The agriculture industry has experience marked growth over the past few years which has benefited the agricultural equipment industry. According to the Agricultural Income and Finance Outlook released in December 2007 by the United States Department of Agriculture (USDA), U.S. net farm income for 2007 is expected to reach $87.5 billion. This represents a $28.5 billion increase from 2006. The USDA believes that the rise in net farm income is a result of dramatic increases in the value of crop and livestock production which more than offset declines in direct government payments and high farm production expenses. According to the USDA, the value of crop production in 2007 is expected to increase by $30.5 billion, representing the largest annual increase since 1984, and the value of livestock production may increase by nearly $20 billion. The USDA believes that the large increases are largely due to increased demand for renewable fuels and agricultural exports, which has raised the price of farm commodities. Management believes that our business is dependent on the farming industry for the bulk of our sales revenues. As such, our business tends to reap the benefits of increases in farm net income, as farmers tend to purchase equipment in lucrative times and forgo purchases in less profitable years. Direct government payments are declining and costs of agricultural production are increasing; therefore, we anticipate that further increases in the value of production will benefit our business, while any future decreases in the value of production will decrease farm net income and may harm our financial results.

18

 
As with other farm equipment manufacturers, we depend on our network of dealers to influence customers’ decisions, and dealer influence is often more persuasive than a manufacturer’s reputation or the price of the product. Following our acquisition of the Miller Pro hay and forage product lines, former Miller Pro dealers began selling our products. We anticipate that the Miller Pro dealers will encourage the sales of products in the same way that they benefited Miller-St. Nazianz.

The value of a dollar overseas may affect our business as we continue to increase exports to foreign countries such as China and the United Kingdom. During our 2007 fiscal year, the value of a U.S. dollar fell compared to the Chinese yuan and the Euro. The falling dollar helps our business overseas, as our products are priced low in comparison to overseas manufacturers, and overseas purchasers can buy more of our products for less of their currency. In order to avoid excess risk exposure, we have remained cautious when we price our products.

The price of steel influences our cost of goods sold for Art’s-Way Manufacturing and Art’s-Way Vessels. In 2005, we experienced challenges due to a sharp increase in the price of steel. Although we are not currently seeing any adverse effects due to the price of steel, sharp increases in the future may have a negative impact on our cost of goods sold.

Seasonality

Sales of our agricultural products are seasonal; however, we have tried to decrease this impact of seasonality through the development of shredders and beet harvesting machinery coupled with private labeled products, as the peak periods for these different products occur at different times. Similar to other manufacturers in the farm equipment industry, we are affected by factors unique to the farm equipment field, including items such as fluctuations in farm income resulting from the change in commodity prices, crop damage caused by weather and insects, government farm programs, interest rates and other unpredictable variables.

We believe that our pressurized vessel sales are not seasonal. Our modular building sales are somewhat seasonal, and we believe that this is due to the budgeting and funding cycles of the universities that commonly purchase our modular buildings. We believe that this cycle can be offset by building backlogs of inventory and through increased sales to other public and private sectors.

Liquidity

Fiscal Year Ended November 30, 2007

Sources of liquidity during our 2007 fiscal year were due in large part to construction loans, our term loan, and our revolving credit loan. See “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS - Capital Resources and Credit Facilities” for more information. We had cash generated from operations of $143,607 for our 2007 fiscal year. Our accounts receivable increased by $774,491 and our consolidated inventory increased by $2,638,427. The increase in accounts receivable reflects our successful year of sales, as gross profit increased across all three of our subsidiaries. The increase in consolidated inventory is partially due to Art’s-Way Manufacturing purchasing inventory throughout the year, rather than in only the first three quarters as in prior years. In addition, our acquisition of Miller-St. Nazianz in September 2007 added approximately $1,500,000 to our inventory.

Fiscal Year Ended November 30, 2006

Our main sources of liquidity were from cash generated from operations and a long-term loan from West Bank of $1,500,000. The loan was used to purchase new equipment for our operations and certain assets of Techspace, Inc., now operated through Art’s-Way Scientific. Our cash generated from operations was $1,626,963 for our 2006 fiscal year. Our accounts receivable increased by $1,356,899 because we were able to reduce our consolidated inventory by $526,876. Our reduction in inventory is largely due to exports of our products, which began in 2006. We allowed extended terms to our export customers, as they must wait approximately two months to receive delivery of our products as the freight travels overseas. However, we establish letters of credit with our export customers in order to secure payment of their accounts.

19


Capital Resources and Credit Facilities

We utilize West Bank for our long-term financing needs. Prior to our long-term debt restructuring, as explained below, we had three long-term loans with West Bank and a revolving line of credit. The first loan was a $2,000,000 loan supported by a guarantee issued by the USDA for 75% of the principal amount outstanding. The variable interest rate was West Bank’s prime rate plus 1.5%, adjusted daily. Monthly principal and interest payments were amortized over 20 years, and the loan had a maturity date of May 31, 2023. Our second loan was a $1,000,000 loan, also supported by a guarantee issued by the USDA for 75% of the outstanding principal. This loan was set to mature on March 31, 2015. The third loan was a $1,500,000 loan also guaranteed by the USDA for 75% of the principal amount. This loan was set to mature in April 2016, and the proceeds from this loan were used to finance our 2006 acquisitions and equipment purchases. J. Ward McConnell, Jr. was required to personally guarantee all three loans. The guarantee of the term debt was reduced after the first three years to a percentage representing Mr. McConnell’s ownership percentage in the company, and it would have been removed in the event that his ownership was reduced to a level of less than 20%. The company compensated Mr. McConnell for his guarantees on a monthly basis in an amount representing 2% of the outstanding balance. Guarantee payments in 2006 totaled approximately $60,000.

Our revolving line of credit for $3,500,000 originally matured on March 31, 2007; however, this has now been extended to mature on April 30, 2008. Advances made under this revolving credit line are used for funding our working capital, letter of credit and corporate credit card needs. The interest rate is West Bank’s prime rate of interest, adjusted daily. In September 2007, we used our revolving line of credit to acquire certain assets of Miller-St. Nazianz, Inc., specifically portions of its Miller Pro line of agricultural products. As of November 30, 2007, we had borrowed $397,859 against this line of credit, but we did not borrow against this line of credit in our 2006 fiscal year. Mr. McConnell issued a personal guarantee for our revolving line of credit before it was extended. Guarantee payments to Mr. McConnell totaled $30,000 during our 2007 fiscal year which represents the time period prior to our debt refinancing in June.

On June 7, 2007, we refinanced our long-term debt with West Bank. In connection with the restructuring, we paid early payment penalties of approximately $50,000 and incurred a non-cash expense of $98,000 in loan amortization fees. The company now has one loan in the principal amount of $4,100,000. The loan will mature on May 1, 2017, at which time the outstanding principal and accrued interest will be due. The loan bears interest at the U.S. daily 5-year treasury index plus 2.75 basis points fixed for five years and is then adjusted to the prevailing same index and margin on the sixth anniversary of the loan for the balance of the term. For the first five years, our interest rate on the loan is fixed at 7.25%. We pay monthly principal and interest payments in the amount of $42,500. Under our previous three loans with West Bank, our monthly principal and interest payments totaled $50,000. As of November 30, 2007, our outstanding principal balance on our long-term loan is $3,989,684. This loan is not guaranteed by the USDA or Mr. McConnell.

On October 9, 2007, we took out a loan with West Bank to finance the construction of the Art’s-Way Scientific manufacturing facility in Monona, Iowa. This loan will supplement the insurance proceeds received when our previous facility was completely destroyed by fire in January 2007. The principal amount of the loan was $1,330,000 and it bears interest at the U.S. daily 5-year treasury index plus 2.75 basis points, fixed at 7% for 5 years. On the sixth anniversary of the loan, the interest rate will be adjusted to the U.S. daily 5-year treasury index plus 2.75 basis points for the balance of the term. We will make monthly payments on the loan of $9,500 until the final remaining balance is due on May 1, 2017. As of November 30, 2007, our outstanding principal balance on this loan is $1,330,000.

On November 30, 2007, we took out a $1,500,000 loan with West Bank to finance the construction of a new Art’s-Way Vessels facility in the industrial park in Dubuque, Iowa; however, only $1,000,000 of this loan was received during our 2007 fiscal year. The loan bears interest at the U.S. daily 5-year treasury index plus 2.75 basis points, fixed at 7.25% for 5 years. On the sixth anniversary of the loan, the interest rate will be adjusted to the U.S. daily 5-year treasury index plus 2.75 basis points for the balance of the term. We will make four monthly consecutive interest payments beginning in January 2008, with interest calculated at a rate of 7.25% on the unpaid principal; followed by 108 monthly principal payments of $11,000 beginning in May 2008; and one principal and interest payment of the remaining balance on May 1, 2017, with interest calculated at a rate of 7.25% on the unpaid principal balance. As of November 30, 2007, our outstanding principal balance on this loan is $1,000,000.

20

 
Material terms and conditions of our debt obligations with West Bank are that we are required to provide monthly financial reports, prepared internally, and annual audited financial statements. The monthly reports must include accounts receivable aging schedules and we must provide borrowing base certificates. The borrowing bases limit advances on our revolving line of credit to 60% of our less than 90-days accounts receivable, 60% of finished goods inventory, 50% of raw material inventories and work-in-process. The loan covenants place restrictions on our debt service coverage ratio and debt to tangible net worth ratio. During our fiscal year ended November 30, 2006, we obtained waivers from West Bank on covenants regarding capital expenditures and payments of dividends and loans to third parties. Under our restructured loan terms, we can issue dividends without the consent of West Bank so long as we achieve all of the financial covenants stated above for the previous fiscal year end.

Our loans and line of credit from West Bank are secured by a first lien on all of our assets and those of our subsidiaries, including real estate, inventory, accounts receivable, machinery and equipment.

The following table represents our working capital and current ratio for the past two fiscal years:

   
Fiscal Year Ended
 
   
November 30, 2007
 
November 30, 2006
 
Current Assets
 
$
13,784,624
 
$
11,218,700
 
Current Liabilities
   
3,547,658
   
2,717,243
 
Working Capital
 
$
10,236,966
 
$
8,501,457
 
               
Current Ratio
   
3.88
   
4.13
 

Off Balance Sheet Arrangements

None.
 
21

 
Item 7. FINANCIAL STATEMENTS.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and Stockholders
Art’s Way- Manufacturing Co., Inc.
Armstrong, Iowa
 
We have audited the accompanying consolidated balance sheets of Art’s-Way Manufacturing Co., Inc. and Subsidiaries as of November 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we do not express such an opinion. An audit also 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 Subsidiaries as of November 30, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Eide Bailly LLP
 
Minneapolis, Minnesota
February 19, 2008


22

 
ART’S-WAY MANUFACTURING CO., INC.
Consolidated Balance Sheets
November 30, 2007 and 2006

   
2007
 
2006
 
Assets
         
Current assets:
         
Cash
 
$
612,201
 
$
2,072,121
 
Accounts receivable-customers, net of allowance for doubtful accounts of $148,636 and $108,372 in 2007 and 2006, respectively
   
3,087,781
   
2,313,290
 
Inventories, net
   
8,636,602
   
5,998,175
 
Deferred taxes
   
773,555
   
672,000
 
Cost and Profit in Excess of Billings
   
265,615
   
 
Other current assets
   
408,870
   
163,114
 
Total current assets
   
13,784,624
   
11,218,700
 
Property, plant, and equipment, net
   
5,497,200
   
3,185,298
 
Deferred taxes
   
   
100,000
 
Covenant not to Compete
   
300,000
   
 
Goodwill
   
375,000
   
 
Other Assets
   
9,771
   
110,240
 
Total assets
 
$
19,966,595
 
$
14,614,238
 
Liabilities and Stockholders’ Equity
             
Current liabilities:
             
Notes payable to bank
 
$
397,859
 
$
 
Current portion of term debt
   
250,027
   
220,559
 
Accounts payable
   
1,368,988
   
587,555
 
Customer deposits
   
53,196
   
424,205
 
Billings in Excess of Cost and Profit
   
7,675
   
57,266
 
Accrued expenses
   
1,323,008
   
1,276,947
 
Income taxes payable
   
146,905
   
150,711
 
Total current liabilities
   
3,547,658
   
2,717,243
 
Long-term liabilities
             
Deferred taxes
   
205,998
   
 
Term debt, excluding current portion
   
6,069,657
   
3,852,372
 
Total liabilities
   
9,823,313
   
6,569,615
 
Stockholders’ equity:
             
Common stock – $0.01 par value. Authorized 5,000,000 shares; issued 1,984,176 and 1,978,176 shares in 2007 and 2006
   
19,842
   
19,782
 
Additional paid-in capital
   
1,828,427
   
1,765,697
 
Retained earnings
   
8,295,013
   
6,259,144
 
Total stockholders’ equity
   
10,143,282
   
8,044,623
 
Total liabilities and stockholders’ equity
 
$
19,966,595
 
$
14,614,238
 
 
See accompanying notes to consolidated financial statements.
 
23


ART’S-WAY MANUFACTURING CO., INC.
Consolidated Statements of Operations
Years ended November 30, 2007 and 2006

   
2007
 
2006
 
Net sales
 
$
25,517,750
 
$
19,853,812
 
Cost of goods sold
   
17,837,030
   
14,148,787
 
Gross profit
   
7,680,720
   
5,705,025
 
Expenses:
             
Engineering
   
338,286
   
428,336
 
Selling
   
1,117,579
   
821,291
 
General and administrative
   
2,468,005
   
2,682,558
 
Total expenses
   
3,923,870
   
3,932,185
 
Income from operations
   
3,756,850
   
1,772,840
 
Other income (expense):
             
Interest expense
   
(383,616
)
 
(408,618
)
Other
   
6,095
   
52,624
 
Total other expense
   
(377,521
)
 
(355,994
)
Income before income taxes
   
3,379,329
   
1,416,846
 
Income tax
   
1,145,648
   
483,306
 
Net income
 
$
2,233,681
 
$
933,540
 
Net income per share:
             
Basic
   
1.13
   
0.47
 
Diluted
   
1.13
   
0.47
 
 
See accompanying notes to consolidated financial statements.
 
 
24

 
 
ART’S-WAY MANUFACTURING CO., INC.
Consolidated Statements of Cash Flows
Years ended November 30, 2007 and 2006

   
2007
 
2006
 
Cash flows from operations:
             
Net income
 
$
2,233,681
 
$
933,540
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Stock based compensation
   
41,360
   
5,360
 
(Gain) Loss on sale of property, plant, and equipment
   
(134,672
)
 
(71,764
)
Depreciation expense
   
347,046
   
303,754
 
Amortization expense
   
98,520
       
Fire loss of operating supplies
   
(371,792
)
     
Deferred income taxes
   
204,443
   
92,000
 
Changes in assets and liabilities, net of
             
TechSpace Inc & Miller Pro acquisition:
             
(Increase) decrease in:
             
Accounts receivable
   
(774,491
)
 
(1,031,074
)
Inventories
   
(1,263,651
)
 
1,119,386
 
Other current assets
   
3,116
   
(34,237
)
Other, net
   
1,949
   
(35,887
)
Increase (decrease) in:
             
Accounts payable
   
781,433
   
56,833
 
Contracts in progress, net
   
(694,581
)
 
57,266
 
Customer deposits
   
(371,009
)
 
(459,402
)
Income taxes payable
   
(3,806
)
 
-
 
Accrued expenses
   
46,061
   
691,188
 
Net cash provided by operating activities
   
143,607
   
1,626,963
 
Cash flows from investing activities:
             
Purchases of property, plant, and equipment
   
(2,982,645
)
 
(974,716
)
Purchase of assets of Miller Pro
   
(2,337,745
)
 
0
 
Proceeds from insurance recoveries
   
1,233,633
       
Purchase of assets of Tech Space Inc.
   
