Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended February 28, 2009
or
¨
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______

Commission File No. 0-5131

ART'S-WAY MANUFACTURING CO., INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
42-0920725
(State or Other Jurisdiction of Incorporation
or Organization)
I.R.S. Employer Identification No.

5556 Highway 9
Armstrong, Iowa 50514
(Address of Principal Executive Offices)

(712) 864-3131
Registrant’s Telephone Number, Including Area Code

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Accelerated filer  ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company  x

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

Number of common shares outstanding as of April 8, 2009:  3,986,352

 
 
 

Art’s-Way Manufacturing Co., Inc.

Index

   
Page No.
 
PART I.  FINANCIAL STATEMENTS
  
     
Item 1 
Condensed Consolidated Financial Statements
1
 
Condensed Consolidated Balance Sheets
1
 
February 28, 2009 and November 31, 2008
  
     
 
Condensed Consolidated Statement of Operations
2
 
Three-month period ended February 28, 2009 and February 29, 2008
  
     
 
Condensed Consolidated Statements of Cash Flows
3
 
Three-month period ended February 28, 2008 and February 29, 2008
  
     
 
Notes to Condensed Consolidated Financial Statements
4
     
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
9
     
Item 4T
Controls and Procedures
12
     
 
PART II.  OTHER INFORMATION
  
     
Item 1
Legal Proceedings
13
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
13
     
Item 3
Defaults Upon Senior Securities
13
     
Item 4
Submission of Matters to a Vote of Security Holders
13
     
Item 5
Other Information
13
     
Item 6
Exhibits
13
 
Signatures
14
 
Exhibit Index
15

 
 
 

PART I – FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
ART’S-WAY MANUFACTURING CO., INC.
Consolidated Balance Sheets

   
(Unaudited)
        
   
February
    
November
  
 
  
2009
    
2008
  
Assets
            
Current assets:
            
Cash
   $ 216,595     $ 103,450  
Accounts receivable-customers, net of allowance for doubtful
                
accounts of $185,746 and $177,434 in 2009 and 2008, respectively
     2,942,564       3,251,326  
Inventories, net
     14,958,842       15,172,723  
Deferred taxes
     800,000       780,000  
Cost and Profit in Excess of Billings
     248,731       250,330  
Income taxes receivable
     146,006       87,000  
Other current assets
     276,097       111,533  
Total current assets
     19,588,835       19,756,362  
Property, plant, and equipment, net
     6,939,851       6,855,042  
Covenant not to Compete
     225,000       240,000  
Goodwill
     375,000       375,000  
Total assets
   $ 27,128,686     $ 27,226,404  
Liabilities and Stockholders’ Equity
                
Current liabilities:
                
Notes payable to bank
   $ 3,463,771     $ 2,581,775  
Current portion of term debt
     434,940       429,689  
Accounts payable
     1,990,386       3,425,885  
Checks issued in excess of deposits
     -       274,043  
Customer deposits
     1,336,520       75,980  
Billings in Excess of Cost and Profit
     179,441       531,736  
Accrued expenses
     1,169,619       1,323,525  
Total current liabilities
     8,574,677       8,642,633  
Long-term liabilities
                
Deferred taxes
     540,000       490,000  
Term debt, excluding current portion
     5,973,887       6,083,159  
Total liabilities
     15,088,564       15,215,792  
Stockholders’ equity:
                
Common stock – $0.005 par value. Authorized 5,000,000 shares; issued 3,986,352 and 3,986,352 shares in 2009 and 2008
     39,864       39,864  
Additional paid-in capital
     2,111,264       2,085,349  
Retained earnings
     9,888,994       9,885,399  
Total stockholders’ equity
     12,040,122       12,010,612  
Total liabilities and stockholders’ equity
   $ 27,128,686     $ 27,226,404  
See accompanying notes to condensed consolidated financial statements.

