UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-QSB
(Mark One)
[x] Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarter ended February 28, 2005
[ ] 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 Small Business Issuer as Specified in Its Charter)
DELAWARE 42-0920725
(State or Other Jurisdiction I.R.S. Employer Identification No.
of Incorporation or Organization)
Hwy 9 West, Armstrong, Iowa 50514
(Address of Principal Executive Offices)
(712) 864-3131
Issuer's Telephone Number, Including Area Code
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 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 __
Number of common shares outstanding as of April 7, 2005: 1,938,176
Transitional Small Business Disclosure Format (check one): Yes _ No X
ART'S-WAY MANUFACTURING CO., INC.
Consolidated Statement of Operations
Condensed
(Unaudited)
Three Months Ended
February 28, February 29,
2005 2004
Net Sales $ 3,591,843 $ 2,624,293
Cost of goods sold 2,336,859 1,990,469
Gross Profit 1,254,984 633,824
Expenses:
Engineering 128,920 54,790
Selling 216,872 121,709
General and administrative 377,822 400,297
Total expenses 723,614 576,796
Income from operations 531,370 57,028
Other expenses (income):
Interest expense 50,207 36,025
Other, net (38,371) (3,200)
Total other expenses 11,836 32,825
Income before income taxes 519,534 24,203
Income tax expense 176,642 0
Net income $ 342,892 $ 24,203
Net income per share:
Basic $ 0.18 $ 0.01
Diluted $ 0.17 $ 0.01
Common shares and equivalent outstanding:
Basic 1,938,176 1,938,176
Diluted 1,964,784 1,958,196
See accompaning notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
Consolidated Balance Sheets
Condensed
(Unaudited)
February 28, November 30,
2005 2004
ASSETS
Current Assets
Cash $ 1,766,714 $ 116,001
Accounts receivable-customers,
net of allowance for doubtful accounts
of $36,522 and $30,417 in February
and November, respectively 1,185,605 737,008
Inventories 6,508,948 6,298,049
Deferred taxes 539,000 539,000
Real estate loan receivable 0 165,725
Other current assets 116,441 90,224
Total current assets 10,116,708 7,946,007
Property, plant and equipment,
at cost 11,612,460 11,600,548
Less accumulated depreciation 10,353,802 10,292,460
Net property, plant
and equipment 1,258,658 1,308,088
Inventories, noncurrent 434,079 459,792
Deferred taxes 607,814 786,000
Other assets 76,623 146,006
Total Assets $ 12,493,882 $ 10,645,893
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to bank 0 870,071
Current portion of long-term debt 251,409 174,674
Accounts payable 386,505 536,929
Customer deposits 1,664,070 77,975
Accrued expenses 849,952 853,795
Landstar payable 130,000 0
Total current liabilities 3,281,936 2,513,444
Long-term liabilities 0 144,766
Long-term debt, excluding current
portion 2,669,613 1,788,242
Total liabilities 5,951,549 4,446,452
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 4,887,997 4,545,105
Total stockholders'
equity 6,542,333 6,199,441
Total liabilities and
stockholders' equity $12,493,882 $ 10,645,893
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
Consolidated Statements of Cash Flow
Condensed
(Unaudited)
Three Months Ended
February 28, February 29,
2005 2004
CASH FLOW FROM OPERATIONS:
Net income $ 342,892 $ 24,203
Adjustment to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 74,509 64,110
Deferred income taxes 178,186 0
Changes in working capital
components: (Increase) decrease in:
Accounts receivable (448,597) (179,524)
Inventories (185,186) (446,936)
Other current assets (26,217) 12,054
Other 165,725 0
Increase (decrease) in:
Accounts payable (150,424) 309,940
Customer deposits 1,586,095 1,881,893
Accrued expenses 56,157 (50,085)
Net cash provided by
operating activities 1,593,140 1,615,655
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (11,912) (270,117)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on line of
credit (870,071) 0
Proceeds from notes payable 1,000,000 0
Principal payments on term debt (41,894) (54,881)
Loan origination fees paid (18,550) 0
Net cash used in financing
activities 69,485 (54,881)
Net increase in cash 1,650,713 1,290,657
Cash at beginning of period 116,001 800,052
Cash at end of period $ 1,766,714 $ 2,090,709
Supplemental disclosures of cash flow information:
Cash paid during
the period for:
Interest $ 50,207 $ 32,835
Income taxes 14,498 13,441
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
NOTES TO CONSOLIDATED 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-KSB for the year ended November 30, 2004. The results of
operations for the first quarter ended February 28, 2005 are not
necessarily indicative of the results for the fiscal year ending
November 30, 2005.
