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, 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 May 31, 1999 there were 886,784 shares outstanding of the Company's
Common Stock at $1.00 par value.
Page 1 of 13
<PAGE>
FORM 10-Q
PART I - FINANCIAL INFORMATION
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
----------------------
April 30 April 30
1999 1998
-------- --------
(In thousands, except
per share data)
Net Sales $10,497 $ 6,286
Other Income 1,363 279
-------- --------
11,860 6,565
Costs and Expenses:
Cost of products sold 7,446 4,690
Selling, administrative and general 2,960 2,462
Interest 384 321
-------- --------
10,790 7,473
-------- --------
INCOME(LOSS) BEFORE INCOME TAXES 1,070 (908)
Income Tax 333 -
-------- --------
NET INCOME(LOSS) $ 737 $ (908)
======== ========
Net Income(Loss) Per Share (Note 3) $ .85 $ (1.04)
Dividends Per Share (Note 3) $ .00 $ .04
Average Shares Outstanding (Note 3) 865 870
See notes to condensed consolidated unaudited financial statements.
Page 2 of 13
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30 January 31
1999 1999
---------- ----------
(Unaudited) (Note)
(Thousands of dollars)
ASSETS
Current Assets
Cash $ 329 $ 182
Accounts receivable less allowance
(April - $464; January - $515) 7,546 6,582
Inventories - Note 2
On first-in, first-out cost method:
Finished products 7,616 7,450
Products in process 305 498
Raw materials 2,487 2,220
Less: Adjustment to reduce inventories
to last-in, first-out cost method (2,567) (2,552)
---------- ----------
7,841 7,616
Recoverable income taxes 1,047 1,035
Prepaid expenses 870 938
---------- ----------
Total Current Assets 17,633 16,353
Property, Plant and Equipment
Cost 37,472 37,212
Less allowances for depreciation (26,238) (25,734)
---------- ----------
11,234 11,478
Other Assets 1,587 2,942
---------- ----------
$30,454 $30,773
========== ==========
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.
Page 3 of 13
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30 January 31
1999 1999
---------- ----------
(Unaudited) (Note)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,133 $ 4,870
Other current liabilities 2,598 2,161
Long-term debt due or callable
within one year 17,621 17,801
---------- ----------
Total Current Liabilities 24,352 24,832
Long-Term Obligations 847 777
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 4,671 3,934
Accumulated other comprehensive income
net of tax (137) 509
Reduction for ESOP loan quarantee (363) (363)
---------- ----------
Total Stockholders' Equity 5,255 5,164
---------- ----------
$30,454 $30,773
========== ==========
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.
Page 4 of 13
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Three Months Ended
------------------------
April 30 April 30
1999 1998
---------- ----------
(Thousands of dollars)
Operating Activities
Net income(loss) $ 737 $ (908)
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 504 499
Changes in accounts receivable, inventories,
prepaid expenses, other assets, accounts
payable, and other liabilities 0 (3,329)
Deferred Federal Income Tax 333 0
---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 586 (3,738)
Investing Activities
Purchase of plant and equipment, less
net book value of disposals (260) (391)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (260) (391)
Financing Activities
Borrowings 0 1,375
Payments of debt (179) (169)
Purchase of common stock for treasury 0 (1)
---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (179) 1,205
---------- ----------
Cash
Increase(Decrease) during period 147 (2,924)
At beginning of period 182 2,778
---------- ----------
CASH (OVERDRAFT) AT END OF PERIOD $ 329 $ (146)
========== ==========
See notes to condensed consolidated unaudited financial statements.
Page 5 of 13
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
April 30, 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 13
<PAGE>
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:
<TABLE>
Domestic International Ohio Art Strydel
Toy Toy Diversified Diversified Total
-------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
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) 1,035 (352) 517 (130) 1,070
===================================================================
Three months ended April 30, 1998
Revenues from external customers $2,471 $ 165 $2,959 $ 691 $ 6,286
Intersegment revenues 47 0 0 252 299
Segment income(loss) (1,255) (468) 678 171 (874)
====================================================================
</TABLE>
The following are reconciliations between total segment and consolidated totals
for income before income taxes:
<TABLE>
Three months ended
-----------------------------------
April 30 April 30
1999 1998
-----------------------------------
(Thousands of Dollars)
<S> <C> <C>
Income and Loss
Total income(loss) for reportable segments $1,070 $ (874)
Other income(loss):
Elimination of intersegment income(loss) 0 (34)
-----------------------------------
Income(Loss) before income taxes $1,070 $ (908)
===================================
</TABLE>
Page 7 of 13
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 April 30, 1998, the Company held securities classified as available-for-
sale, which had unrealized gains. Changes in unrealized gains are includable in
comprehensive income.
