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, 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 August 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
PART I - FINANCIAL INFORMATION
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
------------------ ------------------
July 31 July 31 July 31 July 31
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $10,354 $12,338 $20,419 $21,429
Other income 321 115 418 323
-------- -------- -------- --------
10,675 12,453 20,837 21,752
Costs and expenses:
Cost of products sold 7,188 9,341 14,653 16,985
Selling, administrative
and general 2,623 3,022 5,028 5,583
Interest 178 395 424 879
-------- -------- -------- --------
9,989 12,758 20,105 23,447
-------- -------- -------- --------
Income (loss) before income taxes 686 (305) 732 (1,695)
Provision for income taxes 0 0 0 0
-------- -------- -------- --------
Net income (loss) $ 686 $ (305) $ 732 $(1,695)
======== ======== ======== ========
Net income(loss) per share(Note 3) $ .79 $ ( .35) $ .84 $ (1.96)
Average shares outstanding 871 865 871 865
(Note 3)
See notes to condensed consolidated financial statements.
Page 2 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in thousands)
July 31 January 31
2001 2001
---------- ----------
(unaudited)
Assets
Current assets
Cash $ 1,234 $ 536
Accounts receivable less allowance
(July - $281; January - $449) 5,897 5,966
Inventories - Note 2
Finished products 5,124 3,804
Products in process 103 103
Raw materials 1,260 1,716
---------- ----------
6,487 5,623
Prepaid expenses 218 296
---------- ----------
Total current assets 13,836 12,421
Property, plant and equipment, net 8,455 8,985
Other assets 996 1,538
---------- ----------
Total assets $23,287 $22,944
========== ==========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 4,689 $ 3,959
Other current liabilities 1,663 2,257
Long-term debt due within one year 873 9,554
---------- ----------
Total current liabilities 7,225 15,770
Long-term obligations, less current maturities 9,127 971
Stockholders' equity
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 6,194 5,462
Reduction for ESOP loan guarantee (343) (343)
---------- ----------
Total stockholders'equity 6,935 6,203
---------- ----------
Total liabilities and stockholders' equity $23,287 $22,944
========== ==========
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)
Six Months Ended
------------------------
July 31 July 31
2001 2000
---------- ----------
Cash flows from operating activities
Net income(loss) $ 732 $(1,695)
Adjustments to reconcile net income(loss)
to net cash provided by (used in)
operating activities:
Provision for depreciation and amortization 867 962
Changes in assets and liabilities 290 (794)
---------- ----------
Net cash provided by (used in)
operating activities 1,889 (1,527)
---------- ----------
Cash flows from investing activities
Purchase of plant and equipment, less
net book value of disposals (337) (230)
---------- ----------
Net cash used in investing activities (337) (230)
---------- ----------
Cash flows from financing activities
Proceeds from (payments of) debt (854) 167
---------- ----------
Net cash provided by (used in)
financing activities (854) 167
---------- ----------
Cash
Increase(decrease) during period 698 (1,590)
Beginning of period 536 2,410
---------- ----------
End of period $ 1,234 $ 820
========== ==========
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
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, 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 and sales agents 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 plastic injection molded parts to other manufacturers,
including Ohio Art.
The accounting policies of the reportable segments are the same as those
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)
described in the summary of significant accounting policies.
Intersegment sales are recorded at cost, therefore, 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 (continued)
Financial information relating to reportable segments is as follows:
Domestic International Ohio Art Strydel
Toy Toy Diversified Diversified Total
-------------------------------------------------------------------
Three months ended July 31, 2001
Revenues from external customers $ 3,446 $2,913 $3,161 $ 834 $10,354
Intersegment revenues 29 0 0 141 170
Segment income(loss) 171 352 242 (79) 686
===================================================================
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)
====================================================================
Six months ended July 31, 2001
Revenues from external customers $ 7,622 $5,201 $5,980 $1,616 $20,419
Intersegment revenues 52 0 0 141 193
Segment income(loss) 366 527 137 (298) 732
===================================================================
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)
====================================================================
Page 7 of 11
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5 - Debt (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% (8.00% effective rate at July 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.
