SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended November 30, 2002
Commission File No. 0-5131
ART'S-WAY MANUFACTURING CO., INC.
DELAWARE 42-0920725
_______________________ ________________________
State of Incorporation I.R.S. Employee Identification No.
Armstrong, Iowa 50514
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (712) 864-3131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or informational statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2). Yes No X
Aggregate market value of the voting stock held by non-affilates of the
Registrant on May 31, 2002, end of second fiscal quarter: $3,446,547
Number of common shares outstanding on February 13, 2003: 1,938,176
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for
the Registrant's 2003 Annual Meeting of Stockholders to be filed within
120 days of November 30, 2002 are incorporated by reference into Part III.
Art's-Way Manufacturing Co., Inc.
Index to Annual Report
on Form 10-K
Page
Part I
Item 1 - Description of Business 3 thru 5
Item 2 - Properties 5
Item 3 - Legal Proceedings 5
Item 4 - Submission of Matters to a Vote of
Security Holders 5
Part II
Item 5 - Market for the Registrant's Common Stock
and Related Security Holder Matters 6
Item 6 - Selected Financial Statement Data 7
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results
of Operations 7 thru 13
Item 7A Quantitative and Qualitative Disclosures
About Market Risk 13
Item 8 - Financial Statements and Supplemental Data 14
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
Part III
Item 10 - Directors and Executive Officers of the
Registrant 15
Item 11 - Executive Compensation 15
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 15
Item 13 - Certain Relationships and Related
Transactions 15
Item 14 - Controls and Procedures 15
Part IV
Item 16 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K 16
PART I
Item 1. Description of Business
(a) General Development of Business
Art's-Way Manufacturing Co., Inc. (the "Company" or "Art's-Way") began
operations as a farm equipment manufacturer in 1956. Its manufacturing
plant is located in Armstrong, Iowa.
During the past five years, the business of the Company has remained
substantially the same.
(b) Recent Events
On February 25, 2003, the Company's secured lender granted the Company
forbearance on the lender's ability to call the Company's debt in
relation to the Company's past violations of the debt's financial
covenants through December 1, 2003. The amendment and forbearance
agreement waives the Company's requirements to comply with the financial
covenants of the loan agreement through December 1, 2003. The lender
has retained its rights and remedies under the loan agreement if an
additional event of default occurs, if a material adverse change occurs
as defined in the agreement, or if the Company fails to comply with any
other parts of the loan agreement.
The amendment and forbearance agreement also reduces the maximum
borrowings available under the revolving line of credit to $2,000,000.
As of November 30, 2002, the Company had $1,038,000 of availability
remaining on the revolving line of credit. The revolving line of
credit is shown as a current liability in the Company's financial
statements, as of November 30, 2002, as it is the Company's intention
to pay the revolving line of credit within the next year.
(c) Financial Information About Industry Segments
In accordance with accounting principles generally accepted in the
United States of America, Art's-Way has only one industry segment,
metal fabrication.
(d) Narrative Description of Business
The Company manufactures specialized farm machinery under its own
and private labels.
Equipment manufactured by the Company under its own label includes:
portable and stationary animal feed processing equipment and related
attachments used to mill and mix feed grains into custom animal feed
rations; a high bulk mixing wagon to mix animal feeds containing
silage, hay, and grain; a line of mowers and stalk shredders;
minimum till seed bed preparation equipment; sugar beet and potato
harvesting equipment; and a line of land maintenance equipment,
edible bean equipment, and grain drill equipment.
Private label manufacturing of farm equipment accounted for 26%, 30%,
and 31% of total sales for the years ended November 30, 2002, 2001,
and 2000, 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 Art's-Way products, and dealers may
sell a competitor's product line but are discouraged from doing so.
Raw materials are acquired from domestic sources and normally are
readily available.
The Company maintains manufacturing rights on several of its products
covering unique aspects of design and has trademarks covering product
identification. The Company pays royalties for use of certain
manufacturing rights. In the opinion of the Company, its trademarks
and licenses are of value in securing and retaining business.
Sales of the Company's agricultural products are seasonal; however,
through the development of mowers, shredders and beet harvesting
machinery coupled with private labeled products, the impact of
seasonality has been decreased because the peak periods occur at
different times. The Company, similar to other manufacturers
in the farm equipment industry, is 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.
The Company has an OEM supplier agreement with Case New Holland,
Inc. (CNH). Under the OEM agreement the Company has agreed to
supply CNH's requirements for certain feed processing, tillage
equipment, 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, 2002, 2001, and
2000, sales to Case aggregated approximately 17%, 20%, and 22%
of total sales, respectively.
The feed processing products, including private labeled units,
compete with similar products of many other manufacturers.
There are estimated to be more than 15 competitors producing
similar products, although total market statistics are not
available. The Company's products are competitively priced
with greater diversity than most competitor product lines.
Beet harvesting equipment is manufactured by three companies
that have a significant impact on the market. The Company's
share of this market is estimated to be about 45%. Other
products such as mowers, shredders, and grain drills are
manufactured by approximately 20 other companies; however,
the Company believes its products are competitively priced
and their quality and performance are above average in a
market where price, product performance, and quality are
principal elements.
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.
The backlog of orders on February 3, 2003 was approximately
$3,693,000 compared to approximately $1,750,000 a year ago.
The order backlog is expected to be shipped during the
current fiscal year.
The Company currently does no business with any local, state,
or federal government agencies.
The Company is engaged in experimental work on a continual
basis to improve the present products and create new products.
Research costs for the current fiscal year were primarily
expended on the continuing development of beet harvesting
equipment and mower decks. All research costs are expensed
as incurred. Such costs approximated $12,000, $125,000, and
$302,000 for the years ended November 30, 2002, 2001, and 2000,
respectively. (See also note 1 to the Financial Statements).
The Company is subject to various federal, state and local laws
and regulations pertaining to environmental protection and the
discharge of materials into the environment. The Company does
not anticipate any future expenses or capital expenditures
relating to compliance with such regulations.
During the year ended November 30, 2002, the Company had peak
employment of 86 full-time employees, of which 72 were factory
and production employees, 2 were engineers and engineering
draftsman, 10 were administrative employees, and 2 were in
sales and sales management. Employee levels tend to
fluctuate based upon the seasonality of the product line.
The Company's employees are not unionized. There has been
no work stoppage in the Company's history and no stoppage
is, or has been, threatened. The Company believes its
relationship with its employees is good.
(e) Financial Information about Foreign and Domestic
Operation and Export Sales
The Company has no foreign operations. Its export sales,
primarily to Canada and Denmark, accounted for less than 1%
of sales and less than 1% of operating income (loss) in the
years ended November 30, 2002, 2001 and 2000.
Item 2. Properties
The existing executive offices, production, and warehousing
facilities of Art's-Way are built of hollow clay
block/concrete and contain approximately 240,000 square
feet of usable space. Most of these facilities have been
constructed since 1965 and are in good condition. The
Company owns approximately 127 acres of land west of
Armstrong, Iowa, which includes the factory and inventory
storage space. The Company currently leases excess land
to third parties for farming.
Item 3. Legal Proceedings
Various legal actions and claims are pending against the
Company consisting of ordinary routine litigation incidental
to the business. In the opinion of management, adequate
provisions have been made in the accompanying financial
statements for all pending legal actions and other claims.
(See also note 13 to the Financial Statements.)
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Holder Matters
(a) Price Range of Common Stock
Per Common Stock Bid Prices by Quarter
Year ended Year ended
November 30, 2002 November 30, 2001
High Low High Low
First Quarter 2.200 1.620 3.188 2.750
Second Quarter 3.450 2.050 2.938 1.950
Third Quarter 3.300 2.250 2.340 2.000
Fourth Quarter 4.970 2.750 2.250 1.870
The 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 the Small Cap NASDAQ. The quotations
shown reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent
actual transactions.
(b) Approximate Number of Equity Security Holders
Approximate number of
Title of Class Round Lot Shareholders as of
Common Stock, $.01 February 5, 2003
Par Value 340
(c) Dividend Policy
Holders of Common Stock of the Company are entitled to a pro
rata share of any dividends as may be declared, from time to
time, from funds available and to share pro rata in any such
distributions available for holders of Common Stock upon
liquidation of the Company. The Company has not paid a
dividend during the past five years, and is currently
restricted by its loan covenants from paying any dividends.
