UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
(Mark one)
[x] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended November 30, 2005
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to _______
Commission File No. 0-5131
ART'S-WAY MANUFACTURING CO., INC.
(Name of Small Business Issuer In Its Charter)
DELAWARE 42-0920725
_________________________ ________________________________
(State or Other Jurisdiction of (I.R.S. Employee Identification No.)
Incorporation or Organization)
5556 Highway 9
Armstrong, Iowa 50514
_________________________ ________________________________
(Address of Principal
Executive Offices) (Zip Code)
(712) 864-3131
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock $.01 par value
Check whether the issuer is not required to file reports pursuant to
Section 13 on 15(d) of the Exchange Act. [ ]
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 for the past 90 days.
Yes [X] No []
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not 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). Yes [] No [x]
State issuer's revenues, for its most recent fiscal year: $14,618,904.
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:
$12,564,326. As of Feburary 10, 2006.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date: As of February 3,
2006, there were 1,963,176 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Definitive Proxy
Statement for the registrant's 2006 Annual Meeting of Stockholders to be
filed within 120 days of November 30, 2005, are incorporated by
reference into Part III of this Form 10-KSB.
Transitional Small Business Issuer Forecast (check one): Yes [] No [X]
Art's-Way Manufacturing Co., Inc. and Subsidiary
Index to Annual Report
on Form 10-KSB
Page
Part I
Item 1 - Description of Business 4 thru 6
Item 2 - Description of Property 6
Item 3 - Legal Proceedings 7
Item 4 - Submission of Matters to a Vote of
Security Holders 7
Part II
Item 5 - Market for Common Equity and Related
Stockholder Matters 8
Item 6 - Management's Discussion and Analysis or
Plan of Operation 9 thru 14
Item 7 - Financial Statements 14
Item 8 - Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 15
Item 8A - Controls and Procedures 15
Item 8B - Other Information 15
Part III
Item 9 - Directors and Executive Officers of
the Registrant 16
Item 10 - Executive Compensation 16
Item 11 - Security Ownership of Certain Beneficial
Owners and Management And Related
Stockholder Markets 16
Item 12 - Certain Relationships and
Related Transactions 16
Item 13 - Exhibits 16
Item 14 - Principal Accountant Fees & Services 16
PART I
Item 1. Description of Business
(a) Business Development
Art's-Way Manufacturing Co., Inc. began operations as a farm equipment
manufacturer in 1956. Our manufacturing plant is located in Armstrong,
Iowa.
On July 28, 2003, we purchased the assets of Obeco, Inc., a manufacturer
of steel truck bodies located in Cherokee, Iowa, and changed the name to
Cherokee Truck Bodies, Inc. The purchase included all inventory,
intellectual materials, machinery, tooling, fixtures and the company
name. We also acquired the real estate loan in the amount of $165,725.
In May 2004, we moved the Cherokee Truck Bodies operation from Cherokee
Iowa, to the facility in Armstrong. The move reduced overhead
significantly and enables us to focus on sales growth.
In August 2004, we delivered our new 6812 Sugar Beet Harvester. Sales
were strong, as we introduced the industry's only 12 row harvester. End
users were excited about the overall performance. In 2006 we will again
bring an updated model to market to enhance customer satisfaction.
In November 2004, we launched a second new product offering, our 5165
Grinder Mixer, with faster cycle times and increased capacity. Sales
exceeded our expectations.
We continue to focus our efforts in research and design. In 2005 we saw
sales of our feed processing equipment double, with the November 2004
introduction of our new model 5165 Grinder Mixer. The sugar beet
industry is still excited about our model 6812 which we continue to
enhance with each new model year.
During the 2005 beet harvesting season we field tested a new single pass
defoliator; we project that this product will be in production and in
the field for the 2006 beet harvest. We also tested a new exportable
beet harvester. The export unit is designed off of our model 6812 but
down sized to fit in a cargo container for shipping.
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 for the
purchase price of $844,284, paid in cash. We will operate this new
business through our wholly-owned subsidiary, Art's-Way Vessels, Inc.
(b) Business of Issuer
We manufacture specialized farm machinery under our own and private
labels, steel truck bodies under the label of Cherokee Truck Bodies and
now pressure vessels through our wholly owned subsidiary of Art's-Way
Vessels, Inc.
Equipment manufactured by the Company under our own label includes:
portable & 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.
Private label manufacturing of farm equipment accounted for 15% and 13%
of total sales for the years ended November 30, 2005 and 2004,
respectively.
Art's-Way labeled products are sold by farm equipment dealers throughout
the United States. There is no contractual relationship with these
dealers to distribute our products, and dealers may sell a competitor's
product line.
Automotive and other dealers throughout the United States sell Cherokee
Truck Bodies labeled products.
Art's-Way Vessels, Inc. sells pressurized vessels, both code and
non-code. Vessels can range from 3 feet in length up to 40 feet. The
diameter can be between 18 inches to 8 feet. These vessels are sold to
manufacturing facilities that will use the vessel as a component part of
their end product.
Raw materials, for both Art's-Way Manufacturing and Art's-Way Vessels,
Inc., in all aspects of our business are acquired from domestic and
foreign sources and normally are readily available.
We maintain manufacturing rights on several products covering unique
aspects of design and have trademarks covering product identification.
We pay royalties for use of certain manufacturing rights. Our material
royalty agreement is with CNH. The agreement with CNH will run through
September 2006 on moldboard plows. In our opinion, our trademarks and
licenses are of value in securing and retaining business.
Sales of our agricultural products are seasonal; however, we have tried
to decrease this impact of seasonality through the development of
mowers, 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 peculiar 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 and other unpredictable variables such
as interest rates.
Sales of truck bodies are somewhat seasonal, being affected by the cold
months of winter when sales tend to decrease.
We believe that pressure vessel sales do not tend to be seasonal.
