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 October 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 November 30, 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)
Nine Months Ended Three Months Ended
10/31/99 10/31/98 10/31/99 10/31/98
-------- -------- -------- --------
(In thousands, except per share data)
Net Sales $41,042 $35,828 $18,324 $17,937
Other Income 1,778 857 303 301
-------- -------- -------- --------
42,820 36,685 18,627 18,238
Costs and Expenses:
Cost of products sold 28,823 23,098 12,608 10,981
Selling, administrative
and general 10,123 11,963 4,122 5,749
Interest 1,732 1,268 700 545
-------- -------- -------- --------
40,678 36,329 17,430 17,275
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,142 356 1,197 963
Income Taxes 333 0 0 0
-------- -------- -------- --------
NET INCOME $ 1,809 $ 356 $ 1,197 $ 963
======== ======== ======== ========
Net Income Per Share $ 2.09 $ .41 $ 1.38 $ 1.11
(Note 3)
Dividends Per Share (Note 3) $ .00 $ .12 $ .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
October 31 January 31
1999 1999
-------- --------
(Unaudited) (Note)
(Thousands of dollars)
ASSETS
Current Assets
Cash $ 2,341 $ 182
Accounts receivable less allowance
(October - 470; January - 515) 11,229 6,582
Inventories (Note 2)
On first-in, first-out cost method:
Finished products 4,657 7,450
Products in process 900 498
Raw materials 3,439 2,220
Less: Adjustment to reduce inventories
to last-in, first-out cost method (2,597) (2,552)
-------- --------
6,399 7,616
Recoverable income taxes 1,055 1,035
Prepaid expenses 962 938
-------- --------
Total Current Assets 21,986 16,353
Property, Plant and Equipment
Cost 37,823 37,212
Less: Allowances for depreciation (27,248) (25,734)
-------- --------
10,575 11,478
Other Assets 1,334 2,942
-------- --------
$33,895 $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
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
October 31 January 31
1999 1999
---------- ----------
(Unaudited) (Note)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 5,987 $ 4,870
Other current liabilities 3,211 2,161
Long-term debt due or callable
within one year 17,395 17,801
-------- --------
Total Current Liabilities 26,593 24,832
Long-Term Obligations 975 777
Stockholders' Equity (Note 3)
Common Stock, par value $1.00 per share:
Authorized: 1,935,552 shares
Outstanding: 886,784 shares
(excluding treasury shares of
72,976) 887 887
Additional paid-in capital 197 197
Retained earnings 5,743 3,934
Accumulated other comprehensive income
net of tax (137) 509
Reduction for ESOP loan guarantee (363) (363)
-------- --------
Total Stockholders' Equity 6,327 5,164
-------- --------
$33,895 $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)
Nine Months Ended
10/31/99 10/31/98
-------- --------
(Thousands of dollars)
Operating Activities
Net income $ 1,809 $ 356
Adjustments to reconcile net income to
net cash provided by(used in)operating activities:
Gain on sale of marketable equity security (988) 0
Provision for depreciation and amortization 1,514 1,456
Changes in accounts receivable, inventories,
prepaid expenses, other assets, accounts
payable, and other liabilities 507 (10,734)
Deferred federal income tax 333 0
-------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,175 (8,922)
Investing Activities
Purchase of plant and equipment, less
net book value of disposals (611) (898)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (611) (898)
Financing Activities
Borrowings 0 8,804
Repayments (405) (1,209)
Purchase of treasury shares 0 (1)
Cash dividends 0 (107)
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (405) 7,487
-------- --------
Cash
Increase (Decrease) during period 2,159 (2,333)
At beginning of period 182 2,778
-------- --------
CASH AT END OF PERIOD $ 2,341 $ 445
======== ========
<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)
October 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 fiscal 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 October 31, 1999
Revenues from external customers $11,252 $1,935 $4,096 $1,041 $18,324
Intersegment revenues 34 0 0 773 807
Segment income(loss) 1,083 (4) (42) 158 1,195
===================================================================
Three months ended October 31, 1998
Revenues from external customers $10,523 $2,405 $4,081 $ 928 $17,937
Intersegment revenues 42 0 0 253 295
Segment income 13 68 785 109 975
====================================================================
Nine months ended October 31, 1999
Revenues from external customers $21,731 $4,512 $11,956 $2,843 $41,042
Intersegment revenues 81 0 0 859 940
Segment income(loss) 1,686 (731) 1,150 33 2,138
===================================================================
Nine months ended October 31, 1998
Revenues from external customers $18,260 $5,002 $10,231 $2,335 $35,828
Intersegment revenues 134 0 0 1,023 1,157
Segment income(loss) (1,664) (534) 2,232 412 446
====================================================================
Page 7 of 15
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED 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
-------------------------------------------------
October 31 October 31 October 31 October 31
1999 1998 1999 1998
-------------------------------------------------
(Thousands of Dollars)
Total income for
reportable segments $1,195 $ 975 $2,138 $ 446
Elimination of intersegment
income(loss) 2 (12) 4 (90)
-------------------------------------------------
Income before income
taxes $1,197 $ 963 $2,142 $ 356
=================================================
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 October 31, 1998, the Company held securities classified as available-for-
sale, which had unrealized gains. Changes in unrealized gains are
includable in comprehensive income.