Comprehensive income (loss) is as follows:
Three Months Ended
April 30 April 30
1999 1998
-------- --------
(In Thousands)
Net Income(loss) $ 737 $ (908)
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) (6)
Other comprehensive expense (24) (24)
-------- --------
Comprehensive income(loss) $ 67 $ (938)
======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATIONS
Net sales for the first quarter of 1999 increased dramatically to $10,497,000
from $6,286,000 for the similar period of 1998. The domestic toy segment
increased approximately $2,500,000 and the international toy segment increased
approximately $800,000, while the diversified products segments increased
approximately $900,000. The majority of the increase in toy sales for both the
domestic and international segments was caused by the demand for the Company's
Betty Spaghetty(R) mix and match fashion doll. Domestic shipments of Water
T-Ball(TM), an outdoor water toy, also contributed to the increase. Sales for
the diversified products segments 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 $1,000,000 of steel was purchased and rebilled to the
customer in the first quarter of 1999 versus none in the first quarter of 1998.
Page 8 of 13
<PAGE>
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. Because of the
seasonality of the Company's business, the dollar order backlog at the end of
May is not necessarily indicative of expectations of sales for the full year.
Subject to industry practice and comments as detailed in the Registrant's report
on Form 10-K for the year ended January 31, 1999, order backlog as of May 31st
was approximately $8,700,000 versus $26,200,000 at the same date in 1998.
However, approximately $10,000,000 to $15,000,000 of the May 31, 1998 orders
were cancelled in mid-fourth quarter by major toy retailers.
Other income for the three month period ending April 30, 1999 increased to
$1,363,000 from $279,000 for the three month period ending April 30, 1998. The
increase in other income is primarily due to a gain of $988,000 resulting from
the sale of marketable securities.
Gross profit margin (percentage) for the first quarter of 1999 (29.1%) increased
from the first quarter of 1998 (25.4%). Gross profit margins at standard
decreased slightly from the previous period, but variances, primarily overhead
associated with the Bryan, Ohio facility remained constant in dollars. Because
of the higher level of sales, the standard gross profit margin for the first
quarter of 1999 did not decrease as dramatically as the first quarter of 1998.
Selling, administrative, and general expenses for the first quarter of 1999
increased to $2,960,000 from $2,462,000. The primary reason is an increase in
advertising expense. Advertising expense is expensed based on the level of toy
sales, which have increased significantly in the first quarter of 1999 compared
to the same period of the previous year.
Income tax expense of $333,000 was recorded for the three month period ending
April 30, 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
first quarter 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 April 30, 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.
Page 9 of 13
<PAGE>
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 $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 any 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.
Page 10 of 13
<PAGE>
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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 11 of 13
<PAGE>
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESOLUTION PHASES
<TABLE>
Assessment Remediation Testing Implementation
---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
1. Mainframe Computer System 100% Complete 90% Complete 50% Complete 20% Complete
Expected Expected Expected
Completion Completion Completion
Date Date Date
September 1999 October 1999 November 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
</TABLE>
Page 12 of 13
<PAGE>
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 April 30, 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 8, 1999 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: September 8, 1999 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: September 8, 1999 /s/ Paul R. McCusty
-------------------
Paul R. McCusty
Vice President Finance
Page 13 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the first
quarter 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> APR-30-1999
<CASH> (329)
<SECURITIES> 0
<RECEIVABLES> 8,010
<ALLOWANCES> 464
<INVENTORY> 7,841
<CURRENT-ASSETS> 17,633
<PP&E> 37,472
<DEPRECIATION> 26,238
<TOTAL-ASSETS> 30,454
<CURRENT-LIABILITIES> 24,352
<BONDS> 0
0
0
<COMMON> 887
<OTHER-SE> 4,368
<TOTAL-LIABILITY-AND-EQUITY> 30,454
<SALES> 10,497
<TOTAL-REVENUES> 11,860
<CGS> 7,446
<TOTAL-COSTS> 7,446
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 384
<INCOME-PRETAX> 1,070
<INCOME-TAX> 333
<INCOME-CONTINUING> 737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 737
<EPS-BASIC> .85
<EPS-DILUTED> .85
</TABLE>