We have an OEM supplier agreement with CNH (Case New Holland). Under the
OEM agreement we have agreed to supply CNH's requirements for certain
feed processing and service parts under CNH's label. The agreement has
no minimum requirements and can be cancelled upon certain conditions.
For the years ended November 30, 2005 and 2004, sales under the CNH
label aggregated approximately 8% of total sales.
Our feed processing products, including private labeled units, compete
with similar products of many other manufacturers. We estimated that
there are more than 15 competitors producing similar products although
total market statistics are not available. We believe that our products
are competitively priced with greater diversity than most competitor
product lines. Beet harvesting equipment is manufactured by three
companies that have a significant impact on the market. We estimate our
share of the domestic market is estimated to be about 35%. Other
products such as mowers, shredders and grain drills are manufactured by
approximately 20 other companies. 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.
Another important part of our business is after market service parts
that are available to keep our branded and OEM produced equipment
operating to the satisfaction of the end user.
The backlog of orders booked in February 2006, was approximately
$7,158,000. Art's-Way Vessels, Inc. had a backlog of $2,303,000, and
Art's-Way Manufacturing had a backlog of $4,855,000. Art's-Way
Manufacturing had approximately $4,707,000 in backlog a year ago.
Overall we are looking forward to another strong year.
We currently do no business with any local, state or federal government
agencies.
We are engaged in research and development work on a continual basis to
improve the present products and create new products. In 2004 research
and development costs were down $407,000 as we moved from prototype into
production. In 2005 we invested heavily in research and development,
$285,000 compared to only $10,000 in 2004. For further information
please see Part II, Item 6, Results of Operations. We worked with an
outside engineering firm to develop a new exportable beet harvester.
Art's-Way Vessels, Inc. produces custom tanks and vessels that are
manufactured to customer blue prints. Art's-Way Vessels, Inc. incurred
no research and development costs in 2005.
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 2005 we completed the installation of a new
powder coat paint system. We are also in the process of installing a
different paint system for our whole goods. These new paint systems will
significantly improve the quality of our paint, in terms of luster,
hardness and longevity. The paint systems will be located in a new
location within the plant, as we redesign our workflow to optimize
productivity. We have obtained the proper permits that allow us to
change the paint systems and remain in compliance with all applicable
laws and regulations.
During the year ended November 30, 2005, we had peak employment of 97
full-time and 19 part-time employees, of which 90 were factory and
production employees, 5 were engineers and engineering draftsman, 17
were administrative employees, and 4 were in sales and sales management.
Employee levels fluctuate based upon the seasonality of the product
line.
Item 2. Description of Property
Our existing executive offices, production and warehousing facilities in
Armstrong are built of hollow clay block/concrete and contain
approximately 240,000 square feet of usable space. Most of these
facilities were constructed after 1965 and are in good condition. We own
approximately 127 acres of land west of Armstrong, which includes the
factory and inventory storage space. We currently lease excess land to
third parties for farming.
The facility in Dubuque is a leased building. The building was
constructed in 2004 and is in excellent condition.
Item 3. Legal Proceedings
We are from time to time a party to various legal actions arising in the
normal course of business. We believe that there are no threatened or
pending proceedings against us that if determined adversely, would have
a material adverse effect on our business or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information
Per Common Stock Bid Prices by Quarter
Year ended Year ended
November 30, 2005 November 30, 2004
High Low High Low
First Quarter 8.790 5.50 5.360 4.530
Second Quarter 11.500 5.110 5.600 4.990
Third Quarter 9.050 5.110 5.360 4.620
Fourth Quarter 5.950 4.500 6.240 4.290
Our common stock trades on The NASDAQ Small Cap Stock Market under the
symbol "ARTW." The range of closing bid prices shown above, are as
reported by NASDAQ. The quotations shown reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions.
(b) Holders
There were approximately 461 stockholders of our common stock as of
February 6, 2006.
(c) Dividends
On October 27, 2005 our Board of Directors declared a dividend of $0.05
per share to be paid on November 30, 2005 to stockholders of record as
of November 15, 2005. The loan covenants that restricted the payment of
dividends were waived by our lenders. While we anticipate that this
dividend will be the first in our ongoing plan of future annual dividend
payments, the declaration of and the amount of any future dividends will
be governed by our financial position at that time, and may again
require the waiver of loan covenants by our lenders.
(d) Security Authorization for Issuance Under Equity Compensation Plans.
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of Outstanding for future issuance
outstanding options, options, under equity
warrants and rights Warrants and rights compensation plans
(excluding
securities reflected
in columns (a))
Equity compensation
plans approved
by security holders (a) 25,000 (b) $3.22 (c) 5,000
Equity compensation
plans not approved
by security holders - -
Total 25,000 5,000
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion of our consolidated financial condition and
results of operations should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this Form
10-KSB. The matters discussed herein contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as
amended, which involve risks and uncertainties. All statements other
than statements of historical information provided herein may be deemed
to be forward-looking statements. Without limiting the foregoing the
words "believes", "anticipates", "plans", "expects" and similar
expressions are intended to identify forward-looking statements. Factors
that could cause actual results to differ materially from those in the
forward-looking statements include our degree of financial leverage, the
factors described in Item 1 of this Form 10-KSB, risks associated with
acquisitions and in the integration thereof, risks associated with
supplier/OEM agreements, dependence upon the farm economy and the impact
of competitive services and pricing, as well as other risks referenced
from time to time in our filings with the SEC. Readers are cautioned not
to place undue reliance on these forward-looking statements, which
reflect management's analysis, judgment, belief or expectation only as
of the date hereof. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise
after the date hereof.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
We have identified the following accounting policies as critical to our
operations.
Revenue Recognition - Revenue is recognized when risk of ownership and
title pass to the buyer, generally upon the shipment of the product. In
very limited circumstances, and only upon a written customer agreement,
we recognize revenue upon the production and invoicing of the products.
