10-Q 1 0001.txt Appendix A to Item 601(c) of Regulation S-K Commercial and Industrial Companies Article 5 of Regulation S-X Quarter Ended August 31, 2000 Item Number Item Description Amount 5-02(1) Cash and cash items 16,328 5-02(2) Marketable securities 5-02(3)(a)(1) Notes and accounts receivable-trade 3,027,902 5-02(4) Allowances for doubtful accounts 214,756 5-02(6) Inventory 8,432,528 5-02(9) Total current assets 11,357,716 5-02(13) Property, plant and equipment 10,627,792 5-02(14) Accumulated depreciation 8,450,183 5-02(18) Total assets 14,148,782 5-02(21) Total current liabilities 7,641,066 5-02(22) Bonds, mortgages and similar debt 4,822,403 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 6,131,431 5-02(32) Total liabilities and stockholders' equity 14,148,782 5-03(b)1(a) Net sales of tangible products 4,162,794 5-03(b)1 Total revenues 4,162,794 5-03(b)2(a) Cost of tangible goods sold 3,081,460 5-03(b)2 Total costs and expenses applicable to sales and revenues 775,722 5-03(b)3 Other costs and expenses 36,444 5-03(b)5 Provision for doubtful accounts and notes 3,000 5-03(b)8 Interest and amortization of debt discount 145,814 5-03(b)10 Income before taxes and other items 120,354 5-03(b)11 Income tax expense 0 5-03(b)14 Income from continuing operations 120,354 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 120,354 5-03(b)20 Income per share-primary 0.10 5-03(b)20 Income per share-fully diluted 0.10 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, 2000 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 13, 2000: 1,256,351 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 2000 1999 2000 1999 NET SALES 4,162,794 $5,098,777 $10,828,252 $13,210,294 COST OF GOODS SOLD 3,081,460 3,650,661 8,232,291 9,982,921 GROSS PROFIT 1,081,334 1,448,116 2,595,961 3,227,373 EXPENSES: Engineering 123,896 99,049 305,757 316,873 Selling 233,699 348,253 541,475 952,926 General and Administrative 421,127 548,808 1,288,421 1,741,747 Total 778,722 996,110 2,135,653 3,011,546 INCOME FROM OPERATIONS 302,612 452,006 460,308 215,827 OTHER DEDUCTIONS: Interest expense (145,814) (130,180) (434,200) (359,487) Other (36,444) (7,060) (101,668) (165,206) Other deductions (182,258) (137,240) (535,868) (524,693) INCOME (LOSS) BEFORE INCOME TAXES 120,354 314,766 (75,560) (308,866) INCOME TAX EXPENSE (BENEFIT) - 110,168 - (108,013) NET INCOME (LOSS) $ 120,354 $ 204,598 (75,560) (200,853) INCOME (LOSS) PER SHARE (NOTE 2): Basic $ 0.10 $ 0.16 $ (0.06) $ (0.16) Diluted $ 0.10 $ 0.16 $ (0.06) $ (0.16) COMMON SHARES AND EQUIVALENT OUTSTANDING: Basic 1,256,351 1,246,601 1,256,351 1,246,229 Diluted 1,256,351 1,246,601 1,256,351 1,246,229 See accompanying notes to financial statements. ART'S-WAY MANUFACTURING CO., INC. CONDENSED BALANCE SHEETS August 31, November 30 2000 1999 (Unaudited) ASSETS CURRENT ASSETS Cash $ 16,328 $ 273,303 Accounts receivable-customers, net of allowance for doubtful accounts of $214,756 and $223,696 in August and November, respectively 2,813,146 2,461,502 Inventories 8,432,528 9,074,812 Other current assets 95,714 100,680 Total current assets 11,357,716 11,910,297 PROPERTY, PLANT AND EQUIPMENT, at cost 10,627,792 10,627,792 Less accumulated depreciation 8,450,183 8,073,069 Net property, plant and equipment 2,177,609 2,554,723 DEFERRED INCOME TAXES 613,457 613,457 TOTAL $ 14,148,782 $ 15,078,477 See accompanying notes to financial statements. August 31, November 30, 2000 1999 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to bank $ 3,032,725 $ 3,648,888 Current portion of long-term debt 1,426,801 1,640,101 Accounts payable 2,327,242 2,113,168 Customer deposits 130,646 119,861 Accrued expenses 723,652 916,428 Total current liabilities 7,641,066 8,438,446 LONG-TERM DEBT, excluding current portion 362,877 419,632 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 1,559,037 1,559,037 Retained earnings 5,382,208 5,457,768 6,954,653 7,030,213 Less cost of common shares in treasury of 84,427 in August and November, 809,814 809,814 Total stockholders' equity 6,144,839 6,220,399 TOTAL $ 14,148,782 $ 15,078,477 See accompanying notes to financial statements. ART'S-WAY MANUFACTURING CO., INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDED AUGUST 31, AUGUST 31, 2000 1999 CASH FLOW FROM OPERATIONS: Net Loss $ (75,560) $(200,853) Adjustment to reconcile net loss to net cash provided by operations: Depreciation and amortization 377,114 288,573 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (351,644) 215,129 Inventories 642,284 (54,911) Other 4,966 (92) Increase (Decrease) in: Accounts payable 214,074 481,486 Customer deposits 10,785 (37,598) Accrued expenses (192,776) (56,659) Income taxes, net - (55,781) Total adjustments 704,803 780,147 Net cash provided by operations 629,243 579,294 CASH USED IN INVESTING ACTIVITIES - Purchases of property, plant and equipment - (251,004) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock from treasury - 2,945 Increase (decrease)in short-term loan (829,463) 1,432,210 Decrease in long-term loan (56,755) (1,720,977) Net cash used in financing activities (886,218) (285,822) Net increase (decrease) in cash (256,975) 42,468 Cash at beginning of the period 273,303 13,743 Cash at end of the period $ 16,328 $ 56,211 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 434,200 $ 359,487 Income taxes 4,790 3,952 See accompanying notes to 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, 1999. The results of operations for the third quarter ended August 31, 2000 are not necessarily indicative of the results for the fiscal year ending November 30, 2000. 