0
   
(1,137,606
)
Proceeds from sale of property, plant, and equipment
   
15,000
   
126,489
 
Net cash (used in) investing activities
   
(4,071,757
)
 
(1,985,833
)
Cash flows from financing activities:
             
Net change in line of credit
   
397,859
   
0
 
Payments of notes payable to bank
   
(3,158,453
)
 
(209,288
)
Proceeds from term debt
   
5,405,206
   
1,500,000
 
Proceeds from the exercise of stock options
   
21,430
   
40,700
 
Dividends paid to stockholders
   
(197,812
)
 
(98,659
)
Net cash provided by financing activities
   
2,468,230
   
1,232,753
 
Net increase/(decrease) in cash
   
(1,459,920
)
 
873,883
 
Cash at beginning of period
   
2,072,121
   
1,198,238
 
Cash at end of period
 
$
612,201
 
$
2,072,121
 
               
Supplemental disclosures of cash flow information:
             
Cash paid/(received) during the period for:
             
Interest
 
$
299,273
 
$
391,149
 
Income taxes
   
1,135,960
   
40,359
 
               
Supplemental schedule of investing activities:
             
Miller Pro acquisition:
             
Inventories
   
1,462,745
   
0
 
Property, plant and equipment
   
200,000
   
0
 
Covenant not to Compete
   
300,000
       
Goodwill
   
375,000
   
0
 
Cash paid
 
$
2,337,745
 
$
0
 
               
 
 
25

 
 
Supplemental disclosures of noncash investing activities:
             
Proceeds from insurance recoveries
 
$
1,233,633
 
$
0
 
Insurance recoveries receivable
   
248,872
   
0
 
Net book value of assets destroyed
             
Property, plant and equipment
   
(339,258
)
 
0
 
Cost incurred on contracts in progress
   
(379,375
)
 
0
 
Cost incurred for plant supplies
   
(371,792
)
     
Inventories
   
(87,969
)
 
0
 
Gain on insurance recovery
 
$
304,111
 
$
0
 
               
Supplemental schedule of investing activities:
             
Tech Space Inc acquisition:
             
Accounts Receivable
 
$
0
 
$
325,825
 
Inventories
   
0
   
447,639
 
Property, plant and equipment
   
0
   
678,395
 
Customer deposits
   
0
   
(314,253
)
Cash paid
 
$
0
 
$
1,137,606
 
               
Noncash financing activity:
             
Refinanced existing debt with West Bank
 
$
1,024,794
 
$
0
 

See accompanying notes to consolidated financial statements.

26


ART’S-WAY MANUFACTURING CO., INC.
Consolidated Statements of Stockholders’ Equity
Years ended November 30, 2007 and 2006

   
Common stock
 
Additional
 
 
 
 
 
 
 
Number of
 
 
 
paid-in
 
Retained
 
 
 
 
 
shares
 
 Par value
 
capital
 
earnings
 
Total
 
Balance, November 30, 2005
   
1,963,176
 
$
19,632
 
$
1,719,787
 
$
5,424,263
 
$
7,163,682
 
Exercise of stock options
   
15,000
   
150
   
40,550
   
   
40,700
 
Stock based compensation
   
   
   
5,360
   
   
5,360
 
Dividends paid, $0.05 per share
   
   
   
   
(98,659
)
 
(98,659
)
Net income
   
   
   
   
933,540
   
933,540
 
Balance, November 30, 2006
   
1,978,176
 
$
19,782
 
$
1,765,697
 
$
6,259,144
 
$
8,044,623
 
Exercise of stock options
   
6,000
   
60
   
21,370
   
   
21,430
 
Stock based compensation
   
   
   
41,360
   
   
41,360
 
Dividends paid, $0.10 per share
   
   
   
   
(197,812
)
 
(197,812
)
Net income
   
   
   
   
2,233,681
   
2,233,681
 
Balance, November 30, 2007
   
1,984,176
 
$
19,842
 
$
1,828,427
 
$
8,295,013
 
$
10,143,282
 

See accompanying notes to consolidated financial statements.
 
 
27

Notes to Consolidated Financial Statements

(1)
Summary of Significant Accounting Policies

(a)
Nature of Business

Art’s-Way Manufacturing Co., Inc. is primarily engaged in the fabrication and sale of metal products in the agricultural sector of the United States economy. Major product offerings include animal feed processing equipment, sugar beet harvesting equipment, land maintenance equipment and crop shredding equipment. A significant part of the Company’s business is supplying hay blowers to original equipment manufacturers (OEMs). Another important part of the Company’s business is after market service parts that are available to keep its branded and OEM produced equipment operating to the satisfaction of the end user of the Company’s products.

Art’s-Way Vessels, Inc. is primarily engaged in the fabrication and sale of pressurized vessels and tanks.
Art’s-Way Scientific, Inc. is primarily engaged in the construction of modular laboratories and animal housing facilities.

(b)
Principles of Consolidation

The consolidated financial statements include the accounts of Art’s-Way Manufacturing Co., Inc. and its wholly-owned subsidiaries, Art’s-Way Vessels, Inc. and Art’s-Way Scientific, Inc. Art’s-Way Vessels became active in October 2005 after purchasing certain assets of Vessel Systems, Inc., while Art’s-Way Scientific, Inc. became active in August 2006 after purchasing certain assets of Tech Space, Inc. All material inter-company accounts and transactions are eliminated in consolidation.

(c)
Cash Concentration
 
The Company maintains its cash balances in several different accounts in two different banks, balances in these accounts are periodically in excess of federally insured limits.

(d)
Accounts Receivable

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written-off when deemed uncollectible. Recoveries of accounts receivable previously written-off are recorded when received. Accounts receivable are considered past due 60 days past invoice date, with the exception of international sales which primarily are sold with a letter of credit for 120 day terms.

(e)
Inventories

Inventories are stated at the lower of cost or market, and cost is determined using the first-in, first-out (FIFO) method. Management monitors the carrying value of inventories using inventory control and review processes that include, but are not limited to, sales forecast review, inventory status reports, and inventory reduction programs. The Company records inventory write downs to market based on expected usage information for raw materials and historical selling trends for finished goods. Additional write downs may be necessary if the assumptions made by management do not occur.

(f)
Property, Plant, and Equipment

Property, plant, and equipment are recorded at cost. Depreciation of plant and equipment is provided using the straight-line method, based on the estimated useful lives of the assets which range from three to forty years.
 
28

 
(g)
Goodwill and Other Intangible Assets and Impairment

Goodwill represents costs in excess of the fair value of net tangible and identifiable net intangible assets acquired in business combinations. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, Art’s-Way performs an annual test for impairment of goodwill during the fourth quarter. This test is performed by comparing, at the reporting unit level, the carrying value of the reporting unit to its fair value.

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which is five years. Estimated future amortization of intangible assets is $60,000 in each of the next 5 years.

(h)
Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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 entirely dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

(i)
Revenue Recognition
 
Revenue is recognized when risk of ownership and title pass to the buyer, generally upon the shipment of the product. Shipping costs charged to customers are included in net sales. Freight costs incurred are included in cost of goods sold. In very limited circumstances, and only upon a written customer agreement, we recognize revenue upon the production and invoicing of the products.

Art’s-Way Scientific, Inc. is in the construction industry, and as such accounts for long-term contracts on the percentage of completion method. Revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion.

Costs and profit in excess of amounts billed are classified as current assets and billings in excess of cost and profit are classified as current liabilities.

(j)
Research and Development

Research and development costs are expensed when incurred. Such costs approximated $178,000 and $186,000 for the years ended November 30, 2007 and 2006, respectively.

(k)
Advertising 
 
Advertising costs are expensed when incurred. Such costs approximated $205,000 and $99,000 for the years ended November 30, 2007 and 2006, respectively.

(l)
Income Per Share

Basic net income per common share has been computed on the basis of the weighted average number of common shares outstanding. Diluted net income per share has been computed on the basis of the weighted average number of common shares outstanding plus equivalent shares assuming exercise of stock options.
 
29

 
Basic and diluted earnings per common share have been computed based on the following as of November 30, 2007 and 2006:

   
2007
 
2006
 
Basic:
             
Numerator, net income
 
$
2,233,681
 
$
933,540
 
Denominator: Average number of common shares outstanding
   
1,978,932
   
1,970,676
 
Basic earnings per common share
 
$
1.13
 
$
0.47
 
Diluted
             
Numerator, net income
 
$
2,233,681
 
$
933,540
 
Denominator: Average number of common shares outstanding
   
1,978,932
   
1,970,676
 
           
Effect of dilutive stock options
   
5,375
   
7,432
 
     
1,984,307
   
1,978,108
 
Diluted earnings per common share
 
$
1.13
 
$
0.47
 
 
(m)
Stock Based Compensation

The Company accounted for stock options in accordance with the provisions of the Financial Accounting Standards Board (FASB) Statement No. 123(Revised), Share-Based Payments (FAS 123(R)). Statement FAS 123(R) requires that share-based compensation, which includes stock options, be accounted for at the fair value of the applicable equity instrument. The Company utilized the Black Scholes option pricing model to value stock options.

(n)
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. These estimates include the valuation of the Company’s accounts receivable, inventories and realizability of the deferred tax assets. Actual results could differ from those estimates.

(o)
Recently Issued Accounting Pronouncements

In December 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (Issued 6/06). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. For the Company, the Statement is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have any material impact on the Company’s financial position, results of operations, or cash flows.
 
30

 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. The statement does not require any new fair value measurements, but for some entities, the application of the statement will change current practice. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of this pronouncement to have a material impact on its financial statements.

In February 2007, the FASB issued SFAS No. 159, the Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 provides entities with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that select different measurement attributes. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 159 to have a material impact on its financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations - Revised 2007. SFAS 141 R provides guidance on improving the relevance, representational faithfulness, and comparability of information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies to business combinations where is the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is in the process of analyzing the effects SFAS 141R will have on the Company’s financial statements.

In December 2007, the FASB also issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, which establishes accounting and reporting standards to improve the relevance, comparability, and transparency of financial information in its consolidated financial statements that include an outstanding noncontrolling interest in one or more subsidiaries. SFAS 160 is effective for fiscal years, and the interim periods within those fiscal years, beginning on or after December 15, 2008. Management of the Company does not expect the adoption of this pronouncement to have a material impact on its financial statements.

(2)
Allowance for Doubtful Accounts

A summary of the Company’s activity in the allowance for doubtful accounts is as follows:

   
2007
 
2006
 
           
Balance, beginning
 
$
108,372
 
$
46,385
 
Provision charged to expense
   
81,026
   
88,528
 
Less amounts charged-off
   
(40,762
)
 
(26,541
)
Balance, ending
 
$
148,636
 
$
108,372
 
(3)
Inventories

Major classes of inventory are:

   
2007
 
2006
 
Raw materials
 
$
4,468,920
 
$
3,260,897
 
Work in process
   
336,108
   
981,979
 
Finished goods
   
5,033,063
   
2,886,860
 
   
$
9,838,091
 
$
7,129,736
 
Less: Reserves
   
(1,201,489
)
 
(1,131,561
)
   
$
8,636,602
 
$
5,998,175
 

31


(4)
Contracts in Progress

Amounts included in the consolidated financial statements related to uncompleted contracts are as follows:

   
Cost and Profit in
Excess of Billings
 
Billings in Excess of Costs
and Profit
 
November 30, 2007
             
Costs
 
$
2,910,576
 
$
375,766
 
Estimated earnings
   
648,221
   
105,500
 
     
3,558,797
   
481,266
 
Less: amounts billed
   
(3,293,182
)  
 
(488,941
)
   
$
265,615
 
$
(7,675
)
November 30, 2006
             
Costs
       
$
104,213
 
Estimated earnings
         
8,468
 
           
112,681
 
Less: amounts billed
         
(169,947
)
         
$
(57,266
)

(5)
Property, Plant, and Equipment

Major classes of property, plant, and equipment are:

 
 
2007
 
2006
 
Land
 
$
455,262
 
$
223,509
 
Buildings and improvements
   
4,755,097
   
3,341,804
 
Construction in Progress
   
790,176
       
Manufacturing machinery and equipment
   
9,685,762
   
9,511,453
 
Trucks and automobiles
   
174,174
   
167,535
 
Furniture and fixtures
   
107,982
   
116,286
 
     
15,968,453
   
13,360,587
 
Less accumulated depreciation
   
10,471,253
   
10,175,289
 
Property, plant and equipment
 
$
5,497,200
 
$
3,185,298
 

Depreciation expense totaled $347,046 and $303,754 for the fiscal years ended November 30, 2007 and 2006, respectively.

(6)
Accrued Expenses

Major components of accrued expenses are:

   
2007
 
2006
 
Salaries, wages, and commissions
 
$
562,806
 
$
464,609
 
Accrued warranty expense
   
262,665
   
230,740
 
Other
   
497,537
   
581,598
 
   
$
1,323,008
 
$
1,276,947
 
 
32

 
(7)
Product Warranty

The Company offers warranties of various lengths to its customers depending on the specific product and terms of the customer purchase agreement. The average length of the warranty period is 1 year from date of purchase. The Company’s warranties require it to repair or replace defective products during the warranty period at no cost to the customer. The Company records a liability for estimated costs that may be incurred under its warranties. The costs are estimated based on historical experience and any specific warranty issues that have been identified. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary.

Changes in the Company’s product warranty liability for the years ended November 30, 2007, and 2006 are as follows:

   
2007
 
2006
 
           
Balance, beginning
 
$
230,740
 
$
131,832
 
Settlements made in cash or in-kind
   
(194,889
)
 
(216,068
)
Warranties issued
   
226,814
   
314,976
 
Balance, ending
 
$
262,665
 
$
230,740
 

(8)
Loan and Credit Agreements

The Company has a revolving line of credit for $3,500,000 with advances funding the working capital, letter of credit and corporate credit card needs that mature on April 30, 2008. The interest rate is West Bank’s prime interest rate, adjusted daily. Monthly interest only payments are required and the unpaid principal is due on the maturity date. Collateral consists of a first position on assets owned by the Company including, but not limited to inventories, accounts receivable, machinery and equipment. As of November 30, 2007 and 2006, the Company had borrowed $397,859 and $0 respectively, against the line of credit. The available amounts remaining on the line of credit were $3,102,141 and $3,500,000 on November 30, 2007 and 2006, respectively. Other terms and conditions of the debt with West Bank include providing monthly internally prepared financial reports including accounts receivable aging schedules and borrowing base certificates and year-end audited financial statements. The borrowing base shall limit advances from line of credit to 60% of accounts receivable less than 90 days, 60% of finished goods inventory, 50% of raw material inventory and 50% of work-in-process inventory plus 40% of appraisal value of machinery and equipment.

On June 7, 2007 the Company restructured its long-term debt with West Bank. The Company now has one loan for $4,100,000. The loan matures on May 1, 2017 and bears interest at the U.S. daily 5-year treasury index plus 2.75 bps fixed for 5 years and then adjusted to the prevailing same index and margin on the sixth anniversary of the loan for the balance of the term. For the first five years the interest is fixed at 7.25%. Monthly principal and interest payments in the amount of $42,500 are required compared to $50,000 with the previous three loans. A final payment of principal and accrued interest is due on May 1, 2017. The new loan is not required to be guaranteed by the USDA or by J. Ward McConnell, Jr.

