UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number 0-4479
THE OHIO ART COMPANY
(Exact name of registrant as specified in its charter)
Ohio 34-4319140
(State of Incorporation) (I.R.S. Employer Identification No.)
P.O. Box 111, Bryan, Ohio 43506
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (419) 636-3141
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 (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 _____
At October 31, 1997 there were 897,350 shares outstanding of the
Company's Common Stock at $1.00 par value.
Page 1 of 10
FORM 10-Q
PART I - FINANCIAL INFORMATION
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
September 30 September 30
---------------- ------------------
1997 1996 1997 1996
------- ------- ------- -------
(In thousands, except per share data)
Net Sales $24,351 $24,636 $11,369 $12,530
Other Income 512 453 157 153
------- ------- ------- -------
24,863 25,089 11,526 12,683
Costs and Expenses:
Cost of products sold 20,333 19,583 8,292 8,857
Selling, administrative
and general 8,911 9,202 3,229 3,753
Interest 764 243 367 123
------- ------- ------- -------
30,008 29,028 11,888 12,733
------- ------- ------- -------
LOSS BEFORE INCOME TAXES (5,145) (3,939) (362) (50)
Income Tax Credit (1,286) (1,378) (90) (17)
------- ------- ------- -------
NET LOSS $(3,859) $(2,561) $ (272) $ (33)
======= ======= ======= =======
Net Loss Per Share $ (4.25) $ (2.77) $ (.31) $ (.04)
(Note 3)
Dividends Per Share (Note 3) $ .16 $ .21 $ .04 $ .04
Average Shares Outstanding 908 924 902 917
(Note 3)
<FN>
See notes to condensed consolidated unaudited financial statements.
</FN>
Page 2 of 10
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
1997 1996
------- -------
(Unaudited) (Note)
(Thousands of dollars)
ASSETS
Current Assets
Cash $ 768 $ 1,078
Accounts receivable less allowance
(1997 - $504; 1996 - $365) 9,056 6,222
Inventories - Note 2
On first-in, first-out cost method:
Finished products 3,540 3,997
Products in process 400 393
Raw materials 3,694 2,329
Less: Adjustment to reduce inventories
to last-in, first-out cost method (2,474) (2,429)
------- -------
5,160 4,290
Recoverable income taxes 1,928 711
Prepaid expenses 1,325 1,043
Deferred federal income taxes 692 692
------- -------
Total Current Assets 18,929 14,036
Property, Plant and Equipment
Cost 35,372 33,641
Less allowances for depreciation 23,477 (22,176)
------- -------
11,895 11,465
Other Assets 1,793 1,762
Goodwill 805 820
------- -------
$33,422 $28,083
======= =======
<FN>
See notes to condensed consolidated unaudited financial statements.
NOTE: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
</FN>
Page 3 of 10
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
1997 1996
------- -------
(Unaudited) (Note)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,676 $ 3,169
Other current liabilities 1,866 1,751
------- -------
Total Current Liabilities 5,542 4,920
Deferred Federal Income Taxes 733 733
Long-Term Obligations 17,465 8,375
Stockholders' Equity (Note 3)
Common Stock, par value $1.00 per share:
Authorized: 1,935,552 shares
Outstanding: 1997-899,079; 1996-922,277
shares (excluding treasury shares of
60,681 and 37,483 respectively) 899 922
Additional paid-in capital 209 225
Retained earnings 8,574 12,908
------- -------
9,682 14,055
------- -------
$33,422 $28,083
======= =======
<FN>
See notes to condensed consolidated unaudited financial statements
NOTE: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
</FN>
Page 4 of 10
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
------------------
1997 1996
------- -------
(Thousands of dollars)
Operating Activities
Net loss $(3,859) $(2,561)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for depreciation and amortization 1,301 978
Changes in accounts receivable, inventories,
prepaid expenses, other assets, accounts
payable, and other liabilities (4,597) (5,298)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (7,155) (6,881)
Investing Activities
Purchase of plant and equipment, less
net book value of disposals (1,731) (4,179)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,731) (4,179)
Financing Activities
Borrowings 9,690 9,600
Repayments (600) -0-
Purchase of treasury shares (370) (692)
Cash dividends (144) (197)
------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,576 8,711
------- -------
Cash
Decrease during period (310) (2,349)
At beginning of period 1,078 2,800
------- -------
CASH AT END OF PERIOD $ 768 $ 451
======= =======
<FN>
See notes to condensed consolidated unaudited financial statements.
