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
February 28, 2007
[ ] 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)
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(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 __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X
Number of common shares outstanding as of April 16, 2007: 1,978,176
Transitional Small Business Disclosure Format (check one): Yes _ No X
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Statements of Operations
Condensed
(Unaudited)
Three Months Ended
February February
2007 2006
Net sales $ 5,275,037 $ 4,302,088
Cost of goods sold 3,776,777 2,926,683
Gross profit 1,498,260 1,375,405
Expenses:
Engineering 79,088 91,040
Selling 232,347 192,259
General and administrative 679,826 601,448
Total expenses 991,261 884,747
Income from operations 506,999 490,658
Other income (expense):
Interest expense (105,971) (82,342)
Other 182,689 16,636
Total other expense 76,718 (65,706)
Income before income taxes 583,717 424,952
Income tax 203,388 152,983
Net income $ 380,329 $ 271,969
Net income per share:
Basic $ 0.19 $ 0.14
Diluted 0.19 0.14
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Common shares and equivalent outstanding:
Basic 1,978,176 1,964,009
Diluted 1,982,502 1,976,443
See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Balance Sheets
Condensed
(Unaudited)
February November
Assets 2007 2006
Current assets:
Cash $ 3,287,818 $ 2,072,121
Accounts receivable-customers, net
of allowance for doubtful accounts
of $115,437 and $108,372 in
February and November, respectively 2,950,415 2,313,290
Inventories, net 6,826,294 5,998,175
Profit in excess of billings 12,396 0
Deferred taxes 672,000 672,000
Insurance Recievable 871,400 0
Other current assets 200,396 163,114
Total current assets 14,820,719 11,218,700
Property, plant, and equipment, net 2,846,402 3,185,298
Deferred taxes 100,000 100,000
Other assets 96,478 110,240
Total assets $ 17,863,599 $ 14,614,238
Liabilities and Stockholders Equity
Current liabilities:
Notes payable to bank $ 412,527 $ 0
Current portion of term debt 270,058 220,559
Accounts payable 1,350,553 587,555
Customer deposits 1,834,258 424,205
Billings in Excess of Cost and Profit 473,092 57,266
Accrued expenses 1,347,635 1,427,658
Total current liabilities 5,688,123 2,717,243
Term debt, excluding current portion 3,749,149 3,852,372
Total liabilities 9,437,272 6,569,615
Stockholders equity:
Common stock $0.01 par value.
Authorized 5,000,000 shares;
issued 1,978,176 and 1,963,176 shares
in 2007 and 2006 19,782 19,782
Additional paid-in capital 1,767,072 1,765,697
Retained earnings 6,639,473 6,259,144
Total stockholders equity 8,426,327 8,044,623
Total liabilities and
stockholders equity $ 17,863,599 $ 14,614,238
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See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Statements of Cash Flows
Condensed
(Unaudited)
Three Months Ended
February February
2007 2006
Cash flows from operations:
Net income $ 380,329 $ 271,970
Adjustments to reconcile net
income to net cash provided by operating
activities:
Stock based compensation 1,375 1,256
(Gain) Loss on sale of property, plant,
and equipment 334,040 0
Depreciation and amortization 75,957 53,429
Deferred income taxes 0 140,000
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable (637,125) (1,413,037)
Inventories (828,119) (11,610)
Other current assets (37,282) (27,471)
Insurance Recievable (871,400) 0
Other, net 13,762 0
Increase (decrease) in:
Accounts payable 762,998 161,551
Billings in Excess of Costs 403,430 0
Customer deposits 1,410,053 1,152,694
Accrued expenses (80,023) (88,316)
Net cash provided by
operating activities 927,995 240,466
Cash flows from investing activities:
Purchases of property, plant,
and equipment (71,101) (334,497)
Net cash (used in)
investing activities (71,101) (334,497)
Cash flows from financing activities:
Net change in line of credit 412,527 43,484
Payments of notes payable to bank (53,724) (44,151)
Proceeds from the exercise of
stock options 0 11,599
Net cash provided by (used in)
financing activities 358,803 10,932
Net increase/(decrease)
in cash 1,215,697 (83,099)
Cash at beginning of period 2,072,121 1,198,238
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Cash at end of period $ 3,287,818 $ 1,115,139
Supplemental disclosures of cash flow information:
Cash paid/(received) during the period for:
Interest $ 105,970 $ 90,906
Income taxes 282,000 12,902
See accompanying notes to consolidated 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, 2006. The results of operations for the first quarter ended February 28, 2007 are not necessarily indicative of the results for the fiscal year ending November 30, 2007.
