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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, 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 August 31, 2002 there were 886,784 shares outstanding of the Company's
Common Stock at $1.00 par value.
Page 1 of 13
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
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $10,406 $10,354 $16,521 $20,419
Other income 326 321 603 418
-------- -------- -------- --------
10,732 10,675 17,124 20,837
Costs and expenses:
Cost of products sold 6,923 7,188 11,931 14,653
Selling, administrative
and general 2,932 2,623 5,208 5,028
Interest 95 178 176 424
-------- -------- -------- --------
9,950 9,989 17,315 20,105
-------- -------- -------- --------
Income (loss) before income taxes 782 686 (191) 732
Provision for (Benefit from)
income taxes 279 0 (52) 0
-------- -------- -------- --------
Net income (loss) $ 503 $ 686 $ (139) $ 732
======== ======== ======== ========
Net income(loss) per share(Note 3) $ .58 $ .79 $ (.16) $ .84
Average shares outstanding 873 871 873 871
(Note 3)
See notes to condensed consolidated financial statements.
Page 2 of 13
FORM 10-Q
THE OHIO ART COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in thousands)
July 31 January 31
2002 2002
---------- ----------
(unaudited)
Assets
Current assets
Cash $ 1,252 $ 2,199
Accounts receivable less allowance
(July - $363; January - $436) 6,323 4,988
Inventories - Note 2
Finished products 2,278 3,247
Products in process 126 126
Raw materials 1,524 1,570
---------- ----------
3,928 4,943
Deferred income taxes 875 823
Prepaid expenses 289 380
---------- ----------
Total current assets 12,667 13,333
Property, plant and equipment, net 7,288 7,804
Other assets 1,302 1,414
---------- ----------
Total assets $21,257 $22,551
========== ==========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 4,156 $ 3,221
Other current liabilities 1,800 3,297
Long-term debt due within one year 1,638 1,550
---------- ----------
Total current liabilities 7,594 8,068
Long-term obligations, less current maturities 4,836 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 8,046 8,344
Reduction for ESOP loan guarantee (303) (303)
---------- ----------
Total stockholders' equity 8,827 9,125
---------- ----------
Total liabilities and stockholders' equity $21,257 $22,551
========== ==========
See notes to condensed consolidated financial statements.
Page 3 of 13
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
2002 2001
---------- ----------
Cash flows from operating activities
Net income(loss) $ (139) $ 732
Adjustments to reconcile net income(loss)
to net cash provided by (used in)
operating activities:
Provision for depreciation and amortization 793 867
Changes in assets and liabilities (585) 290
Deferred federal income tax (52)
---------- ----------
Net cash provided by operating activities 17 1,889
---------- ----------
Cash flows from investing activities
Purchase of plant and equipment, less
net book value of disposals (284) (337)
---------- ----------
Net cash used in investing activities (284) (337)
---------- ----------
Cash flows from financing activities
Payments of debt (522) (854)
Dividends (158)
---------- ----------
Net cash used in financing activities (680) (854)
---------- ----------
Cash
Increase(decrease) during period (947) 698
Beginning of period 2,199 536
---------- ----------
End of period $ 1,252 $ 1,234
========== ==========
See notes to condensed consolidated financial statements.
Page 4 of 13
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, 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 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.
Intersegment sales are recorded at cost, therefore, there is no intercompany
profit or loss on intersegment sales or transfers.
Page 5 of 13
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 13
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, 2002
Revenues from external customers $ 4,101 $2,953 $2,128 $1,224 $10,406
Intersegment revenues 23 0 0 0 23
Segment income 115 335 37 16 503
===================================================================
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
====================================================================
Six months ended July 31, 2002
Revenues from external customers $ 6,488 $4,293 $3,336 $2,404 $16,521
Intersegment revenues 30 0 0 0 30
Segment income(loss) (102) 304 (350) 9 (139)
===================================================================
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
====================================================================
Page 7 of 13
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%; adjusted to prime plus 0.75% as of May 7, 2002
(5.5% effective rate at July 31, 2002) 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 August 2, 2002, the Company executed a $2,500 term loan to
refinance its existing term loan on real estate. The new term loan is payable in
monthly installments of $47 including interest at the prime rate (4.75%
effective rate at August 1, 2002). The loan is collateralized by all real and
personal property of the Company.
The various financing agreements contain certain financial covenants common to
similar 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 July 31, 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 expenses for the six months and three months ended July 31, 2002
were $48 and $24 respectively. Estimated amortization expense for the next five
years is:
Amount
------
2003 $ 89
2004 $ 71
2005 $ 51
2006 $ 31
2007 $ 9
Page 8 of 13
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(amounts in thousands)
Results of operations
Net sales for the six months ended July 31, 2002 decreased approximately 19% to
$16,521 from $20,419 for the comparable period of 2001. For the three-month
period ended July 31, 2002, net sales increased approximately 1% to $10,406 from
$10,354 for the quarter ended July 31, 2001. 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, 2002, the domestic and international toy
segments accounted for approximately $1,100 and $900 of the sales decrease
respectively. The Ohio Art diversified products segment accounted for
approximately $2,700 of the decline due to the loss of a major customer and was
partially offset by an increase of approximately $800 in the Strydel diversified
products segment. All toy categories recorded lower sales volume during the
six-month period. The sales increase in the second quarter is comprised of gains
in the toy and Strydel diversified products segments of approximately $700 and
$400 respectively, while the Ohio Arts diversified products segment fell $1,000.