(d) Equity Compensation Plan Information
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in
columns (a)
Plan Category
Equity (a) (b) (c)
compensation
plans approved
by security
holders 15,000 $3.03 0
Equity
compensation
plans not
approved by
security holders 25,000 $2.406 20,000
Total 40,000 20,000
Item 6. Selected Financial Statement Data
The following tables set forth certain information concerning the Statements
of Operations and Balance Sheets of the Company and should be read in
conjunction with the Financial Statements and the notes thereto appearing
elsewhere in this Report.
(a) Selected Statement of Operations Data (In Thousands of Dollars,
Except Per Share Amounts)
Year Year Year Year Year
Ended Ended Ended Ended Ended
November November November November November
30, 2002 30, 2001 30, 2000 30, 1999 30, 1998
Net Sales $10,900 $10,891 $14,229 $17,227 $23,633
Net Income
(Loss) $ 569 $(2,382) $(2,166) $ (630) $ (324)
Net Income
(Loss)
Per Share
Basic $.31 $ (1.86) $ (1.72) $ (.50) $ (.26)
Diluted $.31 $ (1.86) $ (1.72) $ (.50) $ (.26)
Common Shares
and Equivalents
Outstanding:
Basic 1,808,423 1,279,613 1,256,351 1,248,456 1,245,931
Diluted 1,811,439 1,279,613 1,256,351 1,248,456 1,245,931
(a) Selected Balance Sheet Data (In Thousands of Dollars, Except Per
Share Amounts)
November November November November November
30, 2002 30, 2001 30, 2000 30, 1999 30, 1998
Total Assets $ 5,921 $6,755 $10,707 $15,078 $16,854
Current Liabilities $2,080 $4,719 $ 6,308 $ 8,438 $ 7,885
Long-Term Debt $ 521 $ 272 $ 345 $ 420 $ 2,160
Term Debt (Current
and Long-Term) $1,197 $3,308 $ 4,252 $ 5,709 $ 6,888
Other Long-Term
Obligations $ 187 - - - -
Dividends Per Share $ .00 $ .00 $ .00 $ .00 $ .00
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may be deemed to include forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risk and uncertainty. Although the Company
believes that its expectations are based on reasonable assumptions,
it can give no assurance that its expectations will be achieved.
The important factors that could cause actual results to differ
materially from those in the forward-looking statements below
("Cautionary Statements") include the Company's degree of financial
leverage, the factors described in Item 1(a and b) of this report,
risks associated with acquisitions and in the integration thereof,
risks associated with supplier/OEM agreements, dependence upon the
farm economy and the impact of competitive services and pricing, as
well as other risks referenced from time to time in the Company's
filings with the SEC. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the Cautionary Statements.
The Company does not undertake any obligation to release publicly any
revisions to such forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence
of unanticipated events.
The following discussion and analysis of financial condition and results
of operations of the Company are based on the Financial Statements and
the notes thereto included herein.
(a) and (b) Liquidity and Capital Resources
Twelve months ended November 30, 2002
The Company's main source of funds was sale of stock for $800,000 along
with the reduction in accounts receivable and inventory. The reduction
in accounts receivable can be attributed to the increased effort and
efficiency of the Company's collection practices. The reduction in
inventories resulted from building products to sold orders and the
Company's concentrated efforts to reduce inventory levels.
The positive cash flow from operations of $1,525,000 was primarily used
to reduce bank loans by $2,111,000. Capital expenditures for the year
ended November 30, 2002 were $142,000.
Twelve months ended November 30, 2001
The Company's main source of funds was a reduction in accounts receivable
and inventories. The reduction in accounts receivable resulted primarily
from the lower sales volume. The reduction in inventories resulted from a
combination of lower production activity necessitated by lower volume and an
inventory writedown following an auction conducted in November 2001 to sell
excess and obsolete inventory.
The positive cash flow from operations was used in part to reduce bank loans
by $944,000. Capital expenditures for the year ended November 30, 2001 were
$59,000.
Twelve months ended November 30, 2000
The Company's main source of funds was a reduction in accounts receivable and
inventories. The accounts receivable decrease resulted primarily from the
lower sales volume. The reduction in inventories resulted from the lower
production activity necessitated by lower volume combined with the Company's
concentrated efforts to reduce inventory levels. The positive cash flow from
operations allowed for a reduction in bank borrowings. There were no capital
expenditures during the fiscal year ended November 30, 2000.
Capital Resources
The Company has a credit agreement with a lending institution (lender)
that provides for a revolving line of credit (credit facility) and a term
loan, and expires December 1, 2003. The credit facility allows for
borrowings subject to borrowing base percentages on the Company's account
receivable and inventory, and allows for letters of credit up to $100,000.
At November 30, 2002, the Company had borrowed $319,222 on the revolving
line of credit, had $605,371 outstanding on the term loan and had $100,000
in outstanding letters of credit. At November 30, 2001, the Company had
borrowed $2,073,704 on the revolving line of credit, had $889,771
outstanding on the term loan and had $100,000 in outstanding letters of
credit. At November 30, 2002 and 2001, $1,038,000 and $68,000 were
available for borrowings, respectively. The interest rate is based on
the lender's referenced rate and is variable based upon certain
performance objectives. Under the terms of the agreement, the Company
will not pay more than 4% over the reference rate, nor less than the
reference rate during the term of the agreement. The outstanding
borrowings bear interest at 8.25% at November 30, 2002 and 9.00% at
November 30, 2001.
The principal amount of the term loan is repayable in monthly
installments of $23,700 with the remaining unpaid balance due on
December 1, 2003.
All loans, advances and other obligations, liabilities, and
indebtedness of the Company are secured by all present and future
assets. The Company pays an unused line fee equal to three-eighths
of 1% of the unused portion of the revolving line of credit. The
Company's cash account has been restricted by the lender, such that
any available cash is used to pay down on the credit facility.
During 1999, the Company was notified by its lender that the Company
did not fit the lender's customer profile and was requested to relocate
its financing needs.
At November 30, 2000 and 1999, the Company was in default of a loan
covenant, the fixed maturity coverage ratio, of their credit facility
and term loan. The lender notified the Company that the current loan
agreement provided that the lender may, as a result of any event of
default, accelerate the payment of all obligations. As a result, all
borrowings associated with this lender had been classified as current.
The lender did not call for the acceleration of the payment of all
obligations, but retained the right to do so at any time.
The initial term of the loan agreement ended on August 31, 2000. In
a letter dated May 26, 2000, the Company was notified that the lender
did not intend to extend the term of the loan agreement beyond the
termination date. Therefore, all of the obligations outstanding under
the credit agreement and term loan amounting to $4,383,825 at August 31,
2000 were due and payable on August 31, 2000.
During the period between August 31, 2000 and August 31, 2001, the loan
agreement was amended several times to provide for extensions of various
lengths from 30 days to 90 days. On September 1, 2001, the lender sold
the loan to another lending institution (new lender). Under this
arrangement, the Company continued to operate under the same terms as
existed prior to the sale. The new lender granted extensions from
September 1, 2001 through November 15, 2001. On February 25, 2003,
the lender granted forbearance and waived its right to demand payment
because of existing covenant defaults until December 1, 2003.
Therefore, the portion of the term loan not due until December 1, 2003
has been classified as long-term debt in the Company's financial
statements at November 30, 2002.
The amendment and forbearance agreement also reduces the maximium
borrowings available under the revolving line of credit to $2,000,000.
As of November 30, 2002, the Company had $1,038,000 of availability
remaining on the revolving line of credit. The revolving line of
credit is shown as a current liability in the Company's financial
statements, as of November 30, 2002, as it is the Company's
intention to pay the revolving line of credit within the next year.
Management is continuing to evaluate alternative financing
opportunities. Management believes alternative long-term financing
can be obtained from different lenders on acceptable terms and that
the Company will be able to meet its obligations under a new credit
agreement when completed.
In February 2002, the Company sold 640,000 shares of common stock
to an existing shareholder, Mr. J. Ward McConnell, Jr. at estimated
fair value. Proceeds from the sale of the stock were $800,000.
Mr. McConnell has agreed that without prior approval of the Board
of Directors, excluding himself and his son, he will not acquire as
much as fifty percent (50%) of the Company's common stock and will
not take the Company private. Immediately after the transaction,
Mr. McConnell was elected as Chairman of the Board of Directors of
the Company. His son, Mr. Marc McConnell is also a Board Member.
