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 quarterly period ended August
31, 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 October 14, 2005: 1,963,176
Transitional Small Business Disclosure Format (check one): Yes _ No X
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Year to Date
August 31, August 31, August 31, August 31,
2005 2004 2005 2004
Net sales $ 4,190,253 $ 3,398,683 $ 11,581,969 $ 9,208,100
Cost of goods sold 3,121,725 2,484,402 8,235,522 6,672,073
Gross profit 1,068,528 914,281 3,346,447 2,536,027
Operating expenses:
Engineering 95,932 57,026 375,219 151,874
Selling 181,718 162,566 516,822 484,444
General and administrative 336,722 393,633 1,146,792 1,290,845
Total expenses 614,372 613,225 2,038,833 1,927,163
Income from operations 454,156 301,056 1,307,614 608,864
Other expenses:
Interest expense 71,553 48,204 198,922 129,034
Other (9,603) (32,444) (51,560) (47,644)
Total other expenses 61,950 15,760 147,362 81,390
Income before income taxes 392,206 285,296 1,160,252 527,474
Income tax expense (benefit) 133,365 (200,000) 408,761 (300,000)
Net income $ 258,841 $ 485,296 $ 751,491 $ 827,474
Net income per share:
Basic $ 0.13 $ 0.25 $ 0.39 $ 0.43
Diluted $ 0.13 $ 0.25 $ 0.38 $ 0.42
Common shares and
equivalent outstanding:
Basic 1,958,611 1,938,176 1,947,009 1,938,176
Diluted 1,974,656 1,958,243 1,968,595 1,958,574
See accompanying notes to condensed financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED BALANCE SHEETS
(Unaudited)
August 31, November 30,
2005 2004
ASSETS
Current Assets
Cash $ 921,869 $ 116,001
Accounts receivable-customers,
net of allowance for doubtful
accounts of $46,385 and $30,417
in August and November,
respectively 1,064,753 737,008
Acquisitions Deposits 150,015 0
Inventories 6,066,269 6,298,049
Deferred taxes 539,000 539,000
Real estate loan receivable 0 165,725
Other current assets 46,809 90,224
Total current assets 8,788,715 7,946,007
Property, plant and equipment, at cost 11,787,748 11,600,548
Less accumulated depreciation 10,476,485 10,292,460
Net property, plant and equipment 1,311,263 1,308,088
Inventories, noncurrent 350,095 459,792
Deferred taxes 399,151 786,000
Other assets 72,964 146,006
Total assets $ 10,922,187 $ 10,645,893
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 0 $ 870,071
Current portion of long-term debt 238,766 174,674
Accounts payable 326,110 536,929
Customer deposits 46,051 77,975
Accrued expenses 701,901 853,795
Total current liabilities 1,312,828 2,513,444
Long-term liabilities 0 144,766
Long-term debt, excluding current
portion 2,589,777 1,788,242
Total liabilities 3,902,605 4,446,452
Stockholders' Equity
Common stock - $.01 par value.
Authorized 5,000,000 shares;
issued 1,963,176 shares in May
and 1,938,176 in November 19,632 19,382
Additional paid-in capital 1,703,354 1,634,954
Retained earnings 5,296,596 4,545,105
Total stockholders' equity 7,019,582 6,199,441
Total liabilities and
stockholders' equity $ 10,922,187 $ 10,645,893
See accompanying notes to condensed financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
August 31, August 31,
2005 2004
CASH FLOW FROM OPERATIONS:
Net income $ 751,491 $ 698,406
Adjustment to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 184,025 196,723
Deferred income tax 386,849 (300,000)
Changes in working capital components:
(Increase) decrease in:
Accounts receivable (327,745) (84,033)
Other receivables 0 0
Inventories 341,477 (2,811,134)
Other current assets 43,415 80,484
Other 107,302 78,333
Increase (decrease) in:
Accounts payable (210,818) 305,964
Customer deposits (31,924) 732,910
Accrued expenses (151,894) 35,998
Net cash provided by
operating activities 1,092,178 (1,066,349)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (187,200) (495,553)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on line of credit (870,071) 0
Proceeds from notes payable 1,000,000 842,285
Principal payments on long term debt (279,139) (126,160)
Loan origination fees paid (18,550) 0
Proceeds from the exercises of stock options 68,650 0
Net cash provided by (used in) financing
activities (99,110) 716,125
Net increase in cash 805,868 (845,777)
Cash at beginning of period 116,001 800,052
Cash at end of period $ 921,869 $ 800,052
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 181,869 $ 129,034
Income taxes 23,187 12,643
See accompanying notes to condensed 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 third quarter and year to date ended August 31, 2005
are not necessarily indicative of the results for the fiscal year ending
November 30, 2005.
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. The impact on net income and earnings per
share is insignificant, had the Company recorded compensation cost based
on the fair value at the grant date for its stock options under SFAS No.
123.