2. INVENTORIES
Major classes of inventory are:
February 28, November 30,
2007 2006
Raw material $ 4,334,572 $ 3,260,897
Work-in-process 591,591 981,979
Finished goods 3,001,967 2,886,860
Total $ 7,928,129 $ 7,129,736
Less reserves 1,101,836 1,131,561
Inventories $ 6,826,294 $ 5,998,175
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3. ACCRUED EXPENSES
Major components of accrued expenses are:
February 28, November 30,
2007 2006
Salaries, wages and commissions $ 461,447 $ 464,609
Accrued warranty expense 221,089 230,740
Income tax 257,716 356,712
Other 407,423 375,597
Total $ 1,347,675 $ 1,427,658
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4. PRODUCT WARRANTY
The Company offers limited 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, 2007 and February 28, 2006 are as follows:
2007 2006
Balance, beginning $230,740 $131,832
Settlements made in cash or in-kind (107,694) (110,413)
Warranties issued 98,043 63,021
Balance, ending $221,089 $84,440
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5. LOAN AND CREDIT AGREEMENTS
The Company has a revolving line of credit for $3,500,000 with advances funding the working capital, letter of credit and corporate credit card needs that matures on April 30, 2007. 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, 2007 and 2006, the Company had borrowed approximately $413,000 and $43,000, respectively. Total amount available for borrowing at February 28, 2007 was $3,087,000. Other terms and conditions of the debt with West Bank include providing monthly internally prepared financial reports including accounts receivable aging schedules and borrowing base certificates and year-end audited financial statements. The borrowing base shall limit advances from line of credit 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.
J. Ward McConnell, Jr. was required to personally guarantee the debt with West Bank on an unlimited and unconditional basis. The guarantee of the term debt shall be reduced after the first three years to a percentage representing his ownership of the Company. Mr. McConnell's guarantee shall be removed from the term debt 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 guarantee at an annual percentage rate of 2% of the outstanding balance to be paid monthly. Guarantee fee payments to Mr. McConnell were approximately $15,000 and $14,000, for the quarter ended February 28, 2007, and 2006, respectively.
A summary of the Company's term debt is as follows:
February 28, November 30,
2007 2006
West Bank loan payable in monthly
installments of $17,776 including
interest at Bank's prime rate plus
1.5%, due March 31, 2023 (A) (B) $ 1,689,348 $ 1,701,843
West Bank loan payable in monthly
installments of $10,000 including
interest at Bank's prime rate plus
1.5%, due March 31, 2015 (A) (B) $ 935,657 $ 943,034
West Bank loan payable in monthly
installments of $22,063 including
interest at Bank's prime rate plus
1.0% due April 2016 $1,394,202 $1,428,054
Total term debt $ 4,019,207 $ 4,072,931
Less current portion of term debt $ 270,058 $ 220,559
Term debt, excluding current portion $ 3,749,149 $ 3,852,372
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(A) Notes are supported by a guarantee issued by the United States Department of Agriculture (USDA) for 75% of the loan amount outstanding. Collateral for these loans are primarily real estate with a second position on assets securing the line of credit. The USDA subordinates collateral rights in all assets other than real estate in an amount equal to West Bank's other credit commitments.
(B) Covenants include, but are not limited to, restrictions on payment of dividends, debt service coverage ratio, debt/tangible net worth ratio, current ratio, limitation on capital expenditures, and tangible net worth.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (Issued 6/06). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. For the Company, the Statement is effective for fiscal years beginning after December 15, 2006. The Company is assessing the effects of Financial Interpretation No. 48.
7. STOCK OPTION PLANS
On January 25, 2007 the Board of Directors adopted the 2007 Non-Employee Directors' Stock Option Plan. Options will be granted to non-employee directors to purchase shares of common stock of the Company at a price not less than fair market value at the date the options are granted. Non-employee directors are automatically or initially granted options to purchase 1,000 shares of common stock annually upon their election to the Board, which are automatically vested. Options granted are nonqualified stock options. The option price and terms are set by the Compensation Committe of the Board of Directors of the Company.
