Appendix A to Item 601(c) of Regulation S-K
Commercial and Industrial Companies
Article 5 of Regulation S-X
Quarter Ended February 28, 2002
Item Number Item Description Amount
5-02(1) Cash and cash items 141,224
5-02(2) Marketable securities -
5-02(3)(a)(1) Notes and accounts receivable-trade 1,424,583
5-02(4) Allowances for doubtful accounts 59,801
5-02(6) Inventory 4,231,338
5-02(9) Total current assets 5,784,731
5-02(13) Property, plant and equipment 10,583,740
5-02(14) Accumulated depreciation 9,560,300
5-02(18) Total assets 6,808,171
5-02(21) Total current liabilities 4,038,213
5-02(22) Bonds, mortgages and similar debt 2,139,341
5-02(28) Preferred stock-mandatory redemption 0
5-02(29) Preferred stock-no mandatory redemption 0
5-02(30) Common stock 19,382
5-02(31) Other stockholders' equity 2,496,334
5-02(32) Total liabilities and stockholders'
equity 6,808,171
5-03(b)1(a) Net sales of tangible products 2,641,892
5-03(b)1 Total revenues 2,641,892
5-03(b)2(a) Cost of tangible goods sold 2,071,292
5-03(b)2 Total costs and expenses applicable
to sales and revenues 539,901
5-03(b)3 Other costs and expenses 14,111
5-03(b)5 Provision for doubtful accounts
and notes 4,500
5-03(b)8 Interest and amortization of debt
discount 60,589
5-03(b)10 Loss before taxes and other items 48,501
5-03(b)11 Income tax benefit -
5-03(b)14 Loss continuing operations 48,501
5-03(b)(15) Discontinued operations 0
5-03(b)(17) Extraordinary items 0
5-03(b)(18) Cumulative effect-changes in
accounting principles 0
5-03(b)19 Net loss 48,501
5-03(b)20 Loss per share-primary 0.03
5-03(b)20 Loss per share-fully diluted 0.03
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended February 28, 2002 Commission File No. 0-5131
ART'S-WAY MANUFACTURING CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-0920725
State of Incorporation I.R.S. Employer Identification No.
Hwy 9 West, Armstrong, Iowa 50514
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (712) 864-3131
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 requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of April 5, 2002:
1,938,176
Number of Shares
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
February 28, February 28,
2002 2001
NET SALES $2,641,892 $2,990,487
COST OF GOODS SOLD 2,071,292 2,516,176
GROSS PROFIT 570,600 474,311
EXPENSES:
Engineering 14,879 84,458
Selling 128,296 93,305
General and
Administrative 401,226 408,176
Total 544,401 585,939
INCOME LOSS) FROM
OPERATIONS 26,199 (111,628)
OTHER DEDUCTIONS:
Interest expense (60,589) (122,824)
Other (14,111) (52,340)
Other deductions (74,700) (175,164)
LOSS BEFORE
INCOME TAXES (48,501) (286,792)
INCOME TAX BENEFIT - -
NET LOSS $(48,501) $(286,792)
LOSS PER
SHARE (NOTE 2):
Basic $ (0.03) $ (0.23)
Diluted $ (0.03) $ (0.23)
COMMON SHARES AND
EQUIVALENT OUTSTANDING:
Basic 1,411,954 1,256,351
Diluted 1,411,954 1,256,351
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED BALANCE SHEETS
February 28, November 30,
2002 2001
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 141,224 $ 4,375
Accounts receivable-customers,
net of allowance for doubtful accounts
of $59,801 and $55,301 in February
and November, respectively 1,364,782 922,168
Inventories 4,231,338 4,690,008
Other current assets 47,387 54,157
Total current assets 5,784,731 5,670,708
PROPERTY, PLANT AND EQUIPMENT,
at cost 10,583,740 10,583,740
Less accumulated depreciation 9,560,300 9,499,347
Net property, plant and equipment 1,023,440 1,084,393
TOTAL $6,808,171 $6,755,101
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ 994,159 $ 2,073,704
Current portion of long-term debt 890,940 962,040
Accounts payable 837,411 984,052
Customer deposits 625,197 64,449
Accrued expenses 690,506 634,306
Total current liabilities 4,038,213 4,718,551
LONG-TERM DEBT, excluding current portion 254,242 272,333
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value. Authorized
5,000,000 shares; issued 1,938,176 shares
in February and 1,340,778 shares in November 19,382 13,408
Additional paid-in capital 1,634,954 1,249,611
Retained earnings 861,380 909,881
2,515,716 2,172,900
Less cost of common shares in treasury of
0 shares in February and 42,602 in November 0 408,683
Total stockholders' equity 2,515,716 1,764,217
TOTAL $ 6,808,171 $ 6,755,101
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
February 28, February 28,
2002 2001
CASH FLOW FROM OPERATIONS:
Net Loss $ (48,501) $ (286,792)
Adjustment to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation and amortization 60,953 128,062
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (442,614) (662,407)
Inventories 458,670 461,839
Other Assets 6,770 8,015
Increase (Decrease) in:
Accounts payable (146,641) 490,036
Customer deposits 560,748 36,497
Accrued expenses 56,200 (222,521)
Total adjustments 554,086 239,521