Inventory Valuation - 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. We record inventory write downs to market based on
expected usage information for raw materials and historical selling
trends for finished goods. Write downs of inventory create a new cost
basis. Additional write downs may be necessary if the assumptions made
by management do not occur. We classified inventories not expected to be
consumed in our manufacturing process or our parts fulfillment business
within our normal operating cycle as a non-current asset in the
accompanying balance sheets.
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.
Results of Operations
Twelve months ended November 30, 2005 compared to the twelve months
ended November 30, 2004
Our consolidated revenue of $14,619,000 for 2005 represents a 14.3%
increase when compared to $12,784,000 for 2004. Art's-Way Vessels, Inc.,
had revenues of $358,000, for the period from its acquisition on October
4, 2005 through November 2005. Art's-Way Manufacturing had revenues
totaling $14,261,000. Art's-Way Manufacturing's branded products
increased by $1,099,000 while OEM sales increased by $378,000.
Gross profit as a percent of sales was 30% for 2005 compared to 28% for
2004. The agricultural markets we serve are generally forecasted to remain
constant in 2006, yet we anticipate that our sales and profits before
tax for 2006 will increase slightly as we bring new or improved products
to market.
Operating expenses in 2005 increased $210,000 from 2004. Art's-Way
Vessels, Inc. represents 123,000 of that increase, while Art's-Way
Manufacturing represents $87,000 of the total. As a percent of sales,
operating expenses were 19% and 20%, respectively, when comparing 2005
and 2004.
Engineering expenses for Art's-Way Manufacturing increased by $294,000.
This was due to the increase in new product development expenses of
$275,000, for our new export beet harvester and new defoliator. We also
engineered a new domestic defoliator. We increased our engineering staff
by one degreed engineer and an additional part-time drafter. We also
purchased new engineering software. We believe that by investing in our
engineering department and research and development we are investing in
the future of our company. We believe that by developing new products
and updating our current products we will secure and better our position
in our markets and allow the company to grow sales.
Selling expenses for Art's-Way Manufacturing decreased $54,000 from 2005
to 2004. Approximately $24,000 of that decrease was due to a reduction
in commission expense as the Cherokee Truck Bodies sales decreased. In
2004 commissions were up due to increased payments to a sales rep that
helped to design the model 6812 harvester. That cost of approximately
$18,000 went away in 2005. The decrease in commissions accounted for 78%
of the decrease. In 2004 we also incurred the costs for design and
formulation of manuals for the new model 6812, and this accounted for
20% of the cost reduction.
General and administrative expenses decreased by $30,000. The addition
of Art's-Way Vessels, Inc. resulted in an increase of $123,000.
Art's-Way Manufacturing accounted for a decrease of $153,000. In 2004 we
moved the Cherokee Truck Bodies operation from Cherokee, Iowa to
Armstrong and as a result of the move we incurred costs totaling
$59,000. In 2005 our legal fees decreased $30,000 as we settled two
suits in early 2005. Like many other businesses, we struggle with the
ever rising costs of health insurance, and our overall health insurance
costs increased over 20% in 2005. We chose to hold the amount that the
company contributed at a constant and passed the cost of the increase on
to our employees. As a result some of our employees elected to drop the
coverage, resulting in a decrease in our group insurance costs of
$28,000. During 2005 our general and administrative depreciation expense
also decreased approximately $13,000. The remainder of the decrease
comes from numerous other small decreases.
Art's-Way Manufacturing experienced a 28% increase in interest and other
expenses in 2005 compared to 2004. Interest expense was up 45%, compared
to 2004, due to higher average loan balances, as we took an additional
$1,000,000 to finance equipment purchases and acquisitions, and
increased interest rates. This increase was offset by an increase in
other income due primarily to larger cash balances, caused by increased
customer deposits and profits from operations that earned interest.
Income before tax in 2005 was up 60% to $1,474,000 compared to $924,000
in 2004. Net income of $977,000 for 2005 compared to $1,402,000 in 2004.
The decline in our net income is the result of the reversal of the
deferred tax valuation allowance that was established in prior years and
during 2004 we reduced this allowance resulting in the recognition of
income tax benefit of approximately $479,000. Fiscal 2005 reflected
normalized tax expense resulting in $497,000 of tax expense, a $976,000
increase over 2004. Although we are recording tax expense, cash payments
for income taxes was only $53,000 during 2005 due to the utilization of
our operating loss carryforwards.
We continue to strive to reduce costs, and continue our move to a lean
manufacturing environment. We also continue to invest in our future
through research and development as well as new equipment and
acquisitions. We believe as of 2005, our overall company has
strengthened through the consolidation of manufacturing facilities, new
product offerings and the acquisition of Art's-Way Vessels, Inc. The
backlog of orders booked in February 2006, totaled approximately
$7,158,000. Art's-Way Vessels, Inc. had a backlog of $2,303,000, and
Art's-Way Manufacturing had a backlog of $4,855,000. Art's-Way
Manufacturing had approximately $4,707,000 in backlog a year ago.
Overall we are looking forward to another strong year.
Liquidity and Capital Resources
Twelve months ended November 30, 2005
Our main sources of funds were from our ability to generate cash from
operations. Cash provided from operations was $2,497,000 for fiscal year
2005. We are very excited about our ability to generate cash and what
that means for our company as we look to the future. We will continue
reinvesting in our company to strengthen its foundation and maximize
long-term growth.
In 2005 we paid a dividend to our stockholders for the
first time in several years. This had a cash impact of $98,000.
Twelve months ended November 30, 2004
Our main sources of funds were obtained from our line of credit with
West Bank. These funds were used to purchase fixed assets, with the
balance used towards working capital. Capital expenditures for the year
ended November 30, 2004 were $563,000 consisting mainly of two major
expenditures. We purchased a paint line costing $330,000 and are in the
installation process. We also invested $113,000 in tooling for the new
model 6812 sugar beet harvester. These two items totaled 80% of our
capital expenditures in 2004.
