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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, 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 STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Year to Date
May 31, May 31, May 31, May 31,
2003 2002 2003 2002
Net Sales $ 2,432,516 $ 2,252,621 $ 4,941,393 $ 4,894,513
Cost of goods sold 1,634,639 1,611,101 3,505,088 3,682,393
Gross Profit 797,877 641,520 1,436,305 1,212,120
Operating Expenses:
Engineering 15,256 15,758 34,179 30,637
Selling 152,041 130,539 280,235 251,436
General and administrative 327,402 398,738 679,829 807,363
Total expenses 494,699 545,035 994,243 1,089,436
Income from operations 303,178 96,485 442,062 122,684
Other expenses:
Interest expense 30,994 34,225 48,973 94,814
Total other expenses 40,776 66,021 64,820 140,721
Income (loss) before
income taxes 262,402 30,464 377,242 (18,037)
Income tax expense - - 2,031 -
Net income (loss) $ 262,402 $ 30,464 $ 375,211 $ (18,037)
Net income (loss) per share:
Basic $ 0.14 $ 0.02 $ 0.19 $ (0.01)
Diluted $ 0.13 $ 0.02 $ 0.19 $ (0.01)
Common shares and equivalent outstanding:
Basic 1,938,176 1,938,176 1,938,176 1,677,956
Diluted 1,950,438 1,944,368 1,948,646 1,677,956
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED BALANCE SHEETS
(Unaudited)
May 31, November 30,
2003 2002
ASSETS
Current Assets
Cash $ 979,783 $ 75,358
Accounts receivable-customers,
net of allowance for doubtful
accounts of $59,000 and $50,000
in May and November, respectively 973,483 592,945
Other Receivables 110,000 -
Inventories 4,155,119 3,576,707
Other current assets 70,516 95,385
Total current assets 6,388,901 4,340,395
Property, plant and equipment,
at cost 10,725,972 10,725,972
Less accumalated depreciation 9,891,000 9,751,260
Net property, plant and equipment 834,972 974,712
Inventories, noncurrent 430,509 430,509
Other assets 211,515 175,849
Total Assets $ 7,865,897 $ 5,921,465
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ - $ 319,222
Current portion of long-term debt 122,254 356,669
Accounts payable 252,352 523,492
Customer deposits 984,267 249,756
Accrued expenses 733,376 630,972
Total current liabilities 2,092,249 2,080,111
Long-term liabilities 159,777 187,204
Long-term debt, excluding
current portion 2,105,340 520,830
Total liabilities 4,357,366 2,788,145
Stockholders' Equity
Common stock - $.01 par value.
Authorized 5,000,000 shares; issued
1,938,176 shares in May and
in November 19,382 19,382
Additional paid-in capital 1,634,954 1,634,954
Retained earnings 1,854,195 1,478,984
Total stockholders' equity 3,508,531 3,133,320
Total liabilities and
stockholders' equity $ 7,865,897 $ 5,921,465
See accompanying notes to financial statements.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
May 31, May 31,
2003 2002
CASH FLOW FROM OPERATIONS:
Net income (loss) $ 375,211 $ (18,037)
Adjustment to reconcile net income
(loss) to net cash
provided by operating activities:
Depreciation and amortization 139,740 121,908
Changes in working capital components:
(Increase) decrease in:
Accounts receivable (380,538) 102,324
Other receivables (110,000) -
Inventories (578,412) 208,261
Other current assets (75,131) (246,972)
Other, Net (35,666) -
Increase (decrease) in:
Accounts payable (271,140) (154,849)
Customer deposits 734,511 786,601
Accrued expenses 102,404 41,968
Net cash provided by (used in)
operating activities (99,021) 841,204
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment - -
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from (payments of) notes payable
to bank 1,322,668 (1,452,572)
Principal payments on term debt (319,222) (178,409)
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 1,003,446 (830,981)
Net increase in cash 904,425 10,223
Cash at beginning of period 75,358 4,375
Cash at end of period $ 979,783 $ 14,598
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 48,973 $ 94,814
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 second quarter and year to date ended May 31,
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. The reconciling item between the shares used in
the computation of basic and diluted earnings per share is 12,262 for the
second quarter ended May 31, 2003; 6,192 for the second quarter ended May 31,
2002; and 10,470 for the year to date period ended May 31, 2003 equivalent
shares for the effect of dilutive stock options. Due to the net loss for the
year to date period ended May 31, 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.
