SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended May 31, 1998 Commission File No. 0-5131
ART'S-WAY MANUFACTURING CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-0920725
State of Incorporation I.R.S. Employer Identification No.
Hwy 9 West, Armstrong, Iowa 50514
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (712) 864-3131
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filling
requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of July 6, 1998:
1,245,931
Number of Shares
Appendix A to Item 601(c) of Regulation S-K
Article 5 of Regulation S-X
Quarter Ended May 31, 1998
Item Number Item Description Amount
5-02(1) cash and cash items 48,506
5-02(3)(a)(1) notes and accounts receivable-trade 5,390,398
5-02(4) allowances for doubtful accounts 37,000
5-02(6) inventory 9,522,536
5-02(9) total current assets 15,734,521
5-02(13) property, plant and equipment 10,436,737
5-02(14) accumulated depreciation 7,721,260
5-02(18) total assets 18,449,998
5-02(21) total current liabilities 8,952,787
5-02(30) common stock 13,408
5-02(31) other stockholders' equity 7,015,406
5-02(32) total liabilities and stockholders'
equity 18,449,998
5-03(b)1(a) net sales of tangible products 6,872,111
5-03(b)1 total revenues 6,872,111
5-03(b)2(a) cost of tangible goods sold 5,689,300
5-03(b)2 total costs and expenses applicable to
sales and revenues 1,094,779
5-03(b)3 other costs and expenses 177,783
5-03(b)5 provision for doubtful accounts and
notes 3,000
5-03(b)8 interest and amortization of debt
discount 144,987
5-03(b)10 income before taxes and other items -
5-03(b)11 income tax expense -
5-03(b)14 loss continuing operations 58,338
5-03(b)19 net loss 58,338
5-03(b)20 earnings per share - basic -
5-03(b)20 earnings per share - diluted -
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
1998 1997 1998 1997
NET SALES $ 6,872,111 $ 4,599,307 $11,660,133 $ 9,164,509
COST OF GOODS SOLD 5,689,300 3,043,916 9,338,285 6,541,452
GROSS PROFIT 1,182,811 1,555,391 2,321,848 2,623,057
EXPENSES:
Selling 338,215 401,344 687,698 752,366
General and
administrative 612,085 534,249 1,197,547 1,114,483
Total 1,094,779 1,060,499 2,151,531 2,083,385
INCOME FROM OPERATIONS 88,032 494,892 170,317 539,672
OTHER DEDUCTIONS:
Interest expense (144,987) (53,022) (273,950) (124,088)
Other (32,796) (97,789) (57,720) (107,176)
Other deductions
(177,783) (150,811) (331,670) (231,264)
INCOME (LOSS) BEFORE
INCOME TAXES (89,751) 344,081 (161,353) 308,408
INCOME TAX EXPENSE
(BENEFIT) (31,413) 121,814 (56,473) 109,328
NET INCOME (LOSS) $ (58,338) $ 222,267 $ (104,880) $ 199,080
INCOME (LOSS) PER SHARE (NOTE 2):
Basic $ (0.04) $ 0.18 $ (0.08) $ 0.16
Diluted $ (0.04) $ 0.18 $ (0.08) $ 0.16
COMMON SHARES AND EQUIVALENT OUTSTANDING:
Basic 1,245,931 1,238,405 1,245,931 1,238,022
Diluted 1,245,931 1,246,132 1,245,931 1,243,274
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED BALANCE SHEETS
May 31 November 30,
1998 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 48,506 $ 8,692
Accounts receivable-customers,
net of allowance for doubtful accounts
of $37,000 and $31,000 in May and November,
respectively 5,353,398 3,005,837
Inventories (Note 4) 9,522,536 8,754,469
Deferred income taxes 464,426 464,426
Income tax receivable 155,872 99,000
Other current assets 189,783 154,175
Total current assets 15,734,521 12,486,599
PROPERTY, PLANT AND EQUIPMENT,
at cost 10,436,737 10,323,374
Less accumulated depreciation 7,721,260 7,488,142
Net property, plant and equipment 2,715,477 2,835,232
TOTAL $ 18,449,998 $ 15,321,831
See accompanying notes to consolidated financial statements.