On February 5, 2007 the Board of Directors adopted the 2007 Employee Stock Option Plan subject to Stockholder approval at the Annual Stockholders meeting on April 26, 2007.
8. SEGMENT INFORMATION
On October 4, 2005, the Company purchased certain assets of Vessels Systems, Inc. which created a separate operating segment. On August 2, 2006, the Company purchased certain assets of Tech Space, Inc. which created a third operating segment. Prior to these acquisitions the Company operated in one reportable segment.
The Company's reportable segments are strategic business units that offer different products. They are managed separately because each business requires different technology and marketing strategies.
There are three reportable segments: agricultural products, pressurized vessels and modular buildings. The agricultural products segment fabricates and sells farming products as well as replacement parts for these products in the United States and worldwide. Export sales amounted to $844,000 and $0 in 2006 and 2005 respectively. The pressurized vessel segment produces pressurized tanks. The modular building segment produces modular buildings for animal containment and various laboratory uses.
The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Management evaluates the performance of each segment based on profit or loss from operations before income taxes, exclusive of nonrecurring gains and losses.
Approximate financial information with respect to the reportable segments is as follows. The agricultural products, pressurized vessels, and modular building segment information are for the first quarter ended February 28, 2007 and February 28, 2006.
February 28, 2007
Agricultural Pressurized Modular Consolidated
Products Vessels Buildings
Revenue from
external customers $3,272,000 $1,052,000 $ 951,000 $5,275,000
Income from operations 288,000 209,000 10,000 507,000
Income before tax 236,000 187,000 161,000 584,000
Segment profit 149,000 125,000 106,000 380,000
Total Assets 13,497,000 1,842,000 2,525,000 17,864,000
Capital expenditures 65,000 6,000 0 71,000
Depreciation 60,000 12,000 4,000 76,000
February 28, 2006
Agricultural Pressurized Modular Consolidated
Products Vessels Buildings
Revenue from
external customers $3,628,000 $674,000 0 $4,302,000
Income from operations 478,000 13,000 0 491,000
Income before tax 409,000 16,000 0 425,000
Segment profit 262,000 10,000 0 272,000
Total Assets 13,046,000 247,000 0 13,293,000
Capital expenditures 320,000 14,000 0 334,000
Depreciation 42,000 11,000 0 53,000
Item 2
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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. 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
Our critical accounting policies involving the more significant judgments and assumptions used in the preparation of the financial statements as of February 28, 2007 have remained unchanged from November 30, 2006. 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, 2006.
(ii) Results of Operations
Our consolidated net sales for the first quarter of 2007 increased 23% to $5,275,000 as compared to $4,302,000 for 2006. A majority of this increase was due to the inclusion of Art's-Way Scientific, Inc., net sales of $950,000, for the first quarter which was acquired in August of 2006 and therefore was not included in last year's first quarter. Art's-Way Manufacturing had revenues totaling $3,273,000 for the first quarter, compared to $3,629,000 for the same period in 2006. This decrease was due to a reduction in sales to our OEM dealers for blowers. Art's-Way Vessels had revenues totaling $1,052,000 for the first quarter, compared to $674,000 for the same period in 2006.
Art's-Way Manufacturing's gross profit decreased in the quarter to 28% as compared to 32% in 2006. The decrease was due primarily to the addition of Art's-Way Scientific. When we purchased Art's-Way Scientific we also purchased their backlog and had to honor pricing from the prior owners. Art's-Way Scientific's gross profit was 20% for the first quarter of 2007. Art's-Way Manufacturing's gross profit was 30% while Art's-Way Vessel's was 32%.
Operating expenses for the quarter increased $107,000 compared to 2006. However, as a percent of sales, operating expenses decreased by two percentage points- 19% in 2007 compared to 21% in 2006. Art's-Way Manufacturing's operating expense as a percentage of sales decreased from 20% in 2005 to 18% in 2006. Art's-Way Vessel operating expenses as a percentage of sales were 12%.
General and administrative expenses for the quarter increased $78,000 as compared to 2006. Substantially all of the increase was due to the addition of Art's-Way Scientific.
