Appendix A to Item 601(c) of Regulation S-K
Commercial and Industrial Companies
Article 5 of Regulation S-X
Quarter Ended August 31, 1999
Item Number Item Description Amount
5-02(1) Cash and cash items 56,211
5-02(2) Marketable securities
5-02(3)(a)(1) Notes and accounts receivable-trade 3,726,230
5-02(4) Allowances for doubtful accounts 185,528
5-02(6) Inventory 9,443,172
5-02(9) Total current assets 14,069,493
5-02(13) Property, plant and equipment 10,669,311
5-02(14) Accumulated depreciation 7,843,027
5-02(18) Total assets 16,895,777
5-02(21) Total current liabilities 8,353,075
5-02(22) Bonds, mortgages and similar debt 6,599,130
5-02(28) Preferred stock-mandatory redemption 0
5-02(29) Preferred stock-no mandatory redemption 0
5-02(30) Common stock 13,408
5-02(31) Other stockholders' equity 6,598,490
5-02(32) Total liabilities and stockholders'
equity 16,895,777
5-03(b)1(a) Net sales of tangible products 5,098,777
5-03(b)1 Total revenues 5,098,777
5-03(b)2(a) Cost of tangible goods sold 3,650,661
5-03(b)2 Total costs and expenses applicable
to sales and revenues 1,011,611
5-03(b)3 Other costs and expenses 7,060
5-03(b)5 Provision for doubtful accounts
and notes (19,472)
5-03(b)8 Interest and amortization of debt
discount 130,180
5-03(b)10 Income before taxes and other items 314,766
5-03(b)11 Income tax expense 110,168
5-03(b)14 Income from continuing operations 204,598
5-03(b)(15) Discontinued operations 0
5-03(b)(17) Extraordinary items 0
5-03(b)(18) Cumulative effect-changes in
accounting principles 0
5-03(b)19 Net income 204,598
5-03(b)20 Income per share-primary 0.16
5-03(b)20 Income per share-fully diluted 0.16
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 August 31, 1999 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 filing
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 September 15, 1999:
1,255,151
Number of Shares
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Year to Date
August 31 August 31 August 31 August 31
1999 1998 1999 1998
NET SALES $5,098,777 $5,686,348 $13,210,294 $17,346,481
COST OF GOODS SOLD 3,650,661 3,879,938 9,982,921 13,218,223
GROSS PROFIT 1,448,116 1,806,410 3,227,373 4,128,258
EXPENSES:
Engineering 99,049 169,511 316,873 435,797
Selling 348,253 412,940 952,926 1,100,638
General and
administrative 548,808 654,555 1,741,747 1,852,102
Total 996,110 1,237,006 3,011,546 3,388,537
INCOME FROM OPERATIONS 452,006 569,404 215,827 739,721
OTHER DEDUCTIONS:
Interest expense (130,180) (136,922) (359,487) (410,872)
Other (7,060) (48,963) (165,206) (106,683)
Other deductions (137,240) (185,885) (524,693) (517,555)
INCOME (LOSS) BEFORE
INCOME TAXES 314,766 383,519 (308,866) 222,166
INCOME TAX EXPENSE (BENEFIT) 110,168 134,230 (108,013) 77,757
NET INCOME (LOSS) $ 204,598 $ 249,289 $ (200,853) $ 144,409
INCOME (LOSS) PER SHARE (NOTE 2):
Basic $ 0.16 $ 0.20 $ (0.16) $ 0.12
Diluted $ 0.16 $ 0.20 $ (0.16) $ 0.12
COMMON SHARES AND
EQUIVALENT OUTSTANDING:
Basic 1,246,601 1,245,931 1,246,229 1,245,931
Diluted 1,246,601 1,267,303 1,246,229 1,270,403
See accompanying notes to consolidated financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED BALANCE SHEETS
August 31, November 30
1999 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cas $ 56,211 $ 13,743
Accounts receivable-customers,
net of allowance for doubtful accounts
of $185,528 and $205,000 in August and November,
respectively 3,540,702 3,755,831
Inventories 9,443,172 9,388,261
Deferred income taxes 754,172 649,391
Income tax receivable - 49,000
Other current assets 275,236 275,144
Total current assets 14,069,493 14,131,370
PROPERTY, PLANT AND EQUIPMENT,
at cost 10,669,311 10,418,307
Less accumulated depreciation 7,843,027 7,554,454
Net property, plant and equipment 2,826,284 2,863,853
TOTAL $ 16,895,777 $ 16,995,223
See accompanying notes to consolidated financial statements.