Restatement
In Form 10-KSB for the year ended November 30, 2004, we restated our
2004 first and second quarter results to correct the accounting for a
sales arrangement with a specific customer. The fiscal 2004 first
quarter income statement presented herein reflects those corrections and
has been restated from the amounts originally filed on Form 10-QSB for
the quarter ended February 29, 2004. The restatement has the effect of
decreasing sales by $268,000, net income by $62,000 and earnings per
share by $0.03 for the quarter ended February 29, 2004 and will increase
sales, net income and earnings per share by those same amounts in the
quarter ended May 31, 2004.
2. INCOME PER SHARE
Basic net income per common share is computed on the basis of weighted
average number of common shares outstanding. Diluted net income 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 Company accounts for stock options in accordance with the provisions
of APB Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense
would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. Accordingly, the
Company has not recognized compensation expense for its options granted.
Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, permits entities to recognize
as expense over the vesting period by the fair value of all stock-based
awards on the date of grant. SFAS 123 also allows entities to continue
to apply the provisions of APB 25 and provide pro forma net income and
income per share disclosure for employee stock option grants, as if the
fair-value-based method defined in SFAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB 25 and
provide the pro forma disclosure provisions of SFAS 123. Since the
Company applies APB Opinion No. 25 in accounting for its plans, no
compensation cost has been recognized for its stock options in the
financial statements. Had the Company recorded compensation cost based
on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
February 30, February 30,
2005 2004
Net income:
As reported $ 342,892 $ 24,203
Deduct:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (1,898) (6,823)
Pro forma 340,994 17,380
Basic earnings per share:
As reported $ 0.18 $ 0.01
Pro forma 0.18 0.01
Diluted earnings per share:
As reported $ 0.17 $ 0.01
Pro forma 0.17 0.01
3. INVENTORIES
Major classes of inventory are:
February 28, 2005 November 30, 2004
Raw material $ 2,526,515 $ 2,867,914
Work-in-process 1,530,200 1,495,985
Finished goods 2,886,312 2,393,942
Total $ 6,943,027 6,757,841
Less inventories classified
as noncurrent 434,079 459,792
Inventories, current $6,458,948 $6,298,049
4. ACCRUED EXPENSES
Major components of accrued expenses are:
February 28, 2005 November 30, 2004
Salaries, wages and
commissions $ 421,055 $ 412,663
Accrued warranty expense 155,934 119,912
Other 272,963 321,220
Total $ 849,952 $ 853,795
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 one year from
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, 2005 and February 29, 2004 are as
follows:
2005 2004
Balance, beginning $ 119,912 $ 59,207
Settlements made in
cash or in-kind (23,697) (31,791)
Warranties issued 59,719 26,527
Balance, ending $ 155,934 $ 53,943
6. LOAN AND CREDIT AGREEMENTS
Line of Credit
The Company has financing through West Bank consisting of two loan
agreements totaling $6,500,000. On March 14th, 2005, we renewed our
financing agreements with West Bank. The terms below are based on this
renewal.
Facility #1 is a revolving line of credit for $3,500,000 with advances
funding the working capital, letter of credit and corporate credit card
needs that mature on March 31, 2006. The interest rate is West Bank's prime
interest rate adjusted daily. Monthly interest only payments are required
and the unpaid principal is due on the maturity date. Collateral consists
of a first position on assets owned by the Company including, but not
limited to inventories, accounts receivable, machinery and equipment.
