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, 2001
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, 2001 there were 886,784 shares outstanding of the Company's
Common Stock at $1.00 par value.
Page 1 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in thousands)
April 30 January 31
2001 2001
---------- ----------
(unaudited)
Assets
Current assets
Cash $ 1,028 $ 536
Accounts receivable less allowance
(April - $550; January - $475) 5,673 5,966
Inventories - Note 2
Finished products 3,325 3,804
Products in process 103 103
Raw materials 1,789 1,716
---------- ----------
5,217 5,623
Prepaid expenses 305 296
---------- ----------
Total current assets 12,223 12,421
Property, plant and equipment, net 8,624 8,985
Other assets 1,438 1,538
---------- ----------
Total assets $22,285 $22,944
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 3,983 $ 3,959
Other current liabilities 2,152 2,257
Long-term debt due within one year 8,918 9,554
---------- ----------
Total current liabilities 15,053 15,770
Other long-term obligations, less current
maturities 983 971
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 5,508 5,462
Reduction for ESOP loan guarantee (343) (343)
---------- ----------
Total stockholders' equity 6,249 6,203
---------- ----------
Total liabilities and stockholders' equity $22,285 $22,944
========== ==========
See notes to condensed consolidated financial statements.
Page 2 of 11
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)
(unaudited)
Three Months Ended
----------------------
April 30 April 30
2001 2000
-------- --------
Net sales $10,065 $ 9,091
Other income 96 208
-------- --------
10,161 9,299
Costs and expenses:
Cost of products sold 7,465 7,644
Selling, administrative and general 2,404 2,561
Interest 246 484
-------- --------
10,115 10,689
-------- --------
Income (loss) before income taxes 46 (1,390)
Provision for income taxes - -
-------- --------
Net income (loss) $ 46 $(1,390)
======== ========
Net income(loss) per share (Note 3) $ .05 $ (1.61)
Average shares outstanding (Note 3) 871 865
See notes to condensed consolidated financial statements.
Page 3 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(amounts in thousands)
(unaudited)
Three Months Ended
------------------------
April 30 April 30
2001 2000
---------- ----------
Cash flows from operating activities
Net income(loss) $ 46 $(1,390)
Adjustments to reconcile net income(loss)
to net cash provided by (used in)
operating activities:
Provision for depreciation and amortization 434 481
Changes in assets and liabilities 721 248
---------- ----------
Net cash provided by (used in)
operating activities 1,201 (661)
Cash flows from investing activities
Purchase of plant and equipment, less
net book value of disposals (73) (106)
---------- ----------
Net cash used in investing activities (73) (106)
Cash flows from financing activities
Payments of debt (636) (869)
---------- ----------
Net cash used in financing activities (636) (869)
---------- ----------
Cash
Increase(decrease) during period 492 (1,636)
At beginning of period 536 2,410
---------- ----------
Cash at end of period $ 1,028 $ 774
========== ==========
See notes to condensed consolidated financial statements.
Page 4 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts)
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, 2001.
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 calendar 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 First-In,
First-out (FIFO) cost method.
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.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
Page 5 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share amounts)
Note 4 - Industry Segments (continued)
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 6 of 11
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, 2001
Revenues from external customers $4,176 $2,288 $2,819 $ 782 $10,065
Intersegment revenues 23 0 0 0 23
Segment loss 195 175 (105) (219) 46
===================================================================
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 income(loss) (842) (322) (208) (18) (1,390)
====================================================================
Page 7 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share amounts)
Note 5 - Long-term Obligations due or callable within one year(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. Amounts
outstanding on this line of credit agreement as of April 30, 2001 were $1,581.
In addition, the Company obtained term loans aggregating $3,279, with interest
on both loans payable monthly at prime plus 1.25% (8.25% effective rate at May
31, 2001) 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.
On April 7, 2000, the Company executed a $5,200 term loan to refinance its
existing term loan. The 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 (9.50% effective rate). 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 April 30, 2001 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 April 30, 2001 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 $4,000 currently available on the Company's
$12,000 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 8 of 11
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
Results of operations
Net sales for the first quarter of 2001 increased approximately 11% to $10,065
from $9,091 for the comparable 2000 period. Please refer to Note 4 to the
condensed consolidated financial statements for a breakdown of sales by segment.
While domestic toy shipments for the three month period ending April 30, 2001
were approximately the same as the similar period of the previous year, the
international toy segment reported an increase of $1,900, mostly on the
continued popularity of the Betty Spaghetty(R) brand, particularly in the
European and Australian markets. Domestic shipments of the Betty Spaghetty(R)
fashion doll and Water T-Ball(TM), an outdoor water toy, fell during the period,
but the decline was offset by increased sales of the Etch A Sketch(R) line of
products. Sales for the diversified products segments trailed the previous
year's comparable period by approximately $900.
The Company's business is seasonal, with approximately 55-65% 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, 2001, 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, 2001, order backlog as of May 31, 2001 is approximately $12,000
versus $12,600 at the same date in 2000.
Other income for the three month period ended April 30, 2001 decreased to $96
from $208 for the three month period ended April 30, 2000. The decrease in other
income is primarily due to fewer receipts of royalties and advances from
licensees in the current period, an issue related to timing of the royalty
payments.
Gross profit margin (percentage) for the first quarter of fiscal 2002 (25.8%)
increased from the first quarter of fiscal 2001 (15.9%), due in part to
increased shipments of some Etch A Sketch(R) products at higher gross margins
due to relocation of production to China. In addition, manufacturing expense
decreased approximately $600 as the Company's cost reduction plan began to
achieve its intended results.
Selling, administrative, and general expenses for the first quarter of fiscal
2002 decreased to $2,404 from $2,561 for the first quarter of fiscal 2001. The
key areas affected were advertising expense, salaries, health insurance and
domestic selling expenses. The savings in these categories were partially offset
by an increase in legal and professional expenses. Most of the savings occurred
as a result of the Company's cost reduction plan.
Interest expense for the three month period ended April 30, 2001 decreased to
$246 from $484 for the three month period ended April 30, 2000. The Company's
loan agreements prior to April 7, 2000 contained certain financial covenants, of
which one or more covenants had not been 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 9 of 11
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
No income tax expense or benefit was recorded for the first quarter of fiscal
2002 or 2001 based upon estimates of the full fiscal year effective tax rate.
Liquidity and Capital Resources
Cash flows increased by $492 for the three month period ended April 30, 2001
compared to a decrease of $1,636 for the similar period of 2000. The primary
sources of cash in the three months ended April 30, 2001 were accounts
receivable ($300), inventory ($400), and non-cash items ($400). Approximately
$600 of the total cash generated from operations was used to reduce long-term
debt. The cash decrease for the three months ended April 30, 2000 was due
primarily to a net loss of $1,400 and payments to reduce long-term debt ($900).
These uses of funds were partially offset by non-cash items and lower accounts
receivable.
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 April 30, 2001 were $4,000. 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.
The Company was not in compliance with the minimum tangible net worth covenant
included in its Loan and Security Agreement at April 30, 2001. 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 April 30, 2001 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 $4,000 currently available on the Company's
$12,000 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.
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, 2001.
The information called for in Items 1, 2, 3, 4, and 5 are not applicable.
Page 10 of 11
FORM 10-Q
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: June 14, 2001 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: June 14, 2001 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: June 14, 2001 /s/ Jerry D. Kneipp
-------------------
Jerry D. Kneipp
Chief Financial Officer
Page 11 of 11