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v2.4.0.6
Note 8 - Loan and Credit Agreements
12 Months Ended
Nov. 30, 2011
Debt Disclosure [Text Block]
(8)           Loan and Credit Agreements

The Company has a $6,000,000 revolving line of credit with West Bank (the “Line of Credit”) which was scheduled to mature on April 30, 2011.  Effective March 31, 2011, the Company renewed the Line of Credit and extended the maturity date to April 30, 2012.  The Line of Credit is renewable annually with advances funding the Company’s working capital and letter of credit needs.  The interest rate is West Bank’s prime interest rate, adjusted daily, with a minimum rate of 4.00%.  As of November 30, 2011, the interest rate was the minimum of 4.0%. Monthly interest-only payments are required and the unpaid principal is due on the maturity date.  As of November 30, 2011 and 2010, the Company had borrowed $1,389,000 and $2,084,000, respectively, against the Line of Credit.  The available amounts remaining on the Line of Credit were $4,611,000 and $3,916,000 on November 30, 2011 and 2010, respectively.  The borrowing base limits advances from the Line of Credit to 60% of accounts receivable less than 90 days, 60% of finished goods inventory, 50% of raw material inventory and work-in-process inventory plus 40% of Net Book Value of Fixed Assets as calculated at each month-end.  The Company’s obligations under the Line of Credit are evidenced by a Business Loan Agreement effective March 31, 2011 (the “Business Loan Agreement”), a Change in Terms Agreement effective March 31, 2011, and certain other ancillary documents.

On June 7, 2007, the Company obtained a term loan from West Bank in the amount of $4,100,000.  The loan, which had an outstanding principal balance of $2,804,000 and $3,140,000 as of November 30, 2011 and 2010.  This note matures on May 1, 2013 and bears fixed interest at 5.75%.  Monthly principal and interest payments in the amount of $42,500 are required, with a final payment of principal and accrued interest in the amount of $2,302,000 due on May 1, 2013.

The Company obtained two additional loans from West Bank in 2007 for the purpose of financing the construction of the Company’s new facilities in Monona and Dubuque.  On October 9, 2007, the Company obtained a loan for $1,330,000, which has a maturity date of May 1, 2013 and bears interest at a fixed interest rate of 5.75%.  Monthly payments of $11,000 are required for principal and interest, with a final payment of accrued interest and principal in the amount of $1,006,000 due on May 1, 2013.  The outstanding principal balance on this loan was $1,102,000 and $1,168,000 as of November 30, 2011 and 2010.

On November 30, 2007, the Company obtained a $1,500,000 construction loan to finance construction of the Dubuque, Iowa facility, which has a maturity date of May 1, 2013 and bears interest at a fixed interest rate of 5.75%.  Payments of $12,550 are due monthly for principal and interest, with a final accrued interest and principal payment in the amount of $1,145,000 due on May 1, 2013.  The outstanding principal balance on this loan was $1,254,000 and $1,329,000 as of November 30, 2011 and 2010.

Each of the Company’s loans from West Bank are governed by the Business Loan Agreement which requires the Company to comply with certain financial and reporting covenants. The Company must provide monthly internally prepared financial reports, year-end audited financial statements, annual compliance certificates, and notice upon certain events, such as a change in executive or management personnel.  The Company must maintain a minimum debt service coverage ratio of 1.5, a maximum debt to tangible net worth ration of 1.25, and a minimum tangible net worth of $12,000,000, each as measured at the Company’s fiscal year-end. Further, the Company must obtain West Bank’s prior written consent for any investment in, acquisition of, or guaranty relating to another business or entity.  The loans are secured by a first position security interest on the assets of the Company and its subsidiaries, including but not limited to, inventories, accounts receivable, machinery, equipment and real estate, in accordance with the Business Loan Agreement and Commercial Guarantee executed by the company’s subsidiaries. The Company and its subsidiaries were also required to execute Agreements to Provide Insurance that set forth the insurance requirements for the collateral.

If the Company or either of its subsidiaries (as guarantors) commits an event of default under the Business Loan Agreement and fails or is unable to cure that default, the interest rate on the line of credit would increase by 2.0%.  In addition, West Bank may cease advances under the Line of Credit and has the option of causing all outstanding indebtedness to become immediately due and payable. Events of default include, without limitation: (i) becoming insolvent or subject to bankruptcy proceedings; (ii) defaulting on any obligations to West Bank; (iii) defaulting on any obligations to third parties that would materially affect the ability to perform obligations owed to West Bank; (iv) suffering a material adverse change in financial condition or the value of any collateral; (v) experiencing a change in ownership of 25% or more of outstanding common stock; and (vi) making false statements to West Bank.  The Company was in compliance with all covenants under the Business Loan Agreement as measured on November 30, 2011.