 
1
 
 
ART’S-WAY MANUFACTURING CO., INC.
Consolidated Statements of Operations
Condensed

   
Three Months Ended
  
   
February 28,
    
February 29,
  
   
2009
    
2008
  
Net sales
   $ 6,690,866     $ 6,748,514  
Cost of goods sold
     5,374,586       4,573,192  
Gross profit
     1,316,280       2,175,322  
Expenses:
                
Engineering
     88,952       75,468  
Selling
     420,132       452,814  
General and administrative
     709,559       833,115  
Total expenses
     1,218,643       1,361,397  
Income from operations
     97,637       813,925  
Other income (expense):
                
Interest expense
     (126,162 )     (122,632 )
Other
     34,064       41,779  
Total other income
     (92,098 )     (80,853 )
Income before income taxes
     5,539       733,072  
Income tax expense
     1,944       256,241  
Net income
   $ 3,595     $ 476,831  
Net income per share:
                
Basic
     0.00       0.12  
Diluted
     0.00       0.12  

See accompanying notes to condensed consolidated financial statements.

 
2
 
ART’S-WAY MANUFACTURING CO., INC.
  
Consolidated Statements of Cash Flows
  
Condensed
  
   
Year To Date
  
   
February
    
February
  
   
2009
    
2008
  
Cash flows from operations:
            
Net income (loss)
   $ 3,595     $ 476,831  
Adjustments to reconcile net income to net cash provided (used) by operating activities:
                
Stock based compensation
     25,915       43,805  
Depreciation expense
     143,166       124,663  
Amortization expense
     15,000       15,000  
Deferred income taxes
     30,000       (23,433 )
Changes in assets and liabilities:
                
(Increase) decrease in:
                
Accounts receivable
     308,762       329,388  
Inventories
     213,881       (1,615,764 )
Other current assets
     (164,564 )     (213,103 )
Insurance Receivable
     -       248,872  
Other, net
     -       (239,100 )
Increase (decrease) in:
                
Accounts payable
     (1,435,499 )     504,500  
Contracts in progress, net
     (350,696 )     1,273,793  
Customer deposits
     1,260,540       3,003,329  
Income taxes payable
     (59,006 )     247,173  
Accrued expenses
     (153,906 )     (115,227 )
Net cash provided by (used in) operating activities
     (162,812 )     4,060,727  
Cash flows from investing activities:
                
Purchases of property, plant, and equipment
     (227,975 )     (633,282 )
Net cash (used in) investing activities
     (227,975 )     (633,282 )
Cash flows from financing activities:
                
Net change in line of credit
     881,996       (397,859 )
Net activity as a result of checks issued in excess of deposits
     (274,043 )     -  
Payments of notes payable to bank
     (104,021 )     (43,958 )
Proceeds from term debt
     -       500,000  
Proceeds from the exercise of stock options
     -       15,360  
Net cash provided by financing activities
     503,932       73,543  
Net increase in cash
     113,145       3,500,988  
Cash at beginning of period
     103,450       612,201  
Cash at end of period
   $ 216,595     $ 4,113,189  
                 
Supplemental disclosures of cash flow information:
                
Cash paid/(received) during the period for:
                
Interest
   $ 117,793     $ 123,931  
Income taxes
     30,950       32,500  
 
See accompanying notes to condensed consolidated financial statements.
 
3

Notes to Consolidated Financial Statements
 
(1)
Summary of Significant Account Policies
 
Statement Presentation

The foregoing financial statements of Art’s-Way Manufacturing Co., Inc. (the “Company”) are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods.  The financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended November 30, 2008.  The results of operations for the three months ended February 28, 2009 are not necessarily indicative of the results for the fiscal year ending November 30, 2009.

(2)
Income Per Share

Basic net income per common share has been computed on the basis of the weighted average number of common shares outstanding.  Diluted net income per share has been computed on the basis of the weighted average number of common shares outstanding plus equivalent shares assuming exercise of stock options.  Per share computations reflect the results of the two for one stock split that became effective on July 30, 2008.

