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, 2003 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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2).
Yes __ No X
Number of common shares outstanding as of March 21, 2003: 1,938,176
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
February 28, November 30,
2003 2002
Net Sales $ 2,508,877 $ 2,641,892
Cost of goods sold 1,870,449 2,071,292
Gross Profit 638,428 570,600
Expense
Engineering 18,923 14,879
Selling 128,193 128,296
General and administravtive 352,428 401,226
Total expenses 499,544 544,401
Income from operations 138,884 26,199
Other expenses:
Interest expense 17,979 60,589
Other 6,065 14,111
Total other expenses 24,044 74,700
Income (loss) before income taxes 114,840 (48,501)
Income tax expense 2,031 -
Net Income (loss) $ 112,809 $ (48,501)
Net income (loss) per share:
Basic $ 0.06 $ (0.03)
Diluted
Common shares and equivalent outstanding:
Basic 1,938,176 1,411,954
Diluted 1,947,272 1,411,954
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED BALANCE SHEETS
(Unaudited)
February 28, November 30,
2003 2002
ASSETS
Current Assets
Cash $ 76,396 $ 75,358
Accounts receivable-customers,
net of allowance for doubtful accounts
of $54,500 and $50,000 in February and
November,respectively 1,651,416 592,945
Inventories 3,567,581 3,576,707
Other current assets 115,613 95,385
Total current assets 5,411,006 4,340,395
Property, plant and equipment, at cost 10,725,972 10,725,972
Less accumalated depreciation 9,821,130 9,751,260
Net property, plant and equipment 904,842 974,712
Inventories, noncurrent 430,509 430,509
Other assets 175,849 175,849
Total Assets $ 6,922,206 $ 5,921,465
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 172,818 $ 319,222
Current portion of long-term debt 356,669 356,669
Accounts payable 661,198 523,492
Customer deposits 1,086,408 249,756
Accrued expenses 780,210 630,972
Total current liabilities 3,057,303 2,080,111
Long-term liabilities 187,204 187,204
Long-term debt, excluding current portion 431,570 520,830
Total liabilities $ 3,676,077 $ 2,788,145
Stockholders' Equity
Common stock - $.01 par value. Authorized
5,000,000 shares; issued 1,938,176 shares
in February and in November 19,382 19,382
Additional paid-in capital 1,634,954 1,634,954
Retained earnings 1,591,793 1,478,984
Total stockholders' equity 3,246,129 3,133,320
Total liabilities and stockholders'
equity $ 6,922,206 $ 5,921,465
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,
2003 2002
CASH FLOW FROM OPERATIONS:
Net income (loss) $ 112,809 $ (48,501)
Adjustment to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 69,870 60,953
Changes in working capital components:
(Increase) decrease in:
Accounts receivable (1,058,471) (442,614)
Inventories 9,126 458,670
Other current assets (20,228) 6,770
Increase (decrease) in:
Accounts payable 137,706 (146,641)
Customer deposits 836,652 560,748
Accrued expenses 149,238 56,200
Net cash provided by operating activities 236,702 505,585
CASH FLOW FROM INVESTING ACTIVITIES: 0 0
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) notes payable
to bank (146,404) (1,079,545)
Principal payments on term debt (89,260) (89,191)
Proceeds from issuance of common stock from
treasury 0 53,253
Proceeds from issuance of common stock 0 746,747
Net cash used in financing activities (235,664) (368,736)
Net increase in cash 1,038 136,849
Cash at beginning of period 75,358 4,375
Cash at end of period $ 76,396 $ 141,224
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 17,979 $ 64,033
Income taxes 3,301 4,032
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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, 2002.
The results of operations for the first quarter ended February 28,
2003 are not necessarily indicative of the results for the fiscal
year ending November 30, 2003.
2. INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed on the basis of
weighted average number of common shares outstanding. Diluted net
income (loss) per share has been computed on the basis of 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 (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 for the quarter ended February 28, 2002, the anti-dilutive effect
of the Company's stock option plans is not included in the calculation
of diluted loss per share for that period. The reconciling item
between the shares used in the computation of basic and diluted
earnings per share for the first quarter ended February 28, 2003 is
9,096 equivalent shares for the effect of dilutive stock options.
3. INVENTORIES
Major classes of inventory are: February 28, November 30,
2003 2002
Raw material $ 906,731 $ 1,065,166
Work-in-process 1,401,327 1,209,007
Finished goods 1,690,032 1,733,043
Total $ 3,998,090 $ 4,007,216
Less inventories classified
as noncurrent 430,509 430,509
Inventories, current $3,567,581 $3,576,707
4. ACCRUED EXPENSES
Major components of accrued February 28, November 30,
expenses are: 2003 2002
Salaries, wages and commissions $ 298,414 $ 294,220
Accrued warranty expense 55,612 60,232
Other 426,184 276,520
Total $ 780,210 $ 630,972
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 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 for $100,000.
