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, 1999
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, 1999 there were 886,784 shares outstanding of the
Company's Common Stock at $1.00 par value.
Page 1 of 15
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 July 31 July 31 July 31
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands, except per share data)
Net Sales $22,718 $17,891 $12,221 $11,605
Other Income 1,475 556 112 277
-------- -------- -------- --------
24,193 18,447 12,333 11,882
Costs and Expenses:
Cost of products sold 16,215 12,117 8,769 7,427
Selling, administrative
and general 6,001 6,214 3,041 3,752
Interest 1,032 723 648 402
-------- -------- -------- --------
23,248 19,054 12,458 11,581
-------- -------- -------- --------
INCOME(LOSS) BEFORE INCOME TAXES 945 (607) (125) 301
Income Tax 333 0 0 0
-------- -------- -------- --------
NET INCOME(LOSS) $ 612 $ (607) $ (125) $ 301
======== ======== ======== ========
Net Income(Loss) Per Share(Note 3) $ .71 $(.70) $(.14) $ .34
Dividends Per Share (Note 3) $ .00 $ .08 $ .00 $ .04
Average Shares Outstanding 865 870 865 870
(Note 3)
<FN>
See notes to condensed consolidated unaudited financial statements.
</FN>
Page 2 of 15
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31 January 31
1999 1999
---------- ----------
(Unaudited) (Note)
(Thousands of dollars)
ASSETS
Current Assets
Cash $ 469 $ 182
Accounts receivable, less allowance
(July - $394; January - $515) 7,910 6,582
Inventories (Note 2)
On first-in, first-out cost method:
Finished products 6,338 7,450
Products in process 1,318 498
Raw materials 1,966 2,220
Less: Adjustment to reduce inventories
to last-in, first-out cost method (2,582) (2,552)
-------- --------
7,040 7,616
Recoverable income taxes 1,055 1,035
Prepaid expenses 839 938
-------- --------
Total Current Assets 17,313 16,353
Property, Plant and Equipment
Cost 37,668 37,212
Less: Allowances for depreciation (26,743) (25,734)
-------- --------
10,925 11,478
Other Assets 1,606 2,942
-------- --------
$29,844 $30,773
======== ========
<FN>
See notes to condensed consolidated unaudited financial statements.
NOTE: The balance sheet at January 31, 1999 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 15
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31 January 31
1999 1999
--------- ----------
(Unaudited) (Note)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,444 $ 4,870
Other current liabilities 2,854 2,161
Long-term debt due or callable
within one year 17,505 17,801
-------- --------
Total Current Liabilities 23,803 24,832
Long-Term Obligations 911 777
Stockholders' Equity (Note 3)
Common Stock, par value $1.00 per share:
Authorized: 1,935,552 shares
Outstanding: 886,784 shares for both
periods (excluding treasury shares of
72,976 for both periods) 887 887
Additional paid-in capital 197 197
Retained earnings 4,546 3,934
Accumulated other comprehensive income
net of tax (137) 509
Reduction for ESOP loan guarantee (363) (363)
-------- --------
Total Stockholders' Equity 5,130 5,164
-------- --------
$29,844 $30,773
======== ========
<FN>
See notes to condensed consolidated unaudited financial statements.
NOTE: The balance sheet at January 31, 1999 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 15
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Six Months Ended
July 31 July 31
-------- --------
1999 1998
-------- --------
(Thousands of dollars)
Operating Activities
Net income(loss) $ 612 $ (607)
Adjustments to reconcile net income(loss)
to net cash used in operating activities:
Gain on sale of marketable equity security (988) 0
Provision for depreciation and amortization 1,009 998
Changes in accounts receivable, inventories,
prepaid expenses, other assets, accounts
payable, and other liabilities (60) (7,303)
Deferred federal income tax 333 0
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 906 (6,912)
Investing Activities
Purchase of plant and equipment, less
net book value of disposals (456) (686)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (456) (686)
Financing Activities
Borrowings 0 5,304
Repayments (163) (412)
Purchase of treasury shares 0 (1)
Cash dividends 0 (71)
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (163) 4,820
-------- --------
Cash
Increase(Decrease) during period 287 (2,778)
At beginning of period 182 2,778
-------- --------
CASH AT END OF PERIOD $ 469 $ 0
======== ========
<FN>
See notes to condensed consolidated unaudited financial statements.