Basic and diluted earnings per common share have been computed based on the following as of February 28, 2009 and 2008:

   
2009
    
2008
  
Basic:
            
Numerator, net income
   $ 3,595     $ 476,831  
Denominator: Average number
                
of common shares
                
outstanding
     3,986,352       3,970,110  
Basic earnings per
                
common share
   $ 0.00     $ 0.12  
Diluted
                
Numerator, net income
   $ 3,595     $ 476,831  
Denominator: Average number
                
of common shares outstanding
     3,986,352       3,970,110  
                 
Effect of dilutive stock options
     0       21,380  
      3,986,352       3,991,490  
Diluted earnings per
                
common share
   $ 0.00     $ 0.12  
 
(3)
Inventories
 
Major classes of inventory are:
 
   
February 28,
2009
    
November 30,
2008
  
Raw materials
   $ 10,115,259     $ 10,622,204  
Work in process
     908,688       825,330  
Finished goods
     5,829,860       5,667,449  
    $ 16,853,807     $ 17,114,983  
Less: Reserves
     (1,894,965 )     (1,942,260 )
    $ 14,958,842     $ 15,172,723  
 
4
 
(4)
Accrued Expenses
 
Major components of accrued expenses are:
 
   
February 28,
2009
    
November 30,
2008
  
             
Salaries, wages, and commissions
   $ 663,339     $ 780,293  
Accrued warranty expense
     334,755       327,413  
Other
     171,525       215,819  
    $ 1,169,619     $ 1,323,525  
 
(5)
Product Warranty
 
The Company offers warranties of various lengths to its customers depending on the specific product and terms of the customer purchase agreement.  The average length of the warranty period is 1 year from the date of purchase.  The Company’s warranties require it to repair or replace defective products during the warranty period at no cost to the customer.  The Company records a liability for estimated costs that may be incurred under its warranties.  The costs are estimated based on historical experience and any specific warranty issues that have been identified.  Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts.  The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary.
 
Changes in the Company’s product warranty liability for the three months ended February 28, 2009 and February 29, 2008 are as follows:
 
   
2009
    
2008
  
             
Balance, beginning
   $ 327,413     $ 262,665  
Settlements made in cash or in-kind
     (87,099 )     (150,652 )
Warranties issued
     94,441       126,185  
Balance, ending
   $ 334,755     $ 238,198  
 
(6)
Loan and Credit Agreements
 
The Company has a revolving line of credit for $4,500,000, which was increased from $3,500,000 on December 16th, 2008.  The line of credit matures on April 30, 2009 and is renewable annually with advances funding the Company’s working capital and letter of credit needs.  The interest rate is West Bank’s prime interest rate, adjusted daily.  At no time shall the interest rate be less than 4.00%.  As of February 28, 2009, the interest rate was the minimum of 4.0%.  Monthly interest only payments are required and the unpaid principal is due on the maturity date.  Collateral consists of a first position on the assets of the Company and its subsidiaries, including but not limited to, inventories, accounts receivable, machinery and equipment.  As of February 28, 2009 and November 30, 2008, the Company had borrowed $3,463,771 and $2,581,775 respectively, against the line of credit.  The available amounts remaining on the line of credit were $1,036,229 and $918,225 on February 28, 2009 and November 30, 2008, respectively.  Other terms and conditions of the debt with West Bank include providing monthly internally prepared financial reports including accounts receivable aging schedules and borrowing base certificates and year-end audited financial statements.  The borrowing base limits advances from the line of credit to 60% of accounts receivable less than 90 days, 60% of finished goods inventory, 50% of raw material inventory and 50% of work-in-process inventory plus 40% of appraisal value of machinery and equipment.

 
5
 
 
On June 7, 2007, the Company restructured its long-term debt with West Bank into a term loan in the amount of $4,100,000.  The loan was written to mature on May 1, 2017 and bore fixed interest at 7.25%.  On May 1, 2008, the terms of this loan were changed to modify the maturity date, interest rate, and payments.  The loan, with a principal amount of $3,683,949 as of February 28, 2009, will now mature on May 1, 2013 and bears fixed interest at 5.75%.  Monthly principal and interest payments in the amount of $42,500 are required, with a final payment of principal and accrued interest in the amount of $2,304,789 due on May 1, 2013.