May 31 November 30,
1998 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ 4,470,512 $ 3,172,296
Current portion of long-term debt (Note 6) 341,586 483,157
Accounts payable 2,741,582 2,069,584
Customer deposits (Note 3) 725,231 106,793
Accrued expenses (Note 5) 673,876 789,384
Total current liabilities 8,952,787 6,621,214
LONG-TERM DEBT, excluding current portion (Note 6)
2,353,268 1,451,794
DEFERRED INCOME TAXES 115,129 115,129
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value. Authorized
5,000,000 shares; issued 1,340,778 shares 13,408 13,408
Additional paid-in capital 1,618,453 1,618,453
Retained earnings 6,306,702 6,411,582
7,938,563 8,043,443
Less cost of common shares in treasury of
94,847 in May and November 909,749 909,749
Total stockholders' equity 7,028,814 7,133,694
TOTAL $18,449,998 $ 15,321,831
See accompanying notes to financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
May 31 May 31
1998 1997
CASH FLOW FROM OPERATIONS:
Net Income (Loss) $ (104,880) $ 199,079
Adjustment to reconcile net loss to net
cash provided (used) by operations:
Depreciation and amortization 233,118 298,754
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,347,561) (1,430,502)
Inventories (768,067) (3,548,810)
Sundry (35,608) 116,706
Increase (Decrease) in:
Accounts payable 671,998 1,540,940
Customer deposits 618,438 714,710
Accrued expenses (115,508) 83,291
Income taxes, net (56,872) 167,032
Total adjustments (1,800,062) (2,057,879)
Net cash used by operations (1,904,942) (1,858,800)
CASH USED IN INVESTING ACTIVITIES -
Purchases of property, plant and equipment (113,363) (197,426)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
from treasury - 4,518
Increase in short-term loan 1,156,645 2,167,156
Increase in long-term loan 901,474 (99,146)
Net cash provided by financing activities 2,058,119 2,072,528
Net increase in cash and cash equivalents 39,814 16,302
Cash and cash equivalents at beginning of period 8,692 8,995
Cash and cash equivalents at end of the period $ 48,506 $ 25,297
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 273,950 $ 159,682
Income taxes 1,794 1,928
See accompanying notes to consolidated financial statements.
ART'S-WAY MANUFACTURING CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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-K for the six months ended November 30, 1997.
The results of operations for the second quarter ended May 31, 1998 are not
necessarily indicative of the results for the fiscal year ending November 30,
1998.
2. EARNINGS (LOSS) PER SHARE
Earnings (Loss) per share of common stock have been computed on the basis of
the weighted average number of shares of common stock outstanding after giving
effect to equivalent common shares from dilutive stock options. In February
1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share", which
revised the calculation and presentation provisions of Accounting Principals
Board (APB) Opinion 15 and related interpretations. SFAS 128, which is effective
for periods ending after December 15, 1997, requires companies to present, both
currently and retroactively, basic earnings per share and diluted earnings per
share instead of primary and fully-diluted earnings per share which was
previously required under APB Opinion 15. Accordingly, earnings per share for
all periods presented have been restated to apply the provisions of SFAS
No. 128. The calculation after applying the provisions of SFAS No. 128 did
not change the earnings(loss) per share when compared to earnings(loss)
per share calculated under APB Opinion 15.
3. CUSTOMER DEPOSITS
The Company receives customer deposits for equipment to be delivered
at a later date. As equipment is invoiced and shipped, customer deposits
are applied to accounts receivable created by these invoices.
4. INVENTORIES
Major classes of inventory are: May 31, November 30,
1998 1997
Raw material $1,972,595 $ 1,593,469
Work-in-process 3,960,470 3,340,641
Finished goods 3,687,471 3,916,359
Inventory market write-down (98,000) (96,000)
Total $9,522,536 $8,754,469
5. ACCRUED EXPENSES
May 31, November 30,
1998 1997
Major components of accrued expenses are:
Salaries, wages and commissions $ 339,576 $ 285,806
Provision for pending claims 9,555 9,555
Other 324,745 494,023
Total $ 673,876 $ 789,384
6. LOAN AND CREDIT AGREEMENTS
Line of Credit
In April 1998, the Company amended its bank loan agreement. The amendment
provides lower percentage borrowing rates on accounts receivable and inventory,
a lower interest rate, a capital expenditure facility and a term loan amortized
over a seven-year period.
The amended agreement is for a revolving credit facility of up to $6,000,000
based upon a percentage of the Company's accounts receivable and inventory
and allows within the revolving credit facility for the issuance of letters
of credit in an aggregate amount not exceeding $300,000. The interest rate
on this credit facility is based on the bank's referenced rate (8.5% at
May 31, 1998) and is variable based upon certain performance objectives
with a maximum of plus .50% of the referenced rate and a minimum of plus zero.
The amendment also provides for a restructured long-term loan in the principal
amount of $1,991,000. The principal amount is repayable in monthly installments
of $23,700 with the final payment due August 2000 unless the revolving credit
facility is renewed. In the event that the term of the revolving credit
facility is subsequently extended, the term loan shall continue to amortize
based upon the payment schedule outlined above.
