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, 2006
[ ] 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 (I.R.S. Employee
of Incorporation Identification No.)
or Organization)
5556 Highway 9
Armstrong, Iowa 50514
_____________________________ ________________________________
(Address of Principal (Zip Code)
Executive Offices)
(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: $19,853,812.
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:
$15,231,955. As of February 17, 2007.
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 26,
2007, there were 1,978,176 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Definitive Proxy
Statement for the registrant's 2007 Annual Meeting of Stockholders to be
filed within 120 days of November 30, 2006, 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 thru 7
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 8 thru 9
Matters and Small Business Issuer Purchases of
Equity Securities
Item 6 - Management's Discussion and Analysis or Plan 9 thru 13
of Operation
Item 7 - Financial Statements 13
Item 8 - Changes in and Disagreements with Accountants 14
on Accounting and Financial Disclosure
Item 8A - Controls and Procedures 14
Item 8B - Other Information 14
Part III
Item 9 - Directors, Executive Officers, Promoters and 15
Control Persons; Compliance with Section 16(a) of the
Exchange Act
Item 10 - Executive Compensation 15
Item 11 - Security Ownership of Certain Beneficial
Owners and Management And Related Stockholder Matters 15
Item 12 - Certain Relationships and Related Transactions 15
Item 13 - Exhibits 15
Item 14 - Principal Accountant Fees and Services 15
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.
During the 2005 beet harvesting season we field tested a new single pass
defoliator; we projected that this product would 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 operate this new business
through our wholly-owned subsidiary, Art's-Way Vessels, Inc.
In July 2006, we celebrated our 50th Anniversary as an agriculture
equipment manufacturer.
Also in July 2006, we exported our newly designed sugar beet harvester
and defoliator. We shipped units to the Ukraine, Russia and China. We
are very excited to be breaking out into these new markets.
In August 2006 we purchase certain assets of Tech Space Inc., a
manufacturer of modular laboratories, located in Monona, Iowa. We
purchased the inventory, fixed assets and accounts receivable for the
purchase price of $1,137,606, paid in cash. We operate this new business
through our wholly-owned subsidiary, Art's-Way Scientific, Inc.
Our new grinder mixer launched in late 2005 has been a great success. A
major competitor has exited the domestic and international market and we
have gained significant market share. In September 2006 our first
shipment of grinder mixers sold internationally left our Armstrong
facility. We shipped several units to the United Kingdom and to
Australia, and we look forward to strengthening these relationships and
developing new ones going forward.
(b) Business of Issuer
Art's-Way Manufacturing manufactures specialized farm machinery under
our own and private labels. Art's-Way Vessels manufactures pressure
vessels and Art's-Way Scientific manufactures modular building for
various uses, animal containment and laboratories are two of the most
common applications.
Farm equipment manufactured 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 13% and 15%
of Art's-Way Manufacturing's consolidated sales for the years ended
November 30, 2006 and 2005, respectively. While as a percent of sales
this shows a decrease, sales were actually up $391,000 over 2005.
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.
Art's-Way Vessels produces and 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.
Art's-Way Scientific produces and sells modular buildings. The buildings
are designed to meet the needs of the end user. Buildings commonly
produced include swine buildings or the lower end to animal containment
building coupled with laboratories for research. Facilities can have a
selling price ranging anywhere from $50,000 to in excess of $2,400,000.
Raw materials, for Art's-Way Manufacturing, Art's-Way Vessels and
Art's-Way Scientific 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 Case New Holland (CNH). The agreement with CNH
will run through September 2006, on moldboard plows, however the
agreement shall continue in force until terminated or cancelled. We have
not terminated or cancelled the agreement as of November 30, 2006. 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
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.
We believe that pressure vessel sales do not tend to be seasonal.
We believe that there is a funding cycle through the universities that
purchase our modular buildings. We believe that this cycle can be offset
by building back logs to get through the slow time and through sales to
other public and private sectors.