The Company obtained two additional loans in 2007. Both of these loans are to finance the construction of the new facilities in Monona and Dubuque. On October 9, 2007, the Company obtained a loan for $1,330,000 that bears interest at the U.S. daily 5-year treasury index plus 2.75 bps, fixed at 7% for 5 years and then adjusted to the prevailing same index and margin on the sixth anniversary for the balance of the term. Monthly payments of $9,500 are required for principal and interest, with a final payment of accrued interest and principal due on May 1, 2017. On November 30, 2007, the Company obtained a construction loan to finance the Dubuque, Iowa facility. This loan has a principal amount of $1,500,000, however only $1,000,000 was received during the 2007 fiscal year. The loan bears interest at the U.S. daily 5-year treasury index plus 2.75 bps, fixed at 7.25% for 5 years and then adjusted to the prevailing same index and margin on the sixth anniversary for the balance of the term. On December 19, 2007, the additional $500,000 available was disbursed. Payments of $11,000 are due monthly for principal and interest, with a final accrued interest and principal payment due on May 1, 2017. Both loans are secured by unlimited guarantees of Art’s-Way Vessels, Inc. and Art’s-Way Scientific, Inc.
 
33

 
J. Ward McConnell, Jr. was required to personally guarantee the debt on the old loans with West Bank on an unlimited and unconditional basis. The guarantee of the term debt was reduced after the first three years to a percentage representing his ownership of the Company. Mr. McConnell’s guarantee would have been removed from the term debt in the event that his ownership interest in the Company was reduced to a level less than 20% after the first three years of the loan. The Company compensated Mr. McConnell for his personal guarantee at an annual percentage rate of 2% of the outstanding balance to be paid monthly. Guarantee fee payments to Mr. McConnell were approximately $30,000 and $60,000, for the year ended November 30, 2007, and 2006, respectively.

A summary of the Company’s term debt is as follows:

   
2007
 
2006
 
West Bank loan payable in monthly installments of $17,776 including interest at Bank's prime rate plus 1.5% due May 2023 (A) (B)
 
$
0
 
$
1,701,843
 
               
West Bank loan payable in monthly installments of $10,000 including interest at Bank’s prime rate plus 1.5% due March 2015 (A) (B)
   
0
   
943,034
 
               
West Bank loan payable in monthly installments of $22,063 including interest at Bank’s prime rate plus 1.0% due April 2016 (A) (B)
   
0
   
1,428,054
 
               
West Bank loan payable in monthly installments of $42,500 including interest at the U.S daily 5-year treasury index plus 2.75 bps fixed for 5 years and then due May 1, 2017 (C)
   
3,989,684
   
0
 
               
West Bank loan payable in monthly installments of $9,500 including interest at the U.S daily 5-year treasury index plus 2.75 bps fixed for 5 years and then due May 1, 2017 (C)
   
1,330,000
   
0
 
               
West Bank loan payable in monthly installments of $11,000 including interest at the U.S daily 5-year treasury index plus 2.75 bps fixed for 5 years and then due May 1, 2017 (C)
   
1,000,000
   
0
 
               
Total term debt
   
6,319,684
   
4,072,931
 
Less current portion of term debt
   
250,027
   
220,559
 
Term debt, excluding current portion
 
$
6,069,657
 
$
3,852,372
 

(A) Notes are supported by a guarantee issued by the United States Department of Agriculture (USDA) for 75% of the loan amount outstanding. Collateral for these loans are primarily real estate with a second position on assets securing the line of credit. The USDA subordinates collateral rights in all assets other than real estate in an amount equal to West Bank’s other credit commitments.

(B) Covenants include, but are not limited to, restrictions on payment of dividends, debt service coverage ratio, debt/tangible net worth ratio, current ratio, limitation on capital expenditures, and tangible net worth. During the year ended November 30, 2006, the Company violated certain debt covenants that were waived.
 
34

 
(C) Covenants include, but are not limited to, debt service coverage ratio and debt/tangible net worth ratio. These loans are secured by real estate and unlimited guarantees of Art’s-Way Vessels, Inc. and Art’s-Way Scientific, Inc.

A summary of the minimum maturities of term debt follows for the years ending November 30:

Year:
 
Amount
 
2008
 
$
250,027
 
2009
   
346,947
 
2010
   
354,339
 
2011
   
380,712
 
2012
   
409,049
 
Thereafter
   
4,578,610
 
   
$
6,319,684
 
 
(9)
Employee Benefit Plans

The Company sponsors a defined contribution 401(k) savings plan which covers substantially all full-time employees who 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 began making 25% matching contribution up to 1% of eligible compensation starting June 2005. The Company recognized an expense of $29,799 and $17,525 related to this plan during the years ended November 30, 2007 and 2006, respectively.

(10)
Stock Option Plan

On January 25, 2007 the Board of Directors adopted the 2007 Non-Employee Directors’ Stock Option Plan. Options will be granted to non-employee directors to purchase shares of common stock of the Company at a price not less than fair market value at the date the options are granted. Non-employee directors are automatically granted options to purchase 1,000 shares of common stock annually or initially upon their election to the Board, which are automatically vested. Options granted are nonqualified stock options.

On February 5, 2007 the Board of Directors adopted the 2007 Employee Stock Option Plan which was approved by the stockholders at the Annual Stockholders’ Meeting on April 26, 2007.
 
A summary of changes in the stock option plan is as follows:

   
November 30
 
   
2007
 
2006
 
Options outstanding at beginning of period
   
10,000
   
25,000
 
Granted
   
23,000
   
0
 
Exercised
   
(6,000
)
 
(15,000
)
Options outstanding at end of period
   
27,000
   
10,000
 
Options price range for the period
 
$
2.75
 
$
2.32
 
 
    To    
To
 
   
$
21.14
 
$
5.21
 
Options exercisable at end of period
   
15,000
   
8,750
 
 
35

 
At November 30, 2007 and 2006, the weighted-average remaining contractual life of options outstanding was 9.1 years and 6.5 years respectively, and the weighted-average exercise price was $15.20 and $3.98, respectively. The weighted-average exercise price of options granted during the year was $17.04, while the weighed-average exercise price of options exercised was $3.57. Of the number of options granted, 10,000 are fully vested with a weighted average exercise price of $13.06, and a weighed-average remaining contractual term of 6.6 years. The total compensation cost yet to be recognized due to non-vested stock options is $77,880, which shall be recognized over a weighted-average period of two years.

The per share weighted-average fair value of stock options granted during the year ended November 30, 2007 was $5.17. The fair value was calculated using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield 0.0%, risk-free interest rate 4.25%, expected volatility factor of 50.00% for 2007, and an expected life of one to two years.

(11)
Income Taxes

Total income tax expense (benefit) for the years ended November 30, 2007 and 2006 consists of the following:

   
November 30
 
   
2007
 
2006
 
Current expense
 
$
941,205
 
$
391,306
 
Deferred expense
   
204,443
   
92,000
 
   
$
1,145,648
 
$
483,306
 

The reconciliation of the statutory Federal income tax rate and the effective tax rate are as follows:

 
 
November 30
 
   
2007
 
2006
 
Statutory federal income tax rate
   
34.0
%
 
34.0
%
Other
   
(0.1
)
 
0.1
 
     
33.9
%
 
34.1
%

Tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at November 30, 2007 and 2006 are presented below:

   
November 30
 
   
2007
 
2006
 
Current deferred tax assets:
             
Accrued expenses
 
$
156,821
 
$
152,000
 
Inventory capitalization
   
148,000
   
202,000
 
Asset reserves
   
468,734
   
440,000
 
Total current deferred tax assets
 
$
773,555
 
$
794,000
 
               
Non-current deferred tax assets (liabilities):
             
Fire Proceeds
   
(123,244
)
     
Property, plant, and equipment
   
(82,754
)
 
(22,000
)
Total non-current deferred tax assets (liabilities)
 
$
(205,998
)
$
(22,000
)
 
36

 
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.

The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years ended before November 30, 2004.

The Company shall classify interest and penalties to be paid on an underpayment of taxes as income tax expense. For the years ended November 30, 2007 and 2006 no interest or penalty amounts have been recognized in the consolidated statements of operations or the consolidated balance sheets.

(12)
Disclosures About the Fair Value of Financial Instruments

SFAS 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, 2007 and 2006, the carrying amount approximates fair value for cash, accounts receivable, accounts payable, notes payable to bank, term debt, and other current and long-term liabilities. The carrying amounts approximate fair value because of the short maturity of these instruments. The fair value of the Company’s installment term loans payable also approximate recorded value because the interest rates charged under the loan terms are not substantially different than current interest rates.

(13)
Litigation and Contingencies

Various legal actions and claims are pending against the Company. In the opinion of management adequate provisions have been made in the accompanying financial statements for all pending legal actions and other claims.

(14)
Purchase Obligations

The Company has a contract with Maryville Construction Co., Inc. to build the production facility in Dubuque, Iowa. The total contract is for $818,300, of which $538,356 had been billed by November 30, 2007.

(15)
2007 and 2006 Acquisition

Effective September 5, 2007, the Company acquired the product lines of Miller Pro, Victor and Badger from Miller-St. Nazianz, Inc. for a cash purchase price of approximately $2,338,000. Effective August 2, 2006, the Company acquired the operating assets of Tech Space, Inc. for a cash purchase price of approximately $1,138,000. The operating results of the acquired businesses are reflected in the Company’s consolidated statement of operations from the acquisition dates forward. The acquisitions were made to continue the Company’s growth strategy and diversify its product offerings inside and outside the agricultural industry. The purchase prices were determined based on an arms-length negotiated value. The transactions were accounted for under the purchase method of accounting, with the purchase price allocated to the individual assets acquired. (See cash flow statement supplemental disclosure)

Proforma sales and net income information for Tech Space and the acquired Miller Pro product line for 2007 and 2006 were not included, as management believes that the Companies would not have had a material impact on the Company’s financial statements.

(16)
Segment Information

On October 4, 2005, the Company purchased certain assets of Vessels Systems, Inc. which created a separate operating segment. Then on August 2, 2006, the Company purchased certain assets of Tech Space, Inc. which created a third operating segment. Prior to these acquisitions the Company operated in one reportable segment.
 
37

 
Our reportable segments are strategic business units that offer different products. They are managed separately because each business requires different technology and marketing strategies.

There are three reportable segments: agricultural products, pressurized vessels and modular buildings. The agricultural products segment fabricates and sells farming products as well as replacement parts for these products in the United States and worldwide. The pressurized vessel segment produces pressurized tanks. The modular building segment produces modular buildings for animal containment and various laboratory uses.

The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Management evaluates the performance of each segment based on profit or loss from operations before income taxes, exclusive of nonrecurring gains and losses.

Approximate financial information with respect to the reportable segments is as follows.
 
Twelve Months Ended November 30, 2007
 
   
Agricultural
Products
 
Pressurized
Vessels
 
Modular
Buildings
 
Consolidated
 
Revenue from external customers
 
$
14,258,000
 
$
4,272,000
 
$
6,988,000
 
$
25,518,000
 
Income from operations
   
1,687,000
   
916,000
   
1,154,000
   
3,757,000
 
Income before tax
   
1,433,000
   
635,000
   
1,311,000
   
3,379,000
 
Total Assets
   
12,941,000
   
2,432,000
   
4,594,000
   
19,967,000
 
Capital expenditures
   
429,000
   
1,102,000
   
1,652,000
   
3,183,000
 
Depreciation & Amortization
   
369,000
   
49,000
   
28,000
   
446,000
 
 
Twelve Months Ended November 30, 2006
 
   
Agricultural
Products
 
Pressurized
Vessels
 
Modular
Buildings
 
Consolidated
 
Revenue from external customers
 
$
15,025,000
 
$
3,797,000
 
$
1,032,000
 
$
19,854,000
 
Income from operations
   
1,280,000
   
535,000
   
(42,000
)
 
1,773,000
 
Income before tax
   
1,004,000
   
478,000
   
(65,000
)
 
1,417,000
 
Total Assets
   
10,799,000
   
1,736,000
   
2,079,000
   
14,614,000
 
Capital expenditures
   
925,000
   
50,000
   
0
   
975,000
 
Depreciation & Amortization
   
243,000
   
51,000
   
10,000
   
304,000
 

38


Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

Item 8A. CONTROLS AND PROCEDURES.

Our principal executive officer, Carrie L. Majeski, evaluated the effectiveness of our financial disclosure as of the close of our 2007 fiscal year. Based on her evaluation, the above-named officer has concluded that our disclosure controls and procedures are effective to insure that information required to be disclosed by us in our periodic and current reports filed pursuant to our reporting obligations under the Exchange Act is (a) collected and communicated to our management, including the above-named officer, to allow them to make timely decisions regarding required disclosures; and (b) recorded, processed, summarized and reported within the periods mandated by the Securities and Exchange Commission.

There were no changes in our internal control over financial reporting identified in connection with the evaluation performed by our management during our fourth fiscal quarter of 2007 that has materially affected or is likely to materially affect our internal control over financial reporting.

Item 8B. OTHER INFORMATION.

None.
 
PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The information required by Item 9 is incorporated by reference to our definitive proxy statement relating to our 2008 annual meeting of shareholders. In accordance with Regulation 14A, we will be filing that proxy statement no later than 120 days after the end of the last fiscal year.

We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer and the Board of Directors. A copy of our Code of Ethics may be obtained at no charge by writing to us at the following address: Art’s-Way Manufacturing Co., Inc. 5556 Highway 9 Armstrong, Iowa 50514.

Item 10. EXECUTIVE COMPENSATION.

The information required by Item 10 is incorporated by reference to our definitive proxy statement relating to our 2008 annual meeting of shareholders. In accordance with Regulation 14A, we will be filing that proxy statement no later than 120 days after the end of the last fiscal year.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by Item 11 is incorporated by reference to our definitive proxy statement relating to our 2008 annual meeting of shareholders. In accordance with Regulation 14A, we will be filing that proxy statement no later than 120 days after the end of the last fiscal year.
 
39

 
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

 The information required by Item 12 is incorporated by reference to our definitive proxy statement relating to our 2008 annual meeting of shareholders. In accordance with Regulation 14A, we will be filing that proxy statement no later than 120 days after the end of the last fiscal year.

Item 13. EXHIBITS.

Exhibit 
No.
 
Description
 
Method of
Filing
3.1
 
Articles of Incorporation of Art’s-Way Manufacturing Co., Inc.
 
1
         
3.2
 
Bylaws of Art’s-Way Manufacturing Co., Inc.
 
1
         
10.1
 
Asset Purchase Agreement with Miller-St. Nazianz, Inc.
 
*
         
31.1
 
Certificate pursuant to 17 CFR 240 13(a)-14(a)
 
*
         
32.1
 
Certificate pursuant to 18 U.S.C. Section 1350
 
*
 

(1)
Incorporated by reference to the exhibit of the same number on our annual report on Form 10-K for the fiscal year ended May 27, 1989.
(*)
Filed herewith.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by Item 14 is incorporated by reference to our definitive proxy statement relating to our 2008 annual meeting of shareholders. In accordance with Regulation 14A, we will be filing that proxy statement no later than 120 days after the end of the last fiscal year.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
ART’S-WAY MANUFACTURING CO., INC.
   
 
Date: February 19, 2008
/s/ Carrie L. Majeski
 
Carrie L. Majeski
 
President, Chief Executive Officer
 
40

 
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
/s/ Carrie L. Majeski
 
Carrie L. Majeski
 
President, Chief Executive Officer
   
Date: February 19, 2008
/s/ J. Ward McConnell, Jr.
 
