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, 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 November 30, 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 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
2001 2000 2001 2000
-------- -------- -------- --------
Net Sales $15,060 $14,638 $35,479 $36,068
Other Income 486 240 904 562
-------- -------- -------- --------
15,546 14,878 36,383 36,630
Costs and Expenses:
Cost of products sold 10,049 10,357 24,702 27,342
Selling, administrative
and general 3,902 3,500 8,930 9,083
Interest 196 409 620 1,288
-------- -------- -------- --------
14,147 14,266 34,252 37,713
-------- -------- -------- --------
Income (loss) before income taxes 1,399 612 2,131 (1,083)
Provision for income taxes 0 0 0 0
-------- -------- -------- --------
Net income (loss) $ 1,399 $ 612 $ 2,131 $(1,083)
======== ======== ======== ========
Net income(loss) per share(Note 3) $ 1.61 $ .71 $ 2.45 $ (1.25)
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 SHEETS
(amounts in thousands except share amounts)
October 31 January 31
2001 2001
-------- --------
(unaudited)
Assets
Current assets:
Cash $ 1,089 $ 536
Accounts receivable less allowance for
doubtful accounts
(October - $347; January - $475) 9,487 5,966
Inventories - Note 2
Finished products 3,397 3,804
Products in process 103 103
Raw materials 1,371 1,716
-------- --------
4,871 5,623
Prepaid expenses 395 296
-------- --------
Total current assets 15,842 12,421
Property, plant and equipment, net 8,120 8,985
Other assets 987 1,538
-------- --------
Total assets $24,949 $22,944
======== ========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 4,437 $ 3,959
Other current liabilities 2,633 2,257
Long-term debt due within one year 1,550 9,554
-------- --------
Total current liabilities 8,620 15,770
Long-term obligations, less current maturities 8,031 971
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 7,557 5,462
Reduction for ESOP loan guarantee (343) (343)
-------- --------
Total stockholders' equity 8,298 6,203
-------- --------
Total liabilities and stockholders' equity $24,949 $22,944
======== ========
See notes to condensed consolidated financial statements.
Page 3 of 11
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
2001 2000
-------- --------
Cash flows from operating activities
Net income (loss) $ 2,131 $(1,083)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Provision for depreciation and amortization 1,300 1,444
Changes in assets and liabilities (1,111) (1,936)
-------- --------
Net cash provided by (used in) operating
activities 2,320 (1,575)
-------- --------
Cash flows from investing activities
Purchase of plant and equipment, less
net book value of disposals (436) (315)
Cash flows from financing activities
Proceeds from (payments of) debt (1,331) 768
-------- --------
Cash
Increase (decrease) during period 553 (1,122)
Beginning of period 536 2,410
-------- --------
End of period $ 1,089 $ 1,288
======== ========
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
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, 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 October 31, 2001
Revenues from external customers $ 7,647 $3,324 $ 2,925 $1,164 $15,060
Intersegment revenues 18 0 0 81 99
Segment income(loss) 924 414 69 (8) 1,399
===================================================================
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
====================================================================
Nine months ended October 31, 2001
Revenues from external customers $15,268 $8,526 $ 8,905 $2,780 $35,479
Intersegment revenues 71 0 0 222 293
Segment income(loss) 1,290 941 206 (306) 2,131
===================================================================
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)
====================================================================
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% (6.75% effective rate at October 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%, increasing by 0.5% on
each anniversary date through April 1, 2007 (8.00% effective rate at October 31,
2001). 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 at each measurement date through October 31, 2002. Therefore, the
Company's long-term debt obligations have been classified to non-current
liabilities at October 31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
Results of operations
Net sales decreased approximately 2% to $35,479 for the nine months ended
October 31, 2001 from $36,068 for the comparable period of 2000. For the
three-month period, net sales increased approximately 3% to $15,060 for the
quarter ended October 31, 2001 from $14,638 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 nine months ended October 31, 2001, the
domestic toy segment accounted for approximately $600 of the sales decrease and
the diversified products segments accounted for approximately $2,500. These
decreases were mostly offset by an increase of approximately $2,500 in the
international segment. Sales of the Betty Spaghetty(R) fashion doll and Etch A
Sketch(R) products increased by $2,400 and $600 respectively during the period
while decreases were recorded in all other toy categories. The decline in
diversified products shipments was mainly due to the current
Page 8 of 11
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
economic environment and management's decision to turn away unprofitable
business. The sales increase in the third quarter of approximately $400 is
comprised of an increase of $1,000 in international shipments partially offset
by decreases in domestic toy and diversified product shipments of approximately
$100 and $500 respectively.
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, November 30, 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 November 30 is approximately $6,487 versus
$7,444 at the same date in 2000.
Other income for the nine-month period ending October 31, 2001 increased to $834
from $524 for the comparable period of 2000. For the three-month period ending
October 31, 2001, other income increased to $471 from $200 for the comparable
period of 2000. The increases in both the nine-month and three-month periods are
primarily due to royalties paid by international partners and advances from
licensees.
Gross profit margin (percentage) for the nine-month period ending October 31,
2001 (30.3%) increased from the nine-months ended October 31, 2000 (24.2%). The
increase is due primarily to reduced sales returns and allowances along with
lower manufacturing expenses of approximately $1,700 and $2,400 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-month
period ending October 31, 2001 (33.2%) increased from the three months ended
October 31, 2000 (29.2%). The increase is largely due to the same factors
affecting the nine-month period.
Selling, administrative, and general expenses for the nine months ended October
31, 2001 decreased to $8,930 from $9,083 for the comparable period of 2000 and
increased to $3,902 for the three months ended October 31, 2000 from $3,500 for
the comparable period of 2000. The key areas affected for both periods were
advertising expense, salary expense, health insurance, and bonus expense.
Interest expense decreased to $620 for the nine months ended October 31, 2001
from $1,288 for the comparable period of 2000 and decreased to $196 for the
three months ended October 31, 2001 from $409 for the comparable period of 2000.
The lower interest expense is due to a reduction in long-term debt of
approximately $5,100 and to the lowering of the bank prime lending rate.
No income tax expense or benefit was recorded for the nine-month or three-month
periods ended October 31, 2001 based upon estimates of the full fiscal year
effective tax rate after net operating loss carryforwards.
Page 9 of 11
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
Liquidity and Capital Resources
Cash provided by operations for the nine-month period ended October 31, 2001 was
approximately $2,400 versus cash used in operations of approximately $1,600 for
the comparable period of 2000. Working capital decreased by $1,500 during the
nine-month period of 2001 compared to a decrease of $1,200 in the prior year.
Cash used in investing activities for the nine-month period ended October 31,
2001 was approximately $400 compared to a cash usage of $300 in the comparable
period of 2000. The increase in capital expenditures in the nine-month period of
2001 was permitted by improvements in the Company's liquidity situation.
Cash used in Financing activities for the nine-month period ended October 31,
2001 was approximately $1,400 compared to cash provided in the comparable period
of 2000 of approximately $800. 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 October 31, 2001 were $5,700. 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 October 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 October 31, 2001.
The information called for in Items 1, 2, 3, 4, and 5 are not applicable.
Page 10 of 11
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 11, 2001 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: December 11, 2001 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: December 11, 2001 /s/ Jerry D. Kneipp
----------------------
Jerry D. Kneipp
Chief Financial Officer
Page 11 of 11