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 April 30, 2000
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 May 31, 2000 there were 886,784 shares outstanding of the Company's
Common Stock at $1.00 par value.
Page 1 of 10
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in thousands)
April 30 January 31
2000 2000
---------- ----------
Assets
Current assets
Cash $ 774 $ 2,410
Accounts receivable less allowance
(April - $468; January - $449) 6,095 7,341
Inventories - Note 2
Finished products 4,311 4,231
Products in process 835 505
Raw materials 1,325 1,904
Less: Adjustment to reduce inventories
to last-in, first-out cost method (2,502) (2,478)
---------- ----------
3,969 4,162
Prepaid expenses 301 303
---------- ----------
Total current assets 11,139 14,216
Property, plant and equipment 9,882 10,258
Deferred charges 526 0
Other assets 1,410 1,409
---------- ----------
Total assets $22,957 $25,883
========== ==========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 3,330 $ 4,016
Other current liabilities 2,108 2,153
Long-term debt due within one year 1,058 830
---------- ----------
Total current liabilities 6,496 6,999
Long-term obligations, less current maturities 12,766 13,798
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) 887 887
Additional paid-in capital 197 197
Retained earnings 2,974 4,365
Reduction for ESOP loan guarantee (363) (363)
---------- ----------
Total stockholders' equity 3,695 5,086
---------- ----------
Total liabilities and stockholders' equity $22,957 $25,883
========== ==========
See notes to condensed consolidated unaudited financial statements.
Page 2 of 10
FORM 10-Q
PART I - FINANCIAL INFORMATION
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(amounts in thousands, except amounts per share)
Three Months Ended
----------------------
April 30 April 30
2000 1999
-------- --------
Net sales $ 9,091 $10,497
Other income 208 1,363
-------- --------
9,299 11,860
Costs and expenses:
Cost of products sold 7,644 7,942
Selling, administrative and general 2,561 2,960
Interest 484 384
-------- --------
10,689 11,286
-------- --------
Income (loss) before income taxes (1,390) 574
Income tax - 333
-------- --------
Net income (loss) $(1,390) $ 241
======== ========
Net income(loss) per share (Note 3) $ (1.61) $ .28
Dividends per share (Note 3) $ .00 $ .00
Average shares outstanding (Note 3) 865 865
See notes to condensed consolidated unaudited financial statements.
Page 3 of 10
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(amounts in thousands)
Three Months Ended
------------------------
April 30 April 30
2000 1999
---------- ----------
Cash flows from operating activities
Net income(loss) $(1,390) $ 241
Adjustments to reconcile net income(loss)
to net cash provided by (used in)
operating activities:
Gain on sale of marketable equity security 0 (988)
Provision for depreciation and amortization 481 504
Changes in assets and liabilities 248 496
Deferred federal income tax - 333
---------- ----------
Net cash provided by (used in)
operating activities (661) 586
Cash flows from investing activities
Purchase of plant and equipment, less
net book value of disposals (106) (260)
---------- ----------
Net cash used in investing activities (106) (260)
Cash flows from financing activities
Payments of debt (869) (179)
---------- ----------
Net cash used in financing activities (869) (179)
---------- ----------
Cash
Increase(decrease) during period (1,636) 147
At beginning of period 2,410 182
---------- ----------
At end of period $ 774 $ 329
========== ==========
See notes to condensed consolidated unaudited financial statements.
Page 4 of 10
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and
reflect adjustments (consisting solely of normal recurring adjustments) that, in
the opinion of management, are necessary for a fair statement of the interim
periods presented. This report includes information in a condensed format and
should be read in conjunction with the Ohio Art Company's (the Company) audited
consolidated financial statements included in the Annual Report filed on Form
10-K for the year ended January 31, 2000.
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 perpetual inventory 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 is 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. There are no dilutive securities
included in the calculation of earnings (loss) per share, accordingly basic and
diluted earnings (loss) per share are the same.
Page 5 of 10
Form 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands)
Note 4. - Industry Segments
Financial information relating to reportable segments is as follows:
Domestic International Ohio Art Strydel
Toy Toy Diversified Diversified Total
-------------------------------------------------------------------
Three months ended April 30, 2000
Revenues from external customers $4,165 $ 409 $3,527 $ 990 $ 9,091
Intersegment revenues 33 0 0 141 174
Segment loss (842) (322) (208) (18) (1,390)
===================================================================
Three months ended April 30, 1999
Revenues from external customers $5,003 $ 965 $3,645 $ 884 $10,497
Intersegment revenues 24 0 0 33 57
Segment income(loss) 704 (352) 352 (130) 574
====================================================================
Page 6 of 10
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 5 - Comprehensive Income (amounts in thousands)
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, net of
income tax effect, on these securities.
Comprehensive income (loss) is as follows:
Three Months Ended
April 30 April 30
2000 1999
-------- --------
Net income(loss) $(1,390) $ 241
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 1999 net income (646)
Other comprehensive expense (24)
-------- --------
Comprehensive income(loss) $(1,390) $ (429)
======== ========
Note 6 - Long-term Obligations (amounts in thousands)
The Company executed a loan and security agreement on April 7, 2000 that
provides for borrowings up to $12,000 for three years on a revolving credit
basis based on various percentages of eligible inventory and accounts receivable
and term loans aggregating $3,279 with interest payable monthly at prime plus
1.25% and an unused line fee of 0.5%. The term loans are payable $45 per month
plus interest in seventy-two consecutive payments commencing May 1, 2000. The
loan and security agreement is collateralized by all real and personal property
of the Company.
On April 7, 2000, the Company executed a $5,200 term loan to refinance its
existing term loan. The new term loan is payable in monthly installments of $91
including interest at prime plus 2%, increasing by 0.5% on each anniversary date
through April 1, 2007. The loan is collateralized by all real and personal
property of the Company.