J. Ward McConnell, Jr., Executive Chairman, Director
   
Date: February 19, 2008
/s/ David R. Castle
 
David R. Castle, Director
   
Date: February 19, 2008
/s/ Fred W. Krahmer
 
Fred W. Krahmer, Director
   
Date: February 19, 2008
/s/ James Lynch
 
James Lynch, Director
   
Date: February 19, 2008
/s/ Douglas McClellan
 
Douglas McClellan, Director
   
Date: February 19, 2008
/s/ Marc H. McConnell
 
Marc H. McConnell, Executive Vice Chairman, Director
   
/s/ Thomas E. Buffamante
 
Thomas E. Buffamante, Director
 
41

 
EX-10.1 2 v104461_ex10-1.htm
ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this "Agreement") is dated as of the 5th day of September, 2007, by and among ART'S WAY MANUFACTURING CO., INC., a Delaware corporation ("Purchaser"), MILLER-ST. NAZIANZ, INC., a Wisconsin corporation ("Seller"), and only with respect to Section 1.01, Non-Competition Agreement and with respect to Section 5.01 and Section 703 Bulk Sales compliance and indemnity, JOHN C. MILLER ("Miller").

BACKGROUND

A. Seller is engaged in the business of manufacturing and distributing agricultural equipment (the "Business").

B. The Business consists of multiple product lines including, but not limited to, the Miller Pro, Victor, and Badger product lines. For purposes of this Agreement, the Miller Pro, Victor, and Badger product lines are hereinafter referred to collectively as the "Product Lines".

C. Seller wishes to sell to Purchaser, and Purchaser wishes to purchase from Seller, certain assets comprising or related to the Product Lines (the "Purchased Product Lines"), all upon the terms and subject to the conditions set forth herein.

D. John C. Miller is the sole voting shareholder of Seller and in order to induce Buyer to purchase the Purchased Assets (as the term is hereinafter defined) has agreed to execute and deliver to Purchaser a Non-Competition agreement as provided in Section 1.01 and further agreed to certain indemnities as provided in Section 5.01 and Section 7.03.

TERMS AND CONDITIONS
 
In consideration of the premises and the mutual agreements and covenants hereinafter set forth, and intending to be legally bound, and for other good and valuable consideration the sufficiency of which is hereby acknowledged, Seller and Purchaser hereby agree as follows:

Article I

DEFINITIONS

1.01. Certain Defined Terms. For purposes of this Agreement:

"Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority.

"Agreement" shall have the meaning set forth in the Preamble above.

"Ancillary Agreements" means the Warranty Bill of Sale, the Intellectual Property Assignment, the Badger Intellectual Property License Agreement, and the Non-Competition Agreements.


 
"Badger Intellectual Property License Agreement" means the license agreement between Purchaser and Seller attached hereto as Exhibit A, under which Seller shall grant to Purchaser a limited license to use Seller's "Badger" trade name in connection with Purchaser's post-Closing manufacture and sale of the Badger Product Line.

"Badger Product Line" means, exclusively, those items listed on Disclosure Schedule 1.

"Bill of Sale" means the Warranty Bill of Sale to be executed by Seller at the Closing, substantially in the form attached hereto as Exhibit B.

"Claims" means any and all administrative, regulatory or judicial actions, suits, petitions, appeals, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations, proceedings, consent orders or consent agreements, including any Product Warranty Claims or Product Liability Claims.

"Closing" means the Closing of the transaction contemplated by this Agreement pursuant to the terns and conditions of this Agreement.

"Closing Date" shall have the meaning set forth in Section 2.08(a) of this Agreement.

"Customer Lists" shall have the meaning set forth in Section 2.01(a)(iv) of this Agreement.

"Dealer Agreements" shall have the meaning set forth in Section 2.01(a)(x).

"Distribution Agreements" shall have the meaning set forth in Section 2.01(a)(ix).

"Finished Goods Inventory" shall have the meaning set forth in Section 2.01(a)(v).

"Governmental Authority" means (whether foreign or domestic) any federal, national, state, provincial, local or similar government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal or judicial or arbitral body.

"Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.

"Intellectual Property" shall have the meaning set forth in Section 2.01(a)(iii);

"Intellectual Property Assignment" means the Intellectual Property Assignment to be executed by Purchaser and Seller at the Closing, substantially in the form attached hereto as Exhibit C, pursuant to which, Seller will transfer, convey, and assign the Intellectual Property to Purchaser.
 
2

 
"Law" means any federal, national, state, provincial, local or similar statute, law, ordinance, regulation, rule, code, order, requirement or rule of law (including common law), and any permit, approval, identification number, license or other authorization required or issued thereunder.

"Liabilities" means any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including those arising under any Law, Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking.

"Manufacturing Fixtures and Equipment" shall have the meaning set forth in Section 2.01(a)(ii) of this Agreement.

"Non-Competition Agreements" means the Non-Competition Agreements between (i) Seller and Purchaser and (ii) Mr. John C. Miller and Purchaser, substantially in the forms attached hereto as Exhibits D and E, respectively.

"Miller Pro Product Line" means, exclusively, those items listed on Disclosure Schedule 2.

"Product Liability Claims" means all claims (whether asserted or unasserted as of the Closing Date and whether any such claim is stated in tort, breach of warranty or otherwise) for bodily injury, property damage, or both, resulting from any actual or alleged defect in the design, assembly or manufacture of a product or performance of a service of the Business prior to the Closing Date (whether or not such product is sold prior to the Closing Date) or resulting from any act or omission relating to such a product, including, without limitation, failure to warn of hazards, improper instruction in the use of the product or failure to modify, correct or improve such product.

"Product Lines" shall have the meaning set forth in the recitals of this Agreement.

"Product Warranty Claims" shall have the meaning of all claims for repair or replacement or goods or products or to re-perform services and/or to return or credit all or a portion of the sale price of such goods or services, pursuant to Seller's standard express written product warranties, but not including any Product Liability Claims.

"Purchase Price" shall have the meaning set forth in Section 2.03(a) of this Agreement.

"Purchased Assets" shall have the meaning set forth in Section 2.01(a) of this Agreement.

"Purchase Price Allocation" shall have the meaning set forth in Section 2.03(a).

"Purchased Product Lines" shall have the meaning set forth in the Recitals of this Agreement.

"Purchaser" shall have the meaning set forth in the introduction of this Agreement.
 
3

 
"Raw Material and Completed Manufactured Parts Inventory" shall have the meaning set forth in Section 2.01(a)(vii).

"Seller" shall have the meaning set forth in the introduction of this Agreement.

"Seller's Knowledge" or "Knowledge of Seller" or similar terms used in this Agreement means the actual or constructive knowledge of John C. Miller, any officer or director of Seller, or any employee of Seller with management authority.

"Spare Parts Inventory" shall have the meaning set forth in Section 2.01(a)(vi).

"Standard Cost" shall mean the carrying value of each item of inventory on the books of Seller as the same are kept and maintained in the ordinary course of business, determined in a manner consistent with Seller's past practices.

"Trade Names" shall have the meaning set forth in Section 2.01(a)(viii)

"Transaction" means the purchase and sale of the Purchased Assets pursuant to this Agreement and other transactions or related agreements contemplated hereby.

"Victor Product Line" means, exclusively, those items listed on Disclosure Schedule 3.

Article II

PURCHASE AND SALE

2.01. Purchase and Sale of Purchased Assets.

(a) Upon the terms and subject to the conditions of this Agreement, at the respective Closings, and simultaneously with receipt by Seller of the purchase price described in Section 2.03, Seller shall sell, assign, transfer, convey and deliver, or cause to be sold, assigned, transferred, conveyed and delivered, to Purchaser, and Purchaser shall purchase from Seller, all of the assets, properties, goodwill and business of every kind and description and wherever located, whether tangible or intangible, real, personal or mixed, which are owned by Seller and, in any case, belonging to or used or intended to be used in the manufacture, sale or distribution of the Product Lines (the "Purchased Assets"), including the following:

(i) the Purchased Product Lines;

(ii) All tooling, dyes, jigs, patterns, specialized equipment necessary or used for the Product Lines ("Manufacturing Fixtures and Equipment"); for purposes of this Agreement specialized equipment includes without limitation that certain 20' foot Press Break shown on the information referred to in paragraph 3.05 of this agreement, side punching machine, roof punching machine, blower band roller, corrugated shear, roof edge protector bender, and all assembly line racks and bins;
 
4

 
(iii) All patents, applications therefor and unpatented inventions applicable to any product within the Product Lines; all designs, drawings, blue prints, computer data, engineering data or studies, manufacturing data, prototypes, stampings, projects in progress, formulas, processes, technical information and knowhow related to or used in the production of any product within the Product Lines ("Intellectual Property");

(iv) All customer lists, customer backlogs, pending orders, pending purchase contracts, customer files, vendor lists, purchase records, sales records or data (electronic or otherwise) relating to any of the products in the Product Lines ("Customer Lists");

(v) Inventories of finished goods and work in process related to any products in the Product Lines as further described below ("Finished Goods Inventory");

(vi) All inventories of spare parts related to any product in the Product Lines as further described below ("Spare Parts Inventory");

(vii) Inventories of raw materials and completed manufactured parts related to products in the Product Lines as further described below ("Raw Material and Completed Manufactured Parts Inventory");

(viii) All logos, trademarks, trade names, service marks, copyrights, applications for and registrations pertaining to any of the Product Lines and the marketing thereof, including without limitation the names Miller Pro, Victor, Hay Buddy and Badger ("Trade Names") provided however Purchaser's rights to use the "Badger" trade name shall be expressly limited to rights of use in connection with the production or sale of the Badger Product Line, as more particularly set forth in the Badger Intellectual Property License Agreement.;

(ix) All distribution agreements with manufacturers pertaining to the Product Lines including without limitation such agreements with John Deere and Tonutti Spa ("Distribution Agreements");

(x) All dealership, dealer or distributor agreements or contracts pertaining to any of the Product lines with dealers handling any of the Product Lines ("Dealer Agreements"),provided, Purchaser will have no repurchase obligations under such agreements with respect to sales prior to closing; and

(xi) the goodwill of Seller relating to the Product Lines.

(b) Seller shall retain and the Purchased Assets shall specifically exclude all assets of Seller that are not described in the foregoing paragraph 2.01(a).

2.02. Assumption and Exclusion of Liabilities. Purchaser assumes no liabilities or obligations of Seller as a result of the proposed transaction except as provided in Section 2.05. Any security interest, liens or encumbrances with respect to any of the assets shall be released at or prior to Closing.
 
5

 
2.03. Purchase Price. The total combined purchase price for the Assets to be purchased hereunder shall be the sum of Eight Hundred Seventy-Five Thousand Dollars ($875,000.00), plus the sum of the following amounts:

(a) The amount of the Finished Goods Inventory (valued at Seller's Standard Cost) on hand, but the amount of Finished Goods Inventory shall not contain a greater number of any item than the number of such item sold in the 12 month period ending on July 31, 2007.

(b) The amount of the Raw Materials and Completed Manufactured Parts Inventory (valued at Seller's Standard Cost on hand, but the amount of Raw Materials and Completed Manufactured Parts Inventory shall not contain a greater number of any item than the number of such item sold or used in manufacturing by Seller in the 12 month period ending on July 31, 2007.

(c) The amount of the Spare Parts Inventory (valued at Seller's Standard Cost) on hand, provided however, any such Spare Parts Inventory that is used, damaged, otherwise not marketable as a new repair part or is in excess of a two year supply (based sales of such part during the 24 month period ending July 31, 2007) shall be valued at $0.00 (all such Spare Parts Inventory that is valued at zero shall be conveyed to Purchaser along with all such inventory as shall be assigned a value greater than zero).

2.04. Allocation of Purchase Price. The allocation of the Purchase Price among the Purchased Assets shall be reflected on the purchase price allocation attached hereto as Exhibit F (the "Purchase Price Allocation"). Purchaser and Seller agree that the transactions contemplated in this Agreement shall he reported in a manner consistent with the terms of this Agreement, including the Purchase Price Allocation, and that neither of them will take any position inconsistent therewith in any tax return, in any refund claim, in any litigation, or otherwise. Seller and Purchaser agree to cooperate with the other in preparing IRS Form 8594, and to furnish the other with a copy of such document prepared in draft form within a reasonable period before its filing due date.

2.05 Assumption of Warranty Obligations. Purchaser will assume all of Seller's warranty obligations to customers for warranty claims made after the Date of Closing with respect to products included within the Purchased Product Lines for the repair or replacement of defective products under Seller's standard limited warranty, provided however, Purchaser does not assume any obligation for Product Liability or other liability for property damage, consequential damages or personal injury (or any other liability other than for the repair or replacement of defective products) arising out of products sold by Seller prior to Closing. The foregoing notwithstanding Purchaser does not assume any liability or obligation for any product recall with respect to products sold by Seller prior to Closing.

2.06 Payment of Purchase Price. The Purchase Price shall be paid by Purchaser in certified funds, wire transfer, or other immediately available funds at the Closing.
 
6

 
2.07. Determination of Inventory, Post Closing Adjustment. No more than five (5) calendar days prior to the Closing Date, Seller shall determine the amount and value of the Finished Goods Inventory, the Raw Materials and Completed Manufactured Parts Inventory and Spare Parts Inventory and certify the amounts arid counts thereof to Purchaser prior to Closing. All such inventories shall be tagged with tags indicating the respective items of such inventory are "Conveyed to Art's-Way". Purchaser shall have the right to observe the determinations of amount and value of the various inventories called for herein, but no such right or exercise thereof shall constitute a defense to any discrepancy that may be raised by Purchaser in a Discrepancy Notice as hereinafter provided for. The closing shall take place based upon said amounts unless Purchaser shall notify Seller of a disagreement with said numbers prior to closing. After shipment of the Finished Goods Inventory, the Raw Materials and Completed Manufactured Parts Inventory and the Spare Parts Inventory to Purchaser, Purchaser shall notify Seller of any discrepancy in count, condition or valuation of such inventories actually received with the inventories used for closing (Discrepancy Notice). Seller shall refund to Purchaser the amount of such discrepancy set forth in the Discrepancy Notice within 5 days of receipt of same by Seller, provided however, in the event of a disagreement by Seller with the Discrepancy Notice Seller may request binding arbitration under the rules of the American Arbitration Association. During such time as any such disagreement shall exist, Seller shall pay the amount of the discrepancy over to an escrow agent mutually agreeable to the parties to be held pending resolution of the disagreement in the manner set forth herein.

2.08. Closing. Subject to the terms and conditions of this Agreement, the sale and purchase of the Purchased Assets shall take place on September 5, 2007, at 2:00 p.m. Central Time (the "Closing Date"), or at such alternate time and date as may be mutually agreed upon by the parties.

2.09. Closing Deliveries by Seller. At the Closing, Seller shall deliver to Purchaser:

(a) Executed counterparts of each Ancillary Agreement to which Seller is a party;

(b) A true and complete copy, certified by the Secretary of Seller, of the resolutions duly and validly adopted by Seller's Board of Directors evidencing its authorization of the execution and delivery of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby;

(c) All necessary third-party consents as more particularly described in Section 3.13 of this Agreement; and

(d) A certificate, dated as of the Closing Date and in a form reasonably acceptable to Purchaser, executed by a duly authorized officer of Seller certifying (i) that all conditions to Closing have been satisfied, (ii) as to the incumbency arid signature of the officers of Seller executing any agreements or documents in connection with the transactions contemplated by this Agreement and (iii) that all representations and warranties contained herein on the part of the Seller are true as of the Closing;
 
7

 
(e) In the event any of the inventories to be transferred hereunder shall be consigned to a third party, Seller shall deliver at closing written acknowledgment of the person or entity having possession of the consigned goods, that Seller is the owner of same, that Seller has the right to remove same at any time free of any claim or interest of such person or entity;

(f) An opinion of Seller's counsel in form reasonably satisfactory to attorney for Buyer giving the opinions that

(i) Seller is a corporation duly formed and in existence under the laws of the State of Wisconsin.

(ii) Seller has full corporate power and authority to make, execute, deliver and perform its obligations under this Agreement.