The Company obtained two additional loans from West Bank in 2007, for the purpose of financing the construction of the Company’s new facilities in Monona and Dubuque.  On October 9, 2007, the Company obtained a loan for $1,330,000 that bore fixed interest at 7.0%.  On May 1, 2008, the terms of this loan were changed to modify the maturity date, interest rate, and payments.  On February 28, 2009, the outstanding principal balance was $1,274,415.  The current terms are a maturity date of May 1, 2013 and a fixed interest rate of 5.75%.  Monthly payments of $11,000 are required for principal and interest, with a final payment of accrued interest and principal in the amount of $1,007,294 due on May 1, 2013.

On November 30, 2007, the Company obtained a construction loan to finance construction of the Dubuque, Iowa facility.  This loan had an original principal amount of $1,500,000 and bore fixed interest at 7.25%. On May 1, 2008 the terms of this loan were changed to modify the maturity date, interest rate, and payments.  On February 28, 2009, the outstanding principal balance was $1,450,463.  The current terms are a maturity date of May 1, 2013 and a fixed interest rate of 5.75%.  Payments of $12,550 are due monthly for principal and interest, with a final accrued interest and principal payment in the amount of $1,114,714 due on May 1, 2013.

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

   
2009
    
2008
  
             
West Bank loan payable in monthly installments of $42,500 including interest at 5.75% and then due May 1, 2013 (A)
   $ 3,683,949     $ 3,757,213  
                 
West Bank loan payable in monthly installments of $11,000 including interest at 5.75% and then due May 1, 2013 (A)
     1,274,415       1,288,758  
                 
West Bank loan payable in monthly installments of $12,550 including interest at 5.75% and then due May 1, 2013 (A)
     1,450,463       1,466,878  
                 
Total term debt
     6,408,827       6,512,849  
Less current portion of term debt
     434,940       429,689  
Term debt, excluding current portion
   $ 5,973,887     $ 6,083,159  

 
6
 

 
(A)
Covenants include, but are not limited to, debt service coverage ratio and debt/tangible net worth ratio. These loans are secured by all of the Company’s assets and those of its subsidiaries, including real estate, inventory, accounts receivable, inventory and equipment.

We received a debt waiver letter from West Bank for violating the debt/tangible net worth ratio covenant as of November 30, 2008.  This waiver is in effect until the covenant is measured again at November 30, 2009.
 
(7)
Recently Issued Accounting Pronouncements
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.  This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements.  The statement does not require any new fair value measurements, but for some entities, the application of the statement will change current practice.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  FASB Staff Position FAS 157-1 and FAS 157-2 were issued in February 2008.  FSP FAS 157-1 amends SFAS No. 157 to exclude pronouncements that address the fair value measurement for lease classifications from the scope of SFAS No. 157.  FSP FAS 157-2 delayed the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008.  This delay did not include items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  FAS 157 has been adopted by the Company without a material impact on the financial statements.

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active, which clarified the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  FSP FAS 157-3 was effective upon issuance.  Its adoption did not have a material effect on the Company’s financial statements.

In December 2007, the FASB issued FASB Statement No. 141 (Revised 2007), Business Combinations, which requires the Company to record fair value estimates of contingent consideration and certain other potential liabilities during the original purchase price allocation, expense acquisition costs as incurred and does not permit certain restructuring activities previously allowed to be recorded as a component of purchase accounting.  SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented.  The Company has not determined the effect that the adoption of SFAS No. 141(R) will have on the financial results of the Company.

In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51, which causes noncontrolling interests in subsidiaries to be included in the equity section of the balance sheet.  SFAS No. 160 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented.  The Company has not determined the effect that the adoptions of SFAS No. 160 will have on the financial results of the Company.

In December 2007, the SEC published SAB 110, Share-Based Payment. The interpretations in SAB 110 express the SEC staff's views regarding the acceptability of the use of a "simplified" method, as discussed in SAB 107, in developing an estimate of expected term of share options in accordance with FASB Statement No. 123 (Revised) Share-Based Payment. The use of the simplified method requires our option plan to be consistent with a "plain vanilla" plan and was originally permitted through December 31, 2007 under SAB 107. In December 2007, the SEC issued SAB 110, Share-Based Payment, to amend the SEC's views discussed in SAB 107 regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with FAS No. 123(R). SAB 110 is effective for the Company beginning December 31, 2007. The Company will continue to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life, in accordance with SAB 107, as amended by SAB 110.