We have an OEM supplier agreement with CNH. 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, 2006 and 2005, sales under the CNH label aggregated
approximately 8% of consolidated 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 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 2007, was approximately
$11,792,000. Art's-Way Vessels had a backlog of $1,953,000, Art's-Way
Scientific had a backlog of $5,715,000 and Art's-Way Manufacturing had a
backlog of $4,124,000. Art's-Way Manufacturing had approximately
$7,158,000 in consolidated backlog a year ago.
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 2006, research
and development costs were down $99,000. In 2006 most of our research
and development was done internally with the help of an outside
engineering consultant. Our 2006 costs of $186,000 compare to $285,000
in 2005. For further information please see Part II, Item 6, of this
report.
Art's-Way Vessels produces custom tanks and vessels that are
manufactured to customer blue prints. Art's-Way Vessels incurred no
research and development costs in 2006 and 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 2006 we completed the installation of a liquid
paint system for our whole goods. The new paint system significantly
improves the quality of our paint, in terms of luster, hardness and
longevity. The paint system is situated in a new location within the
plant, as we redesign our workflow to optimize productivity. We have
obtained the necessary 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, 2006, we had peak employment of 90
full-time and 12 part-time employees, of which 80 were factory and
production employees, 6 were engineers and engineering draftsman, 13
were administrative employees, and 3 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, Iowa, 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, Iowa, which houses the manufacturing for
Art's-Way Vessels, is a leased building. The building was constructed in
2004.
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 360,000 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 are temporarily operating in this facility as we
recover from the fire and seek additional temporary and permanent
replacement property. For further information, see note 16 to the
consolidated financial statements provided in this report.
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, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities.
(a) Market Information
Per Common Stock Bid Prices by Quarter
Year ended Year ended
November 30, 2006 November 30, 2005
High Low High Low
First Quarter 6.700 4.740 8.790 5.500
Second Quarter 9.190 5.470 11.500 5.110
Third Quarter 7.350 4.870 9.050 5.110
Fourth Quarter 7.850 5.010 5.950 4.500
Our common stock trades on The NASDAQ Capital 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 135 stockholders of our common stock as of
February 16, 2007.
(c) Dividends
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. An identical dividend was declared in November
2005. The loan covenants that restricted the payment of dividends were
waived by our lenders. The payment 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) Securities Authorization for Issuance Under Equity Compensation
Plans.
Number of Weighted-average Number of securities
securities to exercise price of remaining available
be issued upon Outstanding for future issuance
exercise of options, under equity
outstanding Warrants & rights compensation plans
options, warrants (excluding securities
& rights reflected in columns (a))
Equity compensation
plans approved by
security holders - - -
(1) Equity compensation
plans not approved by
security holders (a)10,000 (b) $3.98 (c) 5,000
Total 10,000 - 5,000
(1) Information on Director Stock Option Plan (2001) is disclosed in
note 9 to the Consolidated Financial Statement filed under Part II, Item
7 of this report.
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.
Art's-Way Scientific, Inc. is in the construction industry and will have
deposits and/or bench mark payment. Their revenue is recognized on a
percentage completed basis.
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.
Income Taxes - Current federal and state income taxes are based upon tax
returns to be filed reporting the Company's taxable income computed
under existing tax code and regulations. Deferred 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, 2006 compared to the twelve months
ended November 30, 2005
Our consolidated revenue of $19,854,000 for 2006 represents a 36%
increase when compared to $14,619,000 for 2005. Art's-Way Vessels had
revenues of $3,797,000, compared to $358,000 in 2005, the year in which
we acquired the assets. Art's-Way Scientific had revenues of $1,032,000,
for the period from its acquisition in August 2006 through November
2006. Art's-Way Manufacturing had revenues totaling $15,025,000.
Art's-Way Manufacturing's branded products increased by $992,000 while
OEM sales increased by $228,000.