Shipments of the Company's Betty Spaghetty(R) fashion doll were up more than 25%
over the comparable period of 2001. Etch A Sketch(R) drawing toy volume grew by
more than 15% in the same period.
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, 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 August 31, 2002 is approximately $13,400
versus $13,900 at the same date in 2001.
Other income for the six-month period ending July 31, 2002 increased to $603
from $418 for the comparable period of 2001. For the three-month period ending
July 31, 2002, other income increased slightly to $326 from $321 for the
comparable period of 2001. 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-month period ending July 31, 2002
(27.7%) fell slightly from the six months ended July 31, 2001 (28.2%). The
decline was due primarily to unfavorable overhead variance, which can be traced
to lower production volume in the Ohio Art diversified products segment. Actual
overhead expenses have fallen as the Company's cost reduction plan continued to
produce significant savings over the prior year. Gross profit margin
(percentage) for the three-month period ending July 31, 2002 (33.4%) increased
from the three months ended July 31, 2001 (30.5%). The improvement is largely
due to the stronger sales in the period of the Betty Spaghetty(R) fashion doll
and Etch A Sketch(R) products.
Selling, administrative, and general expenses for the six months ended July 31,
2002 increased to $5,208 from $5,028 for the comparable period of 2001
Page 9 of 13
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
and increased to $2,932 for the three months ended July 31, 2002 from $2,623 for
the comparable period of 2001. The key line items negatively affecting both
periods include advertising expense, commissions, and health insurance, while
salary expense recorded a sizeable savings.
Interest expense decreased to $176 for the six months ended July 31, 2002 from
$424 for the comparable period of 2001 and decreased to $95 for the three months
ended July 31, 2002 from $178 for the comparable period of 2001. The lower
interest expense is primarily due to a reduction in long-term debt of
approximately $3,500.
An income tax benefit of $52 and an income tax expense of $279 were recorded for
the six-month and three-month periods ended July 31, 2002 respectively. No
income tax expense or benefit was recorded for the comparable periods of 2001.
Income taxes are based upon estimates of the full fiscal year effective tax
rate.
Liquidity and Capital Resources
Cash provided by operations for the six-month period ended July 31, 2002 was
approximately $17 versus cash provided by operations of approximately $1,889 for
the comparable period of 2001. Working capital decreased by $192 during the
six-month period of 2002 compared to an increase of $9,960 in the prior year.
The Company was in compliance with the minimum tangible net worth covenant
included in its Loan and Security Agreement at July 31, 2001 but was not in
compliance 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 and as a
non-current liability in the July 31, 2001 balance sheet. The change in
classification accounts for approximately $8,700 of the prior year increase in
working capital.
Cash used in investing activities for the six month period ended July 31, 2002
was approximately $284 compared to a cash usage of $337 in the comparable period
of 2001. The decrease in capital expenditures in the six-month period of 2002 is
due to planned delays in spending.
Cash used in Financing activities for the six month period ended July 31, 2002
was approximately $680 compared to cash provided in the comparable period of
2001 of approximately $854. The cash used in the 2002 period is primarily
attributable to reduced borrowings from the Company's revolving credit facility
and is partially offset by dividend payments of approximately $158 in the 2002
period.
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, 2002 were approximately $6,600. Effective August 2,
2002, the Company executed a five-year $2,500 term loan to replace an existing
seven-year term loan. The revolving credit facility and term loans are
collateralized by the assets of the Company.
Page 10 of 13
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
(amounts in thousands)
The Company was in compliance with the minimum tangible net worth covenant
included in its Loan and Security Agreement at July 31, 2002 and July 31, 2001.
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 July 19, 2002 was filed to announce
that the firm of Crowe, Chizek and Company LLP would no longer serve as
the Company's independent accounting firm, effective July 19, 2002. The
Company has engaged Plante & Moran LLP as its new independent
accountants, also effective July 19, 2002. A letter from Crowe Chizek
indicating their response to the statements made by the Company in Form
8-K was also filed.
A current report on Form 8-K dated September 10, 2002 was filed to
announce the refinancing of the Company's existing real estate loan
with Fifth Third Bank, Northwestern Ohio, N.A. with a new real estate
loan with Sky Bank. The Loan Agreement, dated August 1, 2002, with Sky
Bank was also filed.
The information called for in Items 1, 2, 3, 4, and 5 are not applicable.
Page 11 of 13
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, 2002 /s/ William C. Killgallon
-------------------------
William C. Killgallon
Chairman of the Board
Date: September 13, 2002 /s/ M. L. Killgallon II
-----------------------
M. L. Killgallon II
President
Date: September 13, 2002 /s/ Jerry D. Kneipp
----------------------
Jerry D. Kneipp
Chief Financial Officer
Page 12 of 13
CERTIFICATIONS
I, William C. Killgallon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Ohio Art Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 9, 2002
/s/ William C. Killgallon
-----------------------------------
Chairman of the Board,
Principal Executive Officer
I, Jerry D. Kneipp certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Ohio Art Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 9, 2002
/s/ Jerry D. Kneipp
-----------------------------------
Chief Financial Officer
Page 13 of 13