3. INVENTORIES
Major classes of inventory are: May 31,2003 November 30, 2002
Raw material $ 931,564 $ 1,065,166
Work-in-process 1,653,737 1,209,007
Finished goods 2,000,327 1,733,043
Total $ 4,585,628 $ 4,007,216
Less inventories classified as noncurrent 430,509 430,509
Inventories, current $ 4,155,119 $ 3,576,707
4. ACCRUED EXPENSES
Major components of accrued expenses are: May 31,2003 November 30, 2002
Salaries, wages and commissions $ 356,244 $ 294,220
Accrued warranty expense 59,495 60,232
Other 317,637 276,520
Total $ 733,376 $ 630,972
5. LOAN AND CREDIT AGREEMENTS
On April 25, 2003 the Company obtained long-term financing through West Des
Moines State Bank (West Bank), West Des Moines, Iowa. Credit facilities
consist of two loan agreements totaling $5,500,000.
Facility #1 is a revolving line of credit for $2,500,000 with advances funding
the working capital, letter of credit and corporate credit card needs. It
renews annually with a maturity date of February 28, 2004. The interest rate
will be West Bank's prime interest rate plus 1% adjusted daily. Monthly
interest only payments will be required and the unpaid principal due on the
maturity date. In addition an annual fee of $12,500 will be paid for the use of
this credit facility. Collateral consists of a first position on assets owned
by the Company including, but not limited to inventories, accounts receivable,
machinery and equipment.
Facility #2 is long-term financing for up to $3,000,000 that is supported by a
guarantee issued by the United States Department of Agriculture (USDA) for 75%
of the loan amount outstanding. The loan refinanced existing debt to UPS
Capital (approximately $1,500,000), finance equipment (approximately $250,000),
provide permanent working capital (approximately $500,000) and satisfy closing
costs (approximately $50,000). Approximately $700,000 will be reserved for
future acquisitions. Maturity date is March 31, 2023. The variable interest
rate will be West Bank's prime interest rate plus 1.5% adjusted daily. Monthly
principal and interest payments will be amortized over 20 years, at which time
the loan will mature. A one-time origination fee of 1% was also required.
Collateral for Facility #2 is primarily real estate with a second position on
assets of Facility #1. The USDA subordinates collateral rights in all assets
other than real estate in an amount equal to West Bank's other credit
commitments.
J. Ward McConnell, Jr. was required to personally guarantee Facility #1 and
Facility #2 on an unlimited and unconditional basis. The guarantee of Facility
#2 shall then be reduced after the first three years to a percentage
representing his ownership of the Company. Mr. McConnell's guarantee shall be
removed from Facility #2 in the event that his ownership interest in the
Company is reduced to a level less than 20% after the first three years of the
loan. The Company will compensate Mr. McConnell for his personal guarantee at
an annual percentage rate of 2% of the outstanding balance to be paid monthly.
Other terms and conditions are providing monthly internally prepared financial
reports including accounts receivable aging schedules and borrowing base
certificates and year-end audited financial statements. The borrowing bases
shall limit advances from Facility #1 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. Covenants include debt service coverage ratio, debt/tangible net
worth ratio, current ratio, limit capital expenditures, and maintain a minimum
tangible net worth.
On April 25, 2003 the Company borrowed $2,000,000 against Facility #2.
$1,528,775 was used to payoff UPS Capital with $110,000 being held in reserve
for a letter of credit ($100,000) and any additional fees. The balance of
$471,225 was used as working capital. As of May 31, 2003, the Company has not
borrowed against Facility #1.
A summary of the Company's term debt is as follows:
May 31, November 30,
2003 2002
West Bank real estate loan payable in
monthly Installments of $17,776
including interest at Bank's prime
rate plus 1.5% (5.75%) $ 1,991,807 $ -
Installment term debt payable in
monthly Installments of $23,700, plus
interest at four percent over the
bank's national money market rate
due on demand, secured $ - $ 605,371
State of Iowa Community Development
Block Grant promissory notes at zero
percent interest, maturity 2006,
with quarterly principal payments
of $11,111 $ 144,444 $ 166,667
State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
Maturity 2006, with quarterly
payments of $7,007 $ 91,343 $ 105,461
Total term debt $ 2,227,594 $ 877,499
Less current portion of term debt $ 122,254 $ 356,669
Term debt, excluding current portion $ 2,105,340 $ 520,830
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 six months ended May 31, 2003 came
by securing long-term financing (see footnote 5 of the notes to the condensed
financial statements) and from receiving advance payments from customers on
sugar beet equipment to be delivered in the third quarter.
These sources were offset by increases of the accounts receivable, other
receivables and inventories. The increase in accounts receivable results
from the sales of sugar beet equipment and parts stock orders in May 2003.
Other receivables of $110,000 is monies held in reserve for a letter of credit
that expired May 31, 2003 and additional fees associated with the UPS Capital
payoff. Current production of sugar beet harvesters, the biggest single piece
of equipment produced, and finished goods in stock, mainly grinder/mixers,
defoliators and graders, are the reason for inventories increase.
Other offsets include the reduction of accounts payable.