On June 1, 2009, Art’s-Way Scientific received funds from two $95,000 promissory notes in connection with an agreement signed August 7, 2007 between Art’s-Way Scientific and the Iowa Department of Economic Development.  The first $95,000 promissory note was a 0% interest loan requiring 60 monthly payments of $1,583.33, with a balance of $68,000 as of November 30, 2010 and a final payment due July 1, 2014.   The second $95,000 promissory note, which had an outstanding principal balance of $95,000 as of November 30, 2010, was a forgivable loan subject to certain contract obligations.  The obligations included maintaining Art’s-Way Scientific’s principal place of business in Iowa, complying with certain tax and insurance requirements, and creating 16 full-time positions and retaining 21 full-time positions in Iowa, which must be maintained for a two-year period.  During the fiscal year ending November 30, 2011, the Iowa Department of Economic Development was required to audit the job attainment of Art’s Way Scientific.  Art’s Way Scientific had obtained approximately 48% of the job retention and creation requirements and was required to restructure the original two promissory notes into three separate notes.  The first note is now a 6% interest-bearing note requiring a monthly payment of $2,437 that had a balance of $70,000 as of November 30, 2011 and has a maturity date of June 1, 2014.  The second note is an interest-free note requiring a monthly payment of $813 which had a balance of $25,000 as of November 30, 2011, with a final payment due June 1, 2014.  The third note is a forgivable loan subject to contract obligations which will be measured during April 2012.  The forgivable loan had a balance of $49,000 as of November 30, 2011.  Art’s-Way Manufacturing Co., Inc. has provided a guarantee in connection with these loans to Art’s-Way Scientific.

On May 1, 2010, the Company obtained a loan to finance the purchase of an additional facility located in West Union, Iowa to be used as a distribution center, warehouse facility, and manufacturing plant for certain products under the Art’s-Way brand. The funds for this loan were made available by the Iowa Finance Authority by the issuance of tax exempt bonds.  This loan had an original principal amount of $1,300,000 and bears fixed interest at 3.5%. The payments required on this loan began July 1, 2010 and continue until June 1, 2020. The terms of the loan require monthly payments of $12,892 for principal and interest. As of November 30, 2011 and 2010, the outstanding principal balance on this loan was $1,143,000 and $1,255,000, respectively.
 

This loan from the Iowa Finance Authority, which has been assigned to The First National Bank of West Union, is governed by a Manufacturing Facility Revenue Note dated May 28, 2010 and a Loan Agreement dated May 1, 2010 (“the IFA Loan Agreement”), which requires the Company to provide quarterly internally prepared financial reports and year-end audited financial statements and to maintain a minimum debt service coverage ratio of 1.5 to 1.0, which is measured at November 30 of each year.  Among other covenants, the IFA Loan Agreement also requires the Company to maintain proper insurance on, and maintain in good repair, the West Union Facility, and continue to conduct business and remain duly qualified to do business in the State of Iowa.  The loan is secured by a mortgage on the Company’s West Union Facility, pursuant to a Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement dated May 1, 2010 between the Company and The First National Bank of West Union (the “West Union Mortgage”).

If the Company fails to make a required payment or perform any other covenant under the IFA Loan Agreement or the West Union Mortgage, becomes subject to bankruptcy or insolvency proceedings, defaults in payment on any of our other loan obligations in excess of $100,000, or if there is a determination that any of the Company’s representations made in the IFA Loan Agreement or related documents are materially false, the Company will be deemed to have committed an event of default under the IFA Loan Agreement.  If the Company does not cure the event of default within the time specified by the IFA Loan Agreement, the lender may cause the entire amount of the loan to be immediately due and payable and take any other action that it is permitted to take at law or in equity to enforce the Company’s performance.

On September 15, 2010, the company obtained a zero-interest revolving loan from the West Union Community Development Corporation in the amount of $13,000.  Annual principal payments of $4,333 are due on the first of September of each of the next three years. As of November 30, 2011 and 2010, the outstanding principal balance on this loan was $9,000 and $13,000, respectively.

A summary of the Company’s term debt is as follows:

   
November 30,
2011
   
November 30,
2010
 
   
West Bank loan payable in monthly installments of $42,500
including interest at 5.75%, due May 1, 2013
  $ 2,804,403     $ 3,140,229  
   
West Bank loan payable in monthly installments of $11,000
including interest at 5.75%, due May 1, 2013
    1,102,321       1,167,970  
                 
West Bank loan payable in monthly installments of $12,550
including interest at 5.75%, due May 1, 2013
    1,253,508       1,328,642  
                 
IFA loan payable in monthly installments of $12,892
including interest at 3.5%, due June 1, 2020
    1,143,140       1,255,120  
                 
IDED loan payable in monthly installments of $2,437
including interest at 6%, due June 1, 2014.
    70,024       -  
                 
        IDED loan payable in monthly installments of $813
including interest at 0% due June 1, 2014
    25,229       68,083  
                 
IDED loan payable in monthly installments of $0
including interest at 0%, due July 1, 2014
    48,830       95,000  
                 
WUCDC loan payable in annual installments of $4,333
including interest at  0% due September 1, 2013
    8,667       13,000  
Total term debt
    6,456,122       7,068,044  
Less current portion of term debt
    712,962       615,294  
Term debt, excluding current portion
  $ 5,743,160     $ 6,452,750  

A summary of the minimum maturities of term debt follows for the years ending November 30:

Year:
 
Amount
 
2012
    712,962  
2013
    4,813,701  
2014
    146,961  
2015
    139,529  
        2016     642,969  
    $ 6,456,122