Inventories increased significantly in 2004; $6,298,000 compared to
$3,447,000 in 2003. This was partially due to the significant increase
in steel prices during 2004. Nearly our entire inventory is steel based
and we estimate that 20% of the increase was driven by steel prices. We
also carried approximately $1,000,000 of inventory related to our sugar
beet harvesters. We had intended for a large build in 2004, however as
we moved our new harvester from prototype to production, we ran into
typical transition issues. We will consume all carryover inventories in
the 2005 build of harvesters. At the end of 2004 we also purchased large
amounts of raw steel for our grinder mixer build, but the build was
delayed slightly and the units were not shipped until 2005. This demand
on cash was partially offset by the increase in accounts payable related
to these inventory purchases.
Accrued expenses for the fiscal year ended 2004 were up as a result of
rising insurance costs and increased commissions' payable due to
increased sales in November.
Capital Resources
We have long-term financing through West Bank. Credit facilities consist
of three loan agreements totaling $5,500,000.
Facility #1 is 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 March 31, 2006. We are in the process of securing an
extension for an additional year and expect to receive this extension. The
interest rate is West Bank's prime interest rate plus 1%, 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 our assets
owned including, but not limited to inventories, accounts receivable,
machinery and equipment. As of November 30, 2005 and 2004, the Company
had borrowed $0 and $870,071 respectively, against Facility #1.
Facility #2 is long-term financing for $2,000,000 that is supported by a
guarantee issued by the United States Department of Agriculture (USDA)
for 75% of the loan amount outstanding. The variable interest rate is
West Bank's prime interest rate plus 1.5%, adjusted daily, monthly
principle and interest payments are amortized over 20 years with final
maturity date of March 31, 2023.
Facility #3 is long-term financing for $1,000,000 that is also supported
by a guarantee issued by the USDA for 75% of the loan amount outstanding.
The loan for $1,000,000 was used for new product development.
Collateral for Facilities #2 and #3 is primarily real estate with a second
position on assets of Facility #1. The USDA subordinates collateral rights
in all assets other than real estate in an amount equal to West Bank's other
credit commitments. As of November 30, 2005 the outstanding balance on
Facility #2 and #3 was $1,754,866 and $974,356 respectively compared to
$1,836,565 and $0 at November 30, 2004.
J. Ward McConnell, Jr. was required to personally guarantee Facility #1,
Facility #2 and Facility #3 on an unlimited and unconditional basis. The
guarantees of Facility #1, Facility #2 and Facility #3 shall be reduced
after the first three years to a percentage representing his ownership of
the Company. Mr. McConnell's guarantees shall be removed from Facility #1
and Facility #2 in the event that his ownership interest in the Company is
reduced to a level less than 20% after the first three years of the loan.
The Company compensates Mr. McConnell for his personal guarantees at an
annual percentage rate of 2% of the outstanding balances paid monthly.
Guarantee fee payments to Mr. McConnell were approximately $56,000 and
$47,000, for the years ended November 30, 2005, and 2004, respectively.
Other terms and conditions of all three facilities include providing
monthly internally prepared financial reports including accounts
receivable aging schedules and borrowing base certificates and year-end
audited financial statements. The borrowing bases shall limit advances
from Facility #1 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. Covenants include, but are not limited to, restrictions on debt
service coverage ratio, debt/tangible net worth ratio, current ratio,
capital expenditures, and tangible net worth. During the year ended
November 30, 2005, we violated the restriction on capital expenditures,
payment of dividends and loan to third parties. Under our loan agreement
West Bank would have had the right to call the loan and/or increase the
interest rate by three percentage points. As stated above, we provide
West Bank with monthly financial statements, as well as a cash flow
statement on a monthly basis. Therefore they were aware of the amount of
capital expenditures we had incurred throughout the year. They were also
aware of the decision to pay dividends, and the inter-company loan to
Art's-Way Vessels, Inc. in connection with the asset purchase from
Vessels Systems, Inc., well in advance of the actual expenditures. The
bank views this spending favorably, and waived the covenants.
Contractual Obligations
Contractual Obligation Payments due by period
Total < 1 yr 1-3 yrs 3-5 yrs >5 yrs
Long-term debt
including interest 3,825,193 386,316 666,600 666,600 2,105,677
Capital lease obligation 0 0 0 0 0
Operating lease
obligation 125,000 125,000 0 0 0
Purchase Obligations 80,000 80,000 0 0 0
Other 0 0 0 0 0
Total 4,030,193 591,316 666,600 666,600 2,105,677
* Based on current interest rates at November 30, 2005.
Our current ratio and its working capital are as shown in the following
table:
November 30, 2005 November 30, 2004
Current Assets $9,481,557 $7,946,007
Current Liabilities 2,060,486 2,513,444
Working Capital $7,421,071 $5,432,563
Current Ratio 4.6 3.2
Utilization of Deferred Tax Assets
At November 30, 2005 and 2004, we had established a deferred tax asset
valuation allowance of approximately $41,000. In assessing our deferred
tax assets, management considers whether it is more likely than not that
some portion of 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. In 2004 we utilized a portion
of our net operating loss carryforward. Beginning in fiscal 2005 our
financial results reflected the accrual of income tax expenses of
$497,000, as opposed to 2004 when we recorded a net tax benefit of
$479,000.
For tax purposes, at November 30, 2005 we have utilized all of our net
operating loss carryforwards. We had approximately $132,000 of research
and development credits and $41,000 of state tax credits which begin to
expire in the 2012 and 2007, respectively. We also had $41,000 in AMT
credits that will not expire.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 7 Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Art's-Way Manufacturing Co., Inc.
Armstrong, Iowa
We have audited the consolidated balance sheets of Art's-Way
Manufacturing Co., Inc. and subsidiary as of November 30, 2005 and 2004,
and the related consolidated statements of operations, stockholders'
equity and cash flows for the two 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 audits 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 examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Art's-Way Manufacturing Co., Inc. and subsidiary as of November 30, 2005
and 2004, and the results of their operations and their cash flows for
the years then ended in conformity with U.S. generally accepted
accounting principles.