Net cash provided by (used in)
operating activities 505,585 (47,271)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property, plant and equipment - -
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) notes
payable to bank (1,079,545) 145,265
Principal payments on term debt (89,191) ( 90,063)
Proceeds from issuance of common
stock from treasury 53,253 -
Proceeds from issuance of common stock 746,747 -
Net cash provided by (used in)
financing activities (368,736) 55,202
Net increase in cash 136,849 7,931
Cash at beginning of period 4,375 4,375
Cash at end of period $ 141,224 $ 12,306
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 64,033 $ 137,118
Income taxes 4,032 330
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement Presentation
The financial statements 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, 2001.
The results of operations for the first quarter ended February 28,
2002, are not necessarily indicative of the results for the fiscal
year ending November 30, 2002.
2. LOSS PER SHARE
Basic loss per common share is computed on the basis of
weighted average number of common shares. Diluted loss per
share is computed on the basis of weighted average number of
common shares plus equivalent shares assuming exercise of
stock options.
The difference in shares utilized in calculating basic and diluted
loss per share 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 loss in 2002 and 2001, the anti-dilutive effect of the
Company's stock option plans is not included in the calculation
of diluted loss per share for those periods.
3. INVENTORIES
Major classes of inventory are: February 28, November 30,
2002 2001
Raw material $ 709,300 $ 749,544
Work-in-process 1,029,893 1,181,870
Finished goods 2,492,145 2,758,594
Total $ 4,231,338 $ 4,690,008
4. ACCRUED EXPENSES
Major components of accrued expenses are:
February 28, November 30,
2002 2001
Salaries, wages and commissions $ 326,042 $ 294,961
Accrued warranty expense 74,451 67,426
Other 290,013 271,919
Total $ 690,506 $ 634,306
5. LOAN AND CREDIT AGREEMENTS
Line of Credit
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. The credit facility allows for
borrowings up to $4,500,000, subject to borrowing base
limitations on the Company's accounts receivable and inventory,
and allowing for letters of credit for $100,000. At February 28,
2002, the Company has borrowed $994,159 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 February 28, 2002 and November 30, 2001, $802,000
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 8.75% at February 28, 2002.
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 balance due on demand.
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 one percent of the unused portion of the
revolving line of credit.
During 1999, the Company was notified by its lender that the
Company does 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 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 an extension from September 1,
2001 through November 15, 2001, but has not granted an extension
beyond this date.
Although there is no documented extension, the new lender has
submitted a financing proposal to the Company in regards to
long-term financing. The final terms of the proposal are
currently being negotiated.
The Company believes a new credit facility will be obtained from
the new lender and that it will be able to meet its obligations
under the new credit agreement when completed, although there are
no assurances of such. If the Company is unable to obtain a new
credit agreement, it will be unable to pay its outstanding balance
due upon foreclosure.
A summary of the Company's term debt is as follows:
February 28, November 30,
2002 2001
Installment term debt payable in
monthly installments of $23,700,
plus interest at four percent
over the bank's national money
market rate (8.75%), secured
by the cash, accounts receivable,
inventories and property, plant
and equipment $ 818,671 $ 889,771
State of Iowa Community Development
Block Grant promissory notes at zero
percent interest, maturity 2006 with
quarterly principal payments of
$11,111 200,000 211,111
State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity 2006, with quarterly
payments of $7,814 126,511 133,491
Total term debt 1,145,182 1,234,373
Less current portion of
term debt 890,940 962,040
Term debt, excluding
current portion $ 254,242 $ 272,333
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(a) Liquidity and Capital Resources
The Company's main source of funds for the quarter ended
February 28, 2002 included a reduction in inventory and an
increase in payments received from customers for advance
payments on sugar beet equipment to be delivered in the third
quarter as well as the capital infusion by a private investor.
