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, 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 August 31, 2000 there were 886,784 shares outstanding of the Company's
Common Stock at $1.00 par value.
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in thousands)
July 31 January 31
2000 2000
---------- ----------
Assets
Current assets
Cash $ 820 $ 2,410
Accounts receivable less allowance
(July - $497; January - $449) 7,566 7,341
Inventories - Note 2
Finished products 4,134 4,231
Products in process 1,246 505
Raw materials 1,458 1,904
Less: Adjustment to reduce inventories
to last-in, first-out cost method (2,502) (2,478)
---------- ----------
4,336 4,162
Prepaid expenses 206 303
---------- ----------
Total current assets 12,928 14,216
Property, plant and equipment, net 9,525 10,258
Deferred charges 526 0
Other assets 1,271 1,409
---------- ----------
Total assets $24,250 $25,883
========== ==========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 3,267 $ 4,016
Other current liabilities 2,667 2,153
Long-term debt due within one year 14,925 830
---------- ----------
Total current liabilities 20,859 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 2,670 4,365
Reduction for ESOP loan guarantee (363) (363)
---------- ----------
Total stockholders' equity 3,391 5,086
---------- ----------
Total liabilities and stockholders' equity $24,250 $25,883
========== ==========
See notes to condensed consolidated unaudited financial statements.
<PAGE>
FORM 10-Q
PART I - FINANCIAL INFORMATION
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(amounts in thousands)
Three Months Ended Six Months Ended
------------------ ------------------
July 31 July 31 July 31 July 31
2000 1999 2000 1999
-------- -------- -------- --------
Net Sales $12,338 $12,221 $21,429 $22,718
Other Income 115 112 323 1,475
-------- -------- -------- --------
12,453 12,333 21,752 24,193
Costs and Expenses:
Cost of products sold 9,341 9,580 16,985 17,522
Selling, administrative
and general 3,022 3,041 5,583 6,001
Interest 395 648 879 1,032
-------- -------- -------- --------
12,758 13,269 23,447 24,555
-------- -------- -------- --------
INCOME(LOSS) BEFORE INCOME TAXES (305) (936) (1,695) (362)
Income Tax 0 0 0 333
-------- -------- -------- --------
NET INCOME(LOSS) $ (305) $ (936) $(1,695) $ (695)
======== ======== ======== ========
Net Income(Loss) Per Share(Note 3) $ (.35) $ (1.08) $ (1.96) $ (.80)
Dividends Per Share (Note 3) $ .00 $ .00 $ .00 $ .00
Average Shares Outstanding 865 865 865 865
(Note 3)
See notes to condensed consolidated unaudited financial statements.
<PAGE>
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(amounts in thousands)
Six Months Ended
------------------------
July 31 July 31
2000 1999
---------- ----------
Cash flows from operating activities
Net income(loss) $(1,695) $ (695)
Adjustments to reconcile net income(loss)
to net cash provided by (used in)
operating activities:
Gain on sale of marketable equity security (988)
Provision for depreciation and amortization 962 1,009
Changes in assets and liabilities (794) 1,247
Deferred federal income tax 333
---------- ----------
Net cash provided by (used in)
operating activities (1,527) 906
---------- ----------
Cash flows from investing activities
Purchase of plant and equipment, less
net book value of disposals (230) (456)
---------- ----------
Net cash used in investing activities (230) (456)
---------- ----------
Cash flows from financing activities
Payments of debt 167 (163)
---------- ----------
Net cash used in financing activities 167 (163)
---------- ----------
Cash
Increase(decrease) during period (1,590) 287
Beginning of period 2,410 182
---------- ----------
End of period $ 820 $ 469
========== ==========
See notes to condensed consolidated unaudited financial statements.