Engineering expenses are down $12,000 for the first quarter of 2007 as compared to 2006.
Selling expenses were up for the first quarter of 2007 by $40,000. This is almost entire due to the addition of Art's-Way Scientific, which had selling expenses of $38,000.
We experienced an increase in interest expense of $24,000 in the first quarter of 2007 as a result of a rise in the prime interest rate from the first quarter of 2006. Other income increased by $166,053 in 2007 compared to 2006. This is the result of accounting for the fire and insurance in Monona, Iowa.
On January 16th, 2007, one of our buildings in Monona, Iowa, was completely destroyed by fire. The building housed the production and offices for Art's-Way Scientific. The 36,000 square foot building was a stick built structure with steel siding. We were insured for the loss of the building, its contents as well as the disruption in business. We are currently working with our insurance company to settle the claim. At this time we have received $250,000 towards the claim and we have booked a receivable for the estimated loss of the building of $871,000. We have incurred costs in excess of $900,000 related to the fire, to include $334,000 in loss of fixed assets. We are currently working from one of our other buildings in Monona, Iowa. We are in the process of determining where we will be rebuilding. It is our intent to be in a new building by September 2007. We continue to manufacture buildings and have not lost any orders to date.
The order backlog as of March 31, 2007 is $12,112,000 compared to $5,436,000 one year ago. Art's-Way Manufacturing's order backlog as of March is $3,899,000, Art's-Way Vessels is $2,149,000, and Art's-Way Scientific is $6,064,000.
(iii) Liquidity and Capital Resources
Our main source of funds in the first quarter came from customer deposits which increased $1,410,000 over our 2006 year end. This is a traditional increase for us as our beet programs ran in the first quarter and we offer discounts to our customers for making down payments on their orders. We are working to settle the insurance claim for the building, inventory and assets that were destroyed in Monona, Iowa. We have currently recorded a loss on the assets of $334,000 due to the fire. We are also showing a receivable increase of $871,000 that relates directly to the expected insurance proceeds on the building. Accounts receivable are up $637,000 over our November year end balance. This increase is due to the sales of our blowers to OEM dealers in the last month of the quarter. Inventories increased $828,000. This increase is offset by the decrease in our accounts payable of $763,000, due to bringing in large quantities of steel for our upcoming building of sugar beet equipment.
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 6. EXHIBITS
See Exhibit Index on page 15 of this report.
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: _________________________
E.W. Muehlhausen Carrie L. Majeski
President Chief Financial Officer
Date:______________________ Date:____________________
Exhibits Index
10.1 Non-Employee Director's Stock Option Plan
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.
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Exhibit 31.1
CERTIFICATIONS
I, E.W. Muehlhausen, certify that:
1. I have reviewed this report on Form 10-QSB of Art's-Way Manufacturing Co., Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure control and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has most recent fiscal affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: April 16, 2007 /s/ E.W. Muehlhausen ------------------------ President (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Carrie L. Majeski, certify that:
1. I have reviewed this report on Form 10-QSB of Art's-Way Manufacturing Co., Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure control and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has most recent fiscal affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: April 16, 2007 /s/ Carrie L. Majeski ---------------------------- Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF FINANCIAL STATEMENTS
Pursuant to 18 U.S.C. 63 1350, the President of Art's-Way Manufacturing Co., Inc. (the "Company"), hereby certify that this Form 10-QSB and the financial statements thereto fully comply with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-QSB and the financial statements thereto fairly present, in all material respects, the financial condition and results of operations of the Company.
By: /s/ E.W. Muehlhausen Name: E.W. Muehlhausen President |
Date 4/16/07
Exhibit 32.2
CERTIFICATION OF FINANCIAL STATEMENTS
Pursuant to 18 U.S.C. 63 1350, the Chief Financial Officer of Art's-Way Manufacturing Co., Inc. (the "Company"), hereby certify that this Form 10-QSB and the financial statements thereto fully comply with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-QSB and the financial statements thereto fairly present, in all material respects, the financial condition and results of operations of the Company.
By: /s/ Carrie L. Majeski Name: Carrie L. Majeski Chief Financial Officer |
Date 4/16/07
Exhibit 10.1
ARTS WAY MANUFACTURING CO., INC.