</FN>
Page 5 of 15
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
July 31, 1999
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 January 31, 1999.
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 15
Form 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4. - Industry Segments
Financial information relating to reportable segments is as follows:
Domestic International Ohio Art Strydel
Toy Toy Diversified Diversified Total
-------------------------------------------------------------------
(Thousands of Dollars)
Three months ended July 31, 1999
Revenues from external customers $ 5,476 $1,612 $4,215 $ 918 $12,221
Intersegment revenues 23 0 0 53 76
Segment income(loss) (433) (375) 675 6 (127)
===================================================================
Three months ended July 31, 1998
Revenues from external customers $ 5,266 $2,432 $3,191 $ 716 $11,605
Intersegment revenues 45 0 0 518 563
Segment income(loss) (422) (134) 769 132 345
====================================================================
Six months ended July 31, 1999
Revenues from external customers $10,479 $2,577 $7,860 $1,802 $22,718
Intersegment revenues 47 0 0 86 133
Segment income(loss) 603 (727) 1,192 (125) 943
===================================================================
Six months ended July 31, 1998
Revenues from external customers $7,737 $2,597 $6,150 $1,407 $17,891
Intersegment revenues 92 0 0 770 862
Segment income(loss) (1,677) (602) 1,447 303 (529)
====================================================================
Page 7 of 15
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4. - Industry Segments (continued)
The following are reconciliations between total segment and consolidated totals for income before income
taxes:
Three months ended Six months ended
-------------------------------------------------
April 30 April 30 July 31 July 31
1999 1998 1999 1998
-------------------------------------------------
(Thousands of Dollars)
Income and Loss
Total income(loss) for reportable segments $ (127) $ 345 $ 943 $ (529)
Other income(loss):
Elimination of intersegment income(loss) 2 (44) 2 (78)
-------------------------------------------------
Income(Loss) before income taxes $ (125) $ 301 $ 945 $ (607)
=================================================
Page 8 of 15
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
July 31, 1999
Note 5 - Comprehensive Income
FASB Statement No. 130, "Reporting Comprehensive Income" 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.
During the quarter ended April 30,1999, the Company sold securities
classified as available for sale. The Company recorded a realized gain of
$655,000, net of income tax effect, on these securities.
At July 31, 1998, the Company held securities classified as available-for-
sale, which have unrealized gains. Changes in unrealized gains are
includable in comprehensive income.
Comprehensive income (loss) is as follows:
Six Months Ended Three Months Ended
July 31 July 31 July 31 July 31
1999 1998 1999 1998
-------- -------- -------- --------
(In Thousands) (In Thousands)
Net income (loss) $ 612 $ (607) $ (125) $ 301
Other comprehensive expense,
net of tax:
Unrealized holding gains(losses)
on securities arising during
period, net of reclassification
adjustment for gains of $655
included in net income for the
three and six month periods ended
April 31, and July 31, 1999,
respectively (646) (124) 0 (115)
Other comprehensive expense (48) (13) (24) (6)
-------- -------- -------- --------
Comprehensive income (loss) $ (82) $ (744) $ (149) $ 180
======== ======== ======== ========
Page 9 of 15
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATIONS
Net sales for the six months ended July 31, 1999 increased to $22,718,000
from $17,891,000 for the similar period of 1998 and increased to
$12,221,000 for the three months ended July 31, 1999 from $11,605,000 for
the similar period of 1998. Please refer to Note 4 to the condensed
consolidated financial statements for a breakdown of sales by segment.
For the six months ended July 31, 1999, the domestic toy segment
accounted for approximately $2,700,000 of the sales increase and the
Ohio Art diversified segment accounted for approximately $1,700,000.
Sales of the Betty Spaghetty(r) fashion doll increased approximately
$4,000,000, but were offset by sales decreases of $600,000 for the Bull
Frogg(tm) interactive plush, and $600,000 in our Home and Travel category.
Sales for the Ohio Art diversified segment would have remained flat, but
the method of conducting business with a major lithography customer
changed. In the previous year, the steel which we print was supplied by
this customer. The customer requested that we purchase the steel for them
and include it in the billing to them. Approximately $1,800,000 of steel
was purchased and rebilled to the customer for the six months ended July
31, 1999 versus none for the similar period of 1998. The sales increase in
the second quarter of approximately $900,000 is primarily the purchase of
steel of approximately $800,000 as explained previously.