Gross profit as a percent of sales was 29% for 2006 compared to 30% for
2005. While we worked to retain and improve our profit margins with
pricing, we have also experienced some disruption due to the acquisition
and integration of Art's-Way Vessels and Art's-Way Scientific.
Furthermore, we have made some significant changes to our manufacturing
methods in our Armstrong facility that had caused inefficiencies during
the transition from a batch build to a more lean continuous flow for the
production of our grinder mixer line. We also had a number of products
that went from the design stage into production; this seems to hurt our
efficiencies for a certain amount of time. We do believe that we have
instilled new disciplines and expect to regain our gross profit in 2007.
Consolidated operating expenses in 2006 increased $1,217,000 from 2005.
Art's-Way Vessels represents $736,000 of that increase, Art's-Way
Scientific represents $269,000 while Art's-Way Manufacturing represents
$230,000 of the total. As a percent of sales, operating expenses were
20% and 19%, respectively, when comparing 2006 and 2005.
Consolidated engineering expenses for Art's-Way Manufacturing decreased
by $56,000. This was due to a decrease in research and development from
2005 when we were developing an exportable beet harvester, defoliator
and a new domestic defoliator. As we moved those new products from
design into production our engineering department's focus shifted from
research and development to production support. In early 2007 we updated
our PM 25 grinder mixer. 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.
Consolidated selling expenses for Art's-Way Manufacturing increased
$141,000 from 2005 to 2006. The newly acquired Art's-Way Scientific,
accounts for $71,000. Art's-Way Manufacturing selling costs increased
$70,000 as this segment increased its marketing efforts to better
penetrate our customers and markets.
Consolidated general and administrative expenses increased by
$1,131,000. The addition of Art's-Way Scientific resulted in an increase
of $198,000. Art's-Way Vessels resulted in an increase of $737,000.
Art's-Way Manufacturing accounted for an increase of $215,000. In 2006
we accrued for bonuses paid out in 2007 based on the results of 2006.
This was the first year that we accrued for bonuses, as in the past
bonus amount were not known until after the reporting period was closed.
This change in accounting resulted in an increase in general and
administrative expenses of $133,000 compared to 2005. Other cost
increases for Art's-Way Manufacturing included on-going expenses to
implement a new Enterprise Resource Planning system, costs related to
our 50th anniversary milestone and normal inflationary increases.
Art's-Way Manufacturing experienced a 65% increase in consolidated
interest and other expenses in 2006 compared to 2005. Interest expense
accounted for substantially all of the increase and was due to higher
average loan balances, as we borrowed an additional $1,500,000 to
finance acquisitions and equipment purchases, and increased interest
rates.
Income before tax in 2006 was down slightly to $1,417,000 compared to
$1,474,000 in 2005. Net income of $934,000 for 2006 compared to $977,000
in 2005.
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 that as of the end of fiscal 2006, our overall
company has strengthened through new product offerings and the
acquisition of Art's-Way Scientific. As previously mentioned the backlog
of orders booked in February 2007, totaled approximately $11,792,000
compared $7,158,000 in consolidated backlog a year ago. Overall, we are
looking forward to another strong year in fiscal 2007.
Liquidity and Capital Resources
Twelve months ended November 30, 2006
Our main sources of funds were from our ability to generate cash from
operations and an additional long-term loan. Cash provided from
operations was $1,570,000 for fiscal year 2006. We were able to bring
our consolidated inventories down $527,000. This decrease was offset by
an increase in accounts receivable of $1,357,000. This increase is
attributed to our increase in export sales. We give extended terms to
our export customers that must wait to take delivery of product for
approximately two months while the freight make its way overseas. We do,
however, have letters of credit established with our export customers,
so the receivables are guaranteed. Our new long-term loan through West
Bank was for $1,500,000, and was used to purchase certain assets of Tech
Space Inc. and certain new equipment.
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 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.