Des Moines, Iowa
January 9, 2006
ART'S-WAY MANUFACTURING CO., INC.
Table of Contents
Page
Consolidated Statements of Operations -
Years ended November 30, 2005 and 2004 F-3
Consolidated Balance Sheets -
November 30, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity -
Years ended November 30, 2005 and 2004 F-5
Consolidated Statements of Cash Flows -
Years ended November 30, 2005 and 2004 F-6
Notes to Consolidated Financial Statements -
Years ended November 30, 2005 and 2004 F-7 - F-17
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Statements of Operations
Years ended November 30, 2005 and 2004
2005 2004
Net sales $14,618,904 $12,784,396
Cost of goods sold 10,213,951 9,186,971
Gross profit 4,404,953 3,597,425
Expenses:
Engineering 483,831 189,587
Selling 680,219 734,141
General and administrative 1,551,213 1,581,458
Total expenses 2,715,263 2,505,186
Income from operations 1,689,690 1,092,239
Other income (expense):
Interest expense (261,162) (180,013)
Other 45,792 11,416
Total other expense (215,370) (168,597)
Income before income taxes 1,474,320 923,642
Income tax (benefit) 497,003 (478,631)
Net income $977,317 $1,402,273
Net income per share:
Basic $0.50 $0.72
Diluted 0.50 0.72
See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Balance Sheets
November 30, 2005 and 2004
Assets 2005 2004
Current assets:
Cash $1,198,238 $116,001
Accounts receivable customers,
net of allowance for doubtful
accounts of $46,385 and
$30,417 in 2005 and 2004,
respectively 956,391 737,008
Inventories, net 6,525,051 6,298,049
Deferred taxes 673,000 539,000
Real estate loan receivable 0 165,725
Other current assets 128,877 90,224
Total current assets 9,481,557 7,946,007
Property, plant, and equipment, net 1,890,660 1,308,088
Inventories, noncurrent 144,871 459,792
Deferred taxes 191,000 786,000
Other assets 74,353 146,006
Total assets $11,782,441 $10,645,893
Liabilities and Stockholders
Equity
Current liabilities:
Notes payable to bank $0 $870,071
Current portion of term debt 223,946 174,674
Accounts payable 530,722 536,929
Customer deposits 569,354 77,975
Accrued expenses 736,464 853,795
Total current liabilities 2,060,486 2,513,444
Long term liabilities 0 144,766
Term debt, excluding current portion 2,558,273 1,788,242
Total liabilities 4,618,759 4,446,452
Stockholders equity:
Common stock-$0.01 par value.
Authorized 5,000,000 shares;
issued 1,963,176 and 1,938,176
shares in 2005 and 2004 19,632 19,382
Additional paid-in capital 1,719,787 1,634,954
Retained earnings 5,424,263 4,545,105
Total stockholders equity 7,163,682 6,199,441
Total liabilities and
stockholders equity $11,782,441 $10,645,893
See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Statements of Stockholders Equity
Years ended November 30, 2005 and 2004
Common stock Additional
Number of paid-in Retained
shares Par value capital earnings Total
Balance,
November 30, 2003 1,938,176 $19,382 $1,634,954 $3,142,832 $4,797,168
Net income 0 0 0 1,402,273 1,402,273
Balance,
November 30, 2004 1,938,176 $19,382 $1,634,954 $4,545,105 $6,199,441
Exercise of
stock options 25,000 250 79,033 0 79,283
Stock based
compensation 0 0 5,800 0 5,800
Dividends paid, $0.05
per share 0 0 0 (98,159) (98,159)
Net income 0 0 0 977,317 977,317
Balance,
November 30, 2005 1,963,176 $19,632 $1,719,787 $5,424,263 $7,163,682
See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Statements of Cash Flows
Years ended November 30, 2005 and 2004
2005 2004
Cash flows from operations:
Net income $977,317 $1,402,273
Adjustments to reconcile net income to
net cash provided by operating activities:
Stock based compensation 5,800 0
(Gain) Loss on sale of property, plant,
and equipment (8,486) 7,134
Depreciation and amortization 268,616 311,314
Deferred income taxes 461,000 (507,000)
Changes in assets and liabilities,
net of Vessel Systems Inc acquisition:
(Increase) decrease in:
Accounts receivable 21,202 148,882
Inventories 204,736 (2,827,698)
Other current assets 127,072 59,961
Other, net 71,653 (30,000)
Increase (decrease) in:
Accounts payable (6,207) 453,055
Customer deposits 491,379 24,419
Accrued expenses (117,331) 151,678
Net cash provided by/(used in)
operating activities 2,496,751 (805,982)
Cash flows from investing activities:
Purchases of property, plant,
and equipment (378,420) (563,116)
Purchase of assets of Vessels Systems Inc. (844,284) 0
Proceeds from sale of property,
plant, and equipment 22,600 2,416
Net cash (used in)
investing activities (1,200,104) (560,700)
Cash flows from financing activities:
Proceeds from Line of Credit 0 870,071
Payments on Line of Credit (870,071) 0
Payments of notes payable to bank (180,697) (187,440)
Payments of long-term liabilities (144,766) 0
Proceeds from term debt 1,000,000 0
Proceeds from the exercise of stock options 79,283 0
Dividends paid to stockholders (98,159) 0
Net cash provided by (used in)
financing activities (214,410) 682,631
Net increase/(decrease) in cash 1,082,237 (684,051)
Cash at beginning of period 116,001 800,052
Cash at end of period $1,198,238 $116,001
Supplemental disclosures of cash flow information:
Cash paid/(received) during the period for:
Interest $246,598 $177,049
Income taxes 52,993 (8,323)
Supplemental schedule of investing activities:
Vessel Systems Inc acquisition:
Accounts Receivable $240,585 $0
Inventories 116,817 0
Property, plant and equipment 486,882 0
Cash paid $844,284 $0
See accompanying notes to consolidated financial statements.