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 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 January 31, 1999, order receipts
through August 31st are approximately $46,100,000 versus $51,600,000 for
the same period of 1998. However, approximately $15,000,000 of the August
31, 1998 orders were cancelled in mid-fourth quarter by major toy
retailers.
Other income for the six month period ending July 31, 1999 increased to
$1,475,000 from $556,000 for the similar period of 1998. The increase is
primarily due to a gain of $988,000 resulting from the sale of marketable
securities in the first quarter of 1999.
Gross profit margin (percentage) for the six months ended July 31, 1999
(28.6%) decreased from the six months ended July 31, 1998 (32.3%). The
pass through of the steel purchased for a major lithography customer as
mentioned previously accounted for approximately one-half of the decrease.
Gross profit margins also decreased in 1999 due to lower production levels
at the Bryan, Ohio facility which resulted in an increase in manufacturing
overhead variances. Gross profit margin (percentage) for the three months
ended July 31, 1999 (28.2%) decreased from the three months ended July 31,
1998 (36.0%). Approximately one-half of the decrease is due to lower
production levels which resulted in an increase in manufacturing overhead
variances, approximately one-quarter is due to the pass through of
lithography steel, and one-quarter is due to the change in sales mix.
Page 10 of 15
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selling, administrative, and general expenses for the six months ended
July 31, 1999 decreased to $6,001,000 from $6,214,000 for the similar
period of 1998 and decreased to $3,041,000 for the three months ended July
31, 1999 from $3,752,000 for the similar period of 1998. The majority of
the decrease for both periods is advertising expense which decreased
approximately $300,000 for the six month period and decreased approximately
$600,000 for the three month period. In 1998, advertising expense was
budgeted based upon the level of toy sales, as well as a specific dollar
amount per unit sold for specific toy items which were heavily promoted.
In 1999, the Company is budgeting advertising expense strictly upon the
level of toy sales.
Interest expense increased to $1,032,000 for the six months ended July 31,
1999 from $723,000 for the similar period of 1998 and increased to
$648,000 for the three months ended July 31, 1999 from $402,000 for the
similar period of 1998. The increase for both periods is due to a penalty
interest charge of approximately $250,000 imposed upon the Company by its
existing lender.
Income tax expense of $333,000 was recorded in the first quarter of 1999
due to the realized gain on the sale of marketable securities. No income
taxes were recorded on the remainder of the income or losses for the six
month or three month periods of 1999 or 1998 based upon estimates of the
full fiscal year effective tax rate.
FINANCIAL CONDITION
The Company's current ratio remained the same at .7 to 1 at January 31,
1999 and at July 31, 1999. The low current ratio for both periods is due
to the classification of debt from long-term to current. The Company's
lender formally declared a default on April 30, 1999. The Company is
currently negotiating with several lenders to replace its current lender
and obtain financing. The Company believes that it will be able to do so.
During 1999, the Company has not borrowed additional funds from any lending
source, but has been operating on cash receipts received from operations
which have been sufficient to the date of this filing. The Company intends
as a result of cost savings from operations to continue without additional
bank borrowing until new financing is obtained.
IMPACT OF THE YEAR 2000
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. Please
refer to the chart at the end of this narrative for the status of progress
for the various phases mentioned above as they relate to the various areas
of the business. The following information is supplied to supplement the
chart.
1. Mainframe Computer System. Based on an assessment that was made in
1997, the Company determined that it would be necessary to upgrade its
current version of software used on its mainframe computer system in order
to be Year 2000 compliant. Since only minor modifications will be made
internally to the packaged software, implementation of the Year 2000
compliant software version should be relatively straightforward.
Page 11 of 15
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company has upgraded its hardware to handle the new software. Costs
incurred to date, the majority of which relate to the mainframe computer
and software, approximate $160,000, the majority of which has been financed
under an operating lease, will be expensed monthly over the next two years.