3. INVENTORIES
Major classes of inventory are: August 31, November 30,
2005 2004
Raw material $ 2,673,761 $ 2,867,914
Work-in-process 891,932 1,495,985
Finished goods 2,850,671 2,393,942
Total $ 6,416,364 $ 6,757,841
Less inventories classified as
noncurrent 350,095 459,792
Inventories, current $ 6,066,269 $ 6,298,049
4. ACCRUED EXPENSES
Major components of accrued expenses are:
August 31, November 30,
2005 2004
Salaries, wages and commissions $ 349,853 $ 412,663
Accrued warranty expense 82,929 119,912
Other 269,119 321,220
Total $ 701,901 $ 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 and
nine months ended August 31, 2005 and 2004 are as follows:
Three Months Ended Nine Months Ended
August 31, August 31, August 31, August, 31
2005 2004 2005 2004
Balance, beginning $ 115,993 $ 72,283 $ 119,912 $ 59,207
Settlements made in cash
or in-kind (127,684) (12,852) (375,937) (64,364)
Warranties issued 94,620 53,279 338,954 117,867
Balance, ending $ 82,929 $112,710 $ 82,929 $112,710
6. LOAN AND CREDIT AGREEMENTS
Line of Credit
The Company has financing through West Bank consisting of two loan
agreements totaling $6,500,000.
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 will 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 August 31, 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. The Company's initial borrowing of
$2,000,000 requires monthly principal and interest payments over 20
years with a final maturity date of March 31, 2023. The Company 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 securing 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 August 31, 2005,
the total outstanding balance on Facility #2 was $2,757,166.
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 compliant with all 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 $37,610
and $30,622 under this compensation agreement, for the nine months ended
August 31, 2005 and 2004, respectively.
A summary of the Company's term debt is as follows:
August 31, 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% $ 1,772,589 $ 1,836,565
West Bank Facility #2 payable in
monthly installments of $10,000
including interest at Bank's prime
rate plus 1.5% $ 984,577 $ 0
State of Iowa Community Development
Block Grant promissory notes at zero
percent interest, maturity September
2006, with quarterly principal
payments of $11,111 $ 44,444 $ 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 $ 26,933 $ 48,573
Total term debt $ 2,828,543 $ 1,962,916
Less current portion of term debt $ 238,766 $ 174,674
Term debt, excluding current portion $ 2,589,777 $ 1,788,242
7. Income taxes
Beginning in the first fiscal quarter of 2005, the Company began
recognizing income tax expense as compared to the fiscal year 2004 when
the calculated income tax expense was offset by a reduction in the
valuation allowance for deferred tax assets. At November 30, 2004 the
Company 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 August 31, 2005, the Company has net operating loss carry
forwards for federal tax purposes of approximately $684,000 and
accordingly the Company will not be required to make cash tax payments
until it has 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 report. 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 when appropriate acquisition. In December, of
fiscal year 2005, we started working with an outside engineering firm to
develop a new exportable sugar beet harvester. We continue to look for
new and better ways to improve our product offerings for our end users.
We persist in our attempt to improve our efficiencies, 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 August 31, 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
The third quarter and year to date net sales were 23% and 26%
respectively, higher than for the comparable periods one year ago. For
the first nine months of 2005 revenues of $11,582,000 included increased
sales of grinder mixers, vegetation cutting, and OEM equipment. We
credit part of the increase to changes in our sales force which
increased sales in the north and central regions significantly.
Gross profit, as a percent of sales, has remained consistent with 2004. For
the quarter ended August 31, 2005, gross profit as a percent of sales
was 26% compared to 27% in 2004. Year to date, gross profit as a percent
of sales was 29% compared to 28% for the same period in 2004.
Operating expenses year to date increased $112,000 compared to 2004.
However, as a percent of sales operating expenses decreased from 21% in
2004 to 18% in 2005. General and administrative expenses were down
$144,000 due to the consolidation of manufacturing facilities. This
decrease was offset by increased engineering expenses, which increased
$223,000 over the same period in 2004. This entire increase in
engineering cost is due to new product development expenses. It is our
belief that continuing to bring new products to market will enhance our
growth and overall income, and improve our overall performance. Selling
expenses were up $32,000 year to date, due to increased commission
expense.
We experienced an increase in interest expense in the first nine months
of $70,000 as a result of increased borrowings and a rise in the prime
interest rate.
The order backlog as of September 28, 2005 is $2,629,000 compared to
$3,323,000 one year ago. In 2004 our backlog started to increase due to
the introduction of our new 6812 sugar beet harvester. The introduction
of the 6812 was soon followed by our new 5165 grinder mixer and we were
able to maintain the order backlog for about a year. Now we are seeing
our backlog falling back into our normal cyclical trend. We expect to
have two new product offerings in 2006 and expect the backlog to peak
again at that time. Our current order backlog consists primarily of OEM
equipment.
(iii) Liquidity and Capital Resources
Our main source of funds for the nine months ended August 31, 2005 was
from operations.
See footnote 5 of the notes to the consolidated condensed financial
statements for a discussion of our credit facilities.
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, or is 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 5. OTHER INFORMATION
Subsequent to the period covered by this report, on October 4, 2005,
Art's-Way Manufacturing Co., Inc., acquired substantially all of the
assets of Vessel Systems, Inc. of Dubuque, Iowa. The assets will be
utilized through a wholly owned subsidiary, Art's-Way Vessels, Inc.
Art's-Way Vessel Inc. is a manufacturer of both certified and
non-certified pressure vessels or pressurized tanks, which can be
certified based on the requirements of our customers needs in term of
pounds per square inch. Further information on this acquisition will be
provided in our filing covering the period in which the transaction
occurred.
ITEM 6. EXHIBITS
See exhibit index on page 15.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ART'S-WAY MANUFACTURING CO., INC.
By: _____________________________ By: ________________________________
John C. Breitung Carrie L. Majeski
Chief Executive Officer Chief Financial Officer
Date:____________________________ Date:_______________________________
Exhibits Index
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.