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 May 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 of I.R.S. Employer Identification No.
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 July 14, 2005: 1,958,176
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
May 31, May 31, May 31, May 31,
2005 2004 2005 2004
Net sales $ 3,799,873 $ 3,185,125 $ 7,391,716 $ 5,809,417
Cost of goods sold 2,776,938 2,197,203 5,113,797 4,187,671
Gross profit 1,022,935 987,922 2,277,919 1,621,746
Operating expenses:
Engineering 150,367 40,058 279,287 94,848
Selling 118,231 200,168 335,103 321,878
General and administrative 432,248 496,915 810,070 897,212
Total expenses 700,846 737,141 1,424,460 1,313,938
Income from operations 322,089 250,781 853,459 307,808
Other expenses:
Interest expense 80,087 44,805 130,294 80,830
Other (6,510) (11,999) (44,881) (15,200)
Total other expenses 73,577 32,806 85,413
Net income per share:
Basic $ 0.08 $ 0.16 $ 0.25 $ 0.18
Diluted $ 0.08 $ 0.16 $ 0.25 $ 0.17
65,630
Income before income taxes 248,512 217,975 768,046 242,178
Income tax expense (benefit) 98,754 (100,000) 275,396 (100,000)
Net income $ 149,758 $ 317,975 $ 492,650 $ 342,178
Common shares and
equivalent outstanding:
Basic 1,944,385 1,938,176 1,941,280 1,938,176
Diluted 1,966,405 1,959,639 1,965,566 1,950,438
See accompanying notes to condensed financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED BALANCE SHEETS
(Unaudited)
May 31, November 30,
2005 2004
ASSETS
Current Assets
Cash $ 2,175,798 $ 116,001
Accounts receivable-customers,
net of allowance for doubtful accounts
of $46,385 and $30,417 in May and November,
respectively 859,396 737,008
Inventories 6,834,976 6,298,049
Deferred taxes 539,000 539,000
Real estate loan receivable 0 165,725
Other current assets 147,278 90,224
Total current assets 10,556,448 7,946,007
Property, plant and equipment, at cost 11,675,878 11,600,548
Less accumulated depreciation 10,415,144 10,292,460
Net property, plant and equipment 1,260,734 1,308,088
Inventories, noncurrent 387,992 459,792
Deferred taxes 523,228 786,000
Other assets 73,705 146,006
Total assets $ 12,802,107 $ 10,645,893
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ 0 $ 870,071
Current portion of long-term debt 240,041 174,674
Accounts payable 518,184 536,929
Customer deposits 1,836,277 77,975
Accrued expenses 821,379 853,795
Total current liabilities 3,415,881 2,513,444
Long-term liabilities 0 144,766
Long-term debt, excluding current portion 2,637,085 1,788,242
Total liabilities 6,052,966 4,446,452
Stockholders' Equity
Common stock - $.01 par value. Authorized
5,000,000 shares; issued 1,958,176 shares
in May and 1,938,176 in November 19,582 19,382
Additional paid-in capital 1,691,804 1,634,954
Retained earnings 5,037,755 4,545,105
Total stockholders' equity 6,749,141 6,199,441
Total liabilities and stockholders' equity $ 12,802,107 $ 10,645,893
See accompanying notes to condensed financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
May 31, May 31,
2005 2004
CASH FLOW FROM OPERATIONS:
Net income $ 492,650 $ 342,178
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 125,612 128,220
Deferred income tax 262,772 (100,000)
Changes in working capital components:
(Increase) decrease in:
Accounts receivable (122,388) (197,807)
Other receivables 0 0
Inventories (465,127) (2,371,946)
Other current assets (57,054) 60,124
Other 108,883 64,797
Increase (decrease) in:
Accounts payable (18,745) 774,020
Customer deposits 1,758,302 2,051,391
Accrued expenses (32,416) 80,787
Net cash provided by
operating activities 2,052,488 831,764
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (75,330) (427,635)
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 long term debt (85,790) (90,547)
Loan origination fees paid (18,550) 0
Proceeds from the exercises of stock options 57,050 0
Net cash provided by (used in)
financing activities 82,639 (90,547)
Net increase in cash 2,059,797 313,582
Cash at beginning of period 116,001 800,052
Cash at end of period $ 2,175,798 $ 1,113,634
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 104,980 $ 80,830
Income taxes 12,624 17,321
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 second quarter and year to date ended May 31, 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 second
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 May 31, 2004. The restatement has the effect of
increasing sales by $268,000, net income by $62,000 and earnings per
share by $0.03 for the quarter ended May 31, 2004. This restatement has
no effect on the year to date statement of operations for the six months
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. 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:
May 31, 2005 November 30, 2004
Raw material $ 2,925,584 $ 2,867,914
Work-in-process 1,279,457 1,495,985
Finished goods 3,017,933 2,393,942
Total $ 7,222,968 $ 6,757,841
Less inventories classified
as noncurrent 387,992 459,792
Inventories, current $ 6,834,976 $ 6,298,049
4. ACCRUED EXPENSES
Major components of accrued expenses are:
May 31, 2005 November 30, 2004
Salaries, wages and
commissions $ 420,245 $ 412,663
Accrued warranty expense 115,993 119,912
Other 285,141 321,220
Total $ 821,379 $ 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
six months ended May 31, 2005 and 2004 are as follows:
Three Months Ended Six Months Ended
May 31, May 31, May 31, May, 31
2005 2004 2005 2004
Balance, beginning $ 155,934 $ 53,943 $ 119,912 $ 59,207
Settlements made
in cash or in-kind (224,556) (19,721) (248,253) (51,512)
Warranties issued 184,615 38,061 244,334 64,588
Balance, ending $ 115,993 $ 72,283 $ 115,993 $ 72,283
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 May 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 May 31, 2005, the
total outstanding balance on Facility #2 was $2,787,406.