These sources were offset by an increase in accounts receivable
and payments on the Company's note payable and term debt. The
increase in accounts receivable is comparable to one year ago
and results from the high level of OEM sales in February 2002
which are sold on 30 day terms.
The conditions existing in the agriculture economy, in
addition to adversely impacting sales, have also resulted
in a deterioration of the Company's accounts receivable.
The Company believes it has provided an adequate reserve
for uncollectible accounts based on currently available
information.
As of February 28, 2002, the Company had no material
commitments for capital expenditures.
See footnote 5 of the notes to the condensed financial
statements for a discussion of the Company's credit facility.
On February 13, 2002, the Company sold to J. Ward McConnell, Jr.,
a private investor, 640,000 shares of common stock for $800,000.
The proceeds were used for the repayment of current obligations
and for the reduction of bank debt. 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.
The Company has used approximately $200,000 of the proceeds in
paying down its aged outstanding payables to its suppliers. The
Company is mindful of the necessity to continue to control its
costs, as it intends to finance its working capital and pay
down its debt through cash from operations. The Company believes
that the infusion of capital from Mr. McConnell will also enable
it to successfully complete negotiations with its lender,
although there are no assurances of such.
(b) Results of Operations
Overall sales for the first quarter were approximately $2,642,000,
or 12% lower than last year's first quarter sales of approximately
$2,990,000. Sales of Art's-Way products were 26% higher and OEM
sales were 33% lower than one year ago. OEM sales included products
for three original equipment manufacturers. The reduction in sales
reflects the continuing weakness in the farm economy, although
demand for our feed processing and land maintenance equipment is
significantly higher than the same period one year ago.
Gross profit, as a percent of sales, was 22% for the quarter
ended February 28, 2002, as compared to 16% for the same period
in 2001. A combination of a favorable product mix in the current
year and sales of distressed inventory at low margins in the prior
year account for the improvement.
Operating expenses were slightly below last year. As a percent of
sales, operating expenses were 21% and 20% for the three months
ended February 28, 2002 and 2001, respectively. As a result of cost
reduction programs, engineering expenses decreased by $70,000. We
currently expect these lower engineering costs to continue through-
out fiscal year 2002.
Other deductions decreased by $100,000 from the previous year.
Reduction in bank borrowings combined with lower prime interest
rate and reduced volume in our financed accounts receivable
resulted in this reduction.
The order backlog as of February 28, 2002 is $2,292,000,
compared to $1,409,000 one year ago. These orders primarily
will be delivered by the end of the third quarter of the
current fiscal year. The current year backlog includes $771,000
in orders for beet equipment compared to $50,000 last year at
this time. OEM backlog is $421,000 to be shipped in the third
quarter.
(c) Quantitative and Qualitative Disclosures About Market Risks
The Company does not have any additional market risk exposure
other than what was outlined in the November 30, 2001, 10-K filing.
(d) Critical Accounting Policies
The Company has identified the following accounting policies as
critical to its operations.
Revenue Recognition - Revenue is recognized when risk of ownership
passes to the buyer. This generally occurs when the Company's
product is shipped from its facility to the customer. Products
delivered to dealers on a consignment basis are not recognized
in revenue until the cash is collected from the dealer.
Allowance for Bad Debts - In determining an allowance for receivables
with potential collectibility issues, the Company considers the age
of the receivable, the customer credit history and the reasons for
non-payment.
Inventory Valuation - The Company values its inventory based on a
standard costing system which requires the inventory to be valued
on the first in, first out method of valuing inventory. Any
inventory product that has not moved within the past 3 years is
considered significantly aged, and an appropriate reserve percentage
is assigned to that inventory classification. As the agriculture
industry changes inventory items can become outdated and the Company
evaluates this on a regular basis. If a product is determined to be
outdated, the Company will mark it down to its net realizable value
and try and sell it at this discounted price.
Part II - Other Information
ITEM 1. LITIGATION AND CONTINGENCIES
Various legal actions and claims are pending against the Company
consisting of ordinary routine litigation incidental to the business.
In the opinion of management and outside counsel, appropriate
provisions have been made in the accompanying financial statements
for all pending legal actions and other claims.
SIGNATURES
Pursuant to the requirements 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.
ART'S-WAY MANUFACTURING CO., INC.
Date April 15, 2002 /s/William T. Green
(William T. Green, Chief Financial Officer)
Date April 15, 2002 /s/John C. Breitung
(John C. Breitung, President)