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 and potato harvesting equipment, land maintenance
equipment, finished mowing and crop shredding equipment, seed planting
equipment and truck bodies. A significant part of the Company's business
is supplying hay blowers to several 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.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Art's-Way
Manufacturing Co., Inc. and its wholly-owned subsidiary, Art's-Way
Vessels, Inc., which became active in October 2005 after purchasing
certain assets of Vessel Systems, Inc. All material inter-company
accounts and transactions are eliminated in consolidation.
(c) 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.
(d) 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. The Company has
classified inventories not expected to be consumed in its
manufacturing process or its parts fulfillment business within the
Company's normal operating cycle as a non-current asset in the
accompanying balance sheets.
(e) 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 thirty-three years.
(f) 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.
(g) 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.
(h) Research and Development
Research and development costs are expensed when incurred. Such costs
approximated $285,000 and $10,000 for the years ended November 30, 2005,
and 2004, respectively.
(i) 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.
Basic and diluted earnings per common share have been computed based on
the following as of November 30, 2005 and 2004:
2005 2004
Basic:
Numerator, net income $977,317 $1,402,273
Denominator, average number
of common shares
Outstanding 1,951,108 1,938,176
Basic earnings per
common share $0.50 $0.72
Diluted
Numerator, net income $977,317 $1,402,273
Denominator:
Average number of common 1,951,108 1,938,176
Effect of dilutive stock
options 19,113 20,281
1,970,221 1,958,457
Diluted earnings per
common share $0.50 $0.72
(j) Stock Based Compensation
The Company accounts for stock options in accordance with the
provisions of APB Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation, permits entities to
recognize as expense over the vesting period by the fair value of all
stock-based awards on the date of grant. SFAS 123 also allows entities
to continue to apply the provisions of APB 25 and provide pro forma net
income and income per share disclosure for employee stock option grants,
as if the fair-value-based method defined in SFAS 123 had been applied.
The Company has elected to continue to apply the provisions of APB 25
and provide the pro forma disclosure provisions of SFAS 123.
Since the Company applies APB Opinion No. 25 in accounting for its plans,
compensation cost has only been recognized related to stock options
issued with an exercise price less then the grant date current fair
value. The impact on net income and earnings per share is insignificant,
had the Company recorded compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123.
(k) 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.
(l) Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement
No. 123 (Revised), Share-Based Payment (FAS 123(R)). This Statement
establishes standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the entity's
equity instruments, or that may be settled by the issuance of those
equity instruments. Statement No. 123(R) covers a wide range of
share-based compensation arrangements, including share options,
restricted share plans, performance-based awards, share appreciation
rights and employee share purchase plans. FAS 123(R) replaces existing
requirements under FASB Statement No. 123, Accounting for Stock-Based
Compensation, and eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25, Accounting for Stock
Issued to Employees. For the Company, the Statement is effective as of
the first interim or annual reporting period that begins after
December 15, 2005. The Company is assessing the effects of FAS 123(R).
(2) Allowance for Doubtful Accounts
A summary of the Company's activity in the allowance for doubtful
accounts is as follows:
2005 2004
Balance, beginning $30,417 $39,250
Provision charged to expense 19,909 16,100
Less amounts charged-off (3,941) (24,933)
Balance, ending $46,385 $30,417
(3) Inventories
Major classes of inventory are:
2005 2004
Raw materials $2,820,591 $2,867,914
Work in process 455,077 1,495,985
Finished goods 3,394,254 2,393,942
$6,669,922 $6,757,841
Inventories as of November 30, 2005 and 2004 are stated net of a
reserve for slow moving inventory of approximately $923,000 and
$1,071,000, respectively.
(4) Property, Plant, and Equipment
Major classes of property, plant, and equipment are:
2005 2004
Land $180,909 $180,909
Buildings and improvements 2,704,570 2,679,055
Manufacturing machinery
and equipment 9,163,149 8,516,686
Trucks and automobiles 104,016 104,016
Furniture and fixtures 110,834 119,882
12,263,478 11,600,548
Less accumulated
depreciation 10,372,818 10,292,460
Property, plant
and equipment $1,890,660 $1,308,088
(5) Accrued Expenses
Major components of accrued expenses are:
2005 2004
Salaries, wages,
and commissions $371,680 $412,663
Accrued warranty expense 131,832 119,912
Other 232,952 321,220
$736,464 $853,795
(6) 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, 2005, and 2004 are as follows:
2005 2004
Balance, beginning $119,912 $59,207
Settlements made in cash
or in-kind (294,633) (158,216)
Warranties issued 306,553 218,921
Balance, ending $131,832 $119,912
(7) Loan and Credit Agreements
We have 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 March 31, 2006. 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, 2005 and 2004, the Company
had borrowed none and $870,071, 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.
J. Ward McConnell, Jr. was required to personally guarantee the debt
with West Bank on an unlimited and unconditional basis. The guarantee
of the term debt shall be reduced after the first three years to a
percentage representing his ownership of the Company. Mr. McConnell's
guarantee shall be removed from the term debt in the event that his
ownership interest in the Company is reduced to a level less than
20% after the first three years of the loan. The Company compensates
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 $53,000 and $47,000,
for the years ended November 30, 2005, and 2004, respectively. A
summary of the Company's term debt is as follows:
2005 2004
West Bank loan payable in
monthly installments of
$17,776 including interest at
Bank's prime rate plus 1.5%
due Mach 31, 2023 (A) (B) $1,754,866 $1,836,565
West Bank loan payable in
monthly installments of
$10,000 including interest at
Bank's prime rate plus 1.5%
due March 31, 2015 (A) (B) 974,356 --
State of Iowa Community
Development Block Grant
promissory note at 0% interest,
maturity 2006 with quarterly
principal payments of $11,111 33,334 77,778
State of Iowa Community
Development Block Grant
local participation promissory
notes at 4% interest, maturity
2006, with quarterly principal
payments of $7,007 19,663 48,573
Total term debt 2,782,219 1,962,916
Less current portion of
term debt 223,946 174,674
Term debt, excluding
current portion $2,558,273 $1,788,242
(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, 2005, and 2004, the Company
violated certain debt covenants that were waived.