In addition, 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% (9.25% effective rate at
July 31, 2001), 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, 2001 the lender agreed to amend the agreement so that the
Company would be in compliance with its tangible net worth covenant. Management
is of the opinion that the Company will be able to meet this covenant
requirement through the end of the second quarter of fiscal year 2003.
Therefore, the Company's long-term debt obligations have been reclassified to
non-current liabilities at July 31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
Results of operations
Net sales for the six months ended July 31, 2001 decreased approximately 5% to
$20,419 from $21,429 for the comparable period of 2000 and decreased to $10,354
for the three months ended July 31, 2001 from $12,338 for the comparable period
of 2000. 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, 2001, declines in the domestic toy and the diversified products segments of
approximately $500 and $2,000 respectively were offset in part by an increase in
international toy shipments of approximately $1,500. Sales of the Betty
Spaghetty(R) fashion doll increased by $1,400 during the period while decreases
were recorded in all other categories. The sales decrease in the second quarter
of approximately $2,000 is comprised of decreases in all segments as follows:
domestic toy ($500), international toy ($400), and diversified products
($1,100).
Page 8 of 11
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
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, August 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 August 31, 2001 is
approximately $13,900 versus $14,400 at the same date in 2000.
Other income for the six month period ending July 31, 2001 increased to $418
from $323 for the six month period ended July 31, 2000. For the three month
period ending July 31, 2001, other income increased to $321 from $115 for the
comparable period of 2000. The increases in both the six month and three month
periods are primarily due to royalties paid by international partners and
advances from licensees.
Gross profit margin (percentage) for the six months ended July 31, 2001 (28.2%)
increased from the six months ended July 31, 2000 (20.7%). The increase is due
primarily to reduced sales returns and allowances along with lower manufacturing
expenses of approximately $1,100 and $1,800 respectively. The Company's cost
reduction plan accounts for a significant part of the savings in manufacturing
expenses. Gross profit margin (percentage) for the three months ended July 31,
2001 (30.6%) increased from the three months ended July 31, 2000 (24.3%). The
increase is largely due to the same factors affecting the six month period.
Selling, administrative, and general expenses for the six months ended July 31,
2001 decreased to $5,028 from $5,583 for the comparable period of 2000 and
decreased to $2,623 for the three months ended July 31, 2001 from $3,022 for the
comparable period of 2000. The key areas affected for both periods were
advertising expense, salaries and health insurance. Most of the savings occurred
as a result of the Company's cost reduction plan.
Interest expense decreased to $424 for the six months ended July 31, 2001
from $879 for the comparable period of 2000 and decreased to $178 for the three
months ended July 31, 2001 from $395 for the comparable period of 2000. The
lower interest expense is due to a reduction in long-term debt of approximately
$4,900 and to the lowering of the bank prime lending rate.
No income tax expense or benefit was recorded for the six month or three month
periods ended July 31, 2001 based upon estimates of the full fiscal year
effective tax rate after net operating loss carryforwards.
Liquidity and Capital Resources
Cash provided by operations for the six month period ended July 31, 2001 was
approximately $1,900 versus cash used in operations of approximately $1,500 for
the comparable period of 2000. Working capital increased by $46 during the six
month period of 2001 compared to a decrease of $1,096 in the prior year.
Page 9 of 11
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
Cash used in investing activities for the six month period ended July 31, 2001
was approximately $300 compared to a cash usage of $200 in the comparable 2000
period. The increase in capital expenditures in the six month period of 2001 is
a result of improvements in the Company's liquidity situation.
Cash used in financing activities for the six month period ended July 31, 2001
was approximately $900 compared to cash provided in the comparable 2000 period
of approximately $200. The cash used in the 2001 period is primarily
attributable to reduced borrowings from the Company's revolving credit facility.
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 currently available under the revolving credit
agreements as of July 31, 2001 were $4,800. 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 in compliance with the minimum tangible net worth covenant
included in its Loan and Security Agreement at July 31, 2001. However, the
Company was not in compliance with this covenant at January 31, 2001. As a
result, the long-term debt obligations were classified as a current liability in
the January 31, 2001 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
The Company did not file any reports on Form 8-K during the three
months ended July 31, 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: September 13, 2001 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: September 13, 2001 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: September 13, 2001 /s/ Jerry D. Kneipp
----------------------
Jerry D. Kneipp
Chief Financial Officer
Page 11 of 11