(iii) Seller has authorized the execution, delivery and performance of its obligations under this agreement and the documents related thereto by all necessary company action on its part and has duly executed and delivered this agreement and the documents related thereto.

(e) All such other instruments and documents as Purchaser or its counsel may reasonably request to transfer effectively to Purchaser all of Seller's right, title and interest in and to the Purchased Assets as provided by this Agreement.
 
2.10. Closing Deliveries by Purchaser. At the Closing, Purchaser shall deliver to Seller:

(a) The Purchase Price in certified funds, wire transfer or other immediately available funds;

(b) Executed counterparts of each Ancillary Agreement to which Purchaser is a party; and

(c) A true and complete copy of the resolutions duly and validly adopted by Purchaser's Board of Directors evidencing its authorization of the execution and delivery of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby.

2.11 Sales and Transfer Taxes . Seller shall be responsible for and agrees to pay when due all sales, use and transfer taxes imposed by the United States or the State of Wisconsin arising out of the transfer of the Purchased Assets by Seller and the other transactions contemplated hereunder.
 
8

 
Article III

REPRESENTATIONS AND WARRANTIES
OF SELLER

As an inducement to Purchaser to enter into this Agreement, Seller hereby represents and warrants to Purchaser now and as of Closing, as follows:

3.01. Organization, Authority and Qualification of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin and has all necessary power and authority to enter into this Agreement and the Ancillary Agreements, to carry out its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby.

3.02. No Conflict. Neither the execution and delivery of this Agreement, nor the consummation or performance of any obligation of Seller hereunder will, directly or indirectly, with or without notice or the lapse of time, (i) violate or conflict with. Seller's articles of incorporation or bylaws (or other organizational documents) or any agreement or any resolution of Seller's shareholders or directors, (ii) violate or conflict with any law or regulation or the terms or conditions of any permit, certificate or other authorization to which Seller is subject or (iii) require Seller to obtain or make any waiver, consent, action, approval, or authorization of, or registration, declaration, notice of filing with, any private non-governmental third party or any governmental authority,

3.03 Binding Effect. This Agreement constitutes the legal, valid and binding obligation of Seller, enforceable against it in accordance with its terms. Upon the execution and delivery by Seller of this Agreement and each other instrument to be executed and delivered at the Closing by Seller pursuant to this Agreement (collectively, the "Seller's Closing Documents"), each of Seller's Closing Documents will constitute the legal, valid and binding obligation of Seller, enforceable against it in accordance with its terms.

3.04. Title to Purchased Assets; Location; Seller shall have and shall transfer to Purchaser at Closing good and marketable title to all the Purchased Assets, free and clear of any claim, lien, liability or encumbrance whatsoever. All of the Purchased assets are located at the Seller's plant facility in St. Nazianz, Wisconsin except as set forth on Schedule 3.04.

3.04. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement or the Ancillary Agreements based upon arrangements made by or on behalf of Seller.

3.05 Financial and Product Information. Seller has delivered to Purchaser an information package a copy of which is attached hereto as Schedule 3.05 concerning the Purchased Product Lines including the historical sales and gross margins experienced by Seller with respect to the Purchased Product Lines all of which information is substantially correct and accurately reflects the matters described therein.

3.06 Standard Cost. Standard Cost as used by Seller in the compiling the financial information set forth in Schedule 3.05 above, or that may be used in the valuation of any of the Purchased Assets under this agreement, is computed in accordance with Generally Accepted Accounting Principals, consistently applied.
 
9

 
3.07 Absence of Certain Events. Since January 1, 2007, the business of Seller with respect to the Product Lines has been operated only in the ordinary and normal course of business and in particular:

(a) There has been no material adverse change in the Purchased Assets or in the financial condition, results of operations, prospects or condition (financial or otherwise), of Seller with respect to the Product Lines or the Purchased Assets;

(b) There has been no damage, destruction or loss adversely affecting the Purchased Assets or the Purchased Product Lines; and

(c) No significant customer, supplier, dealer or distributor with respect the Purchased Product Lines or a part thereof has ceased or given notice that it was going to cease or curtail its dealings with the Seller with respect to any of the Product Lines.

3.08. Intellectual Property.

(a) Disclosure Schedule 4 sets forth a complete and accurate list of the Intellectual Property being assigned from Seller to Purchaser pursuant to the Intellectual Property Assignment.

(b) Seller owns and possesses, free and clear of all security interests, encumbrances or liens, all right, title and interest in or to, or has the right to use pursuant to a License Agreement or otherwise, all the Intellectual Property. No Government entity has rendered any holding, decision, or judgment that would limit, cancel or question the validity of any of Intellectual Property.

(c) No claim of infringement has been made or asserted by or against Seller relating to any patent, trademark, trade name or copyright included in the Purchased Assets and no claim of misappropriation or misuse of any invention, trade secret or other proprietary rights has been made or asserted by or against Seller with respect to the foregoing, and to the knowledge of Seiler, no valid basis for any such claim or allegation exists.

(d) That Disclosure Schedule 4 sets forth all Intellectual Property applicable or pertaining to any of the Product Lines and/or Purchased Assets and is all Intellectual Property needed for the production and marketing of any products included in the Product Lines without payment of any royalty, license or other fee whatsoever, and free of any claim of infringement.

3.09. Compliance with Laws. The methods and means employed by it in the operation of its business and its ownership of the Purchased Assets are in compliance with all applicable federal, state and local laws, regulations or orders of any court, or federal, state, municipal or other governmental department, commission, board, agency or other instrumentality.
 
10

 
3.10. Litigation and Proceedings. There is no action, suit or proceeding pending or, to the Knowledge of the Seller, threatened against the Seller, that would prevent the consummation of the transactions contemplated by this Agreement. There is no suit, action or legal, administrative, arbitrative or other proceeding pending, nor does Seller have written notice or actual notice of any threatened suit, action or legal, administrative, arbitrative or other proceeding in connection with the Purchased Assets; and to Seller's Knowledge, Seller is not under governmental investigation with respect to any violation of any law or administrative regulation, federal, local or state, with respect to its design, manufacture or sale of any of the items sold and Seller has no Knowledge of any existing facts or circumstances which would constitute a basis for such action, proceeding, investigation, suit or arbitration.

3.11. Taxes. Seller has duly filed or caused to be filed all federal, state and local tax returns, reports and declarations required to be filed by it, and has paid or made adequate provisions to be filed by it, and has paid or made adequate provisions on the books and records of Seller for the payment of all Taxes (as hereinafter defined) due in respect thereof. As used herein, "Taxes" shall mean all taxes, fees, levies or other assessments, including but not limited to income, excise, property, sales, social security and unemployment compensation taxes imposed by the United States, any state, county or local government, and any interest or penalty relating to such taxes or other assessments, in each case that relate to the Purchased Assets or could become a lien thereon..

3.12. Condition of Purchased Assets. All of the Purchased Assets shall be, as of the Closing Date, in good working condition. The foregoing notwithstanding the 20' press brake referred to in Section 2.01(a)(ii) of this agreement is sold "as is" "where is".

3.13. Third-Party Agreements. Disclosure Schedule 5 sets forth a complete and accurate list and brief description of any arrangements or agreements with third-parties concerning the Purchased Assets, which (i) necessitate any such third-party's consent to the consummation of the transactions contemplated by this Agreement, (ii) require payment of any sums by Purchaser upon sales of Inventory or (iii) are related in any manner to the design, manufacture, sale or distribution of any product included as a part of the Purchased Product Lines.

3.14 Reliance. The representations and warranties of Seller made in this Article III are made by Seller with the knowledge and expectation that Purchaser is placing complete reliance thereon in entering into, and performing each of their obligations under this Agreement.
 
Article IV

REPRESENTATIONS AND WARRANTIES
OF PURCHASER

As an inducement to Seller to enter into this Agreement, Purchaser hereby represents and warrants to Seller as follows:

11


4.01 Organization and Authority of Purchaser. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all necessary corporate power and authority to enter into this Agreement and the Ancillary Agreements and to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.

4.02. No Conflict. The execution, delivery and performance of this Agreement and the Ancillary Agreements by Purchaser does not and will not violate, conflict with or result in the breach of any provision of its articles of incorporation or bylaws (or other organizational documents similar thereto).

4.03. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Purchaser.

Article V

ADDITIONAL AGREEMENTS AND ACKNOWLEDGMENTS

5.01. Bulk Sales Compliance. Purchaser hereby waives Seller's compliance with the requirements of any bulk sales law that may apply with respect to the proposed transaction and, correspondingly, Seller and Miller, jointly and severally agree to indemnify Purchaser with respect to any liability incurred by Purchaser on account of non-compliance with any applicable bulk sales law including without limitation Wis. Stats, Chapter 406.

5.02.Survival of Representations and Warranties. Each of the representations and warranties of each of the parties of this Agreement shall be deemed to be made by each party again at and as of the Closing (or, where the representation or warranty by its terms is expressly made as of the date of this Agreement or any other specified date, then as of the date of this Agreement or other specified date) and shall survive the closing of this transaction. Any investigation made at any time by Purchaser or Purchaser's representatives shall not constitute a waiver of Purchaser's rights under any representation or warranty or any indemnity set forth in this Agreement

5.03. Post-Closing Storage and Loading. Seller agrees that, following the Closing, Purchaser may store the Inventory at Seller's facility in St-Nazianz, WI. Further, Seller agrees that, upon Purchaser's request, Seller shall, at Seller's expense, load Finished Goods Inventory for shipment to customers or to Purchaser. The Inventory will be shipped F.O.B. Seller's facility, St-Nazianz, WI. Storage of Inventory at Seller's premises shall be at no cost to Purchaser. All Manufacturing Fixtures and Equipment And Spare Parts Inventory shall immediately after closing, be loaded for shipment by Seller at no cost to Purchaser, and will be shipped to Purchaser F.O.B. Seller's facility, St-Nazianz, WI.
 
12

 
5.04. Post-Closing Startup Assistance. Following the Closing, Seller shall provide Purchaser access to such of Seller's employees with the necessary skills as may be reasonably necessary to assist Purchaser in establishing its operations with respect to the Purchased Product Lines. The services shall run over a three week period during which period Seller shall furnish one person for the entire first week, two persons for the entire second week and one person for the entire third week, said three week period to commence when requested by Purchaser upon 7 days notice by Purchaser to Seller. Seller shall also provide such assistance as may be reasonably needed to load Seller's computer data related to the Product Lines onto Purchaser's computer systems. All of such assistance shall be furnished at no cost to Purchaser except that Purchaser shall pay the actual travel costs and expenses for Seller's employees traveling to Purchaser's facility.

5.05. Collection of Accounts Receivable. Following the Closing, Purchaser and Seller shall cooperate in the collection of any outstanding balances due from customers that purchased products in the Purchased Product Lines. Purchaser shall have full power and authority to collect for its account all receivables, and to endorse, without recourse to the Seller, in the name of the Seller, any checks or other instruments of payment received on account of payment of any such receivables; provided, further, that any payments received by either Purchaser or Seller shall be applied to the particular invoice designated by the customer paying such invoice and shall promptly be delivered to the party owning such receivable.

5.06. Further Action. Each of the parties hereto shall use all reasonable efforts to take or cause to be taken all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable Law and to execute and deliver such documents and other papers as may be required to carry out the provisions of this Agreement and the Ancillary Agreements to which it is a party and consummate and make effective the transactions contemplated hereby and thereby.

5.07 Regular Course of Business; Continuation of Ordering. From the date hereof until the Closing Date, Seller will operate its business pertaining to the Purchased Product Lines in the ordinary course, diligently and in good faith, consistent with past management practices; will maintain (except for expiration due to lapse of time) all contracts pertaining to the Purchased Product Lines in effect without change except as expressly provided herein; will comply with the provisions of all Laws, applicable to the conduct of its business pertaining to the Purchased Product Lines; will not engage in any significant or unusual transaction not in the ordinary course of business that in any manner pertains to the Purchased Product Lines; From the date hereof until the Closing Date, Seller will not create or permit to become effective any mortgage, pledge, lien, encumbrance or charge of any kind upon its assets pertaining to the Purchased Product Lines other than in the ordinary course of business. The parties acknowledge that certain of the materials used in the manufacturing process have a long order lead time Prior to Closing Seller shall continue ordering said items as has been its past practice (notifying the Purchaser of each such order) and upon closing such orders (and the obligation to pay for same) shall be assigned to Purchaser.
 
13

 
5.08 Access to Information and. Assets. Seller shall permit Purchaser and Purchaser's authorized employees, agents, accountants, legal counsel and other representatives to have access to the books, records, employees, counsel, accountants, engineers and other representatives of Seller at all times reasonably requested by Purchaser for the purpose of conducting an investigation of the Purchased Assets and the accuracy of the information furnished by Seller to Purchaser. Seller shall have the right to have access to inspect the Purchased Assets. In the event the purchase transaction subject to this Agreement does not close for any reason Purchaser as well as its authorized agents, employees, counsel, accountants, legal counsel, and other representatives shall immediately return to Seller any and all copies of documents as well as data and other information obtained pursuant to this provision and they shall not publish, utilize, or cause the same to be utilized directly or indirectly in Purchaser's or any other third party's business.

5.09 Seller Fulfillment of Conditions. Seller will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of Purchaser contained in this Agreement and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition,

5.10 Purchaser Fulfillment of Conditions. Purchaser will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of Seller contained in this Agreement and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition.

Article VI

CONDITIONS TO CLOSING

6.01 Conditions Precedent to Obligations of Seller. The obligation of Seller to effect the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the following conditions (compliance with which or the occurrence of which may be waived in whole or in part in a writing executed by Seller):

(a) Purchaser shall have performed in all material respects its obligations under this Agreement required to be performed by it at or prior to the Closing;

(b) All of the representations and warranties of Purchaser contained in this Agreement shall have been true and correct in all material respects on the date hereof and shall be true and correct in all material respects as of the Closing Date as if such representations and warranties were made on and as of that date;

(c) As of the Closing Date, no litigation, proceeding, investigation or inquiry shall be pending or threatened seeking to enjoin or prevent the consummation of, or to obtain damages or other material relief by reason of, the transactions contemplated by this Agreement;

(d) Purchaser shall have paid all amounts, delivered all items and satisfied all obligations required to be paid, delivered or satisfied by Purchaser pursuant to paragraph 2.10 of this agreement.
 
14

 
6.01 Conditions Precedent to Obligation of Purchaser. The obligation of Purchaser to effect the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the following conditions (compliance with which or the occurrence of which may be waived in whole or in part in a writing executed by Purchaser):

(a) Seller shall have performed in all material respects the obligations under this Agreement required to be performed by it at or prior to the Closing;

(b) All of the representations and warranties of Seller contained in this Agreement shall have been true and correct in all material respects on the date hereof and shall be true and correct in all material respects as of the Closing Date as if such representations and warranties were made on and as of that date;

(c) As of the Closing Date, no litigation, proceeding, investigation or inquiry shall be pending or threatened seeking to enjoin or prevent the consummation of, or to obtain damages or other material relief by reason of the transactions contemplated by this Agreement;

(d) Seller shall have delivered all items and satisfied all obligations required to be delivered or satisfied by Seller pursuant to paragraph 2.09 of this agreement; and

(e) The execution of this agreement arid the closing of the transaction called for herein shall have been duly approved by the board of directors of Seller.