Capital Resources
The Company has long-term financing through West Bank. Credit facilities
consist of a revolving line of credit and three loan agreements totaling
$8,000,000.
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, 2007. 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, 2006 and 2005, we had not borrowed against the line of
credit.
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 May 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 in 2005.
Facility #4 is long-term financing for $1,500,000 that is also supported
by a guarantee issued by the USDA for 75% of the loan amount
outstanding. The loan for $1,500,000 was used for acquisitions and new
equipment in 2006.
Collateral for Facilities #2 and #3 is primarily real estate with a
second position on assets, which are the primary assets securing
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, 2006 the outstanding balances on
Facilities #2, #3 and #4 were $1,701,842, $943,034 and $1,428,054
respectively compared to $1,754,866, $974,356 and $0 at November 30,
2005.
J. Ward McConnell, Jr. was required to personally guarantee all
four credit facilities on an unlimited and unconditional basis. The
guarantees will be reduced after the first three years to a percentage
representing his ownership of the Company. Mr. McConnell's guarantees
shall be removed 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
loans. On Facilities #1 and #2 Mr. McConnell's guarantee portion has
dropped to his percent ownership. The Company compensates Mr. McConnell
at an annual percentage rate of 2% on 40% of the outstanding balance. On
Facilities #3 and #4 the Company compensates Mr. McConnell for his
personal guarantees at an annual percentage rate of 2% of the
outstanding balances. Guarantee payments are made on a monthly basis.
Guarantee fee payments to Mr. McConnell were approximately $60,000 and
$56,000, for the years ended November 30, 2006, and 2005, 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, 2006, we violated the restriction on capital
expenditures, payment of dividends and loans 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 in connection with the asset
purchase from Vessels Systems, 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 5,926,851 598,091 1,196,945 1,198,097 2,933,718
including interest
Capital lease obligation 0 0 0 0 0
Operating lease obligation 125,000 125,000 0 0 0
Purchase Obligations 0 0 0 0 0
Other 0 0 0 0 0
Total 6,051,851 723,091 1,196,945 1,198,097 2,933,718
* Based on current interest rates at November 30, 2006.
Our current ratio and its working capital are as shown in the
following table:
November 30, 2006 November 30, 2005
Current Assets $11,218,700 $9,481,557
Current Liabilities 2,717,243 2,060,486
Working Capital $8,501,457 $7,421,071
Current Ratio 4.1 4.6
Utilization of Deferred Tax Assets
At November 30, 2006 and 2005, we established a deferred tax asset
valuation allowance of approximately $11,000 and $41,000, respectively.
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.
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 sheet of Art's-Way
Manufacturing Co., Inc. and subsidiary as of November 30, 2005, and the
related consolidated statements of operations, stockholders' equity and
cash flows for the year 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 audit.
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 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 audit
provides 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 the results of their operations and their cash flows for the
year then ended in conformity with U.S. generally accepted accounting
principles.
By: /s/ McGladrey & Pullen
Des Moines, Iowa
January 9, 2006
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 sheet of Art's-Way
Manufacturing Co., Inc. and Subsidiaries as of November 30, 2006, and
the related consolidated statements of operations, stockholders' equity,
and cash flows for the year 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 audit provides 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,
2006, and the results of its operations and its cash flows for the year
then ended in conformity with accounting principles generally accepted
in the United States of America.
By: /s/ Eide Bailly
Minneapolis, Minnesota
February 23, 2007
ART'S-WAY MANUFACTURING CO., INC.
Table of Contents
Page
Consolidated Statements of Operations -
Years ended November 30, 2006 and 2005 F-4
Consolidated Balance Sheets -
November 30, 2006 and 2005 F-5
Consolidated Statements of Stockholders' Equity -
Years ended November 30, 2006 and 2005 F-6
Consolidated Statements of Cash Flows -
Years ended November 30, 2006 and 2005 F-7
Notes to Consolidated Financial Statements -
Years ended November 30, 2006 and 2005 F-8 - F-18
ART'S-WAY MANUFACTURING CO., INC.
