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 July 31, 1998
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 August 31, 1998 there were 891,784 shares outstanding of the
Company's Common Stock at $1.00 par value.
Page 1 of 11
FORM 10-Q
PART I - FINANCIAL INFORMATION
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
July 31 June 30 July 31 June 30
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands, except per share data)
Net Sales $17,891 $12,982 $11,605 $ 6,871
Other Income 556 355 277 178
-------- -------- -------- --------
18,447 13,337 11,882 7,049
Costs and Expenses:
Cost of products sold 12,117 12,041 7,427 6,661
Selling, administrative
and general 6,214 5,682 3,752 3,051
Interest 723 397 402 239
-------- -------- -------- --------
19,054 18,120 11,581 9,951
-------- -------- -------- --------
PROFIT (LOSS) BEFORE INCOME TAXES (607) (4,783) 301 (2,902)
Income Tax Credit -- (1,196) -- (538)
-------- -------- -------- --------
NET PROFIT (LOSS) $ (607) $(3,587) $ 301 $(2,364)
======== ======== ======== ========
Net Profit(Loss) Per Share(Note 3) $( .70) $(3.94) $ .34 $(2.60)
Dividends Per Share (Note 3) $ .08 $ .12 $ .04 $ .04
Average Shares Outstanding 870 911 870 908
(Note 3)
<FN>
See notes to condensed consolidated unaudited financial statements.
</FN>
Page 2 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31 December 31
1998 1997
-------- -------
(Unaudited) (Note)
(Thousands of dollars)
ASSETS
Current Assets
Cash $ 0 $ 1,846
Accounts receivable, less allowance
(1998 - $539; 1997 - $415) 8,473 8,295
Inventories (Note 2)
On first-in, first-out cost method:
Finished products 6,932 3,582
Products in process 853 312
Raw materials 2,805 2,357
Less: Adjustment to reduce inventories
to last-in, first-out cost method (2,480) (2,447)
------- -------
8,110 3,804
Recoverable income taxes 1,071 1,066
Prepaid expenses 1,419 1,524
Deferred federal income taxes 1,435 533
------- -------
Total Current Assets 20,508 17,068
Property, Plant and Equipment
Cost 36,805 35,978
Less: Allowances for depreciation (24,892) (23,737)
------- -------
11,913 12,241
Other Assets 2,549 2,422
------- -------
$34,970 $31,731
======= =======
<FN>
See notes to condensed consolidated unaudited financial statements.
NOTE: The balance sheet at December 31, 1997 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 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31 December 31
1998 1997
-------- -------
(Unaudited) (Note)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,602 $ 3,437
Other current liabilities 2,159 2,460
------- -------
Total Current Liabilities 5,761 5,897
Deferred Federal Income Taxes 1,470 533
Long-Term Obligations 20,768 16,633
Stockholders' Equity (Note 3)
Common Stock, par value $1.00 per share:
Authorized: 1,935,552 shares
Outstanding: 1998-891,784; 1997-892,271
shares (excluding treasury shares of
67,976 and 67,489 respectively) 892 892
Additional paid-in capital 204 205
Retained earnings 5,875 7,571
------- -------
6,971 8,668
------- -------
$34,970 $31,731
======= =======
<FN>
See notes to condensed consolidated unaudited financial statements.
NOTE: The balance sheet at December 31, 1997 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 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Six Months Ended
July 31 June 30
-------- --------
1998 1997
-------- --------
(Thousands of dollars)
Operating Activities
Net loss $ (607) $(3,587)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for depreciation and amortization 998 867
Changes in accounts receivable, inventories,
prepaid expenses, other assets, accounts
payable, and other liabilities (7,303) (1,463)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (6,912) (4,183)
Investing Activities
Purchase of plant and equipment, less
net book value of disposals (686) (1,245)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (686) (1,245)
Financing Activities
Borrowings 5,304 5,800
Repayments (412) (600)
Purchase of treasury shares (1) (263)
Cash dividends (71) (109)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 4,820 4,828
-------- --------
Cash
Decrease during period (2,778) (600)
At beginning of period 2,778 1,078
-------- --------
CASH AT END OF PERIOD $ 0 $ 478
======== ========
<FN>
See notes to condensed consolidated unaudited financial statements.
</FN>
Page 5 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
July 31, 1998
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, 1997.
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
Unallocated ESOP shares are deducted from outstanding shares of Common
Stock to arrive at average shares outstanding.
Page 6 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
July 31, 1998
Note 4 - Change in Fiscal Year
The Board of Directors approved a fiscal year-end change from December
31st to January 31st beginning February 1, 1998 through January 31,
1999. The following is condensed information regarding the consolidated
results of operations for the transition period of January 1, 1998 to
January 31, 1998 (in thousands, except per share data):
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS:
Net sales and other income $ 1,442
Costs and expenses:
Cost of products sold 1,590
Selling, administrative and general 825
Interest 111
--------
2,526
--------
Net loss $(1,084)
========
Net loss per share $ (1.25)
Average Shares Outstanding 870
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW:
Net cash provided from operating activities $ 1,843
Net cash used in investing activities (141)
Net cash used in financing activities (770)
--------
Net increase in cash 932
Cash at beginning of period 1,846
--------
Cash at end of period $ 2,778
========
Page 7 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
July 31, 1998
Note 5 - Comprehensive Income
During the year, The Ohio Art Company adopted FASB Statement No. 130,
"Reporting Comprehensive Income". Statement No. 130 requires the
reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the
calculation of net income.
