Appendix A to Item 601(c) of Regulation S-K
Commercial and Industrial Companies
Article 5 of Regulation S-X
Quarter Ended May 31, 2002
Item Number Item Description Amount
5-02(1) Cash and cash items 14,598
5-02(2) Marketable securities -
5-02(3)(a)(1) Notes and accounts receivable-trade 873,453
5-02(4) Allowances for doubtful accounts 53,609
5-02(6) Inventory 4,481,747
5-02(9) Total current assets 5,617,318
5-02(13) Property, plant and equipment 10,583,740
5-02(14) Accumulated depreciation 9,621,255
5-02(18) Total assets 6,579,803
5-02(21) Total current liabilities 3,797,499
5-02(22) Bonds, mortgages and similar debt 1,677,096
5-02(28) Preferred stock-mandatory redemption -
5-02(29) Preferred stock-no mandatory redemption -
5-02(30) Common stock 19,382
5-02(31) Other stockholders' equity 2,526,798
5-02(32) Total liabilities and stockholders'
equity 6,579,803
5-03(b)1(a) Net sales of tangible products 2,252,621
5-03(b)1 Total revenues 2,252,621
5-03(b)2(a) Cost of tangible goods sold 1,611,101
5-03(b)2 Total costs and expenses applicable
to sales and revenues 540,534
5-03(b)3 Other costs and expenses 31,796
5-03(b)5 Provision for doubtful accounts
and notes 4,500
5-03(b)8 Interest and amortization of debt
discount 34,225
5-03(b)10 Income before taxes and other items 30,464
5-03(b)11 Income tax benefit -
5-03(b)14 Income from continuing operations 30,464
5-03(b)(15) Discontinued operations -
5-03(b)(17) Extraordinary items -
5-03(b)(18) Cumulative effect-changes in
accounting principles -
5-03(b)19 Net income 30,464
5-03(b)20 Income per share-primary 0.02
5-03(b)20 Income per share-fully diluted 0.02
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 May 31, 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 June 17, 2002:
1,938,176
Number of Shares
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Year To Date
May 31, May 31, May 31, May 31,
2002 2001 2002 2001
NET SALES $2,252,621 $2,409,492 $4,894,513 $ 5,399,979
COST OF GOODS SOLD 1,611,101 1,772,782 3,682,393 4,288,958
GROSS PROFIT 641,520 636,710 1,212,120 1,111,021
EXPENSES:
Engineering 15,758 55,643 30,637 140,102
Selling 130,539 157,889 251,436 251,193
General and
Administrative 398,738 340,047 807,363 748,223
Total 545,035 553,579 1,089,436 1,139,518
INCOME (LOSS) FROM
OPERATIONS 96,485 83,131 122,684 (28,497)
OTHER DEDUCTIONS:
Interest expense (34,225) (106,884) (94,814) (229,708)
Other (31,796) (20,597) (45,907) (72,939)
Other deductions (66,021) (127,481) (140,721) (302,647)
INCOME (LOSS) BEFORE
INCOME TAXES 30,464 (44,350) (18,037) (331,144)
INCOME TAXS - - - -
NET INCOME (LOSS) $ 30,464 $ (44,350) $(18,037) $(331,144)
INCOME (LOSS) PER
SHARE (NOTE 2):
Basic $ 0.02 $ (0.04) $ (0.01) $ (0.26)
Diluted $ 0.02 $ (0.04) $ (0.01) $ (0.26)
COMMON SHARES AND
EQUIVALENT OUTSTANDING:
Basic 1,938,176 1,265,443 1,677,956 1,260,947
Diluted 1,944,368 1,265,443 1,677,956 1,260,947
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED BALANCE SHEETS
May 31, November 30,
2002 2001
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 14,598 $ 4,375
Accounts receivable-customers,
net of allowance for doubtful accounts
of $53,609 and $55,301 in May and November,
respectively 819,844 922,168
Inventories 4,481,747 4,690,008
Other current assets 301,129 54,157
Total current assets 5,617,318 5,670,708
PROPERTY, PLANT AND EQUIPMENT,
at cost 10,583,740 10,583,740
Less accumulated depreciation 9,621,255 9,499,347
Net property, plant and equipment 962,485 1,084,393
TOTAL $ 6,579,803 $ 6,755,101
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ 621,132 $ 2,073,704
Current portion of long-term debt 819,840 962,040
Accounts payable 829,203 984,052
Customer deposits 851,050 64,449
Accrued expenses 676,274 634,306
Total current liabilities 3,797,499 4,718,551
LONG-TERM DEBT, excluding current portion 236,124 272,333
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value. Authorized
5,000,000 shares; issued 1,938,176 shares
in May and 1,340,778 shares in November 19,382 13,408