A summary of the minimum maturities of term debt follows for the years
ending November 30:
Year: Amount
2005 $223,946
2006 182,352
2007 193,918
2008 206,326
2009 219,545
Thereafter 1,756,132
$2,782,219
(8) 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
$10,613 and none related to this plan during the years ending November
30, 2005 and 2004, respectively.
(9) Stock Option Plans
Under the 2001 Director Option Plan, stock options may 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 who have served for at least one year
are automatically granted options to purchase 5,000 shares of common
stock. Options granted are nonqualified stock options. The option price,
vesting period, and term are set by the Compensation Committee of the
Board of Directors of the Company. Options for an aggregate of 50,000
common shares may be granted under the Plan. Each option will be for a
period of 10 years and may be exercised at a rate of 25% at the date of
grant and 25% on the first, second, and third anniversary date of the
grant on a cumulative basis. At November 30, 2004, the Company had
approximately 5,000 shares available for issuance pursuant to subsequent
grants under the 2001 Director Option Plan.
Under the previously effective 1991 Employee Stock Option Plan, stock
options were granted to key employees 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. Options granted were either nonqualified or
incentive stock options. The option price, vesting period, and term were
set by the Compensation Committee of the Board of Directors of the
Company. Each option was for a period of 10 years and could be exercised
at a rate of 25% at the date of grant and 25% on the first, second, and
third anniversary date of the grant on a cumulative basis. Effective
April 2001, the period available for option grants under the 1991
Employee Stock Option Plan expired, and as a result, no shares are
available for issuance pursuant to subsequent grants under the 1991
Employee Stock Option Plan.
A summary of changes in the stock option plans is as follows:
November 30
2005 2004
Options outstanding at
beginning of period 45,000 45,000
Granted 5,000 -
Exercised (25,000) -
Options outstanding at
end of period 25,000 45,000
Options price range for
the period $ 2.32 $ 2.32
To To
$ 5.21 $ 3.50
Options exercisable at
end of period 20,000 41,250
At November 30, 2005 and 2004, the weighted-average remaining
contractual life of options outstanding was 6.9 years and 6.4 years
respectively, and the weighted-average exercise price was $3.22 and
$2.74, respectively. The weighted-average exercise price for options
exercisable at November 30, 2005 was $2.98.
The per share weighted-average fair value of stock options granted
in the year ended November 30, 2005, was $2.30, on the date of grant
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 30.01%, and an
expected life of 10 years.
(10) Income Taxes
Total income tax expense (benefit) for the years ended
November 30, 2005 and 2004 consists of the following:
November 30
2005 2004
Current expense $574,003 $370,369
Benefit of utilization
of operating loss
carryforward (538,000) (342,000)
Deferred expense (benefit) 461,000 (507,000)
$497,003 $(478,631)
The reconciliation of the statutory Federal income tax rate and the
effective tax rate are as follows:
November 30
2005 2004
Statutory federal income tax rate 34.0% 34.0%
Other due primarily to change in
valuation allowance (0.3) (85.9)
33.7% (51.9)%
Tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at November 30, 2005 and 2004 are
presented below:
November 30
2005 2004
Deferred tax assets:
Net operating loss
carryforwards $0 $538,000
Tax credits 214,000 197,000
Accrued expenses 100,000 101,000
Inventory capitalization 243,000 155,000
Asset reserves 330,000 375,000
Property, plant, and equipment 18,000 0
Total deferred tax assets 905,000 1,366,000
Less valuation allowance 41,000 41,000
Net deferred tax assets $864,000 $1,325,000
At November 30, 2005 the Company has approximately $132,000 of research
and development credits, $41,000 of state tax credits, and $41,000 of
AMT credits. The R&D and state tax credits will begin to expire in 2012
and 2007, respectively.
The Company has established a deferred tax asset valuation allowance of
$41,000 at November 30, 2005 and 2004, due to the uncertainty of
realizing its deferred tax assets related to the state tax credits.
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.
(11) 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, 2005 and 2004, 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
loan payable also approximates fair value because the interest rate is
variable as it is tied to the lender's borrowing rate.
(12) 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.
(13) Lease Obligations
The Company leases the facility in Dubuque Iowa. Under a operating lease
agreement which expires in October 2006. The minimum lease payments for
the fiscal year ended November 30, 2006 will be approximately $125,000.
Total rent expense recognized for the year ended November 30, 2005 was
$25,000.
(14) 2005 Acquisition
Effective October 4, 2005, the Company acquired the operating assets of
Vessels Systems, Inc. for a cash purchase price of approximately
$844,000. The operating results of the acquired business are reflected
in the Company's consolidated statement of income from the acquisition
date forward. The acquisition was made to continue the Company's growth
strategy and diversify its product offerings outside the agricultural
industry. The purchase price was determined based on an arms-length
negotiated value. The transaction was 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 Vessels Systems, Inc. for
2005 and 2004 is not included as management believes that Vessels
Systems, Inc. would not have had a material impact on the Company's
financial statements.
(15) Segment Information
On October 4, 2005, the Company purchased certain assets of Vessels
Systems, Inc. which created a separate operating segment. Prior to the
date of this acquisition the Company operated in one reportable segment.
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 two reportable segments: agricultural products and pressurized
vessels. The agricultural products segment fabricates and sells farming
products as well as replacement parts for these products throughout the
United States. The pressurized vessel segment produces pressurized
tanks.
The accounting policies applied to determine the segment information are
the same as those described in the summary of significant accounting
policies. Currently interest expense on long-term debt is all located
within the agricultural products segment with no interest being charged
to the pressurized vessels segment related to intercompany borrowings.