2007 NON-EMPLOYEE DIRECTORS
STOCK OPTION PLAN
1. NAME.
The name of this Plan is the Arts Way Manufacturing Co., Inc., 2007 Non-Employee Directors Stock Option Plan.
2. DEFINITIONS.
For the purposes of the Plan, the following terms shall be defined as set forth below:
(a) Affiliate means any partnership, corporation, firm, joint venture, association, trust, limited liability company, unincorporated organization, or other entity (other than a Subsidiary) that, directly or indirectly through one or more intermediaries, is controlled by the Company, where the term "controlled by" means the possession, direct or indirect, of the power to cause the direction of the management and policies of such entity, whether through the ownership of voting interests or voting securities, as the case may be, by contract or otherwise.
(b) Board means the Board of Directors of the Company.
(c) Code means the Internal Revenue Code of 1986, as amended from time to time, and the Treasury regulations promulgated thereunder.
(d) Common Stock means the common stock, $.01 par value per share, of the Company or any security of the Company identified by the Board as having been issued in substitution or exchange therefor or in lieu thereof.
(e) Company means Arts Way Manufacturing Co., Inc., a Delaware corporation.
(f) Effective Date means January 25, 2007.
(g) Employee means an individual whose wages are subject to the withholding of federal income tax under Section 3401 of the Code.
(h) Exchange Act means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute.
(i) Fair Market Value of a Share as of a specified date means the average of the highest and lowest market prices of a Share as quoted on the OTC Bulletin Board on such date, or, if no trading of Common Stock is reported for that day, the next preceding day on which trading was reported. In the event the Common Stock is not then quoted on the OTC Bulletin Board, the Fair Market Value of a Share shall be determined by reference to the principal market or exchange on which the Shares are then traded.
(j) Non-Employee Director means an individual who (i) is now or hereafter becomes a member of the Board, and (ii) is not an Employee of the Company or of any Subsidiary or Affiliate on the date of the grant of the NQSO.
(k) NQSO means a stock option that is not qualified under Section 422 of the Code.
(l) Officer means an individual elected or appointed by the Board or by the board of directors of a Subsidiary, or chosen in such other manner as may be prescribed by the bylaws of the Company or a Subsidiary, as the case may be, to serve as such.
(m) Participant means a Non-Employee Director who is granted an NQSO under the Plan.
(n) Plan means this 2007 Non-Employee Directors Stock Option Plan.
(o) Rule 16b-3 means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor or replacement rule adopted by the Securities and Exchange Commission.
(p) Share means one share of Common Stock, adjusted in accordance with Section 9(b), if applicable.
(q) Stock Option Agreement means the written agreement between the Company and the Participant that contains the terms and conditions pertaining to the NQSO.
(r) Subsidiary means any corporation or entity of which the Company, directly or indirectly, is the beneficial owner of fifty percent (50%) or more of the total voting power of all classes of its stock having voting power, unless the Board shall determine that any such corporation or entity shall be excluded hereunder from the definition of the term Subsidiary.
3. PURPOSE.
The purpose of the Plan is to enable the Company to provide incentives, which are linked directly to increases in stockholder value, to Non-Employee Directors so that they will be encouraged to serve on the Board and exert their best efforts on behalf of the Company.
4. ADMINISTRATION.
(a) Board of Directors.
The Plan shall be administered by the Board of Directors, which shall have the authority to administer the Plan in its sole and absolute discretion to grant NQSOs, and to determine the number of Shares subject to NQSOs and the price at which each Share covered by an NQSO may be purchased pursuant to the Plan, all as set forth in Section 8. To this end, the Board of Directors is authorized to construe and interpret the Plan and to make all other determinations necessary or advisable for the administration of the Plan. Subject to the foregoing, any determination, decision or action of the Board of Directors in connection with the construction, interpretation, administration or application of the Plan shall be final, conclusive and binding upon all Participants and any person validly claiming under or through a Participant.
(b) Liability of Board Members.
No member of the Board will be liable for any action or determination made in good faith by the Board with respect to the Plan or any grant or exercise of an NQSO thereunder.
(c) NQSO Accounts.