Consolidated Statements of Operations
Years ended November 30, 2006 and 2005
2006 2005
Net sales $ 19,853,812 $ 14,618,904
Cost of goods sold 14,148,787 10,213,951
Gross profit 5,705,025 4,404,953
Expenses:
Engineering 428,336 483,831
Selling 821,291 680,219
General and administrative 2,682,558 1,551,213
Total expenses 3,932,185 2,715,263
Income from operations 1,772,840 1,689,690
Other income (expense):
Interest expense (408,618) (261,162)
Other 52,624 45,792
Total other expense (355,994) (215,370)
Income before income taxes 1,416,846 1,474,320
Income tax (benefit) 483,306 497,003
Net income $ 933,540 $ 977,317
Net income per share:
Basic $ 0.47 $ 0.50
Diluted 0.47 0.50
See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Balance Sheets
November 30, 2006 and 2005
Assets 2006 2005
Current assets:
Cash $ 2,072,121 $ 1,198,238
Accounts receivable-customers,
net of allowance for doubtful
accounts of $108,372 and $46,385
in 2006 and 2005, respectively 2,313,290 956,391
Inventories, net 5,998,175 6,525,051
Deferred taxes 672,000 673,000
Other current assets 163,114 128,877
Total current assets 11,218,700 9,481,557
Property, plant, and equipment, net 3,185,298 1,890,660
Inventories, noncurrent 0 144,871
Inter Company Trans AWV 0 0
Inter Company Trans AWS 0 0
Deferred taxes 100,000 191,000
Acquisition AWV 0 0
Acquisition AWS 0 0
Other assets 110,240 74,353
Total assets $ 14,614,238 $ 11,782,441
Liabilities and Stockholders Equity
Current liabilities:
Notes payable to bank $ 0 $ 0
Current portion of term debt 220,559 223,946
Accounts payable 587,555 530,722
Customer deposits 424,205 569,354
Billings in Excess of Cost and Profit 57,266 0
Accrued expenses 1,427,658 736,464
Total current liabilities 2,717,243 2,060,486
Long-term liabilities 0 0
Term debt, excluding current portion 3,852,372 2,558,273
Total liabilities 6,569,615 4,618,759
Stockholders equity:
Common stock $0.01 par value.
Authorized 5,000,000 shares;
issued 1,978,176 and 1,963,176
shares in 2006 and 2005 19,782 19,632
Additional paid-in capital 1,765,697 1,719,787
Retained earnings 6,259,144 5,424,263
Total stockholders equity 8,044,623 7,163,682
Total liabilities and
stockholders equity $ 14,614,238 $ 11,782,441
See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Statements of Stockholders Equity
Years ended November 30, 2006 and 2005
Common stock Additional
Number of paid-in Retained
share Par value capital earnings Total
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
Exercise of
stock options 15,000 150 40,550 0 40,700
Stock based
compensation 0 0 5,360 0 5,360
Dividends paid,
$0.05 per share 0 0 0 (98,659) (98,659)
Net income 0 0 0 933,540 933,540
Balance,
November 30, 2006 1,978,176 $ 19,782 $ 1,765,697 $ 6,259,144 $ 8,044,623
See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Statements of Cash Flows
Years ended November 30, 2006 and 2005
2006 2005
Cash flows from operations:
Net income $ 933,540 $ 977,317
Adjustments to reconcile net
income to net cash provided by
operating activities:
Stock based compensation 5,360 5,800
(Gain) Loss on sale of
property, plant, and equipment (71,764) (8,486)
Depreciation and amortization 303,754 268,616
Deferred income taxes 92,000 461,000
Changes in assets and liabilities,
net of TechSpace Inc & Vessel
Systems Inc. acquisition:
(Increase) decrease in:
Accounts receivable (1,031,074) 21,202
Inventories 1,119,386 204,736
Other current assets (34,237) 127,072
Other, net (35,887) 71,653
Increase (decrease) in:
Accounts payable 56,833 (6,207)
Billings in Excess of Costs 57,266 0
Customer deposits (459,402) 491,379
Accrued expenses 691,188 (117,331)
Net cash provided by operating activities 1,626,963 2,496,751
Cash flows from investing activities:
Purchases of property, plant, and equipment (974,716) (378,420)
Purchase of assets of Vessels Systems Inc. 0 (844,284)
Purchase of assets of Tech Space Inc. (1,137,606) 0
Proceeds from sale of property, plant, and equipment 126,489 22,600
Net cash (used in) investing activities (1,985,833) (1,200,104)
Cash flows from financing activities:
Payments on Line of Credit 0 (870,071)
Payments of notes payable to bank (209,288) (180,697)
Payments of long-term liabilities 0 (144,766)
Proceeds from term debt 1,500,000 1,000,000
Proceeds from the exercise of stock options 40,700 79,283
Dividends paid to stockholders (98,659) (98,159)
Net cash provided by (used in) financing activities 1,232,753 (214,410)
Net increase/(decrease) in cash 873,883 1,082,237
Cash at beginning of period 1,198,238 116,001
Cash at end of period $ 2,072,121 $ 1,198,238
Supplemental disclosures of cash flow information:
Cash paid/(received) during the period for:
Interest $ 391,149 $ 246,598
Income taxes 40,359 52,993
Supplemental schedule of investing activities:
Vessel Systems Inc acquisition:
Accounts Receivable $ 0 $ 240,585
Inventories 0 116,817
Property, plant and equipment 0 486,882
Cash paid $ 0 $ 844,284
Supplemental schedule of investing activities:
Tech Space Inc acquisition:
Accounts Receivable $ 325,825 $ 0
Inventories 447,639 0
Property, plant and equipment 678,395 0
Customer deposits (314,253) 0
Cash paid $ 1,137,606 $ 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 and
seed planting 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
thirty-three years.
(g) 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.
(h) 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 will have
deposits and/or bench mark payment. Their revenue is recognized on a
percentage completed basis.
(i) Research and Development
Research and development costs are expensed when incurred. Such costs
approximated $186,000 and $285,000 for the years ended November 30, 2006
and 2005, respectively.
(j) Advertising
Advertising costs are expensed when incurred. Such costs
approximated $99,000 and $66,000 for the years ended November 30, 2006
and 2005, respectively.
(k) 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, 2006 and 2005:
2006 2005
Basic:
Numerator, net income $ 933,540 $ 977,317
Denominator: Average number of
common shares Outstanding 1,970,676 1,951,108
Basic earnings per common share $ 0.47 $ 0.50
Diluted
Numerator, net income $ 933,540 $ 977,317
Denominator: Average number of
common shares Ourstanding 1,970,676 1,951,108
Effect of dilutive stock options 7,432 19,113
1,978,108 1,970,221
Diluted earnings per common share $ 0.47 $ 0.50
(l) 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.
(m) 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.
(n) 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 Company is assessing the effects of
Financial Interpretation No. 48.