The net cash from financing activities of $1,003,446 combined with the
negative cash flow from operation of $99,021 had a net increase in cash of
$904,425 for the six months ended May 31, 2003. The Company had no material
commitments for capital expenditures.
On July 14, 2003 Art's-Way announced that it entered into an agreement to
purchase OBECO Incorporated, a manufacturer of steel truck bodies located in
Cherokee, Iowa. The agreement includes the purchase of real estate, all
inventory, intellectual materials, machinery, tooling, fixtures and the
company name. The name of the Company will change to Cherokee Truck Bodies,
Incorporated, but the truck bodies will continue to be sold under the
recognized name OBECO. The company will continue to be located in Cherokee,
Iowa.
The United States Bankruptcy Court has approved the sale and the anticipated
closing date for the acquisition is set for July 25, 2003. It is anticipated
that this transaction will cost approximately $500,000.
This acquisition fits in with Art's-Way metal fabrication capability and
provides diversification to its agricultural implement product offerings.
We believe this action will facilitate growing the business and improving
shareholder value.
(b) Results of Operations
Fiscal year 2003 second quarter and year to date net sales were 8% and 1%,
respectively, higher than for the comparable periods one-year ago. The sales
mix of Art's-Way products and OEM products shifted. OEM sales increased and
Art's-Way brand sales decreased by 15% when comparing second quarter 2003 to
2002 and 11% for the year to date 2003 and 2002.
Gross profit, as a percent of sales, was 33% for the quarter ended May 31, 2003,
as compared to 28% for the same period in 2002. Year to date through May 31,
2003, gross profit was 29% compared to 25% for the prior year. The increase of
labor efficiency by 15 points and continued cost reduction programs has resulted
in this increase.
Operating expenses were lower than last year. As a percent of sales, operating
expenses were 20% and 24% for the three months ended May 31, 2003 and 2002,
respectively. Year to date ended May 31, 2003 and 2002, operating expenses were
20% and 22%, respectively. Selling expenses increased by $21,502 for the
quarter and $28,799 year to date compared to the same periods of the previous
year. The Company has increased exposure of Art's-Way products both regionally
and nationally through advertisement, direct mailing and trade shows. General
and administrative expenses decreased $71,336 for the quarter and $127,534 year
to date compared to the same periods of the previous year. The decrease is
primarily due to changing the health insurance plan offered to the employees.
Other expenses decreased by $25,245 for the quarter and $75,901 year to date
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 May 31, 2003 is $2,798,000, compared to $2,994,000 one
year ago. These orders primarily will be delivered in the third quarter of the
current fiscal year. The current year backlog includes $1,232,000 in orders
for beet equipment compared to $1,376,000 last year at this time. Potato
harvester is $329,000 and OEM backlog is $284,000 to be shipped in the 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 May 31, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 2003, the Company held an annual meeting of shareholders for the
purpose of: (1) to elect seven (7) directors to serve until the next annual
meeting of shareholders or until such time as their successors are elected
and qualified; 2) to consider and vote upon a proposal to approve the 2001
Director Stock Option Plan; and 3) to consider and vote upon a proposal to
ratify the appointment of McGladrey & Pullen, LLP as independent public
accountants of the Company for the year ending November 30, 2003.
The following information is submitted:
(a) An annual meeting was held on April 24, 2003.
(b) The following directors were all of the nominees and were elected by the
shareholders:
David R. Castle George A. Cavanaugh, Jr.
James L. Koley Douglas McClellan
J. Ward McConnell, Jr. Marc H. McConnell
Thomas E. Buffamante
(c) The shareholders voted on a motion to approve the 2001 Directors Stock
Option Plan.
Total number of shares authorized to vote: 1,938,176
Total number of shares voted in favor: 1,625,872
Total number of shares voted against: 33,906
Total number of abstentions: 14,721
(d) The shareholders voted on a motion to ratify the selection of McGladrey
& Pullen, LLP as independent public accountants for the year ending November
30, 2003.
Total number of shares authorized to vote: 1,938,176
Total number of shares voted in favor: 1,668,350
Total number of shares voted against: 5,849
Total number of abstentions: 300
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.7 Long-term financing agreements, mortgage note and guarantee for both
loans with West Bank
99.1 Certification of Financial Statements
(b) Reports on Form 8-K:
Long-term financing filed 5/2/03
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 and Chief Executive Officer
Date: April 14, 2003 By: /s/ Seth F. LaBore
Seth F. 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 quarterly 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
procedures 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: July 14, 2003
/s/ John C. Breitung
President and Chief Executive Officer
OM504759.1
CERTIFICATIONS
I, Seth F. LaBore, 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 quarterly 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
procedures 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: July 14, 2003
/s/ Seth F. LaBore
Finance Manager
OM504760.1