As of February 28, 2005, the Company had no borrowings against Facility #1.
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. In 2003 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 was reserved for future
acquisitions. The variable interest rate is West Bank's prime interest
rate plus 1.5%, adjusted daily. Our initial borrowing of $2,000,000
requires monthly principal and interest payments over 20 years with a
final maturity date of March 31, 2023. We borrowed an additional
$1,000,000 on this facility in January 2005, which is amortized over 10
years with a final maturity date of March 31, 2015. 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. As of February 28, 2005, the total outstanding balance on
Facility #2 was $2,812,901.
Other terms and conditions include providing monthly internally prepared
financial reports including accounts receivable aging schedules and
borrowing base certificates and year-end audited financial statements.
The borrowing bases 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
restrictions on debt service coverage ratio, debt/tangible net worth
ratio, current ratio, limit capital expenditures and tangible net worth.
We are in compliance with debt covenants.
J. Ward McConnell, Jr. is required to personally guarantee $2,500,000 on
Facility #1 and all of Facility #2 on an unlimited and unconditional
basis. The guarantees of Facility #1 and Facility #2 shall be reduced
after the first three years to a percentage representing his ownership
of the Company. Mr. McConnell's guarantees shall be removed from
Facility #1 and 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 compensates Mr. McConnell for his
personal guarantees at an annual percentage rate of 2% of the
outstanding balances paid monthly. As a result of the outstanding
balances on Facility #1 and Facility #2 Mr. McConnell received $9,795
and $9,618 under this compensation agreement, for the three months ended
February 28, 2005 and 2004, respectively.
A summary of the Company's term debt is as follows:
February 28, November 30,
2005 2004
West Bank Facility #2
payable in monthly
installments of $17,776
including interest at Bank's
prime rate plus 1.5% $ 1,812,901 $ 1,836,565
West Bank Facility #2 payable
in monthly installments of
$10,000 including interest
at Bank's prime rate plus 1.5% $ 1,000,000 $ 0
State of Iowa Community
Development Block Grant
promissory notes at zero
percent interest, maturity
September 2006, with quarterly
principal payments of $11,111 $ 66,667 $ 77,778
State of Iowa Community
Development Block Grant local
participation promissory notes
at 4% interest, maturity September
2006, with quarterly payments
of $ 7,007 $ 41,454 $ 48,573
Total term debt $ 2,921,022 $ 1,962,916
Less current portion
of term debt $ 251,409 $ 174,674
Term debt, excluding
current portion $ 2,669,613 $ 1,788,242
7. Income taxes
Beginning in this fiscal quarter, we have recognized income tax expense
as compared to the first fiscal quarter of 2004 when the calculated
income tax expense was offset by a reduction in the valuation allowance
for deferred tax assets. At November 30, 2004 we eliminated all but
$41,000 of our deferred tax valuation allowance and we will record
income tax expense each quarter as we earn income. As of February 28,
2005, we have net operating loss carry forwards for federal tax purposes
of approximately $3,120,000 and so we will not be required to make cash
tax payments until we have utilized those net operating loss carry
forwards.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing
elsewhere in this document. Management's discussion and analysis
contains forward-looking statements that involve risks and
uncertainties, including but not limited to, quarterly fluctuations in
results; customer demand for our products; economic conditions; the
achievement of lower costs and expenses; the continued availability of
financing in the amount and on the terms required to support future
business; and other risks detailed from time to time in our other
Securities and Exchange Commission filings. Actual results may differ
materially from management's expectations.
(a) Plan of Operation
In the current fiscal year we plan to continue growth through new
product development and acquisition. In December, of fiscal year 2005,
we started working with an outside engineering firm to develop a new
exportable sugar beet harvester. Other projects include updating our
defoliator and a self propelled sugar beet harvester. We will continue
to attempt to improve our efficiencies, and to battle labor demand,
through the implementation of lean manufacturing processes.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations
(i) 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, 2005 have remained unchanged
from November 30, 2004. 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 our annual report on Form 10-KSB for the year ended
November 30, 2004.