Intersegment sales and transfers are accounted for at historical cost.
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. The agricultural products segment information is
for the year ended November 30, 2005 and the pressurized vessels segment
information is for the period from acquisition to November 30, 2005.
Agricultural Pressurized Consolidated
Products Vessels
Revenue from external
customers $14,261,000 $358,000 $14,619,000
Income from operations 1,683,000 7,000 1,690,000
Income before tax 1,467,000 7,000 1,474,000
Segment profit 972,000 5,000 977,000
Total Assets 10,737,000 1,045,000 11,782,000
Capital expenditures 374,000 4,000 378,000
Depreciation 262,000 7,000 269,000
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable
Item 8A. Controls and Procedures.
Senior management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the
Exchange Act is (a) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure; and (b) recorded, processed, summarized and reported,
within the time specified in the SEC's rules and forms. Since that
evaluation process was completed there have been no significant
changes in our disclosure controls or in other factors that could
significantly affect these controls.
There were no changes in our internal control over financial reporting,
identified in connection with this evaluation that occurred during the
fourth fiscal quarter that materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Item 8B. Other Information.
Not Applicable
PART III
Item 9. Directors and Executive Officers of the Registrant.
The information required by Item 9 is incorporated by reference to our
Definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after November 30, 2005.
We have adopted a Code of Ethics that applies to our principal
executive officer, principal financial officer, principal accounting
officer or controller. A copy of the Code of Ethics may be obtained
free of charge by writing to us at the following address:
Art's-Way Manufacturing Co., Inc.
5556 Highway 9
Armstong, IA 50514
Item 10. Executive Compensation.
The information required by Item 10 is incorporated by reference to our
Definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after November 30, 2005.
Item 11. Security Ownership of Certain Beneficial Owners & Management
and Related Stockholder Matters.
The information required by Item 11 is incorporated by reference to our
Definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after November 30, 2005.
Item 12. Certain Relationships and Related Transactions.
The information required by Item 12 is incorporated by reference to our
Definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after November 30, 2005.
Item 13. Exhibits.
Please see Exhibit Index.
Item 14. Principal Accountant Fees and Services.
The information required by Item 14 is incorporated by reference to our
Definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after November 30, 2005.
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.
By: __________________________ By: __________________________
John C. Breitung Carrie L. Majeski
Chief Executive Officer Chief Financial Officer
Date:_____________________ Date:_____________________
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.
______________________________ February 28, 2006
J. Ward McConnell, Jr.
Chairman of the Board and Director Date
______________________________ February 28, 2006
David R. Castle
Director Date
______________________________ February 28, 2006
George A. Cavanaugh, Jr.
Director Date
______________________________ February 28, 2006
James L. Koley
Director Date
______________________________ February 28, 2006
Douglas McClellan
Director Date
_____________________________ February 28, 2006
Marc H. McConnell
Director Date
_____________________________ February 28, 2006
Thomas E. Buffamante
Director Date
Art's-Way Manufacturing Co., Inc. Exhibit Index
Number Exhibit Description
2 Agreement & Plan of Merger for Reincorporation of Art's-Way
Manufacturing Co., Inc., in Delaware. Incorporated by reference to
Exhibit 2 of Annual Report on Form 10-K for the year ended May 27,
1989.
3 Certificate of Incorporation and By-laws for Art's-Way
Manufacturing Co., Inc. Incorporated by reference to Exhibit 3 of
Annual Report on Form 10-K for the year ended May 27, 1989.
3.1 Amendments to Bylaws of Art's-Way Manufacturing Co., Inc. Incorporated
by reference to Exhibit 3.1 to the Form 10-QSB for the quarter ended
May 31, 2004
10 Incorporated by reference to the material contracts filed as
Exhibit 10 to the Annual Report on Form 10-K for the fiscal year
ended May 30, 1991.
10.1 Art's-Way Manufacturing Co., Inc. 401 (k) Savings Plan. Incorporated
by reference to Exhibit 28 (a) to the Art's-Way Manufacturing Co., Inc.
Registration Statement on Form S-8 filed on October 23, 1992.
10.2 Art's-Way Manufacturing Co., Inc. Employee Stock Option Plan (1991).
Incorporated by reference to Exhibit "A" to Proxy Statement for Annual
Meeting of Stockholders held on October 15, 1991.
10.3 Art's-Way Manufacturing Co., Inc. Director Stock Option Plan (2001).
Incorporated by reference as Exhibit 10.3.1 of the Annual Report on
Form 10-K for the fiscal year ended November 30, 2002.
10.4 Asset Purchase Agreement between the Company and J. Ward
McConnell, Jr., and Logan Harvesters, Inc. Incorporated by reference to
Current Report on Form 8-K dated September 6, 1996.
10.5 Agreement dated February 12, 2002 between the Company and J. Ward
McConnell, Jr., purchase of 640,000 shares of common stock.
Incorporated by reference to Current Report on Form 8-K filed
February 22, 2002.
10.6 Forbearance Agreement and Fifteenth Amendment to Loan and Security
Agreement dated January 31, 2003 between the Company and UPS Capital
Corporation. Incorporated by reference to the Form 10-Q for the quarter
ended February 28, 2003.
10.7 Long-term Financing Agreement dated April 25, 2003 between the Company
and West Des Moines State Bank. Incorporated by reference to the
Form 10-Q for the quarter ended May 31, 2003.
10.8 Asset Purchase Agreement between the Company and Obeco Truck Body, Inc.
Incorporated by reference to the Form 10-Q filed for the quarter ended
August 31, 2003.
10.9 Purchase Agreement with Vessels Systems Inc.
21 Subsidiaries of the small business issuer.
23 Consent of McGladrey & Pullen, LLP
31.1 Certification of Chief Executive Officer under the Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under the Section 302 of the
Sabanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer under 18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer under 18 U.S.C. Section 1350.