August 31 November 30,
1999 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ 4,449,413 $ 4,368,303
Current portion of long-term debt 1,710,962 359,862
Accounts payable 2,361,884 1,880,398
Customer deposits 74,304 111,902
Accrued expenses 1,107,612 1,164,271
Total current liabilities 9,704,175 7,884,736
LONG-TERM DEBT, excluding current portion 438,755 2,159,732
DEFERRED INCOME TAXES 140,949 140,949
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 1,617,726 1,618,453
Retained earnings 5,886,841 6,087,694
7,517,975 7,719,555
Less cost of common shares in treasury of
94,177 and 94,847 in August and November,
respectively 906,077 909,749
Total stockholders' equity 6,611,898 6,809,806
TOTAL $ 16,895,777 $ 16,995,223
See accompanying notes to consolidated financial statements.
ART'S-WAY MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
August 31 August 31
1999 1998
CASH FLOW FROM OPERATIONS:
Net income (loss) $ (200,853) $ 144,409
Adjustment to reconcile net loss to net
cash provided (used) by operations:
Depreciation and amortization 288,573 349,643
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 215,129 (1,787,944)
Inventories (54,911) (1,241,220)
Sundry (92) (70,773)
Increase (Decrease) in:
Accounts payable 481,486 556,744
Customer deposits (37,598) 19,825
Accrued expenses (56,659) (9,106)
Income taxes, net (55,781) 206,316
Total adjustments 780,147 (1,976,515)
Net cash provided by (used in) operations 579,294 (1,832,106)
CASH USED IN INVESTING ACTIVITIES -
Purchases of property, plant and equipment (251,004) (454,908)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
from treasury 2,945 -
Increase in short-term loan 1,432,210 1,628,722
Increase (decrease) in long-term loan (1,720,977) 674,567
Net cash provided by (used in)
financing activities (285,822) 2,303,289
Net increase in cash 42,468 16,275
Cash at beginning of period 13,743 8,692
Cash at end of the period $ 56,211 $ 24,967
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 359,487 $ 410,872
Income taxes 3,952 1,794
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 year ended November 30, 1998. The results of operations
for the third quarter ended August 31, 1999 are not necessarily
indicative of the results for the fiscal year ending November 30, 1999.
2. EARNINGS (LOSS) PER SHARE
The Company accounts for earnings per share in accordance with
SFAS 128 Earnings Per Share (SFAS 128). SFAS 128 requires the
presentation of "basic" and "diluted" income per share on the
face of the income statement. Income per common share is
computed by dividing net income by the weighted average number
of common shares and common equivalent shares outstanding during
each period.
The diffference in shares utilized in calculating basic and diluted
earnings per share represents the number of shares issued under the
Company's stock option plans less shares assumed to be purchased
with proceeds from the exercise of the stock options. Due to the
net loss year to date August 31, 1999, the anti-dilutive effect of
the Company's stock option plans is not included in the calculation
of diluted earnings per share for this period. The only reconciling
item between the shares used in the computation of basic and diluted
earnings per share for the quarters ended August 31, 1999 and
August 31, 1998 and year to date August 31, 1998, is the effect of
stock options of 0, 21,372 and 24,472 respectively.