 
7
 

(8)
Stock Option Plan
 
On January 25, 2007 the Board of Directors adopted the 2007 Non-Employee Directors’ Stock Option Plan, which was approved by the stockholders at the annual stockholders meeting on April 24, 2008.  Options will be granted to non-employee directors to purchase shares of common stock of the Company at a price not less than fair market value at the date the options are granted.  Non-employee directors are automatically granted options to purchase 2,000 shares of common stock annually or initially upon their election to the Board, which are automatically vested.  Options granted are nonqualified stock options.
 
On February 5, 2007 the Board of Directors adopted the 2007 Employee Stock Option Plan, which was approved by the stockholders at the Annual Stockholders’ Meeting on April 26, 2007.  Under this plan, options may be granted to key personnel and consultants at the discretion of the plan administrator. The exercise price of the options must be not less than fair market value at the grant date. The options may be non-qualified or incentive stock options.  The term and vesting conditions of options granted under the plan are at the administrator’s discretion.

(9)
Segment Information

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

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

Approximate financial information with respect to the reportable segments is as follows.

Three Months Ended February 28, 2009
   
Agricultural
Products
    
Pressurized
Vessels
    
Modular
Buildings
    
Consolidated
  
Revenue from external customers
   $ 4,709,000     $ 149,000     $ 1,833,000     $ 6,691,000  
Income from operations
     143,000       (213,000 )     168,000       98,000  
Income before tax
     106,000       (250,000 )     150,000       6,000  
Total Assets
     21,245,000     $ 2,843,000       3,041,000       27,129,000  
Capital expenditures
     201,000       27,000       0       228,000  
Depreciation & Amortization
     112,000       22,000       24,000       158,000  

Three Months Ended February 29, 2008
   
Agricultural
Products
    
Pressurized
Vessels
    
Modular
Buildings
    
Consolidated
  
Revenue from  external customers
   $ 4,127,000     $ 114,000     $ 2,508,000     $ 6,749,000  
Income from operations
     531,000       (236,000 )     519,000       814,000  
Income before tax
     514,000       (263,000 )     482,000       733,000  
Total Assets
     18,767,000       2,642,000       3,804,000       25,213,000  
Capital expenditures
     32,000       523,000       78,000       633,000  
Depreciation & Amortization
     111,000       10,000       19,000       140,000  

 
8
 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this report and the audited consolidated financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended November 30, 2008.  Some of the statements in this report may contain forward-looking statements that reflect our current view on future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions.  In some cases you can identify forward-looking statements by the use of words such as “may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions.  Many of these forward-looking statements are located in this report under “Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” but they may appear in other sections as well. Forward-looking statements in this report generally relate to: (i) our ability to meet our production schedule and obtain higher profit margins; (ii) the anticipated benefits of our efforts to improve our disclosure controls and procedures and remediate the material weakness in our internal control over financial reporting; (iii) our expectations related to expenses, particularly engineering expenses; (iv) our beliefs regarding the impact of economic conditions on revenues; and (v) our beliefs regarding the sufficiency of working capital and our continued ability to renew or obtain financing when necessary.

You should read this report thoroughly with the understanding that our actual results may differ materially from those set forth in the forward-looking statements for many reasons, including events beyond our control and assumptions that prove to be inaccurate or unfounded.  We cannot provide any assurance with respect to our future performance or results.  Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including but not limited to: (i) unexpected delays in production; (ii) delays in or obstacles to our ability to successfully improve our disclosure controls and procedures and remediate the material weakness in our internal control over financial reporting; (iii) the impact of tightening credit markets on our ability to renew our line of credit or obtain alternative financing; (iv) the effect of general economic conditions on the demand for our products and the cost of our supplies and materials; (v) unforeseen costs or delays in implementing production of new products; (vi) unforeseen costs or delays in commencing operations at our Salem, South Dakota facility; and (vii) those risks described from time to time in our reports to the Securities and Exchange Commission (including our Annual Report on Form 10-K). We are not under any duty to update the forward-looking statements contained in this report. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Critical Accounting Policies

Our critical accounting policies involving the more significant judgments and assumptions used in the preparation of the financial statements as of February 28, 2009 have remained unchanged from November 30, 2008.  These policies include revenue recognition, inventory valuation, income taxes and stock-based compensation.  Disclosure of these critical accounting policies is incorporated by reference under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended November 30, 2008.
 