The Company shall maintain a journal in which a separate account for each Participant shall be established. Whenever NQSOs are granted to or exercised by a Participant, the Participants account shall be appropriately credited or debited. Appropriate adjustment shall also be made in the journal with respect to each account in the event of an adjustment pursuant to Section 9(b).
5. EFFECTIVE DATE OF THE PLAN; TERM; PLAN YEAR.
(a) Effective Date of the Plan.
The Plan was adopted by the Board and became effective on January 25, 2007.
(b) Term of the Plan.
No NQSO shall be granted pursuant to the Plan on or after January 25, 2017 but NQSOs theretofore granted may extend beyond that date.
(c) Plan Year.
The initial Plan Year begins on the date of the 2007 annual meeting of stockholders and ends on the day prior to the 2008 annual meeting of the stockholders. Subsequent Plan Years begin on the date of the annual meeting of stockholders of each year and end on the day prior to the meeting of the following year.
6. SHARES SUBJECT TO THE PLAN.
The maximum aggregate number of Shares which may be subject to NQSOs granted to Non-Employee Directors under the Plan shall be One Hundred Thousand (100,000). The limitation on the number of Shares which may be subject to NQSOs under the Plan shall be subject to adjustment as provided in Section 9(b).
If any NQSO granted under the Plan expires, or is terminated for any reason without having been exercised in full, the Shares allocable to the unexercised portion of such NQSO shall again become available for grant pursuant to the Plan. At all times during the term of the Plan, the Company shall reserve and keep available for issuance such number of shares as the Company is obligated to issue upon the exercise of all then outstanding NQSOs.
7. SOURCE OF SHARES ISSUED UNDER THE PLAN.
Common Stock issued under the Plan shall be authorized and unissued Shares. No fractional Shares shall be issued under the Plan.
8. NON-QUALIFIED STOCK OPTIONS.
(a) Grant of NQSOs.
On the beginning date of each Plan Year, NQSOs to purchase One Thousand (1,000) Shares shall be granted automatically to each Non-Employee Director. With respect to any Non-Employee Director who first becomes a member of the Board after the beginning date of a Plan Year, NQSOs to purchase One Thousand (1,000) Shares shall be granted automatically on the next succeeding business day following his or her election to the Board. Additional NQSOs may be granted to any Non-Employee Director by the Board in its sole and absolute discretion.
(b) The Exercise Price.
The exercise price of a Share shall be the Fair Market Value of such Share on the first day of the Plan Year for which the options are granted (or the next business day if such date falls on a weekend or holiday), or if granted on another day then the date of such grant.
(c) Terms and Conditions.
All NQSOs granted pursuant to the Plan shall be evidenced by a Stock Option Agreement (which need not be the same for each Participant or NQSO), approved by the Board, which shall be subject to the following express terms and conditions and to the other terms and conditions specified in this Section 8, and to such other terms and conditions as shall be determined by the Board in its sole and absolute discretion which are not inconsistent with the terms of the Plan:
(i) all NQSOs automatically granted to a Participant shall vest and become first exercisable immediately upon grant; those NQSOs granted pursuant to the Boards discretion shall vest as provided by the Board on the date of such grant;
(ii) the failure of an NQSO to vest for any reason whatsoever shall cause the NQSO to expire and be of no further force or effect;
(iii) unless terminated earlier pursuant to this Plan, the term of each NQSO shall be five (5) years from the date of grant;
(iv) NQSOs shall not be transferable by the Participant otherwise
than by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the Participant only by him or her,
or by his or her guardian or legal representative, and after death of
the Participant pursuant to will or applicable law provided, however,
that any exercise after death of the Participant shall occur within one
(1) year of the date of death or prior to the expiration of the term of
the NQSO, whichever is sooner;
(v) no NQSO or interest therein may be transferred, assigned, pledged or hypothecated by the Participant during his or her lifetime whether by operation of law or otherwise, or be made subject to execution, attachment or similar process; and
(vi) payment for the Shares to be received upon exercise of an NQSO may be made in cash, in Shares (determined with reference to their Fair Market Value on the date of exercise) or any combination thereof.
(d) Additional Means of Payment.
Any Stock Option Agreement may, in the sole and absolute discretion of the Board, permit payment by any other form of legal consideration consistent with applicable law and any rules and regulations relating thereto.
(e) Exercise.