The stock sale proceeds were used to pay down accounts payable and
term debt. The Company is mindful of the necessity to continue to
control its costs. The Company intends to finance its working
capital and pay down its debt through cash from operations and
alternative financing sources assuming such negotiations are
successful. The Company believes that the infusion of capital
from Mr. McConnell allowed it to successfully complete negotiations
with its current secured lender.
The Company's current ratio and its working capital are as shown
in the following table:
November 30, 2002 November 30, 2001 November 30, 2000
Current Assets $4,340,395 $5,295,583 $ 8,610,676
Current Liabilities 2,080,111 4,718,551 6,308,381
Working Capital $2,260,284 $ 577,032 $ 2,302,295
Current Ratio 1.9 1.1 1.4
Current liabilities at November 2001 and 2000 include $605,371 and
$995,600, respectively, of the Company's term debt as a result of the
Company's noncompliance under its debt agreement with its secured lender.
The Company believes the funding expected to be generated from operations
and its existing borrowing capacity will be sufficient to meet working
capital and capital investment needs.
(c)Results of Operations
Twelve months ended November 30, 2002 compared to the twelve months ended
November 30, 2001
Revenues of $10,900,000 for 2002 were comparable to 2001 revenues of
$10,891,000. The Company recorded a net profit of $569,000 ($.31 per share)
in 2002 compared to a net loss of $2,382,000 ($1.86 per share) in 2001.
Revenue from Art's-Way branded products increased 3% while OEM sales decreased
10%. Although there is a continuing weakness in the farm economy, the demand
for beet equipment increased as a result of higher beet prices. Sales for
our feed processing and land maintenance equipment are above expectations and
replacement parts sales remain strong.
Gross profit, as a percent of sales was 25% for 2002 compared to 5% for 2001.
As is shown on the statement of operations for 2001, the Company experienced
losses from disposition of excess and obsolete inventory of $1,082,000 and an
asset impairment writedown on tooling related to product lines that have been
abandoned of $547,000. The gross profit, as a percent of sales for 2001
would have been 19%, had these two losses not occurred. Futher cost cutting
programs increased gross profit by $639,000 for 2002 as compared to 2001.
Operating expenses in 2002 decreased $441,000 from 2001. As a percent of
sales, operating expenses were 18% and 22%, respectively, when comparing 2002
and 2001. Engineering expenses were $204,000 lower than in 2001 due to cost
reduction programs. Selling expenses increased $23,000 in 2002 as a result
of higher commissions and increased sales force when compared to 2001.
Other expenses decreased $173,000 in 2002 versus 2001. This was a result of
lower bank borrowings combined with prime interest rate reductions.
Twelve months ended November 30, 2001 compared to the twelve months ended
November 30, 2000
Revenues decreased 23% to $10,891,000 from $14,229,000 while the Company
recorded a net loss of $2,382,000 ($1.86 per share) compared to a net loss
of $2,166,000 ($1.72 per share) in 2000. Revenues from Art's-Way branded
products were down 23% while OEM sales decreased 26%. The reduction in sales
reflects the continuing weakness in the farm economy. The sugar beet
industry continued to be in distress, with the processing plants moving
from private ownership to co-operative ownership and due to increasing
competition from foreign sugar producing sources. Demand for our feed
processing and land maintenance equipment is above expectations and
replacement parts sales remain strong.
Gross profit, as a percent of sales was 5% as compared to 17% for 2000.
As is shown on the statement of operations for 2001, the Company experienced
losses from disposition of excess and obsolete inventory of $1,082,000 and
an asset impairment writedown on tooling related to product lines that have
been abandoned of $547,000. Had these two losses not occurred, the gross
profit, as a percent of sales would have been 19%.
Operating expenses were down $860,000 from 2000 as a result of cost cutting
efforts in January 2001. As a percent of sales, operating expenses were 22%
and 23%, respectively, for 2001 and 2000.
Other expense decreased $306,000 from 2000. This was a result of lower bank
borrowings combined with prime interest rate reductions.
Utilization of Deferred Tax Assets
The Company has established a deferred tax asset valuation allowance of
approximately $1,913,000 at November 30, 2002, due to the uncertainty of
realizing its deferred tax assets. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible.
For tax purposes, the Company has available at November 30, 2002, net operating
loss carryforwards of approximately $3,483,000 which will begin to expire in
the year 2013. The Company also has approximately $110,000 of research and
development credits and $41,000 of state tax credits which begin to expire in
the years 2007 and 2008, respectively.
(d) Critical Accounting Policies
The Company has identified the following accounting policies as critical to
their operations.
Revenue Recognition - Revenue from sales of products is recognized when risk
of ownership and title pass to the buyer.
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.
The Company records inventory writedowns to market based on expected usage
information for raw materials and historical selling trends for finished
goods. Writedowns of inventory create a new cost basis. Additional
writedowns may be necessary if the assumptions made by management do not
occur. The Company hasclassified 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.
During the fourth quarter of 2001, the Company held an auction to sell excess
and obsolete inventory that resulted in a loss of $1,082,441. The Company
obtained better market information in regards to its aging inventory, leading
to a writedown of inventory of approximately $300,000 in the fourth quarter
of 2001.
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.
(e) Effect of New Accounting Standards
During June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 143, Accounting for Asset Retirement Obligations. This Statement
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires an enterprise to record the fair value
of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of a tangible
long-lived asset. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The Company is currently evaluating the impact of the
adoption of this standard and has not yet determined the effect of adoption
on its financial position and results of operations.
In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-lived Assets, replacing SFAS 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of. The Company is adopting the provisions of SFAS 144 during the first
quarter of fiscal 2003, as required. The Company is currently evaluating
the impact of the adoption of this standard and has not yet determined the
effect of adoption on its financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This Interpretation addresses the
disclosures to be made by a guarantor in its interim and annual finacial
statements about its obligations under guarantees. This Interpretation
also clarifies the requirements related to the recognition of a liability
by a guarantor at the inception of a guarantee for the obligations the
guarantor has undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end.
The disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December
15, 2002. The Company is currently evaluating the impact of the adoption
of this Interpretation and has not yet determined the effect of adoption
on its financial positions and results of operations.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation Trasition and Disclosure. This Statement amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The amendments
to SFAS 123 are effective for financial statements for fiscal years
ending after December 15, 2002. The Company is currently evaluating
the impact of adoption of this standard and has not yet determined the
effect of adoption on its financial position and results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk primarily from changes in interest
rates associated with the variable rates on its debt and its accounts
receivable financing.
Item 8. Financial Statements and Supplemental Data
Selected Quarterly Financial Data
(Unaudited) (all figures in thousands of dollars except per share amounts)
Quarter ending Feb'28 May 31 Aug'31 Nov'30
2002
Revenues $2,642 2,253 3,227 2,778
Gross Profit 571 642 847 710
Income from Operations 26 96 335 345
Interest and Other Expense 75 66 69 19
Income (Loss) before Taxes (49) 30 265 327
Income Tax Expense - - - 4
Net Income (Loss) (49) 30 265 323
Income (Loss) per Share $(0.03) 0.02 0.14 .18
2001
Revenues $2,990 2,410 2,615 2,876
Gross Profit (Loss) 474 637 513 (1,130)
Income (Loss) from Operations (112) 84 11 (1,898)
Interest and Other
(Income) Expense 175 128 113 (14)
Loss before Taxes (287) (44) (102) (1,884)
Income Tax Expense - - - 65
Net Loss (287) (44) (102) (1,949)
Loss per Share $(0.23) (0.04) (0.08) (1.50)
2000
Revenues $2,434 4,232 4,162 3,401
Gross Profit (Loss) 530 985 1,081 (234)
Income (Loss) from Operations (174) 332 302 (1,367)
Interest and Other Expense 172 181 182 173
Income (Loss) before Taxes (346) 151 120 (1,540)
Net Income (Loss) (346) 151 120 (2,091)
Income (Loss) per Share $(0.28) 0.12 0.10 (1.66)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers
The information required by Item 10 is incorporated by reference from the
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after November 30, 2002 and is included as Exhibit 99.1 hereto and
incorporated herein by this reference.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after November 30, 2002 and is included as Exhibit 99.1 hereto and
incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from the
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after November 30, 2002 and is included as Exhibit 99.1 hereto and
incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after November 30, 2002 and is included as Exhibit 99.1 hereto and
incorporated herein by this reference.
Item 14. Controls and Procedures
(a)Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), within the 90 days prior to the filing date
of this report, the Company carried out an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and
procedures. This evaluation was carried out under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer along with the Company's Finance Manager.