Future costs to implement the remaining phases are estimated to be in the
$50,000 to $100,000 range, although it is difficult to predict what
problems the Company will encounter. Previously, the current version of
software was tested by forwarding the dates into the year 2000, and the
software did run, although the year 00 came before the year 99. The major
problems occurring because of this would be in the Accounts Payable and
Accounts Receivable areas. The potential solution would be to double the
staff in each department, from two employees to four employees, to manually
sort the dates for approximately three to four months until the majority of
the 99 dates are eliminated. However, there is the risk, however slight,
that the Company installs the updated software, not performing sufficient
testing, and it does not run at all, virtually shutting down the Company.
If this remote possibility would happen, the Company would revert to the
older software version and hire the additional temporary people.
2. Personal Computers. The Company has also evaluated the personal
computers and related software used within the Company and, with minor
upgrades, it is believed there will be no problems experienced or if there
are, they will be minor and isolated. Approximately three to six personal
computers must be upgraded or replaced, at a cost of $5,000 to $10,000.
The Company will back-up all data on each computer just prior to January 1,
2000, and in the unlikely event that certain computers will not function
properly, the data could be run on another personal computer.
3. Operating Equipment with Embedded Chips or Software. The Company has
completed an assessment of its manufacturing facilities for potential
problems with equipment. The Company has isolated any significant problems
to the four-color lithography line which was installed in 1997. The
manufacturer of the equipment is located in Germany, and they were at the
Bryan facility during the April - May time frame to test and implement any
changes needed to insure that the equipment will be operational in January
of 2000. Testing was performed and it appears that no problems will be
encountered. In the unlikely event that the equipment would not function,
the Company believes that most of the work scheduled for this machine could
be run on older equipment which is not computer-reliant, since the
lithography department is not at full capacity in January.
4. Products. Based on a review of its product line, the Company has
determined that all of the products it has sold and will continue to sell
do not require remediation to be Year 2000 compliant. Accordingly, the
Company does not believe that the Year 2000 presents any exposure as it
relates to the Company's products.
5. Third Party Suppliers. The Company has initiated formal communications
with all of its significant suppliers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 Issues. There is no guarantee that the
systems of other companies on which the Company's systems rely will be
timely converted and would not have an adverse effect on the Company's
systems. However, the majority of the Company's products are manufactured
overseas, and the Company has sent representatives to these facilities.
Page 12 of 15
FORM 10-Q
MANAGMENT'S DISCUSSION AND ANALYSIS
These manufacturers do not have sophisticated computer systems, and
generally rely on personal computers. If these personal computers are not
Year 2000 compliant, the manufacturers have assured the Company that they
could still supply the products needed. However, if they could not supply
the products needed, it would have a material impact on the Company.
6. Third Party Customers. The Company's top six customers account for
approximately 70% of sales and the major interface with these customers
is the transmission of orders via E.D.I. The Company has tested and
implemented changes needed and feels confident that January 2000 will
not pose a problem. G.E. Information Systems has certified that the
Company is Year 2000 compliant on E.D.I. Costs incurred to date
approximate $1,000 to $2,000 and were charged to operations. Future
costs are estimated at $1,000 to $2,000 if additional customers request
that their E.D.I. systems be tested.
Page 13 of 15
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESOLUTION PHASES
Assessment Remediation Testing Implementation
---------- ----------- ----------- --------------
1. Mainframe Computer System 100% Complete 100% Complete 100% Complete 80% Complete
Completion Completion Expected
Date Date Completion
August 1999 September 1999 Date
September 1999
2. Personal Computers 100% Complete 100% Complete 100% Complete 100% Complete
Completion Completion Completion
Date Date Date
May 1999 May 1999 May 1999
3. Operating Equipment with
Embedded Chips or Software 100% Complete 100% Complete 100% Complete 100% Complete
Completion Completion Completion
Date Date Date
June 1999 June 1999 June 1999
4. Products 100% Complete N/A N/A N/A
5. Third Party Suppliers 100% Complete 100% Complete 100% Complete 100% Complete
6. Third Party Customers 100% Complete 100% Complete 100% Complete 100% Complete
Page 14 of 15
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 1999.
The information called for in Items 1, 2, 3, 4, and 5 are not
applicable.
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 14, 1999 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: September 14, 1999 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: September 14, 1999 /s/ Paul R. McCusty
----------------------
Paul R. McCusty
Vice President Finance
Page 15 of 15