At year-end (January 31, 1998), the Company held securities classified
as available-for-sale, which have unrealized losses as stated below:
Six Months Ended Three Months Ended
July 31 June 30 July 31 June 30
1998 1997 1998 1997
------- ------- ------- -------
(In Thousands)
Net income (loss) $ (607) $(3,587) $ 301 $(2,364)
Other comprehensive expense, net of tax:
Unrealized holding losses on
securities arising during period (124) 79 (115) 91
Other comprehensive expense (13) (13) (6) (6)
------- -------- ------- --------
Comprehensive income (loss) $ (744) $(3,521) $ 180 $(2,279)
======= ======== ======= ========
No benefit or expense was recorded for income taxes for the six month
or three month periods ended July 31, 1998 because of the inability to
carryback any loss generated for 1998. Income taxes are recorded based
upon estimates of the full fiscal year effective tax rate.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATIONS
- ----------
Net sales for the six months ended July 31, 1998 increased approximately
38% to $17,891,000 from $12,982,000 for the six months ended June 30,
1997 and increased to $11,605,000 for the three months ended July 31,
1998 from $6,871,000 for the three months ended June 30, 1997. For the
Page 8 of 11
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
six month period, toy segment sales increased approximately $3,900,000
while Diversified Products' sales increased approximately $1,000,000.
There was a decrease in the Making Creativity Fun(R) category of
approximately $500,000, but this was offset by sales of 1998 new product
introductions of approximately $4,300,000, such as the Betty Spaghetty(TM)
fashion doll, Water T-Ball(TM) outdoor water toy, and Bull Frogg(TM)
interactive plush. The increase in the Diversified Product segment was
primarily in our metal lithography area. The Company had expanded its
lithography capacity by installing a new lithography line in 1996, but
experienced start-up production problems in the first quarter of 1997.
The sales increase of approximately $4,700,000 for the second quarter
was in the toy segment in 1998 new product introductions as noted above,
as well as an increase of approximately $300,000 in the Making
Creativity Fun(R) category. Diversified Products sales remained
relatively flat in the second quarter.
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. Because of the seasonality of the Company's business, the dollar
order backlog in August is not necessarily indicative of expectations of
sales for the full year. Subject to industry practice and comments as
detailed in the Registrant's annual Form 10-K for the year ended
December 31, 1997, order receipts through August 31st are approximately
$51,600,000 versus $30,800,000 for the same period of 1997, or
approximately a 68% improvement over the prior year.
Gross profit margin (percentage) for the six months ended July 31, 1998
(32.3%) increased dramatically from the six months ended June 30,
1997(7.2%). Gross profit margin percentage for the three months ended
July 31, 1998 significantly increased to 36.0% from 3.1% for the three
months ended June 30, 1997. Gross profit margins were especially low
for both the three months and six months ended June 30, 1997 because of
the voluntary recall of the Splash-Off Water Rocket which occurred in
the second quarter of 1997. Gross profit margins also increased in 1998
due to higher lithography production and toy production at the Bryan,
Ohio facility which resulted in a decrease in manufacturing overhead
variances. However, the primary reason for the increase in 1998 is a
major change in sales mix, primarily the three 1998 new product
introductions mentioned above. All three products are being heavily
promoted through advertising programs and demand higher margins to cover
these programs.
Selling, administrative, and general expenses for the six months ended
July 31, 1998 increased to $6,214,000 from $5,682,000 for the six months
ended June 30, 1997 and increased to $3,752,000 for the three months
ended July 31, 1998 from $3,051,000 for the three months ended June 30,
1997. The primary reason is an increase in advertising expense.
Advertising expense is budgeted based upon the level of toy sales, as
well as a specific dollar amount per unit sold for specific toy items
which are heavily promoted.
Page 9 of 11
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest expense increased to $723,000 for the six months ended July 31,
1998 from $397,000 for the six months ended June 30, 1997 and increased
to $402,000 for the three months ended July 31, 1998 from $239,000 for
the three months ended June 30, 1997. The increase for both periods is
due to the higher level of debt, principally incurred in financing
lithography equipment, that was carried over from the end of 1997 and
has increased throughout 1998.
No benefit was recorded for income taxes for the six month or the three
month period ended July 31, 1998 because of the inability to carryback
any loss generated for 1998. Income taxes are recorded based upon
estimates of the full fiscal year effective tax rate.
FINANCIAL CONDITION
- -------------------
The Company's current ratio increased from 2.9 to 1 at December 31, 1997
to 3.6 to 1 at July 31, 1998. This change was the result of using cash
on hand and the non-current line of credit to finance the buildup of
inventories and to finance the loss for the seven months of calendar
year 1998.
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.
PART II - OTHER INFORMATION
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
July 31, 1998.
The information called for in Items 1, 2, 3, 4, and 5 are not
applicable.
Page 10 of 11
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: September 11, 1998 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: September 11, 1998 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: September 11, 1998 /s/ Paul R. McCusty
-------------------
Paul R. McCusty
Vice President Finance
Page 11 of 11