(2) Allowance for Doubtful Accounts
A summary of the Company's activity in the allowance for doubtful
accounts is as follows:
2006 2005
Balance, beginning $46,385 $30,417
Provision charged to expense 88,528 19,909
Less amounts charged-off (26,541) (3,941)
Balance, ending $108,372 $46,385
(3) Inventories
Major classes of inventory are:
2006 2005
Raw materials $3,260,897 $3,414,777
Work in process 981,979 480,101
Finished goods 2,886,860 3,889,825
$7,129,736 $7,784,703
Less: Reserves 1,131,561 1,114,781
$5,998,175 $6,669,922
(4) Property, Plant, and Equipment
Major classes of property, plant, and equipment are:
2006 2005
Land $223,509 $180,909
Buildings and improvements 3,341,804 2,704,570
Manufacturing machinery & equipment 9,511,453 9,163,149
Trucks and automobiles 167,535 104,016
Furniture and fixtures 116,286 110,834
13,360,587 12,263,478
Less accumulated depreciation 10,175,289 10,372,818
Property, plant and equipment $3,185,298 $1,890,660
(5) Accrued Expenses
Major components of accrued expenses are:
2006 2005
Salaries, wages, and commissions $464,609 $371,680
Accrued warranty expense 230,740 131,832
Other 732,309 232,952
$1,427,658 $736,464
(6) Product Warranty
The Company offers warranties of various length 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, 2006, and 2005 are as follows:
2006 2005
Balance, beginning $131,832 $119,912
Settlements made in cash or in-kind (216,068) (294,633)
Warranties issued 314,976 306,553
Balance, ending $230,740 $131,832
(7) 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 March 2007. 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, 2006 and 2005, the Company
had not borrowed against the line of credit. 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 $60,000 and $56,000, for the years
ended November 30, 2006, and 2005, respectively.
A summary of the Company's term debt is as follows:
2006 2005
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) $1,701,843 $1,754,866
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) 943,034 974,356
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) 1,428,054 0
State of Iowa Community Development
Block Grant promissory note at 0%
interest, maturity 2006 with quarterly
principal payments of $11,111 0 33,334
State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity 2006, with quarterly principal
payments of $7,007 0 19,663
Total term debt 4,072,931 2,782,219
Less current portion of term debt 220,559 223,946
Term debt, excluding current portion $3,852,372 $2,558,273
(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, and 2005, 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
2007 $ 220,559
2008 242,695
2009 267,083
2010 293,891
2011 323,359
Thereafter 2,725,344
$ 4,072,931
(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 $17,525 and $10,613 related
to this plan during the years ended November 30, 2006 and 2005,
respectively.
(9) Stock Option Plan
Under the Director Option Plan (2001), 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, 2006, the Company
had approximately 5,000 shares available for issuance under the 2001
Director Option Plan.
A summary of changes in the stock option plan is as follows:
November 30
2006 2005
Options outstanding at beginning of period 25,000 45,000
Granted 0 5,000
Exercised (15,000) (25,000)
Options outstanding at end of period 10,000 25,000
Options price range for the period $ 2.32 $ 2.32
To To
$ 5.21 $ 5.21
Options exercisable at end of period 8,750 20,000
At November 30, 2006 and 2005, the weighted-average remaining
contractual life of options outstanding was 6.5 years and 6.9 years
respectively, and the weighted-average exercise price was $3.98 and
$3.22, respectively. The weighted-average exercise price for options
exercisable at November 30, 2006 was $3.80.
The per share weighted-average fair value of stock options granted in
the year ended November 30, 2005, was $3.45, 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, 2006
and 2005 consists of the following:
November 30
2006 2005
Current expense $391,306 $574,003
Benefit of utilization of operating
loss carryforward 0 (538,000)
Deferred expense (benefit) 92,000 461,000
$483,306 $497,003
The reconciliation of the statutory Federal income tax rate and the
effective tax rate are as follows:
November 30
2006 2005
Statutory federal income tax rate 34.0% 34.0%
Other due primarily to change in
valuation allowance .1 (0.3)
34.1% 33.7%
Tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at November 30, 2006 and 2005
are presented below:
November 30
2006 2005
Deferred tax assets:
Tax credits 11,000 214,000
Accrued expenses 152,000 100,000
Inventory capitalization 202,000 243,000
Asset reserves 440,000 330,000
Property, plant, and equipment (22,000) 18,000
Total deferred tax assets 783,000 905,000
Less valuation allowance 11,000 41,000
Net deferred tax assets $772,000 $864,000
At November 30, 2006 the Company has approximately $132,000 of research
and development credits, 29,000 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 $11,000 at November 30, 2006 and $41,000 at 2005, 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, 2006 and 2005, 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 an operating
lease agreement which expires in October 2007. The minimum lease
payments for the fiscal year ended November 30, 2007 will be
approximately $125,000. Total rent expense recognized for the year ended
November 30, 2006 and November 30, 2005 was $150,000 and $25,000,
respectively.