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Results of Operations
 
Net Sales and Cost of Sales
 
Our consolidated net sales for the first quarter of 2009 were $6,691,000 compared to $6,749,000 for the same period one year ago.  Art’s-Way Manufacturing, our agricultural products segment, had revenues totaling $4,708,697 for the three months just ended, compared to $4,127,074 for the same period in 2008, which represents a 14.1% increase.  This increase in sales for Art’s-Way Manufacturing was largely due to the sales of forage boxes and rakes from the Miller Pro product line, which we were not yet producing in the first quarter of 2008.  Art’s-Way Vessels, our pressurized vessels segment, had revenues totaling $149,084 for the three months just ended, compared to $113,414 for the same period in 2008, which represents a 31.5% increase.  These increases were offset, however, by a 26.9% decrease in sales at Art’s Way Scientific, our modular buildings segment.  Art’s Way Scientific had revenues totaling $1,833,085 for the three months just ended, compared to $2,508,026 for the same period in 2008. The decrease in revenues for Art’s Way Scientific was the result of a decrease in demand for modular buildings, which management believes was largely due to the impact of current economic conditions on the capital budgets of potential customers.
 
Consolidated gross profit margin for the first quarter of 2009 was 19.7% compared to 32.2% for the same period one year ago, primarily due to decreases in gross profit margin at Art’s-Way Manufacturing and Art’s-Way Scientific.  The gross profit margin of Art’s-Way Manufacturing decreased from 38.4% in the first quarter of 2008 to 21.5% for the same period in 2009.  After the purchase of the Miller Pro product line, we had many orders that we were unable to produce in a timely fashion.  In order to satisfy our customers, we agreed to sell these goods at the lower prices quoted in 2007.  As a result of our production delays, we shipped goods in the first quarter of 2009 that were priced at the end of 2007 and manufactured with materials purchased at higher prices of 2008.  We expect to complete our commitments on the 2007 pricing during the second quarter of 2009, and do not anticipate additional production delays after that time.
 
The gross profit margin of Art’s-Way Scientific decreased from 28.6% in the first quarter of 2008 to 20.6% for the same period in 2009. The decrease in gross profit margin at Art’s-Way Scientific was primarily due to the decrease in revenue explained above. In addition, gross profit margins at Art’s-Way Scientific were negatively impacted during the first quarter by unanticipated cost overruns on a project that was substantially completed during the period.
 
Expenses
 
Consolidated operating expenses for the first quarter of fiscal 2009 decreased $143,000 compared to the first quarter of fiscal 2008.  As a percentage of sales, operating expenses decreased by 2.0%; 18.2% in 2009 compared to 20.2% in 2008.  Year-to-date operating expense as a percentage of sales for each of Art’s-Way Manufacturing, Art’s-Way Vessels and Art’s-Way Scientific was 18.5%,  92.7% and 11.4%, respectively.
 
General and administrative expenses for the quarter decreased $124,000 as compared to the same period in 2008. The decrease was primarily due to a $60,000 decrease in accrued expenses for management bonuses during the first quarter of 2009 as compared to the first quarter 2008, as a result of a decision of the Board of Directors to eliminate management bonuses. Additionally, the elimination of management bonuses caused a reversal of $100,000 of the bonus that had accrued as of the end of our 2008 fiscal year.  Year-to-date general and administrative expenses as a percentage of sales was 10.6% compared to 12.3% in 2008.
 
