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, 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 November 30, 2000 there were 886,784 shares outstanding of the Company's
Common Stock at $1.00 par value.
<PAGE>
FORM 10-Q
PART I - FINANCIAL INFORMATION
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
Oct 31 Oct 31 Oct 31 Oct 31
2000 1999 2000 1999
-------- -------- -------- --------
Net Sales $14,638 $18,324 $36,068 $41,042
Other Income 240 303 562 1,778
-------- -------- -------- --------
14,878 18,627 36,630 42,820
Costs and Expenses:
Cost of products sold 10,357 12,968 27,342 30,490
Selling, administrative
and general 3,500 4,122 9,083 10,123
Interest 409 700 1,288 1,732
-------- -------- -------- --------
14,266 17,790 37,713 42,345
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 612 837 (1,083) 475
Income Tax 0 0 0 333
-------- -------- -------- --------
NET INCOME (LOSS) $ 612 $ 837 $(1,083) $ 142
======== ======== ======== ========
Total Comprehensive Income (Loss) $ 612 $ 813 $(1,083) $ (576)
======== ======== ======== ========
Net Income(Loss) Per Share(Note 3) $ .71 $ .97 $ (1.25) $ .16
Dividends Per Share (Note 3) $ .00 $ .00 $ .00 $ .00
Average Shares Outstanding 865 865 865 865
(Note 3)
See notes to condensed consolidated financial statements.
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
October 31 January 31
2000 2000
-------- --------
Assets (unaudited)
Current assets:
Cash $ 1,288 $ 2,410
Accounts receivable less allowance for
doubtful accounts
(October - 436; January - 449) 8,883 7,341
Inventories (Note 2)
Finished products 3,448 4,231
Products in process 1,171 505
Raw materials 1,895 1,904
Less: Adjustment to reduce inventories
to last-in, first-out cost method (2,501) (2,478)
-------- --------
4,013 4,162
Prepaid expenses 344 303
-------- --------
Total current assets 14,528 14,216
Property, plant and equipment, net 9,127 10,258
Deferred charges 473 0
Other assets 1,275 1,409
-------- --------
Total assets $25,403 $25,883
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 3,373 $ 4,016
Other current liabilities 3,547 2,153
Long-term debt due within one year 14,480 830
-------- --------
Total current liabilities 21,400 6,999
Long-term obligations, less current maturities 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 3,282 4,365
Reduction for ESOP loan guarantee for
unearned ESOP shares (363) (363)
-------- --------
Total stockholders' equity 4,003 5,086
-------- --------
Total liabilities and stockholders' equity $25,403 $25,883
======== ========
See notes to condensed consolidated financial statements.
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(amounts in thousands)
(unaudited)
Nine Months Ended
Oct 31 Oct 31
2000 1999
-------- --------
Cash flows from operating activities
Net income (loss) $(1,083) $ 142
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 1,444 1,514
Changes in assets and liabilities (1,936) 2,174
Deferred federal income tax 0 333
-------- -------
Net cash provided by (used in) operating
activities (1,575) 3,175
Cash flows from investing activities
Purchase of plant and equipment, less
net book value of disposals (315) (611)
-------- --------
Net cash used in investing activities (315) (611)
Cash flows from financing activities
Proceeds from (payments of) debt 768 (405)
-------- --------
Net cash provided by (used in) financing
activities 768 (405)
-------- --------
Cash
Increase (decrease) during period (1,122) 2,159
Beginning of period 2,410 182
-------- --------
End of period $ 1,288 $ 2,341
======== ========
See notes to condensed consolidated financial statements.
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
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 presentation 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 the full fiscal year, or
any other interim period.
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.
Note 4 - Industry Segments
The Company has four reportable segments: domestic toy, international toy, Ohio
Art diversified products, and Strydel diversified products. The domestic toy
segment manufactures and distributes toys through major retailers in the United
States while the international toy segment manufactures and utilizes foreign toy
companies to distribute their products throughout the world. Ohio Art
diversified products manufactures and sells custom lithographed products to
consumer goods companies. The Strydel diversified products segment manufactures
and sells molded plastic parts to other manufacturers, including Ohio Art.