3. INVENTORIES
Major classes of inventory are: August 31, November 30,
1999 1998
Raw material $1,179,937 $ 1,503,784
Work-in-process 3,916,324 4,147,554
Finished goods 4,346,911 3,736,923
Total $ 9,443,172 $9,388,261
4. ACCRUED EXPENSES
Major components of accrued expenses are:
August 31, November 30,
1999 1998
Salaries, wages and commissions $ 347,995 $ 337,682
Other 759,617 826,589
Total $1,107,612 $1,164,271
5. LOAN AND CREDIT AGREEMENTS
A summary of the Company's long-term debt is as
follows:
August 31, November 30,
1999 1998
Installment promissory note payable
in monthly installments of $23,700
plus interest at one-half percent
over the bank's national money
market rate (8.25%), secured $1,635,500 $1,848,800
State of Iowa Community Development
Block Grant promissory notes at zero
percent interest, maturity 2006 with
quarterly principal payments of $11,111 $ 311,111 $ 444,444
State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity 2006, with quarterly
payments of $7,814 $ 203,106 $ 226,350
Total long-term debt $ 2,149,717 $2,519,594
Less current portion of long-term debt 1,710,962 359,862
Long-term debt, excluding
current portion $ 438,755 $2,159,732
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(a) Material Changes in Financial Condition
At August 31, 1999, the Company's working capital was $5.7 million
compared to $6.2 million at November 30, 1998. For the comparable
period last year, the Company's working capital was $6.7 million at
August 31, 1998, as compared to $5.9 million at November 30, 1997.
Debt at August 31, 1999 was $289,000 lower than at November 30,
1998 and $811,000 lower than one year ago. The Company's improved
cash flow from operations for the nine months ended August 31, 1999
resulted primarily from reduced inventory growth and reductions in
accounts receivable.
The Company was notified by its lender that the Company does not
fit the lender's customer profile and was requested to relocate
its financing needs. At August 31, 1999, the Company is in
default with a covenant, the fixed maturity coverage ratio, of
their credit facility. The lender has notified the Company via
letter dated September 15, 1999, that the current loan agreement
provides that the lender may, as a result of any event of
default, accelerate the payment of all obligations. The
Company has continued to represent to the lender that they are
in the process of obtaining alternate financing. As a result,
the lender has decided not to accelerate the payment of all
obligations at this time, even though the lender has the right
to do so. The lender has decided to allow the company to
proceed under the terms of the loan agreement. As a result, all
long-term borrowing associated with this lender has been
classified as current.
The Company is currently negotiating with another financial
institution in order to establish a new credit facility. The
Company anticipates that this new credit facility will be
finalized during the fourth quarter.
As of August 31, 1999, 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, short-term
lines of credit, and long-term debt.
(b) Material Changes in Results of Operations
For the quarter ended August 31, 1999, total sales were 10% lower
than the quarter ended August 31, 1998. OEM sales were off 61% and
domestic sales of Art's-Way branded equipment were off 3%.
The reduction in OEM sales was due to anticipated inventory
reduction strategies by our major customer in reaction to the
continuing difficulties experienced in the agricultural industry.
Art's-Way brand sales were relatively flat, despite the current
disarray in the overall farm economy, primarily as a result of
new product introductions. The new products included a range of
grain drills, edible-bean cutters and multi-crop shredder/deviners
recently acquired from UFT, plus a new 8 row sugar beet
harvester, a new versatile potato harvester and a new one pass
edible-bean windrower developed internally. Sales of sugar beet
equipment were down 8% on much lower farm income expectations
in the Red River Valley growing areas. This weakness was partially
offset by continuing strength in the Company's other major sugar
beet markets, and by a significant contribution from recent new
product introductions.
For year to date ended August 31, 1999, total sales were 24%
below the previous year. Sales of Art's-Way branded
equipment were 10% lower and OEM sales were 43% lower.
Reduction in sales of OEM occurred for the reasons
specified above. Domestic Art's-Way sales continue to be
affected by the general weakness in the farm economy,
particularly weakness in the livestock and grain markets.
Gross profits for the quarter were down 20% from last year on
the 10% lower sales. The ratio of cost of goods sold to net sales
rose to 71.6% from 68.2% a year ago. Gross margins were adversely
impacted by production cutbacks, particularly on sugar beet
equipment and by start-up difficulties experienced on the
new product introductions.