Article VII

INDEMNIFICATION

7.01 Seller's Indemnity. Subject to the provisions of this Article VII, Seller from and after the Closing Date agrees to, indemnify and hold Purchaser and its directors, officers, agents, employees, representatives, successors and assigns, harmless from and against any and all damage, loss, cost, obligation, claims, demands, assessments, judgments or liability (whether based on contract, tort, product liability, strict liability or otherwise), including taxes, and all expenses (including interest, penalties and attorneys' and accountants' fees and disbursements) (collectively "Damages") incurred in litigation or otherwise, and any investigation relating thereto, by any of the above-named persons, directly or indirectly, resulting from or in connection with:

(a) Any misrepresentation, breach of warranty or failure to perform any covenant or agreement made or undertaken by Seller in this Agreement or in any other agreement, certificate, schedule, exhibit or writing delivered to Purchaser pursuant to this Agreement;

(b) All debts, liabilities and obligations of Seller of whatever kind and nature;

15

 
(c) All product liability claims arising out of any product manufactured or sold by Seller;

(d) Any failure to comply with any and all requirements for notice to creditors or similar requirements imposed under any applicable bulk sales laws to the extent applicable to the transactions contemplated by this Agreement. and

(e) Any action, suit, proceeding or claim incident to any of the foregoing.

7.02 Purchaser's Indemnity. Purchaser from and after the Closing Date, shall indemnify and hold Seller harmless from and against any Damages incurred by Seller resulting from or in connection with:

(a) Any misrepresentation, breach of warranty or failure to perform any covenant or agreement made or undertaken by Purchaser in this Agreement or in any other agreement, certificates, schedule, exhibit or writing delivered by Purchaser to Seller pursuant to this Agreement;

(b) Any debts, liabilities and obligations of Purchaser of whatever kind and nature; and

(c) Any action, suit, proceeding or claim incident to any of the foregoing.

7.03 Miller's Indemnity. Miller from and after the Closing Date agrees to, indemnify and hold Purchaser harmless from and against any and all damage, loss, cost, obligation, claims, demands, assessments, judgments or liability, and all expenses (including interest, penalties and attorneys' and accountants' fees and disbursements) (collectively "Damages") arising from any failure to comply with any and all requirements for notice to creditors or similar requirements imposed under any applicable bulk sales laws including without limitation Wis. Stat. Chapter 406, to the extent applicable to the transactions contemplated by this Agreement

7.04 Procedure. All claims for indemnification by a party under this Article VII (the party claiming indemnification and the party against whom such claims are asserted being hereinafter called the "Indemnified Party" and the "indemnifying Party," respectively) shall he asserted and resolved as follows:

16

 
(a) In the event that any claim or demand for which an Indemnifying Party would be liable to an Indemnified Party hereunder is asserted against or sought to be collected from such Indemnified Party by a third party, such Indemnified Party shall with reasonable promptness give notice (the ''Claim Notice") to the Indemnifying Party of such claim or demand, specifying the nature of and specific basis for such claim or demand and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such claim and demand). The Indemnifying Party shall not be obligated to indemnify the Indemnified Party under this Agreement with respect to any such claim or demand if the Indemnified Party fails to notify the Indemnifying Party thereof in accordance with the provisions of this Agreement, and, as a result of such failure, the Indemnifying Party's ability to defend against the claim or demand is materially prejudiced. The Indemnifying Party shall have ten (10) days from the delivery or mailing of the Claim Notice (the "Notice Period") to notify the Indemnified Party (i) whether or not it disputes the liability of the Indemnifying Party to the Indemnified Party hereunder with respect to such claim or demand, and (ii) whether or not it desires, at the cost and expense of the Indemnifying Party, to defend the Indemnified Party against such claim or demand; provided, however, that any Indemnified Party is hereby authorized, but is not obligated, prior to and during the Notice Period, to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party. If the indemnifying Party notifies the Indemnified Party within the Notice Period that it desires to defend the Indemnified Party against such claim or demand, the Indemnifying Party shall, subject to the last sentence of this paragraph, have the right to control the defense against the claim by all appropriate proceedings and any settlement negotiations, provided that to the satisfaction of the Indemnified Party, the Indemnifying Party shall secure the Indemnified. Party against such contested claims by posting a bond or otherwise. If the Indemnified Party desires to participate in, but not control, any such defense or settlement, it may do so at its sole cost and expense. If the Indemnifying Party fails to respond to the Indemnified Party within the Notice Period, elects not to defend the Indemnified Party, or after electing to defend fails to commence or reasonably pursue such defense, then the Indemnified Party shall have the right, but not the obligation, to undertake or continue the defense of, and to compromise or settle (exercising reasonable business judgment), the claim or other matter all on behalf, for the account and at the risk of the indemnifying Party. Notwithstanding the foregoing, if the basis of the proceeding relates to a condition of operations which existed or were conducted both prior to and after the Closing Date or if the Indemnified Party would be otherwise adversely affected as a result of any adverse decision of such proceeding, each party shall have the same right to participate at its own expense and at its own risk in the proceeding without either party having the right of control.

(b) If requested by the Indemnifying Party, the Indemnified Party agrees, at the Indemnifying Party's expense, to cooperate with the Indemnifying Party and its counsel in contesting any claim or demand which the Indemnifying Party elects to contest, or, if appropriate and related to the claim in question, in making any counterclaim against the person asserting the third party claim or demand, or any cross-complaint against any person. No claim as to which indemnification is sought under this Agreement may be settled without the consent of the Indemnifying Party.

(c) If any Indemnified Party should have a claim against the Indemnifying Party hereunder which does not involve a claim or demand being asserted against or sought to be collected from it by a third party, the Indemnified Party shall send a Claim Notice with respect to such claim to the Indemnifying Party. If the Indemnifying Party disputes such claim, such dispute shall be resolved by litigation in an appropriate court of competent jurisdiction.

17

 
7.05 Costs. If any legal action or other proceeding is brought for the enforcement or interpretation of any of the rights or provisions of this Agreement (including the indemnification provision), or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and all other costs and expenses incurred in that action or proceeding, in addition to any other relief to which it may be entitled.

7.06 Limitation on Indemnities. Neither party to this agreement shall assert a right of indemnity under this Article VII unless and until the cumulative claims of the party seeking indemnity shall exceed $5,000.00. Neither party shall be entitled to indemnity under this Article VII with respect to any claim for which the party seeking indemnity shall have been fully compensated by applicable insurance.

Article VIII

GENERAL PROVISIONS

8.01 Expenses. Except as otherwise specified in this Agreement, all costs and expenses, including fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred.

8.02. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by a recognized overnight courier service, by facsimile or registered or certified mail (postage prepaid, return receipt requested) to the respective parties hereto at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 8.02):

Miller-St. Nazianz, Inc.
   
 
511 East Main Street
   
 
P.O. Box 127
   
 
St. Nazianz, Wisconsin 54232
   
 
Attention: John C. Miller
   
With Copy to:
Whyte Hirschboeck Dudek S.C.
   
 
555 East Wells Street
   
 
Suite 1900
   
 
Milwaukee, Wisconsin 53202-3819
   
 
Attention: James R. Lowe
 
18

 
If to Purchaser:
Art’s Way Manufacturing Co., Inc.
   
 
P.O. Box 288 – 5556 Hwy. 9
   
 
Armstrong, Iowa 50504
   
 
Attention: J.Ward McConnell, Jr.
   
 
With a copy to Purchaser’s counsel:
   
 
Wooten & Coley
   
 
P.O. Box 1555
   
 
Kinston, NC 28503
   
 
Attention: Everette Wooten

8.03. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect for so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party hereto. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.

8.04. Entire Agreement. This Agreement and the Ancillary Agreements constitute the entire agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior agreements and undertakings, both written and oral, between Seller and Purchaser with respect to the subject matter hereof and thereof.

8.05. Assignment. This Agreement may not be assigned by operation of law or otherwise without the express written consent of Seller and Purchaser (which consent may be granted or withheld in the sole discretion of Seller or Purchaser).

8.06. Amendment. This Agreement may only be amended by mutual, written consent of both Purchaser and Seller.

8.07. No Third Party Beneficiaries. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors and permitted assigns, nothing herein, express or implied, is intended to or shall confer upon any other person.
 
19

 
8.08. Counterparts. This Agreement may be executed and delivered (including by facsimile or PDF transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement.
 
[Signature page, follows]
 
20

 
IN WITNESS WHEREOF, Seller and Purchaser have caused this Agreement to be executed by their respective officers thereunto duly authorized and Miller has hereunto set his hand adopted as his seal the typed word "Seal" appearing next to his name, all, done this the day and year first above written.

 
MILLER-ST. NAZIANZ, INC.
     
 
By: 
/s/ John C. Miller
   
 Name: John C. Miller
   
 Title: President
     
 
ART’S WAY MANUFACTURING CO., INC.
     
 
By: 
/s/ J. Ward McConnell, Jr.
   
Name: J. Ward McConnell, Jr.
   
Title: Chairman
     
 
/s/ John C. Miller                                                              (SEAL)
 
John C. Miller, Individually
 
21

 
EXHIBIT A — BADGER INTELLECTUAL PROPERTY LICENSE AGREEMENT

Document is attached.
 
22


BADGER INTELLECTUAL PROPERTY LICENSE AGREEMENT

This Trademark License Agreement (the "Agreement"), dated and effective as of the 5th day of September, 2007 (the "Effective Date"), by and between MILLER-ST. NAZIANZ, INC., a Wisconsin corporation ("Licensor") and ART'S WAY MANUFACTURING CO., INC., a Delaware corporation ("Licensee").

WHEREAS, Licensor and Licensee have entered into an Asset Purchase Agreement, dated as of September 5, 2007 (the "Purchase Agreement") pursuant to which Licensor agreed to sell to Licensee, and Licensee agreed to purchase from. Licensor the Purchased Assets (as defined in the Purchase Agreement), as more particularly set forth in the Purchase Agreement;

WHEREAS, Licensor owns certain rights to the BADGER trade name and mark ("Mark") in connection with the production or sale of the Badger Product Line (as that term is defined in the Purchase Agreement) as well as other goods and services, registrations with respect to the Mark are described in the attached "Exhibit A";

WHEREAS, the Badger Product Line consists of the products described on the attached "Exhibit B"; and

WHEREAS, Licenser and Licensee wish to enter into an agreement to reflect the terms of the Purchase Agreement whereby Licensee will be a licensee of the Mark in connection with the production or sale of the Badger Product Line.

NOW, THEREFORE, in consideration of the mutual promises and covenants made herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
 
1.  
Definitions. Capitalized terms used herein but not otherwise defined herein have the meaning set forth in the Purchase Agreement.
 
2.  
Grant of License. Licensor grants to Licensee a royalty-free, fully paid-up and worldwide license, without the right to sublicense, to use the Mark only in connection with the sale or production of the Badger Product Line as set forth herein. The License granted herein shall be exclusive with respect to the products comprising the Badger Product Line or products of the same type or use as the products comprising the Badger Product Line and Licensor shall not use or license the use of the Mark in connection with products comprising the Badger Product Line or products of the same type or use as the products comprising the Badger Product Line. The foregoing notwithstanding, Licensor retains the right to use or license the use of the Mark in connection with products not of the same type and use as those contained in the Badger Product Line, and, in particular, Licensor retains the exclusive right to use or license the Mark in connection with Farmstead Products Line. "Farmstead Products Line" consists of farming equipment attached to, installed in or installed under farm buildings and are further described on the attached “Exhibit C”.
 
23

 
3.  
Use Restriction. Licensee shall use the Mark only on goods included in the Badger Product Line and upgrades and improvements to and variations of goods included therein. Licensee shall not use the Mark on any other goods or in relation to any services relating to goods not included in the Badger Product Line. Licensee shall not use the Mark on any goods comprising or services relating to the Farmstead Product Line. Licensee shall not modify or amend the Mark in any way, nor shall Licensee use any confusingly similar mark or any derivative of the Mark on or in connection with the Badger Product Line or any other goods.

4.  
Ownership of the Mark. Licensee acknowledges that, as between Licensor and Licensee, Licensor owns all right, title and interest in and to the Mark. All use of the Mark by Licensee shall inure to the benefit of Licensor. Nothing in this Agreement shall give Licensee any right, title or interest in or to the Mark other than the right to use the Mark in accordance with this Agreement. Licensee shall neither attack the validity of the license granted herein nor will it at any time do or cause to be done any act or thing contesting or in any way impairing or intending to impair any part of Licensor's right, title and interest in the Mark. Licensor warrants to Licensee that it is the owner of the Mark, has the right to license the rights herein described, and that use of the Mark by the Licensee in connection with products included in the Badger Product Line will not infringe upon the rights of others, provided however, such warranty shall not extend to claims of infringement arising out of any modification or improvement made by Licensee to any product in the Badger Product Line or to any use of the Mark by Licensee not licensed hereunder.

5.  
Quality Assurances. Licensee and Licensor hereby each covenants with the other that the nature and quality of all products produced or sold by Licensee or Licensor under the Mark as well as any advertising and promotional materials relating to the same, shall he of at least the same quality as that offered or provided by Licensor under the Mark immediately prior to the Effective Date.

6.  
Quality Standards. Licensee acknowledges that, based upon its own investigation and analysis, it is familiar with the goods comprising the Badger Product Line and the quality standards of such goods employed by Licensor immediately prior to the Effective Date, Neither Licensee nor Licensor shall depart from the standard of quality established by this paragraph in any material respect without the other party's prior written consent. On an annual basis and after providing written notice, Licensor and Licensee shall each have the right to inspect all uses of the Mark by the other and the products bearing the Mark produced by Licensee to confirm that use of the Mark by the other conforms to the quality standards called for herein. Each party shall cooperate with the other in exercising the rights set forth in this paragraph.
 
24

 
7.  
Term and Termination. This Agreement shall continue in full force and effect until Licensee ceases to manufacture or sell any goods comprising the Badger Product Line for a period of two (2) years, at which time this Agreement and the license hereunder shall terminate. If Licensee defaults in the performance or obligations of any of the terms of this Agreement, Licensor shall notify the Licensee in writing. If the default is not cured within sixty (60) days after the delivery of such written notice, Licensor shall have the right to terminate this Agreement and the license hereunder upon written notice. Upon termination of this Agreement, all rights and privileges of Licensee hereunder shall terminate, and Licensee shall not use the Mark in any way or for any reason and shall destroy all materials and signage bearing or using the Mark. During the term of this agreement Licensor shall make all filings and take such other actions as are necessary to keep Licensor's rights with respect to the Mark current and in effect.

8.  
Infringement Proceedings. Licensee shall promptly notify Licensor in writing of any unauthorized use of the Licensed Marks by third parties as it comes to Licensee's attention. Licensor shall have the right and discretion to bring infringement, unfair competition or other proceedings or actions involving the Mark against such third parties. Licensor shall bear the legal costs and fees in such infringement, unfair competition or other proceeding or action. In the event such unauthorized use shall involve products like or similar to the products contained in the Badger Product Line, and if Licensor does not take action to enforce the Licensor's rights to the Mark (and/or Licensee's right hereunder) Licensee may at its expense bring such infringement, unfair competition or other proceeding or action as may be appropriate to enforce its rights with respect to the Mark and the rights licensed under this agreement.

9.  
Indemnification. Licensee shall indemnify, defend and hold harmless Licensor from and against any and all Claims asserted against, resulting to, imposed upon or incurred by Licensor by any reason of, arising out of or resulting from the breach by Licensee of any of its obligations under this Agreement, the use by Licensee of the Mark under this Agreement (except for claims for infringement not arising out of any modification or improvement made by Licensee to any product in the Badger Product Line or to any use of the Mary by licensee not licensed hereunder), or any alleged wrong or defect in the goods or services Licensee provides, manufactures, sells, offers or distributes. Licensor shall indemnify, defend and hold harmless Licensee from and against any and all Claims asserted against, resulting to, imposed upon or incurred by Licensee by any reason of, arising out of or resulting from the breach by Licensor of any of its obligations under this Agreement, the use by Licensor of the Mark either prior to the date of this agreement, or with respect to any use made by the Licensor of the Mark after the date of this agreement, or any alleged wrong or defect in the goods or services Licensor provides, manufactures, sells, offers or distributes. As used in this Agreement, the term "Claim" or "Claims" shall include; (i) all liabilities, obligations or responsibilities, fixed or unfixed, known or unknown, asserted or unasserted, liquidated or unliquidated, secured or unsecured; (ii) all losses, damages, judgments, awards, settlements, costs and expenses (including, without Limitation, interest, penalties, court costs and attorneys' fees and expenses); and (iii) all demands, claims, suits, actions, costs of investigation, causes of action, proceedings, arbitrations and assessments, whether or not ultimately determined to be valid.
 