At February 28, 2003, the Company has borrowed $172,818 and has
$100,000 in outstanding letters of credit. At November 30, 2002,
the Company had borrowed $319,222 and had $100,000 in outstanding
letters of credit. At February 28, 2003 and November 30, 2002,
$1,741,000 and $1,038,000 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 February 28, 2003.
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 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
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. 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
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.
A summary of the Company's term debt is as follows:
February 28, November 30,
2003 2002
Installment term debt payable in monthly
installments of $23,700, plus interest
at four percent over the bank's national
money market rate (8.25%), due on demand,
secured (a) $ 534,271 $ 605,371
State of Iowa Community Development
Block Grant promissory notes at zero
percent interest, maturity 2006, with
quarterly principal payments of $11,111 155,556 166,667
State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity 2006, with quarterly payments
of $7,007 98,412 105,461
Total term debt 788,239 877,499
Less current portion of term debt 356,669 356,669
Term debt, excluding current portion $ 431,570 $ 520,830
(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.
6. RELATED PARTY TRANSACTION
In February 2002, the Company sold 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, Marc McConnell, is also a Board Member.
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, 2003
were payments received from customers for advance payments on sugar beet
equipment to be delivered in the second and third quarter. 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
results from the high level of OEM sales in February 2003 which are sold
on 30 day terms.
The positive cash flow from operations of $236,702 was used to reduce bank
notes by $235,664. As of February 28, 2003, 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.
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.
(b) Results of Operations
Overall sales for the first quarter of fiscal 2003 were approximately
$2,509,000, or 5% lower than last year's first quarter sales of
approximately $2,642,000. Sales of Art's-Way products were 21% lower and
OEM sales were 12% higher than one year ago. OEM sales included products
for two original equipment manufacturers. The reduction in sales reflects
the continuing weakness in the farm economy.
Gross profit, as a percent of sales, was 25% for the quarter ended
February 28, 2003, as compared to 22% for the same period in 2002.
Operating expenses in the first quarter 2003 decreased $45,000 from 2002.
This decrease is primarily due to changing the health insurance plan
offered to the employees. As a percent of sales, operating expenses
were 20% and 21% for the three months ended February 28, 2003 and 2002,
respectively.
Other expenses decreased by $51,000 from the previous year. Reduction
in bank borrowings combined with lower interest rates and reduced
volume in our financed accounts receivable resulted in this reduction.
The order backlog as of February 28, 2003 is $2,916,000, compared to
$2,292,000 one year ago. These orders primarily will be delivered
in the second and third quarter of the current fiscal year. The
current year backlog includes $1,187,000 in orders for beet equipment
compared to $771,000 last year at this time. OEM backlog is $731,000
to be shipped in the second and third quarter.
(c) Critical Accounting Policies
The Company's critical accounting policies involving the more significant
judgments and assumptions used in the preparation of the financial
statements as of February 28, 2003, have remained unchanged from November
30, 2002. These policies involve revenue recognition, inventory valuation
and income taxes. Disclosure of these critical accounting policies is
incorporated by reference under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operation" in the Company's
Annual report on Form 10-K for the year ended November 30, 2002.
Item 3
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, 2002, 10-K filing.
Item 4
DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days of the filing date of this quarterly report, the Company's
Chief Executive Officer and Finance Manager have evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14(c) and
15(d)-14(c)) and, based on their evaluation, have concluded that the
disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective action with regard to
significant deficiencies and material weaknesses.
Part II - Other Information
ITEM 1. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.6 Forbearance Agreement
99.1 Certification of Financial Statements
(b) Reports on Form 8-K:
None
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 14, 2003 By: /s/John C. Breitung
(John C. Breitung, President)
By: /s/Seth LaBore
Date April 14, 2003 (Seth LaBore, Finance Manager)
CERTIFICATIONS
I, John C. Breitung, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Art's-Way
Manufacturing Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quartely report;
4. The registrant'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 registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and rocedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant'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 registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly 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.
Date: April 14, 2003
/s/ John C. Breitung
President and Chief
Executive Officer
OM504759.1
CERTIFICATIONS
I, Seth F. La Bore, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Art's-Way
Manufacturing Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quartely report;
4. The registrant'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 registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and rocedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant'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 registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly 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.
Date: April 14, 2003
/s/ Seth F. LaBore
Finance Manager
OM504760.1