Additional paid-in capital 1,634,954 1,249,611
Retained earnings 891,844 909,881
2,546,180 2,172,900
Less cost of common shares in treasury of
0 shares in May, 2002 and 42,602 shares
in November, 2001 - 408,683
Total stockholders' equity 2,546,180 1,764,217
TOTAL $ 6,579,803 $ 6,755,101
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
May 31, May 31,
2002 2001
CASH FLOW FROM OPERATIONS:
Net Loss $ ( 18,037) $ (331,144)
Adjustment to reconcile net loss to net
cash provided by operations:
Depreciation and amortization 121,908 255,760
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 102,324 555,788
Inventories 208,261 204,221
Sundry (246,972) (62,528)
Increase (decrease) in:
Accounts payable (154,849) 223,018
Customer deposits 786,601 57,967
Accrued expenses 41,968 (303,997)
Total adjustments 859,241 930,229
Net cash provided by operations 841,204 599,085
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable to bank (1,452,572) (497,035)
Principal payments on term debt (178,409) (180,162)
Proceeds from issuance of common stock
from treasury 53,253 91,705
Proceeds from issuance of common stock 746,747 -
Net cash used in financing activities (830,981) (585,492)
Net increase in cash 10,223 13,593
Cash at beginning of the period 4,375 4,375
Cash at end of the period $ 14,598 $ 17,968
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 94,814 $ 229,708
Income taxes 4,032 4,276
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 second quarter and year to date
ended May 31, 2002 are not necessarily indicative of the results
for the fiscal year ending November 30, 2002.
2. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are computed on the basis of
weighted average number of common shares. Diluted earnings (loss)
per share are 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 year to date May 31, 2002 and May 31, 2001, and for the
quarter ended May 31, 2001, the anti-dilutive effect of the Company's
stock option plans is not included in the the calculation of diluted
loss per share for these periods. The only reconciling item between
the shares used in the computation of basic and diluted earnings
per share for the quarter ended May 31, 2002 is the effect of dilutive
stock options of 6,192.
3. INVENTORIES
Major classes of inventory are: May 31, November 30,
2002 2001
Raw material $ 873,242 $ 749,544
Work-in-process 1,157,924 1,181,870
Finished goods 2,450,581 2,758,594
Total $4,481,747 $4,690,008
4. ACCRUED EXPENSES
Major components of accrued expenses are:
May 31, November 30,
2002 2001
Salaries, wages and commissions $ 352,528 $ 294,961
Accrued warranty expense 60,063 67,426
Other 263,683 271,919
Total $ 676,274 $ 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 May 31, 2002, the Company has borrowed $621,132 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 May 31, 2002 and November 30, 2001, $917,000 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 May 31, 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:
May 31, 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 (8.750%), secured by the cash,
accounts receivable, inventories
and property, plant and equipment $ 747,570 $ 889,771
State of Iowa Community Development
Block Grant promissory notes at zero
percent interest, maturity 2006, with
quarterly principal payments of $11,111 $ 188,889 $ 211,111
State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity 2006, with quarterly
payments of $7,814 $ 119,505 $ 133,491
Total term debt $1,055,964 $1,234,373
Less current portion of term debt $ 819,840 $ 962,040
Term debt, excluding
current portion $ 236,124 $ 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 six months ended
May 31, 2002 included a reduction in inventory, a reduction in
accounts receivable 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 prepayments
to vendors for material purchases, a reduction in accounts payable,
and payments on the Company's note payable and term debt.