(14) 2006 and 2005 Acquisition
Effective August 2, 2006, the Company acquired the operating assets of
Tech Space, Inc. for a cash purchase price of approximately $1,138,000.
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 businesses are reflected
in the Company's consolidated statement of income from the acquisition
date forward. The acquisitions were 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 Tech Space and Vessels
Systems, Inc. for 2006 and 2005 were not included as management believes
that the Companies 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. 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.
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. Export sales amounted
to $844,000 and $0 in 2006 and 2005 respectively. 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. The agricultural products and pressurized
vessels segment information is for the year ended November 30, 2006 and
the modular buildings segment information is for the period from
acquisition to November 30, 2006.
Twelve Months Ended November 30, 2006
Agricultural Pressurized Modular Consolidated
Products Vessels Buildings
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 0 950,000
Depreciation
& Amortization 243,000 51,000 10,000 304,000
Twelve Months Ended November 30, 2005
Agricultural Pressurized Modular Consolidated
Products Vessels Buildings
Revenue from
external customer $14,261,000 $358,000 $0 $14,619,000
Income from operations 1,683,000 7,000 0 1,690,000
Income before tax 1,467,000 7,000 0 1,474,000
Total Assets 10,691,000 1,091,000 0 11,782,000
Capital expenditures 374,000 4,000 0 378,000
Depreciation
& Amortization 262,000 7,000 0 269,000
(16) Subsequent Events
On January 16, 2007, a fire occurred late in the evening at Art's-Way
Scientific's plant in Monona, Iowa. The fire destroyed the manufacturing
building and all of its contents. There were no injuries, and the
Company was able to save the computer server.
The Company is currently working with its insurance carrier to assess
the value of the loss and commence replacement of its assets. The
Company has contacted all of the customers that had orders booked and
buildings ready to deliver. To date the Company has not lost any orders.
The Company's main goal at present is to manufacture and ship against
its existing backlog. Within a week of the fire the Company was able to
start rebuilding one of the buildings that was lost in the fire. The
Company also owns a smaller warehouse in Monona which is being used as a
temporary production facility. The Company brought in trailers to serve
as additional space. Two buildings are to be shipped in February.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On August 25, 2006, the Company engaged Eide Bailly, LLP to be its
independent accountant to audit the Company's financial statements.
Prior to the engagement, the Company had not previously had consulted
with Eide Bailly, LLP on any matters.
Item 8A. Controls and Procedures.
Senior management, including the President 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 President 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 President 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, 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 to be filed pursuant to Regulation 14A
within 120 days after November 30, 2006.
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 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, 2006.
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, 2006.
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, 2006.
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, 2006.
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:_____________________________
E.W. Muehlhausen Carrie L. Majeski
President Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Accounting 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 26, 2007
J. Ward McConnell, Jr.
Chairman of the Board and Director Date
______________________________ February 26, 2007
David R. Castle
Director Date
______________________________ February 26, 2007
Fred Krahmer
Director Date
______________________________ February 26, 2007
James Lynch
Director Date
______________________________ February 26, 2007
Douglas McClellan
Director Date
_____________________________ February 28, 2007
Marc H. McConnell
Director Date
_____________________________ February 28, 2007
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 Asset Purchase Agreement with Vessels Systems Inc. incorporated by
reference to the Form 10-KSB filed for the year ended November 31, 2005
10.10 Asset Purchase Agreement with Tech Space Inc.
21 Subsidiaries of the small business issuer.
23 Consent of McGladrey & Pullen, LLP
23.1 Consent of Eide Bailly, 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.