The loan and security agreement and term loans contain certain financial
covenants that require, among other things, minimum amounts of tangible net
worth and limit dividend payments and purchases of property, plant and
equipment.
Page 7 of 10
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
Results of operations
Net sales for the first quarter of 2000 decreased 13% to $9,091 from $10,497 for
the comparable 1999 period. The domestic and international toy segments
decreased approximately $800 and $600 respectively, while the diversified
products segments reported results approximating the same as a year ago. Most of
the decrease in toy sales for both the domestic and international segments was
due to reduced shipments of the Company's Betty Spaghetty(R) fashion doll, which
was affected by fewer retail promotional advertisements. Domestic shipments of
Water T-Ball(TM), an outdoor water toy, also fell during the period. The decline
was partially offset by increased sales of the Etch A Sketch(R) line of
products.
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 at the most
recent period end, May 31, 2000, is not necessarily indicative of expectations
of sales for the full year. Subject to industry practice and comments as
detailed in the Company's report on Form 10-K for the year ended January 31,
2000, order backlog as of May 31, 2000 is approximately $12,600 versus $8,700 at
the same date in 1999.
Other income for the three month period ended April 30, 2000 decreased to $214
from $1,363 for the three month period ended April 30, 1999. Marketable
securities were sold in the first quarter of 1999 resulting in a one-time pretax
gain of $988. There were no similar activities in the current year.
Gross profit margin (percentage) for the first quarter of 2000 (15.9%) decreased
from the first quarter of 1999 (24.3%), due in part to reduced shipments of the
Betty Spaghetty(R) fashion doll, and Water T-Ball(TM), both of which are
generally sold at a higher gross margin than other products. These decreases in
shipments were partially offset by increased revenue from shipments of Etch a
Sketch(R) products. In addition, closeout products were sold during the period
at little or no margin.
Selling, administrative, and general expenses for the first quarter of 2000
decreased to $2,561 from $2,960 from the first quarter of 1999. The primary
reasons were decreases in advertising expense and non-capitalizable legal and
professional fees. Advertising expense is incurred based on the level of toy
sales, which decreased in the first quarter of 2000 compared to the same period
of the previous year. Legal fees incurred by the Company in securing new
financing were capitalized as loan costs to be amortized over the expected lives
of the loans. These fees and other loan acquisition costs are recorded as
deferred charges on the Company's condensed consolidated balance sheet.
Interest expense for the three month period ended April 30, 2000 increased to
$484 from $384 for the three month period ended April 30, 1999. The Company's
loan agreements prior to April 7, 2000 contained certain financial covenants, of
which one or more covenants had not been technically met. As a result, the bank
charged the Company default interest in 2000 amounting to approximately $166
even though the Company made timely interest and principal payments.
Page 8 of 10
Form 10-Q
MANAGEMENT'S DISCUSSISON AND ANALYSIS (continued)
(amounts in thousands)
No income tax expense or benefit was recorded for the three month period ended
April 30, 2000 due to the net loss recorded for this period and the Company's
inability to record a tax benefit related to the loss due to the valuation
allowance recorded for the deferred tax asset. Income tax expense of $333 was
recorded for the three month period ending April 30, 1999 due to the realized
gain on the sale of marketable securities.
Liquidity and Capital Resources
Cash flows used in operations were $661 for the three month period ended April
30, 2000 compared to $586 provided by operations in the comparable period of
1999. The $1,631 decrease in net income for the period was offset by the
non-cash effect of the gain on sale of marketable equity securities, net of tax.
Capital expenditures were reduced in 2000 to $106 from $260 in 1999. Purchases
of equipment and other capital assets have been delayed until later in the year
to ensure sufficient cash is available to meet normal operating requirements.
Effective April 7, 2000, the Company entered into a three year revolving credit
agreement that provides for borrowings of up to $12,000 based on various
percentages of eligible inventory and accounts receivable and six year term
loans aggregating $3,279. In addition, at that time the Company executed a
$5,200 term loan to refinance its existing term loan. The revolving credit
facility and term loans are collateralized by the assets of the Company. During
1999, the Company had not borrowed additional funds from any lending source, but
had been using cash received from operations.
The Company was not in compliance with the minimum tangible net worth covenant
included in its Loan and Security Agreement at April 30, 2000. This event of
default was subsequently waived by the lender unconditionally.
IMPACT OF THE YEAR 2000
The Company developed and initiated plans that addressed the possible exposures
related to the impact of the Year 2000 on its computer systems, equipment,
business and operations. The Company completed all Year 2000 readiness work on
time and experienced no significant problems. Costs incurred were approximately
$250, the majority of which related to the mainframe computer and software, and
a network server. There are no material expenditures expected to be incurred in
the future related to the Year 2000 .
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 9 of 10
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
A current report on Form 8-K dated April 17, 2000 was filed to announce
the refinancing of the Company's existing working capital line with
Fifth Third Bank, Northwestern Ohio, N.A. with new credit facilities
with The CIT Group/Business Credit, Inc. and with Fifth Third Bank,
Northwestern Ohio, N.A., respectively. The Loan and Security Agreement,
dated April 7, 2000, with The CIT Group/Business Credit, Inc. and the
Loan Agreement dated April 7, 2000, with Fifth Third Bank, Northwestern
Ohio, N.A. were also filed. A press release dated April 7, 2000
reporting the Company's operating results for its fourth quarter and
year-ended January 31, 2000 and the completion of the refinancing of
its working capital was also filed.
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: /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: /s/ Jerry D. Kneipp
-------------------
Jerry D. Kneipp
Chief Financial Officer
Page 10 of 10