Based upon that evaluation, the Chief Executive Officer along with the
Finance Manager concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported with the time
periods specified in Securities and Exchange Commission rules and forms.
(b)Changes in Internal Control.
There are no significant changes in the Company's internal controls or,
to the Company's knowledge, in other factors that could significantly
affect such internal controls subsequent to the date of the Company's
evaluation of its internal controls.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K:
(a) Index to Financial Statements and Schedules
See index to financial statements and supporting schedules on page F-1.
(b) Reports on Form 8-K
No current Reports on Form 8-K have been filed during the last fiscal quarter
of the period covered by this Report.
(c) Index to Exhibits
Any exhibits filed with the Securities and Exchange Commission will be supplied
upon written request to John C. Breitung, President, Art's-Way Manufacturing Co.
Inc., Highway 9 West, Armstrong, Iowa 50514. A charge will be made to cover
copying costs. See Exhibit Index below.
Exhibits Required to be Filed
Number Exhibit Description
2 Agreement and Plan of Merger for Reincorporation of Company in
Delaware. Incorporated by reference to Exhibit 2 of Annual Report on
Form 10-K for the year ended May 27, 1989.
3 Certificate of Incorporation and By-laws for Art's-Way Manufacturing Co.,
Inc. Incorporated by reference to Exhibit 3 of Annual Report on Form
10-K for the year ended May 27, 1989.
10 Incorporated by reference are the Material Contracts filed as Exhibit 10
of the Annual Report on Form 10-K for the fiscal year ended May 30, 1981.
10.1 Art's-Way Manufacturing Co., Inc. 401 (k) Savings Plan. Incorporated by
reference to Exhibit 28 (a) to the Art's-Way Manufacturing Co., Inc.
Registration Statement on Form S-8 filed on October 23, 1992.
10.2 Art's-Way Manufacturing Co., Inc. Employee Stock Option Plan (1991).
Incorporated by reference to Exhibit "A" to Proxy Statement for Annual
Meeting of Stockholders held on October 15, 1991.
10.3.1 Incorporated by reference Art's-Way Manufacturing Co., Inc. Director
Stock Option Plan (2001) 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.
99.1 Proxy Statement for 2003 Annual Meeting to be filed on or before 120
days after November 30, 2002.
Independent Auditors' Report
The Board of Directors
Art's-Way Manufacturing Co., Inc.:
We have audited the accompanying financial statements of Art's-Way
Manufacturing Co., Inc. (the Company) as listed in the accompanying table of
contents on page F-1. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
November 30, 2002 and 2001, and the results of its operations and its cash flows
for the years ended November 30, 2002, 2001, and 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
January 8, 2003, except as
to notes 7 and 17, which are
as of February 25, 2003
Omaha, Nebraska
ART'S-WAY MANUFACTURING CO., INC.
Table of Contents
Page
Statements of Operations
Years ended November 30, 2002, 2001, and 2000 F-3
Balance Sheets
November 30, 2002 and 2001 F-4
Statements of Stockholders' Equity
Years ended November 30, 2002, 2001, and 2000 F-5
Statements of Cash Flows
Years ended November 30, 2002, 2001, and 2000 F-6
Notes to Financial Statements
Years ended November 30, 2002, 2001, and 2000 F-7 - F-18
ART'S-WAY MANUFACTURING CO., INC.
Statements of Operations
Years ended November 30, 2002, 2001, and 2000
2002 2001 2000
Net sales $10,899,822 $10,891,398 $14,229,178
Cost of goods sold,
excluding items below 8,130,059 8,768,676 11,867,404
Loss on inventory
disposition - 1,082,441 -
Asset impairment writedown - 546,523 -
Total cost of goods sold 8,130,059 10,397,640 11,867,404
Gross profit 2,769,763 493,758 2,361,774
Expenses:
Engineering 4,283 208,378 439,511
Selling 552,107 529,225 701,289
General and administrative 1,411,539 1,670,987 2,128,164
Total expenses 1,967,929 2,408,590 3,268,964
Income (loss) from operations 801,834 (1,914,832) (907,190)
Other income (expense):
Interest expense (170,260) (411,101) (559,785)
Other (58,439) 9,208 (148,454)
Total other expense (228,699) (401,893) (708,239)
Income (loss) before
income taxes 573,135 (2,316,725) (1,615,429)
964: Income tax expense 4,032 65,176 550,557
Net income (loss) $569,103 $(2,381,901) $ (2,165,986)
Net income (loss) per share:
Basic $ 0.31 (1.86) (1.72)
Diluted 0.31 (1.86) (1.72)
Common shares and equivalent outstanding:
970: Basic 1,808,423 1,279,613 1,256,351
971: Diluted 1,811,439 1,279,613 1,256,351
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
Balance Sheets
November 30, 2002 and 2001
Assets 2002 2001
Current assets:
Cash $ 75,358 $ 4,375
Accounts receivable-customers,
net of allowance for doubtful
accounts of $50,000 and $55,301
983: in 2002 and 2001, respectively 592,945 922,168
Inventories 3,576,707 4,314,883
985: Other current assets 95,385 54,157
Total current assets 4,340,395 5,295,583
Property, plant, and equipment,
at cost 10,725,972 10,583,740
Less accumulated depreciation 9,751,260 9,499,347
Net property, plant, and equipment 974,712 1,084,393
Inventories, noncurrent 430,509 375,125
992: Other assets 175,849 -
Total assets $ 5,921,465 $ 6,755,101
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 319,222 $ 2,073,704
Current portion of term debt 356,669 962,040
Accounts payable 523,492 984,052
Customer deposits 249,756 64,449
1000: Accrued expenses 630,972 634,306
1001: Total current liabilities 2,080,111 4,718,551
1002: Long-term liabilities 187,204 -
Term debt, excluding current portion 520,830 272,333
1004: Total liabilities 2,788,145 4,990,884
Stockholders' equity:
Common stock $0.01 par value.
Authorized 5,000,000 shares;
issued 1,938,176 and 1,340,778
shares in 2002 and 2001,
1010: respectively 19,382 13,408
Additional paid-in capital 1,634,954 1,249,611
1012: Retained earnings 1,478,984 909,881
3,133,320 2,172,900
Less cost of common shares in
treasury of 0 and 42,602 in 2002
and 2001, respectively 408,683
Total stockholders' equity 3,133,320 1,764,217
Total liabilities and stockholders'
equity $ 5,921,465 $6,755,101
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
Statements of Stockholders' Equity
Years ended November 30, 2002, 2001, and 2000
Additional
Number of Stated/ paid-in Retained Treasury
shares par value capital earnings stock Total
Balance,November 30,1999
1,256,351 $13,408 $1,559,037 $5,457,768 $(809,814)$6,220,399
Net loss
- - (2,165,986) - (2,165,986)
Balance,November 30,2000
1,256,351 13,408 1,559,037 3,291,782 (809,814) 4,054,413
Net loss
- - - (2,381,901) - (2,381,901)
Shares reissued from tresury
1039: 41,825 - (309,426) - 401,131 91,705
Balance,November 30, 2001
1,298,176 13,408 1,249,611 909,881 (408,683) 1,764,217
Net income
- - - 569,103 - 569,103
Shares issued from common stock
597,398 5,974 740,774 - - 746,748
Shares reissued from treasury
42,602 - (355,431) - 408,683 53,252
Balance,November 30, 2002
1049: 1,938,176 $19,382 $1,634,954 $1,478,984 - $3,133,320
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
Statements of Cash Flows
Years ended November 30, 2002, 2001, and 2000
2002 2001 2000
Cash flows from operations:
Net income (loss) $ 569,103 (2,381,901) (2,165,986)
Adjustments to reconcile
net income (loss) to net cash
provided by operating activities:
Gain on sale of property, plant,
1064: and equipment - (1,308) (6,616)
Depreciation and amortization 251,913 453,603 517,462
Asset impairment writedown - 546,523 -
Deferred income taxes - 62,900 550,557
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 329,223 409,140 1,130,194
Inventories 682,792 2,494,316 1,890,488
Other current assets (41,228) 36,512 10,011
Other, net 11,355 - -
Increase (decrease) in:
Accounts payable (460,560) (302,591) (826,525)
Customer deposits 185,307 (62,747) 7,335
Accrued expenses (3,334) (353,030) 70,908
Net cash provided by
1079: operating activities 1,524,571 901,417 1,177,828
Cash flows from investing
activities:
Purchases of property,
plant, and equipment (142,232) (58,534)
Proceeds from sale of
1085: property, plant, and equipment - 9,150 10,050
Net cash provided by (used in)
1087: investing activities (142,232) (49,384) 10,050
Cash flows from financing
activities:
Payments of notes payable
to bank (1,754,482) (478,479)(1,096,705)
Principal payments on
term debt (356,874) (465,259) (360,101)
Proceeds from issuance
of common stock 800,000 91,705
Net cash used in
financing activities (1,311,356) (852,033) (1,456,806)
Net increase (decrease) in cash 70,983 - (268,928)
Cash at the beginning of period $4,375 4,375 273,303
Cash at end of period $75,358 4,375 4,375
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
1105: Interest $170,260 411,101 559,785
1106: Income taxes 4,032 2,276 4,790
See accompanying notes to financial statements.