2. EARNINGS (LOSS) PER SHARE The Company has adopted SFAS 128 Earnings Per Share (SFAS 128) which has changed the method for calculating income per share. 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 anti-dilutive effect of the Company's stock option plans the stock options have not been included in the calculation of diluted earnings per share for all those periods presented. 3. INVENTORIES Major classes of inventory are: August 31, November 30, 2000 1999 Raw material $1,493,052 $ 1,146,456 Work-in-process 2,655,586 3,362,003 Finished goods 4,283,890 4,566,353 Total $ 8,432,528 $9,074,812 4. ACCRUED EXPENSES Major components of accrued expenses are: August 31, November 30, 2000 1999 Salaries, wages and commissions $ 393,854 $ 337,611 Other 329,798 578,817 Total $ 723,652 $ 916,428 5. LOAN AND CREDIT AGREEMENTS Line of Credit The Company has a credit agreement with a bank which allows for borrowings up to $4,500,000, subject to borrowing base percentages on the Company's accounts receivable and inventory, and allowing for letters of credit for $100,000. At November 30, 1999 the Company had borrowed $3,648,888 and has $100,000 in outstanding letters of credit. At August 31, 2000 the Company has borrowed $3,032,725 and has $100,000 in out- standing leters of credit. At November 30, 1999 and August 31, 2000, $182,000 and $281,000 was available for borrowings, respectively. The interest rate is based on the bank's referenced rate and is variable based upon certain performance objectives with a maximum of plus 3.00% of the referenced rate and a minimum of plus zero (12.50% at August 31, 2000). The Company also has a long-term loan with the bank with an original principal amount of $1,991,000. The principal amount is repayable in monthly installments of $23,700 with the remaining balance due October 2000. All loans, advances and other obligations, liabilities and indebtedness of the Company are secured by all present and future assets. The Company pays an unused line fee equal to three- eights of one percent of the unused portion of the revolving line of credit. During 1999, 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 November 30, 1999 the Company was in default of a loan covenant, the fixed maturity coverage, of their credit facility and installment promissory note. The lender notified the Company, that the current loan agreement provided that the lender might, as a result of any event of default, accelerate the payment of all obligations. As a result, all long-term borrowings associated with this lender have been classified as current. The lender did not call for the acceleration of the payment of all obligations, but had the right to do so at any time. The initial term of the loan ended on August 31, 2000. In a letter dated May 26, 2000, the Company was notified that the lender did not intend to extend the term of the loan agreement beyond the termination date. Therefore, all of the obligations outstanding under the credit agreement and long term loan amounting to $4,383,825 at August 31, 2000 were due and payable on August 31, 2000. On August 31, 2000 the loan agreement was amended, and the lender agreed to forbear the lender from exercising its rights and remedies under the loan agreement until October 15, 2000 and to extend the maturity date of the loan agreement to October 15, 2000. Effective October 15, 2000 the loan agreement was amended. As part of this amendment,the lender agreed to forbear the lender from exercising its rights and remedies under the loan agreement until any future event of default or January 15, 2001, whichever is earlier. The amendment also extended the maturity date of the loan agreement to January 15, 2001. The Company continues to pursue financing with other lending institutions and explore different alternate financing arrangements. Lending institutions are reluctant to expand their loan portfolios in the agriculture sector of the economy until the depressed state of the farm economy improves. In addition, the size of the loan is difficult to place as the loan required is too large and specialized for many local lenders and too small for the regional and national lenders. While the Company believes a new credit facility will be obtained, there is no assurance of such. If the Company is unable to obtain a new credit facility prior to the expiration of its existing facility on January 15, 2001, it will be unable to repay its outstanding balance due January 15, 2001. A summary of the Company's long-term debt is as follows: August 31, November 30, 2000 1999 Installment promissory note payable in monthly installments of $23,700 plus interest at three percent over the bank's national money market rate (12.50%), secured by the cash, accounts receivable, inventories and property, plant and equipment $1,351,100 $1,564,400 State of Iowa Community Development Block Grant promissory notes at zero percent interest, maturity 2006 with quarterly principal payments of $11,111 $ 266,668 $ 300,000 State of Iowa Community Development Block Grant local participation promissory notes at 4% interest, maturity 2006, with quarterly payments of $7,814 $ 171,910 $ 195,333 Total long-term debt $ 1,789,678 $2,059,733 Less current portion of long-term debt 1,426,801 1,640,101 Long-term debt, excluding current portion $ 362,877 $ 419,632 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (a) Material Changes in Financial Condition The Company's main source of funds for the nine months ended August 31, 2000 was a decrease in inventories and an increase in accounts payable. These two main sources of funds were offset partially by an increase in receivables and a