Engineering expenses, which are expenses related to research and development and implementation of new product lines, increased $13,000 for the quarter compared to the same quarter in 2008.  As a percentage of sales, engineering expenses were 1.3% in the first quarter of 2009, compared to 1.1% for the same period in 2008.  These increases are largely due to the process of establishing auger production, which is a new product line that will be offered by Art’s-Way Manufacturing and manufactured at a new site in Salem, South Dakota.  We expect to continue to incur such expenses throughout the year.
 
Selling expenses decreased for the quarter by $33,000 compared to the same quarter in 2008.  As a percentage of sales, selling expenses decreased to 6.3% in the first quarter of 2009, compared to 6.7% for the same period in 2008.
 
Interest expense for the first quarter increased slightly due to greater borrowings on our line of credit compared to the first quarter of 2008.  Other expenses decreased by $8,000 in the first quarter of 2009 compared to the same period in 2008.
 
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Order Backlog

The consolidated order backlog as of February 28, 2009 was $13,127,000 compared to $20,864,000 as of the end of the first quarter in 2008.  Art’s-Way Manufacturing’s order backlog as of quarter-end was $9,456,000, compared to $15,324,000 in 2008.  The majority of this decrease was due to our alleviation of delays in production and shipment of products in our Miller Pro product line, as explained above.  The backlog for Art’s-Way Vessels was $205,000 at quarter-end, compared to $83,000 in 2008. The backlog for Art’s-Way Scientific was $3,466,000 at quarter-end, compared to $5,457,000 in 2008. The decrease in the backlog at Art’s Way Scientific is largely due to a reduction in the number of customer orders, which management believes was the result of decreases in capital budgets of many potential customers.

Liquidity and Capital Resources
 
Our main source of funds year to date came from customer deposits, which increased by $1,260,540, to $1,336,520 over $75,980 at our 2008 year end. This is a traditional increase for us, as our beet programs run in the first quarter and we offer discounts to our customers for making down payments on their orders.  This is, however, down dramatically compared to customer deposits of $3,056,525 as of February 29, 2008.  During the first quarter of 2009, we also implemented a program on forage boxes that offers discounts for making a down payment on that order. Increased borrowing on our line of credit also provided cash during the first quarter of 2009.
 
The majority of the cash used by operations during the first quarter of 2009 was due to payments on raw material purchases for the OEM and Miller Pro blower lines of Art’s-Way Manufacturing, as well as fulfilling commitments related to production at Art’s-Way Scientific. Our accounts payable decreased from $3,425,885 at November 30, 2008 to $1,990,386 on February 28, 2009.
 
We have a revolving line of credit for $4,500,000, which was increased from $3,500,000 on  December 16th, 2008.  The line of credit matures on April 30, 2009 and is renewable annually with advances funding the Company’s working capital and letter of credit needs.  The interest rate is West Bank’s prime interest rate, adjusted daily.  At no time shall the interest rate be less than 4.00%.  As of February 28, 2009, the interest rate was the minimum of 4.0%.  Monthly interest only payments are required and the unpaid principal is due on the maturity date.  Collateral consists of a first position on our assets and those of our subsidiaries, including, but not limited to, inventories, accounts receivable, machinery and equipment.  As of February 28, 2009 and November 30, 2008, we had borrowed $3,463,771 and $2,581,775 respectively, against the line of credit.  The available amounts remaining on the line of credit were $1,036,229 and $918,225 on February 28, 2009 and November 30, 2008, respectively.  Other terms and conditions of the debt with West Bank include providing monthly internally prepared financial reports including accounts receivable aging schedules and borrowing base certificates and year-end audited financial statements.  The borrowing base limits advances from the line of credit to 60% of accounts receivable less than 90 days, 60% of finished goods inventory, 50% of raw material inventory and 50% of work-in-process inventory plus 40% of appraisal value of machinery and equipment.
 
On June 7, 2007, we restructured our long-term debt with West Bank into a term loan in the amount of $4,100,000.  The loan was written to mature on May 1, 2017 and bore fixed interest at 7.25%.  On May 1, 2008, the terms of this loan were changed to modify the maturity date, interest rate, and payments.  The loan, with a principal amount of $3,683,949 as of February 28, 2009, will now mature on May 1, 2013 and bears fixed interest at 5.75%.  Monthly principal and interest payments in the amount of $42,500 are required, with a final payment of principal and accrued interest in the amount of $2,304,789 due on May 1, 2013.

