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, 2002
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, 2002 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
2002 2002
---------- ----------
(unaudited)
Assets
Current assets
Cash $ 1,225 $ 2,199
Accounts receivable less allowance
(April - $452; January - $436) 4,162 4,988
Inventories - Note 2
Finished products 2,911 3,247
Products in process 126 126
Raw materials 1,180 1,570
---------- ----------
4,217 4,943
Deferred income taxes 1,154 823
Prepaid expenses 407 380
---------- ----------
Total current assets 11,165 13,333
Property, plant and equipment, net 7,657 7,804
Other assets 1,241 1,414
---------- ----------
Total assets $20,063 $22,551
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 3,009 $ 3,221
Other current liabilities 2,158 3,297
Long-term debt due within one year 1,645 1,550
---------- ----------
Total current liabilities 6,812 8,068
Other long-term obligations, less current
maturities 4,892 5,358
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 7,578 8,344
Reduction for ESOP loan guarantee (303) (303)
---------- ----------
Total stockholders' equity 8,359 9,125
---------- ----------
Total liabilities and stockholders' equity $20,063 $22,551
========== ==========
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
2002 2001
-------- --------
Net sales $ 6,116 $10,065
Other income 277 96
-------- --------
6,393 10,161
Costs and expenses:
Cost of products sold 5,009 7,465
Selling, administrative and general 2,277 2,404
Interest 80 246
-------- --------
7,366 10,115
-------- --------
Income (loss) before income taxes (973) 46
Benefit from income taxes (331) -
-------- --------
Net income (loss) $ (642) $ 46
======== ========
Net income(loss) per share (Note 3) $ (.74) $ .05
Average shares outstanding (Note 3) 873 871
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
2002 2001
---------- ----------
Cash flows from operating activities
Net income(loss) $ (642) $ 46
Adjustments to reconcile net income(loss)
to net cash provided by (used in)
operating activities:
Provision for depreciation and amortization 396 434
Changes in assets and liabilities 237 721
Deferred federal income tax (331) -
---------- ----------
Net cash provided by (used in)
operating activities (340) 1,201
---------- ----------
Cash flows from investing activities
Purchase of plant and equipment, less
net book value of disposals (249) (73)
---------- ----------
Net cash used in investing activities (249) (73)
---------- ----------
Cash flows from financing activities
Payment of debt (262) (636)
Dividends (123) -
---------- ----------
Net cash used in
financing activities (385) (636)
---------- ----------
Cash
Increase(decrease) during period (974) 492
At beginning of period 2,199 536
---------- ----------
Cash at end of period $ 1,225 $ 1,028
========== ==========
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 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, 2002.
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 the Company's 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.
Intersegment sales are recorded at cost, therefore, there is no intercompany
profit or loss on intersegment sales or transfers.
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)
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 April 30, 2002
Revenues from external customers $ 2,388 $1,340 $ 1,208 $1,180 $6,116
Intersegment revenues 7 0 0 0 7
Segment loss (217) (31) (387) (7) (642)
===================================================================
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 income(loss) 195 175 (105) (219) 46
====================================================================
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 $12,000,000 for three years on a revolving credit
basis based on various percentages of eligible inventory and accounts receivable
and term loans aggregating $3,279,000 with interest payable monthly at prime
plus 1.25% and an unused line fee of 0.5%. The term loans require monthly
principal payments of $45,542 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 $5,200,000 term loan to refinance its
existing term loan. The new term loan is payable in monthly installments of
$91,500 including interest at prime plus 2%, 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 various financing agreements contain certain financial covenants common to
such agreements that require, among other things, maintenance of minimum amounts
of tangible net worth and limit dividend payments and purchases of property,
plant and equipment. As of April 30, 2002, the Company was in compliance with
these financial covenants.
Note 6 - Intangible Assets
Original Accumulated Net Book
Cost Amortization Value
------ ------------ --------
Trademarks $908 $657 $251
==== ==== ====
Amortization expense for the first quarter 2003 was $24. Estimated amortization
expense for the next five years is:
Amount
------
2003 $ 89
2004 $ 71
2005 $ 51
2006 $ 31
2007 $ 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
Results of operations
Net sales for the first quarter of fiscal 2003 decreased approximately 39% to
$6,116 from $10,065 for the comparable period of fiscal 2002. Please refer to
Note 4 to the condensed consolidated financial statements for a breakdown of
sales by segment. Domestic and international toy shipments for the three
Page 8 of 11
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
month period ending April 30, 2002 accounted for approximately $1,800 and $900
respectively of the decline and included all major toy categories. The
Company considers the decreases to be short-term as customers continue to sell
off inventories remaining from the 2001 holiday season. Sales for the
diversified products segments fell approximately $1,200 from the previous year's
comparable period, primarily due to the loss of a major customer by the
Company's lithography segment. Strydel, the Company's injection molding segment,
reported a 50% sales increase, largely to the automotive market.
The Company's business is seasonal, with approximately 50-60% 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, 2002, 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,
2002, order backlog as of May 31 is approximately $7,600 versus $12,000 at the
same date in 2001.
Other income for the three-month period ending April 30, 2002 increased to $277
from $96 for the comparable period of 2001. The improvement is due in part to
the timing of royalties and advances from licensees during the period and to the
recovery of a customer account written off in a prior period.
Gross profit margin (percentage) for the first quarter of fiscal 2003 (18.1%)
fell from the first quarter of fiscal 2002 (25.8%). The Company's cost reduction
plan has continued to generate significant savings in manufacturing expenses,
but these savings have been more than offset by unfavorable manufacturing
variances resulting from declines in production volume in the Company's
lithography segment.
Selling, administrative, and general expenses for the first quarter of fiscal
2003 decreased to $2,300 from $2,400 for the comparable period of fiscal 2002.
Significant declines were noted in advertising, royalty and salary expense.
These decreases were partially offset by increases in employee benefit costs.
Interest expense for the three-month period ended April 30, 2002 decreased to
$80 from $246 for the three-month period ended April 30, 2001. The lower
interest expense is due to a year over year reduction in long-term debt of
approximately $3,800 and to the lowering of the bank prime lending rate.
An income tax benefit of $331 was recorded for the first quarter of fiscal 2003
based upon estimates of the full fiscal year effective tax rate. No income tax
expense or benefit was recorded for the first quarter of fiscal 2002 based upon
estimates of the full fiscal year effective tax rate.
Liquidity and Capital Resources
Cash used in operations for the three-month period ended April 30, 2002 was
approximately $340 versus cash provided by operations of approximately $1,200
for the comparable period of 2001. Working capital decreased by $912 during the
three-month period of 2002 compared to a decrease of $720 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 three-month period ended April 30,
2002 was approximately $250 compared to a cash usage of $70 in the comparable
period of 2001. The increase in capital expenditures in the three-month period
of 2002 is a result of improvements in the Company's liquidity situation.
Cash used in financing activities for the three-month period ended April 30,
2002 was approximately $390 compared to cash usage in the comparable period of
2001 of approximately $640. The cash used in the 2002 period is primarily
attributable to lower borrowings from the Company's revolving credit facility.
The reduction in the prior year is due to lower borrowings from the same
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 April 30, 2002 were approximately $4,300. 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.
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 April 30, 2002.
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 13, 2002 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: June 13, 2002 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: June 13, 2002 /s/ Jerry D. Kneipp
-------------------
Jerry D. Kneipp
Chief Financial Officer
Page 11 of 11