<PAGE>
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 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 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 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>
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:
<TABLE>
Domestic International Ohio Art Strydel
Toy Toy Diversified Diversified Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months ended July 31, 2000
Revenues from external customers $ 3,950 $3,342 $4,191 $ 855 $12,338
Intersegment revenues 27 0 0 274 301
Segment income(loss) (734) 158 290 (19) (305)
===================================================================
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) (134) 6 (936)
====================================================================
Six months ended July 31, 2000
Revenues from external customers $ 8,115 $3,751 $7,718 $1,845 $21,429
Intersegment revenues 60 0 0 415 475
Segment income(loss) (1,576) (164) 82 (37) (1,695)
===================================================================
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) (446) (125) (695)
====================================================================
</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 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:
Six Months Ended Three Months Ended
July 31 July 31 July 31 July 31
2000 1999 2000 1999
-------- -------- -------- --------
(In Thousands) (In Thousands)
Net income (loss) $(1,695) $ (695) $ (305) $ (936)
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 30, and July 31, 1999,
respectively (646) 0
Other comprehensive expense (48) (24)
-------- -------- -------- --------
Comprehensive income (loss) $(1,695) $(1,389) $ (305) $ (960)
======== ======== ======== ========
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 payable
monthly at prime plus 1.25% (10.75%) and an unused line fee of 0.5%. 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)
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%), 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 July 31, 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 third quarter and as a result the debt has been
classified as a current liability in the July 31, 2000 balance sheet.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
Results of operations
Net sales for the six months ended July 31, 2000 decreased approximately 6% to
$21,429 from $22,718 for the similar period of 1999 and increased to $12,338 for
the three months ended July 31, 2000 from $12,221 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 six months ended July 31, 2000, the
domestic toy segment decreased approximately $2,400 while the international
segment increased $1,200. Sales of the Betty Spaghetty(R) fashion doll and Water
T-Ball(TM), an outdoor water toy, accounted for most of the decrease ($1,200)
during the period, but the decreases were partially offset by a sales increase
for the Etch A Sketch(R) category ($600). The sales increase in the second
quarter of approximately $100 is comprised of a decrease in domestic toy
shipments of approximately $1,500 and an offsetting increase in International
shipments of $1,700.
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, August 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 August 31, 2000 is
approximately $14,400 versus $18,900 at the same date in 1999.
Other income for the six month period ending July 31, 2000 decreased to $323
from $1,475 for the six month period ended July 31, 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 six months ended July 31, 2000 (20.7%)
decreased from the six months ended July 31, 1999 (22.9%). The
<PAGE>
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
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 July 31, 2000 (24.3%) increased from the three months ended July
31, 1999 (21.6%). The increase is largely due to higher production levels which
resulted in decreases in direct labor and manufacturing overhead variances.
Selling, administrative, and general expenses for the six months ended July 31,
2000 decreased to $5,583 from $6,001 for the similar period of 1999 and
decreased to $3,022 for the three months ended July 31, 2000 from $3,041 for the
similar period of 1999. The majority of the decrease for both periods is
advertising expense which decreased approximately $200 for the six month period
and $100 for the three month period. In addition, reductions were achieved in
salaries, travel and entertainment, and legal and professional fees. Legal fees
incurred by the Company in securing new financing were capitalized in the first
quarter 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 decreased to $879 for the six months ended July 31, 2000 from
$1,032 for the similar period of 1999 and decreased to $395 for the three months
ended July 31, 2000 from $648 for the similar period of 1999. The higher charges
in 1999 were due to a penalty interest charge of approximately $250 imposed upon
the Company by its previous lender.
No income tax expense or benefit was recorded for the six month or three month
period ended July 31, 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 in the first quarter of 1999 due to the realized gain on the
sale of marketable securities.
Liquidity and Capital Resources
Cash flows used in operations were $1,527 for the six month period ended July
31, 2000 compared to $906 provided by operations for the similar period of 1999.
The $1,000 increase in net loss this year over last year was partially offset by
the non-cash effect of the gain on sale of marketable equity securities in 1999,
net of tax. In addition, funds were used in 2000 for deferred loan acquisition
costs and reduced trade payables. Last year, funds were provided by a reduction
in inventory of approximately $1,900.
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
<PAGE>
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
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 July 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 third quarter and as a result the debt has been
classified as a current liability in the July 31, 2000 balance sheet.
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
A current report on Form 8-K dated May 3, 2000 was filed to announce
that the firm of Ernst & Young LLP would no longer serve as the
Company's independent accounting firm, effective with the filing of the
Company's Form 10-K. The Company has engaged PricewaterhouseCoopers LLP
as its new independent accountants, also effective with the filing of
the Company's Form 10-K. A letter from Ernst & Young indicating their
response to the statements made by the Company in Form 8-K 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: September 14, 2000 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: September 14, 2000 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: September 14, 2000 /s/ Jerry D. Kneipp
----------------------
Jerry D. Kneipp
Chief Financial Officer