</FN>
Page 5 of 10
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1997
Note 1 - Basis of Presentation
The accompanying condensed consolidated unaudited financial statements
have been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations, and cash
flows in conformity with generally accepted accounting principles.
For further information, refer to the consolidated financial statements
and footnotes included in the Company's annual report on Form 10-K for
the year ended December 31, 1996.
All adjustments necessary (consisting of normal adjustments), in the
opinion of management, for a fair statement of results for the periods
indicated have been made.
Due to the seasonal nature of the toy business in which the Company is
engaged and the factors set forth in Management's Discussion and
Analysis, the results of interim periods are not necessarily indicative
of a full calendar year.
Note 2 - Inventories
The Company takes a physical inventory annually at each location. The
amounts shown in the quarterly financial statements have been determined
using the Company's standard cost accounting system. An estimate, based
on past experience, of the adjustment which may result from the next
physical inventory has been included in the financial statements.
Inventories are priced at the lower of cost or market under the last-in,
first-out (LIFO) cost method. Since inventories under the LIFO method
can only be determined at the end of each fiscal year based on
quantities and costs at that time, interim inventory valuation must be
based on estimates of quantities and costs at year-end.
Note 3 - Average Shares Outstanding
During 1996 the Company declared a two for one stock split by way of a
dividend on all outstanding common stock excepting shares held in the
treasury. The Company used 190,000 shares of treasury stock and 280,751
of authorized but previously unissued common stock to effect the
dividend. All share (excepting treasury shares) and per share amounts
have been retroactively adjusted for the stock split.
Unallocated ESOP shares are deducted from outstanding shares of Common
Stock to arrive at average shares outstanding.
Page 6 of 10
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATIONS
- ----------
Net sales for the nine months ended September 30, 1997 decreased
approximately 1% to $24,351,000 from $24,636,000 for the comparable
1996 period and decreased approximately 9% to $11,369,000 for the third
quarter of 1997 from $12,530,000 for the comparable 1996 period. The
slight decrease for the nine month period is comprised of a decrease of
approximately $1,900,000 in the toy segment and an increase of
approximately $1,590,000 in the diversified products segment. The
majority of the decrease in the toy segment was in our "Making
Creativity Fun"(R) category of product which is made up of Etch A Sketch(R)
and related products. The increase in the diversified products segment,
specifically the metal lithography department, resulted from the new
metal lithography equipment which became operational early in 1997.
The decrease for the three month period is comprised of a decrease of
approximately $2,100,000 in the toy segment and an increase of
approximately $940,000 in the diversified products segment for the same
reasons as cited above for the nine month period.
The Company's business is seasonal, with approximately 60-70% of its
sales being made in the last six months of the calendar year in recent
years. Subject to industry practice and comments as detailed in the
Registrant's annual Form 10-K for the year ended December 31, 1996,
order backlog as of October 31st is approximately $6,577,000 versus
$6,882,000 at the same date in 1996 or approximately 4% lower than
the prior year. Based on the lower level of sales through the first
nine months, as well as the decrease in the order backlog, it is
anticipated that net sales for the calendar year 1997 will be lower
than 1996 sales by approximately 1% to 5%, although it is difficult to
predict the final outcome for 1997.