(1) Summary of Significant Accounting Policies
(a) Nature of Business
The Company 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 tillage, hay blowers, and finish mowers 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.
(b) 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 writedowns to market
based on expected usage information for raw materials and historical selling
trends for finished goods. Writedowns of inventory create a new cost basis.
Additional writedowns 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.
(c) Auction Sale of Inventory
During the fourth quarter of 2001, the Company held an auction to sell excess
and obsolete inventory. The auction resulted in a loss of $1,082,441, and is
included in cost of goods sold.
As a result of the inventory auction in the fourth quarter of 2001, the Company
obtained better market information in regards to its aging inventory, leading to
a writedown of inventory of approximately $300,000 in the fourth quarter of
2001.
(d) 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.
(e) Impairment of Long-lived Assets
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets, requires the review of long-lived assets and
certain identifiable intangibles to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. As of November 30, 2001, the Company determined
the carrying costs of certain fixed asset tooling items were not recoverable
because the Company had decided that it will no longer manufacture the
products that this tooling was being used to produce. The impairment loss of
$546,523 is included in cost of goods sold. As of November 30, 2002, the
Company determined that no additional impairments have occurred relating to
the Company's long-lived assets.
(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 from sales of products is recognized when risk of ownership and title
pass to the buyer.
(h) Research and Development
Research and development costs are expensed when incurred. Such costs
approximated $12,000, $125,000, and $302,000 for the years ended November 30,
2002, 2001, and 2000, respectively.
(i) Income (Loss) Per Share
Basic net income (loss) per common share has been computed on the basis of
the weighted average number of common shares outstanding. Diluted net income
(loss) 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.
The difference in shares utilized in calculating basic and diluted net
income per share in 2002 represents the number of shares issued under the
Company's stock option plans less shares assumed to be purchased with
proceeds from the exercise of the stock options. Due to the net losses in
2001 and 2000, the anti-dilutive effect of the Company's stock option plans
is not included in the calculation of diluted earnings per share for those
periods. The reconciling item between the shares used in the computation of
basic and diluted earnings per share for 2002 is 3,016 equivalent shares for
the effect of dilutive stock options.
(j) Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
The Company has entered into an agreement whereby it can sell accounts
receivable to a financial institution. The agreement provides for the
Company to pay monthly interest on the face amount of each invoice at
a rate of 2.75% over the prime rate (7.00% at November 30, 2002 and 8.25%
at November 30, 2001) from the date of the invoice for 180 days, or the
date of customer payment, whichever occurs first. The buyer is responsible
for servicing the receivables, and has recourse to the Company for
receivables outstanding greater than 180 days. The sale of the receivables
has been reflected as a reduction of trade accounts receivable by the
Company. At November 30, 2002 and 2001, there were approximately $182,000
and $324,000, respectively, of receivables outstanding which the Company
had sold relating to this agreement. Interest paid to the financial
institution was approximately $20,200, $24,200, and $94,700 for the years
ended November 30, 2002, 2001, and 2000, respectively.
(k) 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. Accordingly, the Company
has not recognized compensation expense for its options granted in the
years ended November 30, 2002, 2001, and 2000. Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
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. See note 10 for additional discussion and pro
forma disclosures.
(l) 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
ccounting principles generally accepted in the United States of America.
These estimates include the valuation of the Company's accounts receivable
and inventories. Actual results could differ from those estimates.
(m) Reclassifications
Certain 2001 financial statement amounts have been reclassified to conform
with the current year presentation.
(n) Recently Issued Accounting Pronouncements
During June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 143, Accounting for Asset Retirement Obligations. This Statement
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires an enterprise to record the fair value
of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of a tangible
long-lived asset. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The Company is currently evaluating the impact of the
adoption of this standard and has not yet determined the effect of
adoption on its financial position and results of operations.
In October 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-lived Assets, replacing SFAS 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of. The Company is adopting the provisions of SFAS 144 during the first
quarter of fiscal 2003, as required. The Company is currently evaluating
the impact of the adoption of this standard and has not yet determined
the effect of adoption on its financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This Interpretation addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. This Interpretation
also clarifies the requirements related to the recognition of a liability
by a guarantor at the inception of a guarantee for the obligations the
guarantor has undertaken in issuing the guarantee. The initial recognition
and initial measurement provisions of this Interpretation are applicable
on a prospective basis to guarantees issued or modified after December 31,
2002, irrespective of the guarantors fiscal year-end. The disclosure
requirements in this Interpretation are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company
is currently evaluating the impact of the adoption of this Interpretation
and has not yet determined the effect of adoption on its financial position
and results of operations.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation Transition and Disclosure. This Statement amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The amendments to SFAS 123 are effective for financial statements for
fiscal years ending after December 15, 2002. The Company is currently evaluating
the impact of adoption of this standard and has not yet determined the effect of
adoption on its financial position and results of operations.
(2) Liquidity
The Company is currently negotiating with various lenders to refinance the
Company's debt (see note 17). The refinancing is intended to provide the Company
with the needed funds to pay the Company's debt when due and to provide cash for
the Company's ongoing operations. The Company plans to increase its sales and
profits through expansion of its sales force and further development and
promotion of its product lines. However, there can be no assurance as to whether
additional debt funding will be obtained, or the terms of any such funding.
Failure to obtain the additional funding on acceptable terms could result in the
inability of the Company to implement its business plan or pay its debt if
demanded on December 1, 2003.
(3) Allowance for Doubtful Accounts
A summary of the Company's activity in the allowance for doubtful accounts
is a follows:
Balance, November 30, 1999 $ 223,696
Additions
Charged to operating expenses 188,689
Deduct
Accounts charged off (366,082)
Balance, November 30, 2000 76,303
Additions
Charged to operating expenses 48,000
Deduct
Accounts charged off (69,002)
Balance, November 30, 2001 55,301
Additions
Charged to operating expenses 5,799
Deduct
Accounts charged off (11,100)
Balance, November 30, 2002 $50,000
(4) Inventories
Major classes of inventory are: November 30
2002 2001
Raw material $ 1,065,166 $ 749,544
Work in process 1,209,007 1,181,870
Finished goods 1,733,043 2,758,594
Total 4,007,216 4,690,008
Less Inventories classified as current 3,576,707 4,314,883
Inventories, noncurrent $ 430,509 $ 375,125
(5) Property, Plant, and Equipment
Major classes of property, plant, and
equipment are: November 30
2002 2001
Land $ 180,909 $ 180,909
Buildings and improvements 2,621,795 2,615,573
Manufacturing machinery and equipment 7,713,760 7,577,750
Trucks and autombiles 89,626 89,626
Furniture and fixtures 119,882 119,882
Total $10,725,972 $10,583,740
(6) Accrued Expenses
Major components of accrued expenses are: November 30
2002 2001
Salaries, wages and commissions $ 294,220 $ 294,961
Accrued warranty expense 60,232 67,426
Other 276,520 271,919
Total $ 630,972 $ 634,306
(7) Loan and Credit Agreements
The Company has a credit agreement with a lending institution (lender) that
provides for a revolving line of credit (credit facility) and a term loan,
and expires December 1, 2003. The credit facility allows for borrowings up to
$4,500,000, subject to borrowing base percentages on the Company's accounts
receivable and inventory, and allowing for letters of credit up to $100,000.
At November 30, 2002, the Company has borrowed $319,222 and has $100,000 in
outstanding letters of credit. At November 30, 2001, the Company had borrowed
$2,073,704 and had $100,000 in outstanding letters of credit. At November 30,
2002 and 2001, $1,038,000 and $68,000 were available for borrowings,
respectively. The interest rate is based on the lender's referenced rate and
is variable based upon certain performance objectives. Under the terms of the
agreement, the Company will not pay more than 4% over the reference rate, nor
less than the reference rate during the term of agreement. The outstanding
borrowings bear interest at 8.25% at November 30, 2002 and 9.00% at November
30, 2001.