The holder of an NQSO may exercise the same by filing with the Corporate Secretary of the Company a written election, in such form as the Board may determine, specifying the number of Shares with respect to which such NQSO is being exercised. Such notice shall be accompanied by payment in full of the exercise price for such Shares. Notwithstanding the foregoing, the Board may specify a reasonable minimum number of Shares that may be purchased on any exercise of an option, provided that such minimum number will not prevent the holder from exercising the option with respect to the full number of Shares as to which the option is then exercisable.
(f) Termination of NQSOs.
NQSOs granted under the Plan shall be subject to the following events of termination:
(i) in the event a Participant is removed from the Board for cause (as contemplated by the Companys bylaws), all unexercised NQSOs held by such Participant on the date of such removal (whether or not vested) will expire immediately;
(ii) in the event a Participant is no longer a member of the Board, other than by reason of removal for cause, all NQSOs which have vested prior to such time shall expire twelve (12) months thereafter unless by their terms they expire sooner; and
(iii) in the event a Participant becomes an Officer or Employee of the Company or a Subsidiary (whether or not such Participant remains a member of the Board) all NQSOs which have vested prior to such time shall expire twelve (12) months thereafter unless by their terms they expire sooner.
9. RECAPITALIZATION.
(a) Corporate Flexibility.
The existence of the Plan and the NQSOs granted hereunder shall not affect or restrict in any way the right or power of the Board or the stockholders of the Company, in their sole and absolute discretion, to make, authorize or consummate any adjustment, recapitalization, reorganization or other change in the Companys capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, common stock, preferred or prior preference stocks ahead of or affecting the Companys capital stock or the rights thereof, the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other grant of rights, issuance of securities, transaction, corporate act or proceeding, notwithstanding the fact that any such activity, proceedings, action, transaction or other event may have, or be expected to have, an impact (whether positive or negative) on the value of any NQSO.
(b) Adjustments Upon Changes in Capitalization.
Except as otherwise provided in Section 10 below and subject to any required action by the stockholders of the Company, in the event of any change in capitalization affecting the Common Stock of the Company, such as a stock dividend, stock split or recapitalization, the Board shall make proportionate adjustments with respect to:
(i) the aggregate number of Shares available for issuance under the Plan;
(ii) the number of Shares subject to each grant under the Plan;
(iii) the number and exercise price of Shares subject to outstanding NQSOs; and
(iv) such other matters as shall be appropriate in light of the circumstances; provided, however, that the number of Shares subject to any NQSO shall always be a whole number and that no such adjustment shall be made if the adjustment would cause the Plan to fail to comply with the formula award exception, as set forth in Rule 16b-3(c)(2)(ii) of the Exchange Act, for grants of NQSOs to Non-Employee Directors.
10. CHANGE OF CONTROL.
In the event of a Change of Control (as defined below), all options not vested on or prior to the effective time of any such Change of Control shall immediately vest as of such effective time. The Board in its discretion may make provisions for the assumption of outstanding options, or the substitution for outstanding options of new incentive awards covering the stock of a successor corporation or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices so as to prevent dilution or enlargement of rights; provided, however, that no such adjustment shall be made if the adjustment would cause the Plan to fail to comply with the formula award exception, as set forth in Rule 16b-3(c)(2)(ii) of the Exchange Act, for grants of NQSOs to Non-Employee Directors.
A Change of Control will be deemed to occur on the date any of the following events occur:
(a) any person or persons acting together which would constitute a group for the purpose of Section 13(d) of the Exchange Act (other than the Company, any Subsidiary and any entity beneficiary owned by any of the foregoing), beneficially owns (as defined in Rule 13d-3 under the Exchange Act) without Board approval, directly or indirectly, at least 30% of the total voting power of the Company entitled to vote generally in the election of the Board;
(b) either (i) the Current Directors (as herein defined) cease for any reason to constitute at least a majority of the members of the Board (for these purposes, a Current Director means any member of the Board as of January 25, 2007, and any successor of a Current Director, and any additional director filling a vacancy created by an expansion of the size of the Board, whose election, or nomination for election by the Companys shareholders, was approved by at least a majority of the Current Directors then on the Board), or (ii) at any meeting of the stockholders of the Company called for the purpose of electing directors, a majority of the persons nominated by the Board for election as directors fail to be elected;
(c) the stockholders of the Company approve (i) a plan of complete liquidation of the Company, or (ii) an agreement providing for the merger or consolidation of the Company (A) in which the Company is not the continuing or surviving corporation (other than consolidation or merger with a wholly-owned subsidiary of the Company in which all Shares outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration), or (B) pursuant to which the Shares are converted into cash, securities or other property, except a consolidation or merger of the Company in which the holders of the Shares immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger, or in which the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or
(d) the stockholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company.