decrease in accrued liabilites. The positive cash flow allowed for the reduction in bank borrowings. The conditions existing in the agriculture economy, in addition to adversely impacting sales, has also resulted in a deterioration of the Company's accounts receivable. The Company believes it has provided an adequate reserve for uncollectible accounts based on currently available information. As of August 31, 2000, the Company had no material commitments for capital expenditures. The Company has a credit agreement with a bank which allows for borrowings up to $4,500,000, subject to borrowing base percentages on the Company's accounts receivable and inventory, and allowing for letters of credit for $100,000. At November 30, 1999, the Company had borrowed $3,648,888 and had $100,000 in outstanding letters of credit. At August 31, 2000, the Company has borrowed $3,032,725 and has $100,000 in outstanding letters of credit. At August 31, 2000, $281,000 was available for borrowings. During 1999, 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 November 30, 1999, the Company was in default of a loan covenant, the fixed maturity coverage, of their credit facility and installment promissory note. The lender has notified the Company 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 lender did not call for this acceleration, but has the right to do so at any time. The lender assessed an additional 2.0% interest factor to its credit facility. The initial term of the loan ended on August 31, 2000. In a letter dated May 26, 2000, the Company was notified that the lender did not intend to extend the term of the loan agreement beyond the termination date. Therefore, all of the obligations outstanding under the credit agreement and long term loan amounting to $4,383,825 at August 31, 2000 were due and payable on August 31, 2000. On August 31, 2000, the loan agreement was amended and the lender agreed to forbear the lender from exercising its rights and remedies under the loan agreement until October 15, 2000 and to extend the maturity date of the loan agreement to October 15, 2000. The amendment contains essentially the same terms as the initial agreement except for the interest rate, which has been increased from one-half percent to three percent over the bank's referenced rate (9.5%). At August 31, 2000 the loan bears interest at 12.5% per annum. Effective October 15, 2000 the loan agreement was amended. As part of this amendment, the lender agreed to forbear the lender from exercising its rights and remedies under the loan agreement until any future event of default or January 15, 2001, whichever is earlier. The amendment also extended the maturity date of the loan agreement to January 15, 2001. The Company continues to pursue financing with other lending institutions and explore different alternate financing arrangements. Lending institutions are reluctant to expand their loan portfolios in the agriculture sector of the economy until the depressed state of the farm economy improves. In additon, the size of the loan is difficult to place as the loan required is too large and specialized for many local lenders and too small for the regional and national lenders. While the Company believes a new credit facility will be obtained, there is no assurance of such. If the Company is unable to obtain a new credit facility prior to the expiration of its existing facility on January 15, 2001, it will be unable to repay its outstanding balance due. The Company believes the funding expected to be generated from operations and provided by the new credit facility when established, and its existing borrowing capacity will be sufficient to meet working capital and capital investment needs. (b) Material Changes in Results of Operations For the quarter ended August 31, 2000, total sales were 18% lower than the quarter ended August 31, 1999. OEM sales were 10% higher and sales of Art's-Way branded equipment were 20% lower. OEM sales reflect high service parts sales. The decline in sales of Art's-Way branded products results from a reduced demand for feed processing products and beet equipment due to the continuing weakness in the farm economy. For the year to date ended August 31, 2000, total sales were 18% below the previous year. Both Art's-Way branded product and OEM product sales continue to be effected by the general weakness in the farm economy, particularly weakness in the livestock and grain markets. Major cost reduction programs were implemented effective December 1, 1999. These cost reductions have served to maintain the gross profit as a percent of sales and also to reduce operating expenses and resulted in income from operations improving by 113% year to date ended August 31,2000 when compared to the same period the previous year. The increase in interest expense results from higher interest rates. These higher rates are a combination of the increase in prime rate and the implementation of an additional 2% interest factor by our prime lender. Due to the distressed agricultural economy, the Company will not record any tax benefits until the Company returns to profitability. Although the farm economy remains distressed, the order backlog as of August 31, 2000 is $2,300,000 compared to $1,400,000 a year ago. These orders will principally be delivered by the end of the fourth quarter of the current fiscal year. Part II - Other Information ITEM 1. LITIGATION AND CONTINGENCIES 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 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 16, 2000 /s/William T. Green (William T. Green, President, Chief Financial Officer)