25

 
10.  
Relationship of the Parties. The parties shall be deemed independent contractors and shall have no authority to bind the other to any contract, agreement or matter.

11.  
Notice. Ali notices and communications provided for in this Agreement shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by an internationally recognized overnight courier service, by facsimile or registered or certified mail (postage prepaid, return receipt requested) to the appropriate address as set forth in the Purchase Agreement, unless another address is substituted in writing by a party to this Agreement.

12.  
Assignment and Sublicense. This Agreement is entered into in reliance upon and in consideration of the character, qualifications and representations of the parties. Neither this Agreement nor any of the rights, privileges or obligations herein shall be assigned, transferred or divided in any manner by either party without the prior written approval of the other party; provided, however, that (i) the Licensor may assign this Agreement or any of their respective rights and obligations hereunder to one or more of its affiliates or related companies and (ii) either party may assign this Agreement to a person or entity which acquires and succeeds to the business of such party (as it relates to this Agreement) without the consent of the other party.

13.  
Severability. If any section, paragraph, sentence, clause or other provision of this Agreement is held by a court of competent jurisdiction to be illegal, null and void or unenforceable, such determination shall not affect the remainder of this Agreement, and such remainder shall remain in full force and effect, to extent permitted by law.

14.  
Waiver. The waiver of either party of any right hereunder or failure to perform or breach by the other party shall not be deemed as a waiver of any other right hereunder or of any other breach or failure by said other party whether of a similar nature or otherwise.

15.  
Scope of Agreement. This Agreement supersedes and terminates any and all prior agreements or contracts concerning the subject matter hereof, whether oral or in writing, which have been entered into between Licensor and Licensee prior to the Effective Date. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter hereof. No change, termination, waiver, amendment or modification of any of the provisions hereof shall be binding upon the parties, unless in a writing signed by duly authorized representatives of the parties. This Agreement may he executed in counterparts, each of which shall he deemed an original, but all of which together shall constitute one and the same instrument.

[Signature page follows]

26

 
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the Effective Date.

LICENSOR: 
 
LICENSEE:
MILLER-ST. NAZIANZ, INC.
 
ART'S WAY MANUFACTURING CO., INC.
 
   
 
   
By:
     
By:
   
 
John C. Miller
     
J. Ward McConnell, Jr.
 
 
President
     
Chairman
 
 
27

 
EXHIBIT A

Mark
 
Country
 
Registration No.
 
Registration Date
BADGER
 
U.S.
 
2,460,006
 
12-Jun-2001
BADGER
 
Canada
 
TMA549,726
 
10-Aug-2001
BADGER & Design
(as depicted below)
 
[BADGER]
 
U.S.
 
871,241
 
17-Jun-1969
 
28

 
EXHIBIT B

Badger Product Line

The following products manufactured and/or marketed using the Badger tradename or trademark:

Forage Boxes (including front, rear, combo or other)

Forage Blowers

Running Gears

Dump Boxes

Options for any of the foregoing
 
29

 
EXHIBIT C

Farmstead Product Line

Silo unloaders

Silage chutes

Silage spreaders

Barn cleaners

Alley scrapers

Manure pumps

Manure agitators

Manure Augers

Manure tanker

Chain conveyors for barn use

Belt conveyors for barn use

Chain feeders

Belt feeders

Stationary feed mixers

Roller mills

Accessories and parts for any of the foregoing
 
30

 
EXHIBIT B — WARRANTY BILL OF SALE

Document is attached.
 
31


WARRANTY BILL OF SALE

KNOW ALL MEN BY THESE PRESENTS, that for good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, Miller-St. Nazianz, Inc., a Wisconsin corporation ("Seller"), does hereby sell, assign, transfer, convey and deliver to Art's Way Manufacturing Co., Inc., a Delaware corporation (the "Purchaser"), pursuant to that certain Asset Purchase Agreement, dated as of September 5, 2007, by and among the Seller, John C. Miller, and Purchaser (the "Asset Purchase Agreement"), all of the following assets, properties, goodwill and business (the "Purchased Assets"):

(i)  The Miller Pro product lines described on the attached Schedule 2, the Victor product lines described on the attached Schedule 3, and the Badger product lines described on the attached Schedule l (hereinafter referred to collectively as the "Product Lines").

(ii)  All tooling, dyes, jigs, patterns, specialized equipment necessary or used for the Product Lines ("Manufacturing Fixtures and Equipment"); for purposes of this Agreement specialized equipment includes without limitation that certain 20' foot Press Break shown on the information referred to in paragraph 3.05 of the Asset Purchase Agreement, side punching machine, roof punching machine, blower band roller, corrugated shear, roof edge protector bender, and all assembly line racks and bins;

(iii)  All patents, applications therefor and unpatented inventions applicable to any product within the Product Lines; all designs, drawings, blue prints, computer data, engineering data or studies, manufacturing data, prototypes, stampings, projects in progress, formulas, processes, technical information and knowhow related to or used in the production of any product within the Product Lines ("Intellectual Property");

(iv)  All customer lists, customer backlogs, pending orders, pending purchase contracts, customer files, vendor lists, purchase records, sales records or data (electronic or otherwise) relating to any of the products in the Product Lines ("Customer Lists");

(v)  Inventories of finished goods and work in process related to any products in the Product Lines as described in the Asset Purchase Agreement ("Finished Goods Inventory");

(vi)  All inventories of spare parts related to any product in the Product Lines as further described in the Asset Purchase Agreement ("Spare Parts Inventory");

(vii)  Inventories of raw materials and completed manufactured parts related to products in the Product Lines as further described in the Asset Purchase Agreement ("Raw Material and Completed Manufactured Parts Inventory");

(viii)  All logos, trademarks, trade names, service marks, copyrights, applications for and registrations pertaining to any of the Product Lines and the marketing thereof, including without limitation the names Miller Pro, Victor, Hay Buddy and Badger ("Trade Names") provided however Purchaser's rights to use the "Badger" trade name shall be expressly limited to rights of use in connection with the production or sale of the Badger Product Line, as more particularly set forth in the Badger Intellectual Property License Agreement.;

32

 
(ix)  All distribution agreements with manufacturers pertaining to the Product Lines including without limitation such agreements with John Deere and Tonutti S.p.A ("Distribution Agreements");

(x)  All dealership, dealer or distributor agreements or contracts pertaining to any of the Product lines with dealers handling any of the Product Lines ("Dealer Agreements"),provided, Purchaser will have no repurchase obligations under such agreements with respect to sales prior to closing; and

(xi)  the goodwill of Seller relating to the Product Lines.

and that all of the foregoing assets be free of all liens, and it being understood that the Seller shall retain and the Purchased Assets shall specifically exclude all other assets of the Seller.

TO HAVE AND TO HOLD the Purchased Assets unto and for the use of Purchaser, its successors and assigns forever.

Seller does hereby warrant and defend the title to the Purchased Assets against the lawful. claims and demands of all persons.

From and after the date hereof, upon request of Purchaser, Seller shall duly perform such further acts and duly execute, acknowledge and deliver all such further acts, deeds, assignments, certificates, receipts, transfers, conveyances, powers of attorney and assurances as may be reasonably required to convey and to vest in Purchaser and to protect its right, title and interest in and enjoyment of all assets intended to be assigned, transferred and conveyed pursuant to this Warranty Bill of Sale and as may be appropriate otherwise to carry out the transactions as contemplated by this Warranty Bill of Sale.

Capitalized terms used herein without definition shall have the meanings ascribed to them in the Asset Purchase Agreement. In the event of any conflict or inconsistency between the terms of the Asset Purchase Agreement and the terms hereof, the terms of the Asset Purchase Agreement shall govern.

[Signature Page follows]
 
33


SIGNATURE PAGE TO
WARRANTY BILL OF SALE
 
IN WITNESS WHEREOF, Seller has signed and sealed this Warranty Bill of Sale as of September 5, 2007.

 
Miller-St. Nazianz, Inc.
     
 
By:
 
   
Name: John C. Miller
   
Title: President
     
 
Art’s Way Manufacutring Co., Inc.
     
 
By:
 
   
Name:
   
Title:
 
34

 
SCHEDULE 1 — BADGER PRODUCT LINE

The following products manufactured and/or marketed using the Badger tradename or trademark:

Forage Boxes (including front, rear, combo or other)

Forage Blowers

Running Gears

Dump Boxes

Options for any of the foregoing

Other products manufactured and/or marketed using the Badger tradename or trademark are not included.
 
35


SCHEDULE 2 — MILLER PRO PRODUCT LINE

All products manufactured and/or marketed using the Miller Pro tradename, including without limitation:

Forage Boxes (including front, rear, combo or other)

Receiver Boxes

Running Gears and Tires

Forage Blowers

Dump Boxes

Rotary Rakes

Finger Wheel Rakes

Miller produced Hay Mergers

All "Hay Buddy" equipment

Options for any of the foregoing

Excepted from the foregoing are pull type sprayers marketed under the Miller Pro brand and products manufactured by Ziegler,
 
36


SCHEDULE 3 — VICTOR PRODUCT LINE

All products manufactured and/or marketed using the Victor trademark, including without limitation:

Forage Boxes (including front, rear, combo or other)

Running Gears

Rotary Rakes

Forage Blowers

Dump Boxes

Options for any of the foregoing.
 
37


EXHIBIT C — INTELLECTUAL PROPERTY ASSIGNMENT
 
Document is attached.
 
38


ASSIGNMENT OF INTELLECTUAL PROPERTY

WHEREAS, Miller-St. Nazianz, Inc., a Wisconsin corporation (the "Seller") is the owner of certain Intellectual Property, as defined in Section 2.01(a)(iii) of that certain Asset Purchase Agreement by and among Seller, John C. Miller, and Art's Way Manufacturing Co., Inc., a Delaware corporation (the "Purchaser"), dated as of September 5, 2007 (the "Asset Purchase Agreement"), and including, but not limited to: (a) rights in the Victor and Miller Pro trade names and all goodwill relating thereto; and (b) the following patents and registrations and the other Intellectual Property described as follows:

Trademarks

Mark
 
Country
 
Registration #
 
Registration Date
 
Next Action
Due
"Hay Buddy"
 
U.S.
 
548,356
 
7/19/2001
 
7/19/2016
"Victor"
 
Canada
 
2,373,268
 
8/1/2000
 
8/1/2010
"Victor"
 
U.S.
 
2,866,031
 
7/27/2004
 
7/27/2010
"Miller Pro"
 
 
 
no registration
 
no registration
 
 
 
Patents
1) United States Patent No. 5,175,987 — Issued June 5, 1993

Other (to the extent title thereto is not effectively conveyed in a Warranty Bill of Sale of even date herewith between the parties hereto)

All other patents, applications therefor and unpatented inventions applicable to any product within the Product Lines (as the term is defined in the Asset Purchase Agreement); all designs, drawings, blue prints, computer data, engineering data or studies, manufacturing data, prototypes, stampings, projects in progress, formulas, processes, technical information and know-how related to or used in the production of any product within the Product Lines.

All logos, trademarks, trade names, service marks, copyrights, applications for and registrations pertaining to any of the Product Lines and the marketing thereof, including without limitation the names Miller Pro, Victor, Hay Buddy and Badger ("Trade Names") provided however Purchaser's rights to use the "Badger" trade name shall be expressly limited to rights of use in connection with the production or sale of the Badger Product Line, as more particularly set forth in the Badger Intellectual Property License

Agreement delivered by Seller to Purchaser this date.

All of the foregoing being collectively referred to as the "Intellectual Property".

39

 
WHEREAS, Seller was and remains the sole owner of said Intellectual Property.

WHEREAS, Purchaser desires to acquire the Intellectual Property.

NOW, THEREFORE, in consideration of the sum of one dollar ($1.00), and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller by these presents does sell, assign and transfer unto said Purchaser sole, entire and complete ownership of the Intellectual Property, including the right to sue for past infringement and all goodwill relating thereto, the same to be held and enjoyed by the Purchaser for its own use and behoof, and for its legal representatives and assigns, as fully and entirely as the same would have been held by the Seller had this assignment and sale not been made. Seller does hereby warrant and shall defend the title to the Intellectual Property against the lawful claims and demands of all persons and agrees to indemnify Purchaser for any breach of such warranty in accordance with Article VII of the Asset Purchase Agreement. Seller shall execute such documents and use commercially reasonable efforts to take or cause to be taken all actions and to do or cause to be done all things necessary, proper or advisable to consummate the transactions contemplated by this Assignment (including, without limitation, to put Purchaser in actual possession and operating control of the Intellectual Property, to effectuate, record or perfect the transfer of the Intellectual Property to Purchaser, to confirm the title of the Intellectual Property in Purchaser and to assist Purchaser in exercising rights relating thereto), and to make all filings and give all notices which may be necessary or required in order to effectuate the transactions contemplated hereby.

[Signature Page follows]
40

 
SIGNATURE PAGE TO
ASSIGNMENT OF INTELLECTUAL PROPERTY

Executed on September 5, 2007.
   
   
Miller-St, Nazianz, Inc.
     
   
By:
 
   
Name: John C. Miller
   
Title: President
 
   
Witness:
 
   
Name:
 
   
Title:
 
 
41

 
EXHIBIT D SELLER NON-COMPETITION AGREEMENT

Document is attached.

42


NON-COMPETITION AGREEMENT

NON-COMPETITION AGREEMENT (this "Agreement") dated as of September 5, 2007, between Miller-St. Nazianz, Inc., a Wisconsin corporation (the "Seller"), and Art's Way Manufacturing Co., Inc., a Delaware corporation (the "Purchaser").

RECITALS

WHEREAS, pursuant to that certain Asset Purchase Agreement by and among Seller, John C. Miller, President of Seller, and Purchaser, dated as of September 5, 2007 (the "Asset Purchase. Agreement"), Seller agreed to sell, and Purchaser agreed to purchase, the Purchased Assets, as defined in the Asset Purchase Agreement; and

WHEREAS, assets the purchased under the Asset Purchase Agreement includes assets constituting certain product lines, said product lines being the Victor Product Line described on the attached Schedule 3, the Badger Product Line described on the attached Schedule 1 and the Miller Pro Product Line described on the attached Schedule 2; and

WHEREAS, an agreement prohibiting Seller from competing with Purchaser is necessary for Purchaser to receive the full benefit of the Purchased Assets and the good will included therein; and

WHEREAS, Section 2.09(a) of the Asset Purchase Agreement requires that a non-competition agreement be executed and delivered by Seller at the Closing; and

WHEREAS, Seller and Purchaser wish to set forth certain agreements with respect to non-competition as provided in this Agreement.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties agree as follows:

AGREEMENT

The parties, intending to be legally bound, agree as follows:

1. DEFINITIONS

Capitalized terms not expressly defined in this Agreement shall have the meanings ascribed to them in the Asset Purchase Agreement.