The Company continues to operate under the terms and conditions
of a credit agreement that expired November 15, 2001. Under the
terms of the agreement, all cash received by the Company is applied
to the bank indebtedness. Based upon levels of accounts receivable
and inventory, the Company borrows funds necessary to meet current
obligations. The amounts available for borrowing at May 31, 2002
and November 30, 2001, were $917,000 and $68,000, respectively.
The Company is negotiating on terms with a lender in regards to a
proposal for long-term financing. The proposed lender has indicated
a sincere interest in consummating an agreement and the Company
believes a new credit facility will be obtained, although there
are no assurances of such.
Also see footnote 5 of the notes to the condensed financial
statements for a discussion of the Company's credit facility.
As of May 31, 2002, the Company had no material commitments for
capital expenditures.
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 fity percent (50%) of
the Company's common stock and will not take the Company private.
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
can be no assurances that these negotiations will be successfully
concluded.
(b) Results of Operations
Fiscal year 2002 second quarter and year to date sales were 7%
and 9%, respectively, lower than for the comparable periods
one-year ago. 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 28% for the quarter ended
May 31, 2002, as compared to 26% for the same period in 2001. Year
to date through May 31, 2002, gross profit is 25% compared to 21%
for the prior year. 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. The sale of distressed
inventory in the prior year served to reduce gross profit by
approximately 3% and 1% for the quarter and year-to-date ended
May 31, 2001.
Operating expenses were slightly below last year. As a percent of sales,
operating expenses were 24% and 23% for the three months ended May 31,
2002 and 2001, respectively, and 22% and 21% year to date May 31, 2002
and 2001, respectively. As a result of cost reduction programs,
engineering expenses decreased by $40,000 for the quarter and $109,000
year to date compared to the same periods of the previous year. We
currently expect these lower engineering costs to continue throughout
fiscal year 2002.
Other deductions decreased by $61,000 for the quarter and $162,000
year to date 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 May 31, 2002 is $2,994,000, compared to
$1,600,000 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 $1,376,000 in orders for beet equipment compared
to $310,000 last year at this time. OEM backlog is $662,000 to be
shipped in the third quarter.
(c) Quantitative and Qualitative Disclosures About Market Risk
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 cusstomer 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. Any inventory product that has not
moved within the past 3 years is considered significantly aged, and is
assigned to that inventory classification to write its value down to
the Company's estimate of net realizable value. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 2002, the Company held an annual meeting of shareholders
for the purpose of electing six (6) directors to serve until the next
annual meeting of shareholders or until such time as their successors
are elected and qualified and to consider and vote upon a proposal to
ratify the appointment of KPMG LP as independent public accountants of
the Company for the year ending November 30, 2002.
The following information is submitted:
(a) An annual meeting was held on April 23, 2002.
(b) The following directors were all of the nominees and were elected
by the shareholders:
J. Ward McConnell, Jr. David R. Castle
George A. Cavanaugh, Jr. James L. Koley
Douglas McClellan Marc H. McConnell
(c) The shareholders voted on a motion to ratify the selection of
KPMG LP as independent public accountants for the year ending
November 30, 2002.
Total number of shares authorized to vote: 1,298,176
Total number of shares voted in favor: 1,221,213
Total number of shares voted against: 701
Total number of abstentions: 725
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 July 5, 2002 /s/William T. Green
(William T. Green, Chief Financial Officer)
Date July 5, 2002 /s/John C. Breitung
(John C. Breitung, President)