The term loan was for an original principal amount of $1,991,000. The principal
amount is repayable in monthly installments of $23,700 with the remaining
unpaid balance due on December 1, 2003.
All loans, advances and other obligations, liabilities, and indebtedness of the
Company are secured by all present and future assets. The Company pays an
unused line fee equal to three-eighths of 1% of the unused portion of the
revolving line of credit. The Company's cash account has been restricted by the
lender, such that any available cash is used to pay down on the credit facility.
During 1999, the Company was notified by its lender that the Company did not fit
the lender's customer profile and was requested to relocate its financing needs.
At November 30, 2000 and 1999, the Company was in default of a loan covenant,
the fixed maturity coverage ratio, of their credit facility and term loan. The
lender notified the Company that the current loan agreement provided that the
lender may, as a result of any event of default, accelerate the payment of all
obligations. As a result, all term borrowings associated with this lender had
been classified as current. The lender did not call for the acceleration of the
payment of all obligations, but retained the right to do so at any time.
The initial term of the loan agreement ended on August 31, 2000. In a letter
dated May 26, 2000, the Company was notified that the lender did not intend to
extend the term of the loan agreement beyond the termination date. Therefore,
all of the obligations outstanding under the credit agreement and term loan
amounting to $4,383,825 at August 31, 2000 were due and payable on August
31, 2000.
During the period between August 31, 2000 and August 31, 2001, the loan
agreement
was amended several times to provide for extensions of various lengths from 30
days to 90 days. On September 1, 2001, the bank sold the loan to another lending
institution (new lender). Under this arrangement, the Company continued to
operate under the same terms as existed prior to the sale. The new lender
granted extensions from September 1, 2001 through November 15, 2001. On
February 25, 2003 (see note 17), the lender granted forbearance and waived its
right to demand payment because of existing covenant defaults until December
1, 2003. Therefore, the portion of the term loan not due until December 1, 2003
has been classified as long-term debt in the accompanying balance sheet.
Management believes alternative long-term financing can be obtained from
different lenders on acceptable terms and that the Company will be able to meet
its obligations under a new credit agreement when completed.
Accounts payable at November 30, 2002 and 2001 includes book overdraft amounts
of $0 and $43,323, respectively.
A summary of the Company's term debt is as follows:
2002 2001
Installment term loan payable in monthly
installments of $23,700 plus interest at 4% over
the bank's national money market rate (8.25%),
due on demand, secured (a) $ 605,371 $ 889,771
State of Iowa Community Development Block
Grant promissory notes at 0% interest, maturity
2006 with quarterly principal payments of $11,111 166,667 211,111
State of Iowa Coummunity Development Block
Grant local participation promissory notes at 4%
interest, maturity 2006,with quarterly payments
of $7,007 105,461 133,491
Total term debt 877,499 1,234,373
Less current portion of term debt 356,669 962,040
Term debt ,excluding current portion $ 520,830 $ 272,333
a.All borrowings under the installment term loan payable are secured by the
cash,
accounts receivable, inventories, and property, plant, and equipment of the
Company.
The agreement required the Company to maintain specified ratios, as defined, of
debt-to-tangible net worth and net cash income to current maturities, and
restricted
the Company from issuing any dividends. See note 17.
A summary of the minimum maturities of term debt follows for the years ending
November 30:
Year Amount
2003 $ 356,669
2004 394,005
2005 73,334
2006 53,491
(8) Long-Term Liabilities
Under the agreement with a former manufacturer of one of the Company's product
lines,
the Company is required to remit annual royalty payments through fiscal year
2007
for the right to manufacture and sell the product line.The agreement calls
for the
payment of royalties based on a percentage of the product line's annual sales,
subject
to annual and aggregate minimums, as defined in the agreement. A summary of the
minimum payments follows for the years ending November 30:
Year Amount
2003 $ 21,753
2004 30,000
2005 30,000
2006 30,000
2007 160,000
Total minimum royalty payments 271,753
Less amount representing discount (9%) 62,796
Present value of minimum royalty payments 208,957
Less current portion, classified as accrued expensed 21,753
Long-term liabilities $ 187,204
(9) Employee Benefit Plans
The Company sponsors a defined contribution 401(k) savings plan which covers
substantially all full-time employees who meet eligibility requirements.
Participating employees may contribute as salary reductions a minimum of 4%
of their compensation up to the limit prescribed by the Internal Revenue
Code. The Company may make matching contributions at a discretionary percent
upon approval from the Board of Directors. No contributions were made by the
Company in the years ended November 30, 2002, 2001, and 2000.
(10) 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.
Nonemployee 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, 2002, the Company had approximately 20,000 shares available
for issuance pursuant to subsequent grants under the 2001 Director Option Plan.
Under the 1991 Employee Stock Option Plan, stock options may be granted to key
employees to purchase shares of common stock of the Company at a price not
less than fair market value at the date the options are granted. Options
granted may be either nonqualified or incentive stock options. The option
price, vesting period, and term are set by the Compensation Committee of the
Board of Directors of the Company. Options for an aggregate of 100,000 common
shares may be granted. 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. Effective
April 2001, the period available for option grants under the 1991 Employee
Stock Option Plan expired, and as a result, 0 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
2002 2001 2000
Options outstanding at beginning of period 61,500 46,500 51,500
Granted 5,000 40,000 -
Canceled (26,500) (25,000) (5,000)
Options outstanding at the end of period 40,000 61,500 46,500
Options price range for the period $2.320 $2.320 $6.000
to to to
$3.030 $6.750 $10.375
Options exercisable at end of period 18,750 31,500 46,500
At November 30, 2002, 2001, and 2000, the weighted-average remaining
contractual life of options outstanding was 8.6 years, 7.0 years, and 2.4
years, respectively, and the weighted-average exercise price was $2.64, $3.89,
and $8.27, respectively. The weighted-average exercise price for options
exercisable at November 30, 2002 was $2.63.
The per share weighted-average fair value of stock options granted during the
years ended November 30, 2002, 2001, and 2000, was $1.74, $2.39, and $4.73,
respectively, on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: November 30, 2002
expected dividend yield 0.0%, risk-free interest rate 4.19%, expected
volatility factor of 31.59%, and an expected life of 10 years; November
30, 2001 expected dividend yield 0.0%, risk-free interest rate of 4.92%,
expected volatility factor of 29.25%, and an expected life of 10 years;
November 30, 2000 expected dividend yield 0.0%, risk-free interest rate
of 5.65%, expected volatility factor of 29.36%, and an expected life of
10 years.
Since the Company applies APB Opinion No. 25 in accounting for its plans,
no compensation cost has been recognized for its stock options in the
financial statements. Had the Company recorded compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income (loss) and net income (loss) per share would have
been reduced to the pro forma amounts indicated below:
November 30
2002 2001 2000
Net income(loss)
As reported $ 569,103 (2,381,901) (2,165,986)
Proforma 557,602 (2,392,509) (2,169,855)
Basic net income(loss)per share
As reported $ 0.31 (1.86) (1.72)
Proforma 0.31 (1.87) (1.73)
Diluted net income (loss) per share
As reported $ 0.31 (1.86) (1.72)
Proforma 0.31 (1.87) (1.73)
(11) Leases
The Company has a single noncancelable-operating lease that expires in 2004.
Rental expense for operating leases during 2002, 2001, and 2000 was $27,740,
$32,021, and $34,192, respectively.
Future minimum lease payments under the noncancelable-operating lease as of
November 30, 2002 are:
Year ending November 30, Amount
2003 $3,567
2004 1,486
In the ordinary course of business, the Company expects to renew or replace
this lease as it expires.