(ii) Results of Operations
Revenue of $3,592,000 for the first quarter of 2005 is 37% higher when
compared to $2,624,000 for the same period in 2004. First quarter 2005
Art's-Way branded whole goods revenue increased by approximately
$1,443,000. The two product lines that showed the greatest increase was
grinder mixers and land planes. OEM sales decreased by approximately
$532,000 due to a delay in the timing of the blower built in 2005
compared to last year. OEM sales are expected to be up in the second
quarter of 2005 as the delayed production is completed.
Gross profit, as a percent of sales was 35% for the quarter ended
February 28, 2005, as compared to 24% for the same period in 2004. The
shift in the product lines from OEM to Art's-Way branded product effect
the gross profit as Art's-Way branded products typically obtain a higher
gross profit as compared to OEM products. Also during the first quarter
of 2004 we started to experience price increases on steel and at that
time we were unable to pass along those increases, thus bringing down
our gross profit. We have now been able to partially pass on price
increases for transportation and raw materials to our customers, while
decreasing our manufacturing expenses through the consolidation of our
manufacturing facilities.
Operating expenses in first quarter of 2005 increased $147,000 from
2004. As a percent of sales, operating expenses were approximately 20%
and 22%, respectively, when comparing 2005 and 2004. General and
administrative expenses are down $23,000 due to the consolidation of
manufacturing facilities. This decrease was offset by continuing new
product development, expenses of $94,000 reflected in engineering
expenses which is an $84,000 increase over 2004. This increase allows us
to introduce new product offerings for 2005 and beyond that will
continue to improve revenue and earnings. Selling expenses also
increased $95,000 over 2005 from 2004, primarily due to an increase in
commission of $76,000. We also have an additional salesperson compared
to a year ago. These wages along with increased travel and meal expenses
also contributed to the increase. We continue to attend more farm and
industry trade shows to regain visibility of Art's-Way and Cherokee
Truck Bodies branded products.
We experienced an increase in interest expense in the first quarter of
39% as a result of increased borrowings and a rise in the prime interest
rate. Other income increased as the result of the repayment of the real
estate loans receivable.
The order backlog as of March 2005 is $4,104,000, compared to $4,060,000
one year ago. These orders primarily will be delivered in the second and
third quarters of the current fiscal year.
(iii) Liquidity and Capital Resources
Our main source of funds for the quarter ended February 28, 2005 was
customer deposits received for advance payments on sugar beet equipment
sales to be delivered in the second and third quarters. These customer
deposits are unique to our sugar beet equipment line and are seasonal in
nature. The increase in account receivable results from the OEM sales in
February 2005, which were sold on 30-day terms.
The positive cash flow from operations of $1,593,000, a result of
customer deposits mentioned above, increased our cash balance which will
be used for general operating needs.
See footnote 5 of the notes to the consolidated condensed financial
statements for a discussion of the Company's credit facility.
Item 3
CONTROLS AND PROCEDURES
Senior management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures
are 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 our Chief
Executive Officer and Chief 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. Since that evaluation process was completed there
have been no significant changes in our disclosure controls or in other
factors that could significantly affect these controls.
There were no changes in our internal control over financial reporting,
identified in connection with this evaluation that occurred during the
period covered by this report that materially affected, this reasonably
likely to materially affect, our internal control over financial
reporting.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
During the period covered by this report, we were not a party to any
legal action or claim which was other than routine litigation incidental
to our business.
ITEM 6. EXHIBITS
(a) Exhibits: 3.0 Certificate of Incorporation and Bylaws for Art's-Way
Manufacturing, Inc. (incorporated by reference to
Exhibit 3 to the Form 10-K for the year ended
May 27, 1989.)
3.1 Amendments to Bylaws of Art's-Way Manufacturing, Inc.
adopted as of February 27, 2004 (incorporated by
reference to Exhibit 3.1 to the Form 10-QSB for the
quarter ended May 31, 2004).
31.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant
to Rule 13a-14(a).
32.1 Certification of Chief Executive Officer under 18
U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer under 18
U.S.C. Section 1350.