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4 - Industry Segments (continued)
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, not including gains and losses on the
Company's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Intersegment sales are recorded at cost, and as such, there is no intercompany
profit or loss on intersegment sales or transfers.
The Company's reportable segments offer either different products in the case of
the diversified products segments, or utilize different distribution channels in
the case of the two toy segments.
<PAGE>
Form 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(amounts in thousands)
Note 4 - Industry Segments (continued)
Financial information relating to reportable segments is as follows:
<TABLE>
<CAPTION>
Domestic International Ohio Art Strydel
Toy Toy Diversified Diversified Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months ended October 31, 2000
Revenues from external customers $ 7,750 $2,311 $3,706 $ 871 $14,638
Intersegment revenues 27 0 0 515 542
Segment income(loss) 191 146 222 53 612
===================================================================
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) (402) 158 835
====================================================================
Nine months ended October 31, 2000
Revenues from external customers $15,865 $6,063 $11,424 $2,716 $36,068
Intersegment revenues 87 0 0 930 1,017
Segment income(loss) (1,385) (18) 304 16 (1,083)
===================================================================
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) (517) 33 471
====================================================================
</TABLE>
<PAGE>
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 nine months ended October 31, 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 Nine Months Ended
Oct 31 Oct 31 Oct 31 Oct 31
2000 1999 2000 1999
-------- -------- -------- --------
Net income (loss) $ 612 $ 837 $(1,083) $ 142
Other comprehensive loss, net of tax:
Net unrealized holding 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 0 0 (646)
Other comprehensive (loss) (24) (72)
-------- -------- -------- --------
Comprehensive income (loss) $ 612 $ 813 $(1,083) $ (576)
======== ======== ======== ========
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 under the terms of a
revolving credit agreement. Borrowings are subject to availability, based on
various percentages of eligible inventory and accounts receivable. In addition,
the Company obtained term loans aggregating $3,279, with interest on both loans
payable monthly at prime plus 1.25% (10.75% effective rate) and an unused line
fee of 0.5% on the revolving credit agreement. The term loans require monthly
payments of $45 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.
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6 - Long term Obligations (continued)
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% (11.50% effective rate), 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. At October 31, 2000 the Company was not in compliance with one of its
covenants for which it has received a waiver from the Lender. However, it
appears probable that the Company will not be able to meet this covenant
requirement at the end of its fiscal year and as a result the debt has been
classified as a current liability in the October 31, 2000 balance sheet.
Management is currently implementing an operating plan with the goal of reducing
overhead and other operating costs by approximately $2,500. This plan includes
workforce reduction and moving the production of the Company's Etch-A-Sketch
overseas. Management is of the opinion that the implementation of this operating
plan along with the $3,684 currently available on the Company's revolving line
of credit agreement will be more than adequate to meet the Company's cash flow
requirements for the ensuing twelve months. Management believes the current line
of credit will continue to be available, despite a possible future covenant
violation, based on the expected asset base which securitizes the lending
arrangement.
Note 7 - New Accounting Pronouncement
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (hereinafter referred to as Statement) which will be applicable to
the Company beginning on February 1, 2000. Under this Statement, all derivative
instruments will be recorded at their fair values. If the derivative instruments
are designated as hedges of fair values, both the change in the fair value of
the hedge and the hedged item will be included in current earnings. Fair value
adjustments related to cash flow hedges will be recorded in other comprehensive
income and reclassified to earnings when hedged transaction is reflected in
earnings. Ineffective portions of hedges are reflected in income currently. The
Company does not expect this Statement will have a significant impact on its
financial statements since it currently does not use derivative instruments in
its business.