(12) Income Taxes
Total income tax expense (benefit) for the years ended November 30, 2002,
2001, and 2000 consists of the following:
November 30
2002 2001 2000
Current
Federal $ - - -
State 4,032 2,276 -
4,032 2,276 -
Defered
Federal - 62,900 550,577
State - - -
- 62,900 550,577
$4,032 $65,176 $550,577
The reconciliation of the statutory Federal income tax rate and the effective
tax rate are as follows:
November 30
2002 2001 2000
Statutory federal income tax rate 34.0% (34.0)% (34.0)%
Increase (decrease) due to:
Change in valuation allowance (34.0) 36.7 67.6
Other-net 0.7 0.0 0.5
0.7% 2.7% 34.1%
Tax effects of temporary differences that give rise to significant portions of
the deferred tax assets at November 30, 2002 and 2001 are presented below:
November 30
2002 2001
Deferred tax assets:
Net operating loss carryforwards $1,184,343 $1,325,218
Tax credits 150,969 150,969
Accrued expenses 65,869 55,427
Inventory capitalization 126,297 219,423
Asset reserves 295,188 261,494
Property, plant and equipment 90,343 95,473
Total deferred tax assets 1,913,009 2,108,004
Less valuation allowance 1,913,009 2,108,004
Net deferred tax assets - -
For tax purposes, the Company has available at November 30, 2002, net operating
loss carryforwards of approximately $3,483,000 which will begin to expire in the
year 2013. The Company also has approximately $110,000 of research and
development
credits and $41,000 of state tax credits which begin to expire in the years 2007
and 2008, respectively.
The Company has established a deferred tax asset valuation allowance of
approximately $1,913,000 at November 30, 2002, due to the uncertainty of
realizing its deferred tax assets. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible.
(13) Litigation and Contingencies
Various legal actions and claims are pending against the Company. In the
opinion of management, adequate provisions have been made in the accompanying
financial statements for all pending legal actions and other claims.
(14) Credit Concentration
The Company' sales to one major OEM were $1,827,465, $2,213,054, and
$3,192,642 for the years ended November 30, 2002, 2001, and 2000, respectively.
Accounts receivable from this customer are unsecured, and were $58,755 and
$152,340 at November 30, 2002 and 2001, respectively.
(15) 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,
2002 and 2001, the carrying amount approximates fair value for cash and cash
equivalents, 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
national money market rate.
(16) Related Party Transaction
In February 2002, the Company sold 640,000 shares of common stock to an
existing shareholder, Mr. J. Ward McConnell, Jr., at estimated fair value.
Proceeds from the sale of the stock were $800,000. Mr. McConnell has agreed
that without prior approval of the Board of Directors, excluding himself and
his son, he will not acquire as much as fifty percent (50%) of the Company's
common stock and will not take the Company private. Immediately after the
transaction, Mr. McConnell was elected as Chairman of the Board of Directors
of the Company. His son, Mr. Marc McConnell, is also a Board Member.
(17) Subsequent Event
On February 25, 2003, the Company's secured lender granted the Company
forbearance on the lender's ability to call the Company's debt in relation
to the Company's past violations of the debt's financial covenants through
December 1, 2003. The amendment and forbearance agreement waives the
Company's requirements to comply with the financial covenants of the loan
agreement through December 1, 2003. The lender has retained its rights and
remedies under the loan agreement if an additional event of default occurs,
if a material adverse change occurs as defined in the agreement, or if the
Company fails to comply with any other parts of the loan agreement.
As a result of this amendment and forbearance, $320,971 of the term loan is
classified as term debt, excluding current portion, at November 30, 2002 in
the accompanying balance sheet. This amount will be shown as a current
liability in the Company's financial statements subsequent to November 30, 2002
as the due date will be within one year of the date of any subsequent financial
statements to be issued by the Company.
The amendment and forbearance agreement also reduces the maximum borrowings
available under the revolving line of credit to $2,000,000. As of November
30, 2002, the Company had $1,038,000 of availability remaining on the revolving
line of credit. The revolving line of credit is shown as a current liability,
as of November 30, 2002, as it is the Company's intention to pay the revolving
line of credit within the next year.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on January 22, 2003
ART'S-WAY MANUFACTURING CO., INC.
By: J. Ward McConnell By: John Breitung
Chairman of the Board President
By: Seth LaBore
Finance Manager
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
J. Ward McConnell, Jr. Chairman of the Board January 22,2003
and Director Date
David R. Castle Director January 22, 2003
Date
George A. Cavanaugh, Jr Director January 22, 2003
Date
James L. Koley Director January 22, 2003
Date
Douglas McClellan Director January 22, 2003
Date
Marc H. McConnell Director January 22, 2003
Date
CERTIFICATION OF FINANCIAL STATEMENTS
Pursuant to 18 U.S.C. 63 1350, the Chief Executive Officer and the
Finance Manager of Art's-Way Manufacturing Co., Inc. (the "Company"),
hereby certify that this Form 10-K and the financial statements thereto
fully comply with the requirements of Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, and the information contained in the
Form 10-K and the financial statements thereto fairly present, in all
material respects, the financial condition and results of operations
of the Company.
John C. Breitung Seth F. LaBore
Chief Executive Officer Finance Manager
February 28, 2003 February 28, 2003
Date Date
Certifications
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Public Law
Number107-204), the Chief Executive Officer of the Company certifies that:
1) I have reviewed this report;
2) Based upon my knowledge, this report does not contain any untrue
statement of a material fact, or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3) Based upon my knowledge, the financial statements and other financial
information included in this report fairly present in all material
respects the financial condition, results of operations, and cash
flows of the Company as of, and for, the period presented in this
report;
4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company and its consolidated
subsidiaries is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures within 90 days prior to the filing date of this
report (the "Evaluation Date");
c) presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5) The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit
committee of the Company board of directors (or persons performing
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize, and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6) The Company's other certifying officers have indicated in this report
whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
_____________________________
John C. Breitung
Chief Executive Officer
February 28, 2003
Date
Certifications
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Public Law
Number107-204), the Chief Executive Officer of the Company certifies that:
1) I have reviewed this report;
2) Based upon my knowledge, this report does not contain any untrue
statement of a material fact, or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3) Based upon my knowledge, the financial statements and other financial
information included in this report fairly present in all material
respects the financial condition, results of operations, and cash
flows of the Company as of, and for, the period presented in this
report;
4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company and its consolidated
subsidiaries is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures within 90 days prior to the filing date of this
report (the "Evaluation Date");
c) presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5) The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit
committee of the Company board of directors (or persons performing
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize, and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6) The Company's other certifying officers have indicated in this report
whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Seth LaBore
Finance Manager
February 28, 2003
Date
Exhibit 10.3.1
ART'S-WAY MANUFACTURING CO., INC.
DIRECTOR STOCK OPTION PLAN (2001)
APPROVED BY THE BOARD OF DIRECTORS JULY 24, 2001
ART'S-WAY MANUFACTURING CO., INC.
DIRECTOR STOCK OPTION PLAN (2001)
CONTENTS
SUBJECT PAGE
1. Purpose 1
2. Administration 1
3. Eligibility 1
4. Common Stock 1
5. Required Terms and Conditions of Options 2
6. Expiration of Option 3
7. Method of Exercise 3
8. Adjustments 4
9. Option Agreements 5
10. Legal and Other Requirements 5
11. Nontransferability 5
12. Indemnification of Committee 6
13. Termination and Amendment of Plan 6
14. Effective Date of Plan 6
ART'S-WAY MANUFACTURING CO., INC.
DIRECTOR STOCK OPTION PLAN (2001)
1. Purpose
The purpose of Art's-Way Manufacturing Co., Inc. Director Stock Option
Plan (2001) (the "Plan"), as hereinafter set forth, is to enable
Art's-Way Manufacturing Co., Inc., a Delaware corporation (the "Company"),
to attract, retain and reward nonemployee Directors and to foster a
widespread sense of ownership and commitment by offering them an
opportunity to have long-term compensation and a greater proprietary
interest in and closer identity with the Company and with its financial
success. Options granted under this Plan will be nonstatutory Options
and, as such, are not intended to qualify as Incentive Stock Options
as defined by Section 422A of the Internal Revenue Service Code of
1986, as amended. Proceeds of cash or property received by the Company
from the sale of Common Stock pursuant to Options granted under the
Plan will be used for general corporate purposes.
2. Administration
The Plan shall be administered by the Executive Committee (the
"Committee") of the Board of Directors of the Company (the "Board").
Subject to the express provisions of the Plan, the Committee may
interpret the Plan, prescribe, amend and rescind rules and regulations
relating to it and make such other determinations as it deems necessary
or advisable for the administration of the Plan. The decisions of the
Committee on matters within their jurisdiction under the Plan shall be
conclusive and binding. No member of the Board or the Committee shall
be liable for any action taken or determination made in good faith.
3. Eligibility
Options may be granted under this Plan only to nonemployee Directors
of the Company who have served as a member of the Board of Directors
for at least one (1) year.