Page 8 of 15
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 5 - Comprehensive Income (continued)
Comprehensive income is as follows:
Nine Months Ended Three Months Ended
10/31/99 10/31/98 10/31/99 10/31/98
-------- -------- -------- --------
(In Thousands) (In Thousands)
Net income $1,809 $ 356 $1,197 $ 963
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 nine month
periods ended April 30, and October
31, 1999, respectively (646) (217) 0 (93)
Other comprehensive expense (60) (19) (24) (6)
-------- -------- -------- --------
Comprehensive income $1,103 $ 120 $1,173 $ 864
======== ======== ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATIONS
Net sales for the nine months ended October 31, 1999 increased approximately
15% to $41,042,000 from $35,828,000 for the similar period of 1998 and
increased to $18,324,000 for the three months ended October 31, 1999
from $17,937,000 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 nine months ended October 31, 1999, the domestic toy
segment accounted for approximately $3,500,000 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 $6,900,000 and sales
of Water T-Ball(r) increased approximately $600,000 but were offset by sales
decreases of $2,800,000 for the Bull Frogg(tm) interactive plush, and $1,300,000
in our Home and Travel category. Sales for the Ohio Art diversified segment
would have decreased approximately $500,000, 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 steel for them and include it in the billing to them.
Approximately $2,800,000 of steel was purchased and rebilled to the customer
for the nine months ended October 31, 1999 versus approximately $600,000 for
the similar period of 1998.
Page 9 of 15
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 January 31, 1999, order backlog as of
November 30th is approximately $8,204,000 versus $5,492,000 at the same date
in 1998 or approximately 49% higher than the prior year. It is anticipated
that sales for the fourth quarter will be slightly less than the fourth
quarter of the previous year because it is anticipated that inventory will not
be available to meet some of these orders. It is estimated that sales for
1999 will be 10 - 15% higher than the previous year, although it is difficult
to predict the final outcome for 1999.
Other income for the nine months ended October 31, 1999 increased to
$1,778,000 from $857,000 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 nine months ended October 31, 1999
(29.8%) decreased from the nine months ended October 31, 1998 (35.5%). The
pass through of the steel purchased for a major lithography customer as
mentioned previously accounted for approximately one-quarter of the decrease.
The remaining decrease was due to a change in product mix as margins for Bull
Frogg interactive plush in 1998 were higher than current product in order to
cover the cost of advertising programs. Gross profit margin percentage for
the three months ended October 31, 1999 (31.2%) decreased from the three
months ended October 31, 1998 (38.8%). The majority of the decrease was the
change in product mix as mentioned above, and a significant write-down of
selected inventory.
Selling, administrative, and general expenses for the nine months ended
October 31, 1999 decreased to $10,123,000 from $11,963,000 for the similar
period of 1998 and decreased to $4,122,000 for the three months ended October
31, 1999 from $5,749,000 for the similar period of 1998. The majority of the
decrease for both periods is advertising expense which decreased approximately
$1,800,000 for the nine month period and decreased approximately $1,500,000
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 $1,732,000 for the nine months ended October 31,
1999 from $1,268,000 for the similar period of 1998 and increased to $700,000
for the three months ended October 31, 1999 from $545,000 for the similar
period 1998. The increase for both periods is due to a penalty interest
charge of approximately $520,000 for the nine months ended October 31, 1999
and $270,000 for the three months ended October 31, 1999, 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 nine
month or three month periods of 1999 or 1998 based upon estimates of the
full fiscal year effective tax rate.
Page 10 of 15
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
The Company's current ratio remained relatively the same at .7 to 1 at January
31, 1999 and .8 to 1 at October 31, 1999. The low current ratio for both
periods is due to the classification of debt as current. The Company's lender
formally declared a default on April 30, 1999, although the Company has kept
current on all required debt payments during the year. 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 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. 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 $5,000 to $10,000 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 updated software, which has already been installed, 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
four people.
Page 11 of 15
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. 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. 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 product needed, it would have a material
impact on the Company.
Page 12 of 15
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 implementated changes needed and feels confident
that the year 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.
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 100% Complete
Completion Completion Completion
Date Date Date
August 1999 September 1999 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 October 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: December 8, 1999 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: December 8, 1999 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: December 8, 1999 /s/ Paul R. McCusty
----------------------
Paul R. McCusty
Vice President Finance
Page 15 of 15