Other terms and conditions of the original agreement dated August 1995
remain unchanged.
Notes Payable - Long-Term
A summary of the Company's long-term debt at May 31, 1998 is as follows:
Installment promissory note dated April 23, 1998,
in the original principal sum of $1,991,000, payable
in monthly installments of $23,700 plus interest
at zero percent over the bank's national money
market rate, secured $ 1,991,000
State of Iowa Community Development Block Grant
promissory notes at zero percent interest, maturity
2006 with quarterly principal payments to begin
October 1997 466,667
State of Iowa Community Development Block Grant
local participation promissory notes at 4% interest,
maturity 2006. Interest is payable quarterly beginning
in November 1996 and principal payments begin in
November 1997 237,187
Total long-term debt 2,694,854
Less current portion of long-term debt 341,586
Long-term debt, excluding current portion $ 2,353,268
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(a) Liquidity and Capital Resources
At May 31, 1998, the Company's working capital was $6.8 million compared
to $5.9 million at November 28, 1997. For the comparable period last year,
the Company's working capital was $5.4 million at May 31, 1997, as compared
to $5.2 million at November 28, 1996. Short-term bank borrowings are $1.8
million higher than a year ago. During the quarter, production continued
to be disrupted by start-up problems on new products and vendor supply problems.
These problems, now corrected, caused unbalanced material flow into the plant,
which increased inventories, especially in raw materials, and work-in-process,
resulting in increased bank borrowings.
As of May 31, 1998, the Company had no material commitments for capital
expenditures.
The Company anticipates that funds which may be required for future working
capital requirements, capital expenditures and business acquisitions will
be obtained from future operations, long-term and short-term debt and
short-term lines of credit.
(b) Results of Operations
For the second quarter ended May 31, 1998, overall sales were 49% higher than
a year ago, due to a major contribution from our contract to manufacture a range
of tillage equipment for a major OEM account. The total value of wholegoods,
service parts and miscellaneous components sold under this contract was in
excess of $3,300,000 - although approximately half of this amount represents
sales that were delayed due to start-up problems encountered in the first
quarter. Over $700,000 worth of Art's-Way branded products were shipped through
this OEM. This $4,000,000 total sales of completely new business represented
60% of our second quarter sales. Demand for our grinder mixers was down sharply
in the second quarter as the price of hogs weakened to the low thirties before
recovering to around $40 per cwt in May. Similarly prices for potatoes grown in
our sales areas were abysmal, with consequent demand for new potato equipment at
low levels not seen for many years. Demand for our mower line was down
significantly from last year because of a dealer over-stocking situation, and
sales of our SupRaMix declined slightly along with some weakness in milk prices.
Gross profits for the second quarter were down 24% from last year on the
49% higher sales. The ratio of cost of goods sold to net sales rose to 82.8%
from 66.2% a year ago. This major deterioration was due entirely to the
introduction of the new tillage line, which affected our profitability in two
ways. The OEM business has inherently lower profit margins, and compounded
by the concentration of tillage business in the second quarter, contributed
approximately 2/3 of the 16.6 point deterioration. The remaining 1/3 of the
variance, worth $407,000, was caused by continuing problems with delay in supply
from new vendors which reduced labor efficiency, and cost increases on materials
as we resourced our way around some of those vendor delays.
Operating expenses were 3% higher, due mainly to a continuing increase in
engineering expenditures and increased employee benefit costs. The operating
expense to sales ratio continued to fall, standing at 15.9% vs. 23.0 a year ago.
Interest costs were higher for the second quarter this year over last year due
to higher inventory and accounts receivable levels.
Year to date sales for this fiscal year are 27% over last year resulting from
second quarter sales as explained above.
The ratio of cost of goods sold to net sales rose from 71% last year to 80%
this year. A higher percentage of OEM sales to total sales and the startup and
efficiency problems involved with the new tillage business caused this increase.
Interest costs increased due to the higher inventory and accounts receivable
levels.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Various legal actions and claims are pending against the Company consisting
of ordinary routine litigation incidental to the business. In the opinion
of management and outside counsel, appropriate provisions have been made in
the accompanying consolidated financial statements for all pending legal
actions and other claims.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ART'S-WAY MANUFACTURING CO., INC.
Date_______July 13, 1998_________ /s/ J. David Pitt
(J. David Pitt, President)
Date_______July 13, 1998_________ /s/William T. Green
(William T. Green, Executive
Vice President, Chief Financial Officer)