Gross profits for the year were down 22% from last year on the
24% lower sales. The ratio of cost of goods sold to net sales
declined from 76.2% in 1998 to 75.6% in 1999. The margin improve-
ment resulted primarily from product mix change; i.e., a higher
proportion of Art's-Way branded sales compared to OEM sales.
Operating expenses for the quarter were 19% lower than for the
same period one year ago, with major reductions in selling and
administration costs. Selling expenses were lower, primarily
in commissions and travel costs, due to the reduced Art's-Way
branded equipment sales. The reduction in administrative
expenses results primarily from staff reductions and the
elimination of the Company's match on the employee 401(k)
Savings plan. The operating expense to sales ratio was
significantly lower, 19.5% vs 21.8% a year ago.
Operating expenses year to date were 11% lower than the previous year.
Significant savings have been achieved in all categories and
engineering expenditures have been prioritized to maximize
current income without critically damaging ongoing product
development.
Other expenses for the quarter decreased $42,000 over the same
period one year ago. Higher costs on the Company's program to
offer floor plan financing to our larger dealers through a
third party was offset by a debt forgiveness on some of the
Company's EDSA loans. The EDSA loan agreement provides that if
the Company met certain contract obligations in regard to job
creation/retention, demonstrating 51% benefit to low and moderate-
income individuals and investment, $100,000 of the debt would be
forgiven. Upon compliance with this provision in the third quarter
ended August 31, 1999, the Company's long-term borrowings of
$100,000 were forgiven and included in other income.
Other expense year to date increased $59,000 primarily due to
increased floor plan financing costs. The interest expense
decrease of $51,000 reflects the lower borrowing levels on bank
debt.
(c) Year 2000 Issues
In 1998 the Company began preparing its computer-based systems for
year 2000 ("Y2K") computer software compliance issues. Historically,
certain computer programs were written using two digits rather than
four to define the applicable year. As a result, software may recognize
a date using the two digits "00" as 1900 rather than the year 2000.
Computer programs that do not recognize the proper date could generate
erroneous data or cause systems to fail. The Company's Y2K project
covers its significant computer programs and certain equipment,
which contain microprocessors and is divided into five major phases-
assessment, planning, conversion, implementation and testing. The
Company has completed the Y2K project and it is expected that all
systems will function reliably or that any problems will not have
any material inpact on the Company's operations.
The Company's Y2K project also considers the readiness of significant
customers and vendors. The Company is in the process of identifying
and contacting critical suppliers and customers regarding their
plans and progress in addressing their Y2K issues. The Company has
received varying information from such parties on the state of
compliance or expected compliance. The non-compliance of such vendors
could impair the ability of the Company to obtain necessary products
or to sell or provide services to its customers. Disruptions of
the computer systems of the Company's vendors could have a material
adverse effect on the Company's financial condition and results of
operations for the period of such disruption. Contingency plans are
being developed in the event that any critical supplier or customer
is not compliant.
The Company has incurred approximately $305,000 of Y2K project expense
to date. Future expenses are estimated to be approximately $3,000.
Such cost estimates are based upon presently available information
and may change as the Company continues with its Y2K project.
The Company believes that its internal operating systems will be
Year 2000 compliant before December 31, 1999. Therefore, the
Company believes that the most reasonably likely worst-case
scenario will be that one or more of third parties with which
the Company has a material business relationship will not have
successfully dealt with its Year 2000 issues. A critical third
party failure (such as telecommunication, utilities or
financial institutions) could have a material adverse affect
on the Company by eliminating the Company's ability to order
and pay for products from suppliers and receive orders and
payments from customers. It is also possible that one or
more of the internal operating systems will not function
properly and make it difficult to complete routine tasks,
such as accounting and other record keeping duties. Based
on information currently available, the Company does not
believe there will be any long-term operating systems failures.
However, the Company will continue to monitor these issues
and will concentrate its efforts on minimizing their impact.
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 October 12, 1999 /s/ J. David Pitt
(J. David Pitt, President)
Date October 12, 1999 /s/William T. Green
(William T. Green, Executive Vice President,
Chief Financial Officer)