11. SECURITIES LAW REQUIREMENTS.
No Shares shall be issued under the Plan unless and until: (i) the Company and the Participant have taken all actions required to register the Shares under the Securities Act of 1933, as amended, or perfect an exemption from the registration requirements thereof; (ii) any applicable requirement of Nasdaq or any stock exchange on which the Common Stock is listed has been satisfied; and (iii) any other applicable provisions of state or federal law have been satisfied. The Company shall be under no obligation to register the Shares under the Securities Act of 1933, as amended, or to effect compliance with the registration or qualification requirements of any state securities laws.
12. AMENDMENT AND TERMINATION.
(a) Modifications to the Plan.
The Board may, insofar as permitted by law, from time to time, with respect to any Shares at the time not subject to NQSOs, suspend or terminate the Plan or, subject to Sections 8(a) through 8(c), revise or amend the Plan in any respect whatsoever. However, unless the Board specifically otherwise provides, any revision or amendment that would cause the Plan to fail to comply with Rule l6b-3 or any other requirement of applicable law or regulation if such amendment were not approved by the stockholders of the Company, shall not be effective unless and until such approval is obtained.
(b) Rights of Participant.
No amendment, suspension or termination of the Plan that would adversely affect the right of any Participant with respect to an NQSO previously granted under the Plan will be effective without the written consent of the affected Participant.
13. MlSCELLANEOUS.
(a) Stockholders Rights.
Neither a Participant, nor a beneficiary, nor other person claiming under or through such Participant shall acquire any rights as a stockholder of the Company by virtue of such Participant having been granted an NQSO under the Plan. No Participant and no beneficiary or other person claiming under or through such Participant will have any right, title or interest in or to any Shares allocated or reserved under the Plan or subject to any NQSO except as to Shares, if any, that have been issued or transferred to such Participant. No adjustment shall be made for cash dividends for which the record date is prior to the date of exercise.
(b) Other Compensation Arrangements.
Nothing contained in the Plan shall prevent the Board from adopting other compensation arrangements, subject to stockholder approval if such approval is required. Such other arrangements may be either generally applicable or applicable only in specific cases.
(c) Treatment of Proceeds.
Proceeds realized from the exercise of NQSOs under the Plan shall constitute general funds of the Company.
(d) Costs of the Plan.
The costs and expenses of administering the Plan shall be borne by the Company.
(e) No Right to Continue as Director.
Nothing contained in the Plan or in any instrument executed pursuant to the Plan will confer upon any Participant any right to continue as a member of the Board or affect the right of the Company, the Board or the stockholders of the Company to terminate the directorship of any Participant at any time with or without cause.
(f) Severability.
The provisions of the Plan shall be deemed severable and the validity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
(g) Binding Effect of Plan.
The Plan shall inure to the benefit of the Company, its successors and assigns.
(h) No Waiver of Breach.
No waiver by any party hereto at any time of any breach by another party hereto of, or compliance with, any condition or provision of the Plan to be performed by such other party shall be deemed a waiver of the same, any similar or any dissimilar provisions of conditions at the same or at any prior or subsequent time.
(i) Governing Law.
The Plan and all actions taken thereunder shall be enforced, governed and construed by and interpreted under the laws of the State of Delaware applicable to contracts made and to be performed wholly within such State without giving effect to the principles of conflict of laws thereof.
(j) Headings.
The headings contained in the Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of the Plan.
14. EXECUTION.
To record the adoption of the Plan to read as set forth herein, the Company has caused the Plan to be signed by its Chief financial Officer and Secretary as of January 25, 2007.
ARTS WAY MANUFACTURING CO., INC.,
a Delaware corporation
By: Carrie L. Majeski
Chief Financial Officer and Secretary