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 $23,778
and $19,103 under this compensation agreement, for the six months ended
May 31, 2005 and 2004, respectively.
A summary of the Company's term debt is as follows:
May 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% $ 1,791,792 $ 1,836,565
West Bank Facility #2 payable
in monthly installments of $10,000
including interest at Bank's prime
rate plus 1.5% $ 995,614 $ 0
State of Iowa Community Development
Block Grant promissory notes at zero
percent interest, maturity September
2006, with quarterly principal
payments of $11,111 $ 55,556 $ 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 $ 34,164 $ 48,573
Total term debt $ 2,877,126 $ 1,962,916
Less current portion of term debt $ 240,041 $ 174,674
Term debt, excluding current portion $ 2,637,085 $ 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 May 31, 2005, the Company has net operating loss carry
forwards for federal tax purposes of approximately $1,090,000 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 way 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 May 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 second quarter and year to date net sales were 19% and 27%
respectively, higher than for the comparable periods one year ago. The
first six months of 2005 revenues of $7,392,000 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
certain regions significantly.
Gross profit, as a percent of sales, was 27% for the quarter ended May
31, 2005, as compared to 31% for the same period in 2004; this was due
to a product mix shift. Gross profit as a percent of sales in the first
quarter was 34% as compared to 24% in first quarter 2004. In the first
quarter of our fiscal year we typically bill out a high percent of OEM
equipment at low margins. In 2005 a majority of those sales were pushed
back into the second quarter; bringing our gross profit as a percent of
sales down slightly for the quarter. Year to date gross profit as a
percent of sales is 31% which is a 3% increase over last year.
Operating expenses year to date increased $111,000 from 2004, however,
as a percent of sales; operating expenses went from 23% in 2004 to only
19% in 2005. General and administrative expenses were down $87,000 due
to the consolidation of manufacturing facilities. This decrease was
offset by increased engineering expenses. Engineering expenses have
increased $184,000 over the same period in 2004. This entire increase 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 the overall performance of the Company.
Selling expenses remain relatively consistent.
We experienced an increase in interest expense in the first six months
of $49,000 as a result of increased borrowings and a rise in the prime
interest rate.
The order backlog as of May 31, 2005 is $3,042,000 compared to
$3,936,000 one year ago. In 2004 our backlog started going up
significant 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
cyclical trend. We will have two new product offerings in 2006 and
expect the backlog to peak again at that time. Our current order backlog
consists primarily of sugar beet equipment.
(iii) Liquidity and Capital Resources
Our main source of funds for the six months ended May 31, 2005 was
customer deposits received for advance payments on sugar beet equipment
sales to be delivered in the third quarter. These customer deposits are
unique to our sugar beet equipment line and are seasonal in nature. They
accounted for $1,758,000 of the $2,053,000 in cash flow 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held April 19, 2005, the following
individuals were re-elected to our Board of Directors to hold office
until the next annual meeting or until their successors are elected and
qualified, with the following votes in favor of election:
FOR WITHHELD
David R. Castle 1,738,512 140,549
George A. Cavanaugh, Jr. 1,868,812 10,249
James L. Koley 1,871,312 7,749
Douglas McClellan 1,875,812 3,249
J. Ward McConnell, Jr. 1,875,812 3,249
Marc H. McConnell 1,873,312 5,749
Thomas E. Buffamante 1,873,312 5,749
The stockholders also ratified the selection of McGladrey & Pullen, LLP
as independent public accountants for the year ending November 30, 2005.
Total number of shares voted in favor: 1,877,836
Total number of shares voted against: 600
Total number of abstentions: 625
Total number of broker non-votes: 0
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.