<PAGE>
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
Results of operations
Net sales for the nine months ended October 31, 2000 decreased approximately 12%
to $36,068 from $41,042 for the similar period of 1999 and decreased 20% to
$14,638 for the three months ended October 31, 2000 from $18,324 for the similar
period of 1999. 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, 2000, the domestic toy segment accounted for approximately $5,900 of
the sales decrease and the diversified products segments accounted for
approximately $700. These decreases were offset by an increase of approximately
$1,600 in the international toy segment. Sales of the Betty Spaghetty(R) fashion
doll and Water T-Ball(TM), an outdoor water toy, accounted for most of the
decrease ($2,700) during the period. Increases in the Etch A Sketch(R) ($400)
and drum ($600) categories limited the impact of these decreases. The sales
decrease in the third quarter of approximately $3,700 is comprised of decreases
in domestic toy and diversified product shipments of approximately $3,500 and
$600 respectively and an offsetting increase in international shipments of $400.
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, November 30, 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 November 30 is approximately $7,444 versus
$8,204 at the same date in 1999.
Other income for the nine months ended October 31, 2000 decreased to $562 from
$1,778 for the similar period of 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 2000.
Gross profit margin (percentage) for the nine months ended October 31, 2000
(24.2%) decreased from the nine months ended October 31, 1999 (26.0%). The
decrease is due in part to reduced domestic 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. Gross profit margin (percentage) for the three
months ended October 31, 2000 (29.2%) equaled the margin for the three months
ended October 31, 1999.
Selling, administrative, and general expenses for the nine months ended October
31, 2000 decreased to $9,083 from $10,123 for the similar period of 1999 and
decreased to $3,500 for the three months ended October 31, 2000 from $4,122 for
the similar period of 1999. The majority of the decrease for both periods is
advertising expense which decreased approximately $600 for the nine month period
and $400 for the three month period. In addition, reductions were achieved in
royalty expense, salaries, travel and entertainment, and legal and professional
fees.
Interest expense decreased to $1,288 for the nine months ended October 31, 2000
from $1,732 for the similar period of 1999 and decreased to $409 for the three
months ended October 31, 2000 from $700 for the similar period 1999.
<PAGE>
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
The higher charges in 1999 were due to a penalty interest charge of
approximately $520 for the nine months ended October 31, 1999 and $270 for the
three months ended October 31, 1999, imposed upon the Company by its previous
lender.
No income tax expense or benefit was recorded for the nine month or three month
period ended October 31, 2000 due to the net loss recorded for this period. The
Company has a net operating loss carry forward, the tax effects of which are
offset by a valuation allowance recorded for the deferred tax asset. Income tax
expense of $333 was recorded in the first quarter of 1999 due to the realized
gain on the sale of marketable securities.
Liquidity and Capital Resources
Cash flows decreased by $1,122 for the nine month period ended October 31, 2000
compared to an increase of $2,159 for the similar period of 1999. Net income for
the nine months ended October 31, 1999 included gain on sale of marketable
securities of $988. In addition, cash flows for the nine months ended October
31, 2000 decreased due to deferred loan acquisition costs, and increased trade
receivables. Last year, outflows decreased due to a reduction in inventory of
approximately $2,900 and increased trade payables and accrued expenses.
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. Amounts available under the revolving credit
agreements as of October 31, 2000 were $3,684. 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 October 31, 2000. This event of
default was subsequently waived by the lender unconditionally. However, it
appears probable that the Company will not be able to meet this covenant
requirement at the end of its fiscal year, and as a result, the debt has been
classified as a current liability in the October 31, 2000 balance sheet.
Management is currently implementing an operating plan with the goal of reducing
overhead and other operating costs by approximately $2,500. This plan includes
workforce reduction and moving the production of the Company's Etch-A-Sketch
overseas. Management is of the opinion that the implementation of this operating
plan along with the $3,684 currently available on the Company's revolving line
of credit agreement will be more than adequate to meet the Company's cash flow
requirements for the ensuing twelve months.
Management believes the current line of credit will continue to be available,
despite a possible future covenant violation, based on the expected asset base
which securitizes the lending arrangement.
<PAGE>
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
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, 2000.
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 15, 2000 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: December 15, 2000 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: December 15, 2000 /s/ Jerry D. Kneipp
----------------------
Jerry D. Kneipp
Chief Financial Officer