We obtained two additional loans from West Bank in 2007, for the purpose of financing the construction of our new facilities in Monona and Dubuque.  On October 9, 2007, we obtained a loan for $1,330,000 that bore fixed interest at 7%.  On May 1, 2008 the terms of this loan were changed to modify the maturity date, interest rate, and payments.  On February 28, 2009, the outstanding principal balance was $1,274,415.  The current terms are a maturity date of May 1, 2013 and a fixed interest rate of 5.75%.  Monthly payments of $11,000 are required for principal and interest, with a final payment of accrued interest and principal in the amount of $1,007,294 due on May 1, 2013.
 
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On November 30, 2007, we obtained a construction loan to finance construction of the Dubuque, Iowa facility.  This loan had an original principal amount of $1,500,000 and bore fixed interest at 7.25%. On May 1, 2008 the terms of this loan were changed to modify the maturity date, interest rate, and payments.  On February 28, 2009, the outstanding principal balance was $1,450,463.  The current terms are a maturity date of May 1, 2013 and a fixed interest rate of 5.75%.  Payments of $12,550 are due monthly for principal and interest, with a final accrued interest and principal payment in the amount of $1,114,714 due on May 1, 2013.

We received a debt waiver letter from West Bank for violating the debt/tangible net worth ratio covenant as of November 30, 2008.  This waiver is in effect until the covenant is measured again at November 30, 2009.

We believe that cash flows from operating activities will be adequate to meet our working capital needs. We expect to continue to be able to procure financing upon reasonable terms. If we are unable to do so, management is committed to taking action necessary to conserve adequate cash to finance operations.

Off Balance Sheet Arrangements

None.

Item 4T.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
The person serving as our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report.  As a result of the material weakness relating to inventory accounting that existed at the end of our fiscal year, which was previously disclosed in Item 9A(T) of our 2008 Annual Report on Form 10-K, the person serving as our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) accumulated and communicated to our management, including the person serving as our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; and (b) recorded, processed, summarized and reported, within the time specified in the SEC’s rules and forms.  As a result of this conclusion, the financial statements for the period covered by this report were prepared with particular attention to the material weakness previously disclosed.
 
We are taking actions to remediate the previously-disclosed material weakness in our internal controls over financial reporting and improve our disclosure controls and procedures. We will continue to evaluate and monitor these efforts and intend to take all appropriate action when and as necessary to ensure we have effective disclosure controls and procedures.

Changes in Internal Controls

We are undertaking efforts to remediate the material weakness identified in our 2008 Annual Report on Form 10-K. During the first quarter of 2009, we continued to improve our physical inventory count procedures to ensure that inventory is properly reflected in the Company’s financial statements. We intend to continue to implement and use these procedures throughout the 2009 fiscal year. No other changes in our internal control over financial reporting occurred during the first quarter of 2009 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

We are currently not a party to any material pending legal proceedings.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

Item 5.  Other Information

None.

Item 6.  Exhibits

See “Exhibit Index” on page 15 of this report.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ART'S-WAY MANUFACTURING CO., INC.
   
Date: April 14, 2009
By:
/s/ Carrie L. Majeski       
   
Carrie L. Majeski
 
President, Chief Executive Officer and Principal
Financial Officer
 
 
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Exhibits Index

Exhibit
No.
  
Description
10.1
  
Promissory Note to West Bank dated December 16, 2008—incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2008
     
10.2
  
Commercial Security Agreement between Art’s-Way Vessels, Inc. and West Bank dated December 16, 2008—incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2008
     
10.3
  
Form of Agreement to Provide Insurance for loan dated December 16, 2008—incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2008
     
10.4
  
Letter Agreement from West Bank dated January 20, 2009—incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2008
     
31.1
  
Certificate pursuant to 17 CFR 240 13a-14(a)—filed herewith
     
32.1
  
Certificate pursuant to 18 U.S.C. Section 1350—filed herewith
 
 
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