Other income for the nine months ended September 30, 1997 increased to
$512,000 from $453,000 for the comparable 1996 period and increased to
$157,000 for the third quarter of 1997 from $153,000 for the comparable
1996 period. The increase in other income is primarily due to an
increase in royalty income from the distribution of the Company's
products outside of the United States.
Gross profit margin (percentage) for the nine months ended September
30, 1997 (16.5%) decreased significantly from the comparable 1996
period (20.5%). Gross profit margin (percentage) for the third quarter
of 1997 decreased to 27.1% from 29.3% for the similar period of 1996.
The decrease for both periods is primarily due to lower domestic toy
sales production at the Bryan, Ohio facility which resulted in increased
manufacturing overhead variances. In addition, the nine month period of
1997 was adversely affected by the voluntary recall of the Splash Off(TM)
Water Rocket which occurred in the second quarter of 1997 and was
explained in more detail in the second quarter Form 10-Q.
Page 7 of 10
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selling, administrative, and general expenses for the nine months ended
September 30, 1997 decreased to $8,911,000 from $9,202,000 for the
comparable 1996 period and decreased to $3,229,000 for the third quarter
of 1997 from $3,753,000 for the comparable 1996 period. The decrease
for the nine month period is primarily a decrease in royalty expense
which is due to lower sales of products subject to royalty. The
decrease for the three month period is primarily a decrease in royalty
expense as well as a decrease in advertising expense. Advertising
expense, which is budgeted based upon the current level of sales, had
been accelerated in the second quarter of 1997 due to the voluntary
recall of the Splash Off(TM) Water Rocket.
Income tax credit for both the nine month period and three month period
ending September 30, 1996 was calculated at 35% of the loss before
income taxes. For the nine month period and three month period ending
September 30, 1997, the income tax credit was recorded at 25% based upon
the estimated 1997 effective tax rate.
FINANCIAL CONDITION
- -------------------
The seasonal nature of the business generally requires a substantial
buildup of working capital during the second and third calendar quarters
to carry inventory and accounts receivable. Extended payment terms are
in general use in the toy industry. Historically, this was given in
order to encourage earlier shipment of merchandise for selling during
the Christmas season. Customers in the toy industry now accept
shipments when inventory is needed, not early, but the extended payment
terms have remained. In addition, it is now necessary for the Company
to carry inventory in order to meet estimates of fourth quarter customer
demand. Borrowings to finance this working capital requirement are
normally repaid during the fourth quarter as these receivables are
collected.
Consistent with this seasonal nature of the business, working capital
was increased during the third quarter of 1997. This buildup was
primarily funded through bank borrowings. The use of bank borrowings,
classified as long-term obligations, has resulted in an increase in the
current ratio from 2.9 to 1 at December 31, 1996 to 3.4 to 1 at
September 30, 1997.
Certain of the matters discussed in Management's Discussion and Analysis
contain certain forward-looking statements concerning the Company's
operations, economic performance, and financial condition. These
statements are based on the Company's expectations and are subject to
various risks and uncertainties. Actual results could differ materially
from those anticipated.
Page 8 of 10
FORM 10-Q
PART II - OTHER INFORMATION
Item 5. The Board of Directors has decided to change the Company's
fiscal year from December 31st to January 31st beginning in
1998 in order to more closely match its business cycle.
Item 6. Exhibits and reports on Form 8-K - The Company did not
file any reports on Form 8-K during the three months ended
September 30, 1997.
The information called for in Items 1, 2, 3, and 4 are not applicable.
Page 9 of 10
FORM 10-Q
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.
THE OHIO ART COMPANY
----------------------
(Registrant)
Date: November 12, 1997 /s/ William C. Killgallon
--------------------------
William C. Killgallon
Chairman of the Board
Date: November 12, 1997 /s/ M. L. Killgallon II
------------------------
M. L. Killgallon II
President
Date: November 12, 1997 /s/ Paul R. McCusty
----------------------
Paul R. McCusty
Vice President Finance
Page 10 of 10