2. NON-COMPETITION

As an inducement for Purchaser to enter into the Asset Purchase Agreement and close the Purchase transaction provided for therein (without which inducement Seller acknowledges that Purchaser would not enter into the Asset Purchase Agreement or close the Purchase transaction called for therein), Seller agrees that:

43


(a) For a period of five (5) years after the Closing, Seller will not, directly or indirectly, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation or control of, be employed by, associated with or in any manner connected with, lend Seller's name or any similar name to, lend Seller's credit to or render services or advice to, any business whose products or activities compete in whole or in part with the products or activities of the Purchased Assets (including the products comprising the Victor, Badger and Miller Pro Product Lines), anywhere in the World; provided, however, that Seller may purchase or otherwise acquire up to (but not more than) one percent of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934. Seller agrees that this covenant is reasonable with respect to its duration, geographical area and scope. Seller will not be considered in violation of this Agreement solely because Seller is acquired by an entity that is already engaged in the distribution of any products or equipment of the type contained within the Purchased Assets. Further, Seller shall not be considered in violation of this agreement if he or Corporation manufactures or sells self propelled hay mowers.

3. REMEDIES

If Seller breaches the covenants set forth in Section 2 of this Agreement, Purchaser will be entitled to the following remedies:

(a) damages from Seller; and

(b) in addition to its right to damages and any other rights it may have, to obtain injunctive or other equitable relief to restrain any breach or threatened breach or otherwise to specifically enforce the provisions of Section 2 of this Agreement, it being agreed that money damages alone would be inadequate to compensate Purchaser and would be an inadequate remedy for such breach.

(c) The rights and remedies of the parties to this Agreement are cumulative and not alternative.

4. WAIVER

Neither the failure nor any delay by any party in exercising any right, power or privilege under this Agreement will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement.

44

 
5. GOVERNING LAW

This Agreement shall be governed by and construed and enforced in accordance with the internal Laws of the State of Wisconsin regardless of conflicts of laws principles.

6. SEVERARILITY

Whenever possible each provision and term of this Agreement wilt be interpreted in a manner to be effective and valid but if any provision or term of this Agreement is held to be prohibited or invalid, then such provision or term will be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting in any manner whatsoever the remainder of such provision or term or the remaining provisions or terms of this Agreement. If any of the covenants set forth in Section 2 of this Agreement are held to be unreasonable, arbitrary or against public policy, such covenants will be considered divisible with respect to scope, time and geographic area, and in such lesser scope, time and geographic area, will be effective, binding and enforceable against Seller.

7. COUNTERPARTS

This Agreement may he executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

8. SECTION HEADINGS; CONSTRUCTION

The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require.

10. NOTICES

All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt) or (b) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses set forth in the Asset Purchase Agreement (or to such other addresses numbers as a party may designate by notice to the other parties).

45

 
11. ENTIRE AGREEMENT

This Agreement and the Asset Purchase Agreement constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior written and oral. agreements and understandings between Purchaser and Seller with respect to the subject matter of this Agreement. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment.
 
[Signature Page follows]

46


SIGNATURE PAGE TO
NON-COMPETITION AGREEMENT

IN WITNESS WHEREOF, the parties have executed this Agreement as of September 5, 2007.

 
Miller-St. Nazianz, Inc.
 
     
 
By:
 
     
 
Name: John C. Miller
 
 
Title: President
 
     
 
Art's Way Manufacturing Co., Inc.
 
     
 
By:
 
     
 
Name:
 
 
Title:
 
 
47

 
SCHEDULE 1— BADGER PRODUCT LINE

The following products manufactured and/or marketed using the Badger tradename, or trademark:

Forage Boxes (including front, rear, combo or other)

Forage Blowers

Running Gears

Dump Boxes

Options for any of the foregoing

Other products manufactured and/or marketed using the Badger tradename or trademark are not included.
 
48


SCHEDULE 2 — MILLER PRO PRODUCT LINE

All products manufactured and/or marketed using the Miller Pro tradename, including without limitation:

Forage Boxes (including front, rear, combo or other)

Receiver Boxes

Running Gears and Tires

Forage Blowers

Dump Boxes

Rotary Rakes

Finger Wheel Rakes

Miller produced Hay Mergers

All "Hay Buddy" equipment

Options for any of the foregoing

Excepted from the foregoing are pull type sprayers marketed under the Miller Pro brand and products manufactured by Ziegler.
 
49


SCHEDULE 3 - VICTOR PRODUCT LINE

All products manufactured and/or marketed using the Victor trademark, including without limitation:

Forage Boxes (including front, rear, combo or other)

Running Gears

Rotary Rakes

Forage Blowers

Dump Boxes

Options for any of the foregoing
 
50


EXHIBIT E — JOHN C. MILLER NON-COMPETITION AGREEMENT

Document is attached.

51


NON-COMPETITION AGREEMENT

NON-COMPETITION AGREEMENT (this "Agreement") dated as of September 5, 2007, between John C. Miller, an individual ("Miller"), and Art's Way Manufacturing Co., Inc., a Delaware corporation (the "Purchaser").

RECITALS

WHEREAS, pursuant to that certain Asset Purchase Agreement by arid among Miller-St. Nazianz, Inc., a Wisconsin corporation (the "Corporation."), Miller, and. Purchaser, dated as of September 5, 2007 (the "Asset Purchase Agreement"), the Corporation agreed to sell, and Purchaser agreed to purchase, the Purchased Assets, as defined in the Asset Purchase Agreement; and

WHEREAS, Miller if president and sole voting shareholder of Corporation and is and has been involved in its day to day operations included the operations involving the Purchased Product Lines and the Purchased Assets; and

WHEREAS, the assets purchased under the Asset Purchase Agreement includes assets constituting certain product lines, said product lines being the Victor Product Line described on the attached Schedule 3, the Badger Product Line described on the attached Schedule I and the Miller Pro Product Line described on the attached Schedule 2; and

WHEREAS, an agreement prohibiting Miller from competing with Purchaser is necessary for Purchaser to receive the full benefit of the Purchased Assets and the good will included therein; and

WHEREAS, Section 2.09(a) of the Asset Purchase Agreement requires that a non-competition agreement be executed and delivered by Miller at the Closing; and

WHEREAS, Miller and Purchaser wish to set forth certain agreements with respect to non-competition as provided in this Agreement; and

WHEREAS this agreement is not entered into between an employer and employee, John C. Miller is not an. employee of Purchaser and John C. Miller's employment is not conditioned or based upon in any way this Agreement, the parties expressly acknowledge that Wis. Stats. §5103.465, Restrictive Covenants in Employment Contracts is inapplicable to this Agreement.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties agree as follows:
 
52

 
AGREEMENT

The parties, intending to be legally bound, agree as follows:
 
1. DEFINITIONS

Capitalized terms not expressly defined in this Agreement shall have the meanings ascribed to them in the Asset Purchase Agreement.

2. NON-COMPETITION

As an inducement for Purchaser to enter into the Asset Purchase Agreement and close the Purchase transaction provided for therein (without which inducement Miler acknowledges that Purchaser would not enter into the Asset Purchase Agreement or close the Purchase transaction called for therein), Miller agrees that:

(a) For a period of five (5) years after the Closing, Miller will not, directly or indirectly, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation or control of he employed by, associated with or in any manner connected with, lend Miller's name or any similar name to, lend Miller's credit to or render services or advice to, any business whose products or activities compete in whole or in part with the products or activities of the Purchased Assets (including the products comprising the Victor, Badger and Miller Pro Product Lines), anywhere in the World; provided, however, that Miller may purchase or otherwise acquire up to (but not more than) one percent of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934. Miller agrees that this covenant is reasonable with respect to its duration, geographical area and scope. Miller will not be considered in violation of this Agreement solely because Corporation is acquired by an entity that is already engaged in the distribution of any products or equipment of the type contained within the Purchased Assets. Further, Miller shall not be considered in violation of this agreement if he or Corporation manufactures or sells self propelled hay mowers.

3.  REMEDIES

If Miller breaches the covenants set forth in Section 2 of this Agreement, Purchaser will be entitled to the following remedies:

(a) damages from Miller; and

(b) in addition to its right to damages and any other rights it may have, to obtain injunctive or other equitable relief to restrain any breach or threatened breach or otherwise to specifically enforce the provisions of Section 2 of this Agreement, it being agreed that money damages alone would be inadequate to compensate Purchaser and would be an inadequate remedy for such breach.

(c) The rights and remedies of the parties to this Agreement are cumulative and not alternative.

53

 
4. WAIVER
 
Neither the failure nor any delay by any party in exercising any right, power or privilege under this Agreement will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum. extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party wilt be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement.

5. GOVERNING LAW

This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Wisconsin regardless of conflicts of laws principles.

6. SEVERABILITY

Whenever possible each provision and term of this Agreement will be interpreted in a manner to be effective and valid but if any provision or term of this Agreement is held to be prohibited or invalid, then such provision or term will be ineffective only to the extent of such prohibition or invalidity, Without invalidating or affecting in any manner whatsoever the remainder of such provision or term or the remaining provisions or terms of this Agreement. If any of the covenants set forth in Section 2 of this Agreement are held to be unreasonable, arbitrary or against public policy, such covenants will be considered divisible with respect to scope, time and geographic area, and in such lesser scope, time and geographic area, will be effective, binding and enforceable against Miller.

7. COUNTERPARTS

This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

8. SECTION HEADINGS; CONSTRUCTION

The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require.

9. NOTICES

All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt) or (h) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses set forth in the Asset Purchase Agreement (or to such other addresses numbers as a party may designate by notice to the other parties).

54

 
11. ENTIRE AGREEMENT

This Agreement and the Asset Purchase Agreement constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior written and oral agreements and understandings between Purchaser and Miller with respect to the subject matter of this Agreement. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment.

[Signature Page follows]

55


SIGNATURE PAGE TO
NON-COMPETITION AGREEMENT

IN WITNESS WHEREOF, the parties have executed this Agreement as of September 5, 2007.

 
By:
   
 
 
Name: John C. Miller
 
       
 
Art’s Way Manufacturing Co., Inc.
 
       
 
By:
   
 
 
Name:
 
 
 
Title:
 
    
56

 
SCHEDULE 1— BADGER PRODUCT LINE

The following products manufactured and/or marketed using the Badger tradename or trademark:

Forage Boxes (including front, rear, combo or other)

Forage Blowers

Running Gears

Dump Boxes

Options for any of the foregoing

Other products manufactured and/or marketed using the Badger tradename or trademark are not included.
 
57


SCHEDULE 2 — MILLER PRO PRODUCT LINE

All products manufactured and/or marketed using the Miller Pro tradename, including without limitation:

Forage Boxes (including front, rear, combo or other)

Receiver Boxes

Running Gears and Tires

Forage Blowers

Dump Boxes

Rotary Rakes

Finger Wheel Rakes

Miller produced Hay Mergers

AR "Hay Buddy" equipment

Options for any of the foregoing

Excepted from the foregoing are pull type sprayers marketed under the Miller Pro brand and products manufactured by Ziegler.
 
58

 
SCHEDULE 3 — VICTOR PRODUCT LINE

All products manufactured and/or marketed using the Victor trademark, including without limitation:

Forage Boxes (including front, rear, combo or other)

Running Gears

Rotary Rakes

Forage Blowers

Dump Boxes

Options for any of the foregoing.


59



EXHIBIT F — PURCHASE PRICE ALLOCATION

Purchase Price before Deduction on account of warranty Assumption
 
$
975,000.00
 
         
Less: Negotiated Adjustment for Buyer's Assumption of warranty under Section 2.05
   
(100,000.00
)
 
       
         
Total Purchase Price Per Section 2.03 (before Inventories)
   
875,000.00
 
         
Allocation of Price:
       
         
Fixtures, tooling and Equipment
 
$
200,000.00
 
 
       
Good Will, trade names, trademarks, non competition and other assets not included within Fixtures, tooling and Equipment nor Inventory
   
675,000.00
 
         
Total
 
$
875,000.00
 
 
Inventories shall be allocated a value equal to the value thereof as used in the final computation of purchase price.
 
60


DISCLOSURE SCHEDULE 1— BADGER PRODUCT LINE

The following products manufactured and/or marketed using the Badger tradename or trademark:

Forage Boxes (including front, rear, combo or other)

Forage Blowers

Running Gears

Dump Boxes

Options for any of the foregoing

Other products manufactured and/or marketed using the Badger tradename or trademark are not included.
 
61


DISCLOSURE SCHEDULE 2 — MILLER PRO PRODUCT LINE

All products manufactured and/or marketed using the Miller Pro tradename, including without limitation:

Forage Boxes (including front, rear, combo or other)

Receiver Boxes

Running Gears and Tires

Forage Blowers

Dump Boxes

Rotary Rakes

Finger Wheel Rakes

Miller produced Hay Mergers

All "Hay Buddy" equipment

Options for any of the foregoing

Excepted from the foregoing are pull type sprayers marketed under the Miller Pro brand and products manufactured by Ziegler.
 
62


DISCLOSURE SCHEDULE 3 — VICTOR PRODUCT LINE

All products manufactured and/or marketed using the Victor trademark, including without limitation:

Forage Boxes (including front, rear, combo or other)

Running Gears

Rotary Rakes

Forage Blowers

Dump Boxes

Options for any of the foregoing
 
63


DISCLOSURE SCHEDULE 4 — INTELLECTUAL PROPERTY

Trademarks

Mark
 
Country
 
Registration #
 
Registration Date
 
Next Action Due
 
"Hay Buddy"
   
U.S.
   
548,356
   
7/19/2001
   
7/19/2016
 
"Victor"
   
Canada
   
2,373,268
   
8/1/2000
   
8/1/2010
 
"Victor"
   
U.S.
   
2,866,031
   
7/27/2004
   
7/27/2010
 
"Miller Pro"
                         

Patents

1) United States Patent5,175,987 — Issued June 5, 1993

Other

All patents, applications therefor and unpatented inventions applicable to any product within the
Product Lines; all designs, drawings, blue prints, computer data, engineering data or studies,
manufacturing data, prototypes, stampings, projects in progress, formulas, processes, technical
information and knowhow related to or used in the production of any product within the Product
Lines.
 
64


DISCLOSURE SCHEDULE 5 — THIRD-PARTY AGREEMENTS

A.
All sales of "Hay Buddy" equipment are subject to a license arrangement, which requires a two percent (2%) royalty payment on aggregate annual sales.

B.
Affiliated Marketing Agreement with Deere & Company dated July 15, 1997

C.Supply Agreement with Tonutti S.p.A. dated September 26, 2006
 
65


SCHEDULE 3.04 - PROPERTY NOT AT MAIN PLANT

Inventory on consignment with dealers in Ontario and Quebec with a value of less than $21,000.
 
66


SCHEDULE 3.05 - OFFERING BOOKLET

Document is attached.
 
67

EX-31.1 3 v104461_ex31-1.htm Unassociated Document
CERTIFICATION PURSUANT TO 17 CFR 240.13(a)-14(a)
(SECTION 302 CERTIFICATION)
 
I, Carrie L. Majeski, certify that:

1.
I have reviewed this annual report on Form 10-KSB of Art’s Way Manufacturing Co., Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer, as of, and for, the periods presented in this report;
 
4.
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and have:

 
a)
Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
d)
Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.
I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal controls over financial reporting.
 
Date:
February 19, 2008
 
/s/ Carrie L. Majeski
     
Carrie L. Majeski, President, Chief Executive
Officer
(principal executive and financial officer)
 

EX-32.1 4 v104461_ex32-2.htm
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the annual report on Form 10-KSB of Art’s Way Manufacturing Co., Inc. (the “Company”) for the fiscal year ended November 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carrie L. Majeski, as the President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
/s/ Carrie L. Majeski
 
Carrie L. Majeski, President, Chief Executive Officer
 
(principal executive and financial officer)
   
 
Dated: February 19, 2008
 
 
 

 
 
-----END PRIVACY-ENHANCED MESSAGE-----