4. Common Stock
Options may be granted for a number of shares not to exceed, in the
aggregate, fifty thousand (50,000) shares of Common Stock of the
Company, except as such number of shares shall be adjusted in
accordance with the provisions of Section 8 hereof. Such shares may
be either authorized but unissued shares or treasury shares. In
the event that any Option granted under the Plan expires unexercised,
or is surrendered by a participant for cancellation, or is terminated,
or ceases to be exercisable for any other reason without having
been fully exercised prior to the end of the period during which
Options may be granted under the Plan, the shares theretofore
subject to such Option, or to the unexercised portion thereof,
shall again become available for new Options to be granted under
the Plan to any eligible nonemployee Director (including the
holder of such former option) at an Option price determined in
accordance with Section 5(b) hereof, which price may then be
greater or less than the Option price of such former Option.
5. Required Terms and Conditions of Options
The Options granted under the Plan shall be in the following
form:
(a) Shares Under Option
Each non-employee Director who has served as a member
of the Board of Directors for at least one (1) year
as of the date of adoption of this plan shall
automatically be granted an Option to purchase five
thousand (5,000) shares of Common Stock. Each new
non-employee Director shall, on the first anniversary
of such individual becoming a Director, automatically
be granted an Option to purchase five thousand (5,000)
shares of Common Stock.
(b) Option Price
The Option price of each Option to purchase Common Stock
shall be one hundred percent (100%) of the Fair Market
Value of the stock on the day of grant.
(c) Maximum Term
No Option shall be exercisable after the expiration of
ten (10) years from the date it is granted.
(d) Time of Exercise
Options granted under the Plan shall be exercisable as
to 1,250 shares of common stock commencing on the date
of grant and 1,250 shares on the second, third and
fourth anniversaries. Exercisable options may be exercised
until 5:00 p.m. on the last day of the tenth anniversary
from the date of grant.
6. Expiration of Option
(a) General Rule
Each Option shall expire on the earlier of the date set
forth in Section 5 (c) of this Plan, or, if earlier, on
the applicable date specified in the following subsections
of this Section 6.
(b) Each Option shall expire ninety (90) days after the date
that the directorship of the optionee with the Company
terminates for any reason other than disability, death,
retirement or cause.
(c) Expiration Following Disability or Death
If the optionee ceases to be a Director of the Company
by reason of disability (as determined by the Committee)
or by reason of death, his or her Options, if any, shall
expire on the first anniversary of such termination of
directorship.
(d) Expiration Following Retirement
If the optionee ceases to be a Director of the Company
due to retirement with the consent of the Company, his
or her Options, if any, shall expire ninety (90) days
after the date of such termination of directorship. If
an optionee who has so retired dies prior to exercising
in full an Option which has not expired pursuant to the
preceding sentence, then notwithstanding the preceding
sentence, his or her Options shall expire on the first
anniversary of the date of the optionee's death.
(e) Expiration for Cause
If the optionee ceases to be a Director of the Company
for cause, his or her Options, if any, shall expire on
the date of termination. For purposes of the Plan,
termination "for cause" shall mean termination because
the optionee engaged in dishonest or fraudulent conduct
in the performance of his or her duties for the Company.
7. Method of Exercise
Options may be exercised by giving written notice to the Secretary
of the Company stating the number of shares of Common Stock with
respect to which the Option is being exercised and tendering
payment therefor. Payment for Common Stock, whether in cash or
other shares of Common Stock, shall be made in full at the time
that an Option, or any part thereof, is exercised.
8. Adjustments
(a) The aggregate number of shares of Common Stock with
respect to which Options may be granted hereunder,
the number of shares of Common Stock subject to each
outstanding Option and the Option price per share for
each such Option may all be appropriately adjusted,
as the Committee may determine, for any increase or
decrease in the number of shares of issued Common
Stock of the Company resulting from a subdivision or
consolidation of shares whether through reorganization,
payment of a share dividend or other increase or
decrease in the number of such shares outstanding
effected without receipt of consideration by the
Company.
(b) Subject to any required action by the stockholders,
if the Company shall be a party to a transaction
involving a sale of substantially all its assets,
a merger or a consolidation, any Option granted
hereunder shall pertain to and apply to the securities
to which a holder of the number of shares of Common
Stock subject to the Option would have been entitled
if the participant actually owned the stock subject
to the Option immediately prior to the time any
such transaction became effective; provided, however,
that all unexercised Options under the Plan may be
cancelled by the Company as of the effective date
of any such transaction by giving notice to the
holders thereof of its intention to do so and by
permitting the exercise, during the thirty (30) day
period preceding the effective date of such transaction,
of all partly or wholly unexercised Options in full
(without regard to installment exercise limitations),
provided that the participant is not terminated for
cause as defined in Section 6 (e).
(c) On the basis of information known to the Company,
the Board or the Committee shall make all
determinations under this Section 8, including
whether a transaction involves a sale of substantially
all the Company's assets, and all such determinations
shall be conclusive and binding.
9. Option Agreements
Each optionee shall agree to such terms and conditions in
connection with the exercise of an Option, including restrictions
on the disposition of the Common Stock acquired upon the
exercise thereof, as the Committee may deem appropriate. The
certificates evidencing the shares of Common Stock acquired
upon exercise of an Option may bear a legend referring to the
terms and conditions contained in the respective Option agreement
and the Plan, and the Company may place a stop transfer order
with its transfer agent against the transfer of such shares.
If requested to do so by the Committee at the time of exercise of
an Option, each optionee shall execute a certificate indicating
that he or she is purchasing the Common Stock under such Option
for investment and not with any present intention to sell the
same. Upon the grant or exercise of an Option, the Company
shall have the right to deduct from any cash payments otherwise
due to the optionee any amounts required to be withheld under
any Federal, state or local income tax laws.
10. Legal and Other Requirements
The obligation of the Company to sell and deliver Common Stock
under Options granted under the Plan shall be subject to all
applicable laws, regulations, rules and approvals, including,
but not by way of limitation, the effectiveness of a registration
statement under the Securities Act of 1933, if deemed necessary
or appropriate by the Board, of the Common Stock reserved for
issuance upon exercise of Options. A participant shall have no
rights as a stockholder with respect to any shares covered by
an Option granted to or exercised by the participant until the
date of delivery of a stock certificate for such shares. No
adjustment other than pursuant to Section 8 hereof shall be
made for dividends or other rights for which the record date
is prior to the date such stock certificate is delivered.
11. Nontransferability
During the lifetime of a participant, any Option granted shall
be exercisable only by the participant or the participant's
guardian or legal representative. No Option shall be assignable
or transferable, except by a beneficiary designated in a
document filed by the participant with the Company or, in the
absence of such document, by will or by the laws of descent
and distribution. The granting of an Option shall impose
no obligation upon the optionee to exercise such Option or
right.
12. Indemnification of Committee
In addition to such other rights of indemnification as they
may have as Directors or as members of the Committee, the
members of the Committee shall be indemnified by the Company
against the reasonable expenses, including attorneys' fees
actually and necessarily incurred with the defense of any
action, suit or proceeding (or in connection with any appeal
therein), to which they or any of them may be a party by
reason of any action taken or failure to act under or in
connection with the Plan or any Option granted hereunder,
and against all amounts paid by them in settlement thereof
or paid by them in satisfaction of a judgment in any such
action, suit or proceeding, so long as such Committee member
acted in good faith, received no improper benefit, believed
his conduct was in the best interest of the Company and,
in the case of a criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. Indemnification
may take the form of paying attorneys' fees and expenses as
they accrue and advancing attorneys' fees and expenses to
the affected Committee member.
13. Termination and Amendment of Plan
No Options shall be granted under the Plan more than
ten (10) years after the date the Plan was adopted by the
Board. The Board, acting by a majority of its members
without further action on the part of the stockholders,
may from time to time alter, amend or suspend the Plan
or any Option granted hereunder or may at any time terminate
the Plan; provided, however, the Board may not:
(a) Except as provided in Section 8 hereof, change
the total number of shares of Common Stock
available for Options under the Plan;
(b) Extend the duration of the Plan;
(c) Increase the maximum term of Options;
(d) Decrease the minimum Option price or otherwise
materially increase the benefits accruing to
participants under the Plan; or
(e) Materially modify the eligibility requirements
of the Plan;
and provided further that no such action shall materially
and adversely affect any outstanding Options without the
consent of the respective optionees.
14. Effective Date of Plan
The Plan shall become effective upon adoption by the
Board of Directors.