SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1996.
Commission file number 0-4479.
THE OHIO ART COMPANY
- ------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-4319140
- ------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 111, Bryan, Ohio 43506
- ------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 419-636-3141
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $1 Par Value American Stock Exchange
- -------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None
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
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (paragraph 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ X ].
Page 1 of 2 of Cover Page
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of March 21, 1997 was approximately $4,800,000 (based
upon the closing price on The American Stock Exchange). The number of
shares outstanding of the issuer's Common Stock as of March 21, 1997 was
910,586. It is estimated that 28% of such stock is held by
non-affiliates. (Excludes shares beneficially owned by officers and
directors and their immediate families).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders' report for the year ended
December 31, 1996 are filed as Exhibit (13) filed hereto and are
incorporated by reference into Parts I, II, and IV.
Portions of the Ohio Art Company Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III.
This document, including exhibits, contains 48 pages.
The cover page consists of two pages.
The Exhibit Index is located on page 15.
Page 2 of 2 of Cover Page
PART I
Item 1. Business
Registrant is principally engaged in two lines of business: (a)
the manufacture and distribution of toys and (b) the manufacture and
sale of custom metal lithography and molded plastic products to other
manufacturers and consumer goods companies. (See Note 6 of Notes to
Consolidated Financial Statements included in the Annual Shareholders'
Report for the year ended December 31, 1996, and included in Exhibit
(13) filed hereunder.)
Registrant manufactures and markets approximately 60 toy items
including the nationally advertised Etch A Sketchr, Travel Etch A
Sketchr, Pocket Etch A Sketchr, and Zooper Sounds Etch A Sketchr drawing
devices, Glitter Writerr, craft items, drums, and a line of sports
activity toys, primarily basketball sets.
Registrant maintains showrooms in Bryan, Ohio and New York City
and distributes its products through its own full-time sales force and
through manufacturers' representatives. The toy products are sold
directly to general and specialty merchandise chains, discount stores,
wholesalers, mail order houses, and both direct to customers and through
licensees in foreign countries.
The Registrant's Diversified Products segment manufactures
specialty plastic components and lithographic metal items such as parts
for automobile trim, lithographed metal serving trays, replica metal
signs, film canisters, and decorative cans. These products are sold to
others directly or through manufacturers' representatives.
The following table reflects the approximate percentage of total
sales contributed by each class of similar products of Registrant's
total sales in any of the last three fiscal years.
Year Ended December 31
CLASS 1996 1995 1994
- ----- ---- ---- ----
Writing and Drawing Toys ................... 49% 52% 50%
Activity Toys .............................. 12% 21% 15%
Traditional Toys ........................... 4% 4% 7%
Diversified Products ....................... 35% 23% 28%
- 3 -
The toy industry is highly competitive, and among Registrant's
competitors are a number of substantially larger firms having greater
financial resources and doing a substantially greater volume of
business. Published statistics for the year 1996 indicate the
Registrant accounted for less than one percent (1%) of the total toy
sales in the United States. Competition in Registrant's business is
believed to be based on novelty of product, customer appeal,
merchandising of character licenses, ability to deliver products on a
timely basis, price, and reputation for quality.
The Diversified Products segment sales are primarily products
manufactured to customers' specifications. Registrant believes that the
principal competitive factors in this business are price and
demonstrated ability to deliver quality products on a timely basis.
Registrant's toy business is seasonal and historically
approximately 65% to 75% of its sales have been made in the last six
months of the calendar year. Second half shipments in 1996 and 1995
amounted to 67% and 71% of annual sales respectively. Second half sales
have shown particular strength in recent years due to the introduction
of new products supported with television advertising concentrated in
the primary selling season prior to Christmas. Although customers
historically have ordered toy merchandise during the spring and summer
months for fall shipments in anticipation of Christmas sales, the
Company's customers in recent years tend to order later in the year
in an effort to control inventories, particularly in years with
uncertain economic conditions. The Diversified Products segment does
not have any established seasonal pattern.
Registrant's order backlog at the end of any fiscal year is not a
meaningful predictor of financial results of the preceding or succeeding
year. Historically, new toy products have been introduced to the trade
at the annual industry trade fair in February in New York and at foreign
trade fairs which generally occur within a thirty day period prior to
the U.S. trade fair. In recent years there has been a trend to earlier
introduction of new items to major customers. Major customers normally
place tentative orders during the first and second calendar quarters
which indicate the items they will be buying for the coming season and
an indication of quantity. These orders are usually "blanket" orders
which have no designated shipment date. Customers confirm specific
shipment dates during the year to meet their requirements. Industry
practice is that these orders are cancellable until shipped at no cost
to the customer. As the Registrant's product mix was changed to a
higher percentage of promotional type products in recent years, the
dollar amount of orders in the order backlog which have been cancelled
in the third and fourth calendar quarters has been unpredictable. It is
therefore difficult to state the level of order backlog believed to be
firm during the first calendar quarter.
- 4 -
Order backlog at mid-March is also impacted by the timing of the
February trade fair and placing of initial tentative orders by major
accounts, the product mix between spring and fall items, the mix between
domestic versus international orders, and the year-end inventory
carry-over of the Company's products at the retail level on the part of
its customers. The order backlogs believed to be firm, subject to
comments above, as of mid-March were:
1997 - approximately $5,200,000
1996 - approximately $2,200,000
The seasonal nature of the business generally requires a
substantial build-up of working capital during the second and third
calendar quarters to carry inventory and accounts receivable. Extended
payment terms are in general use in the toy industry to encourage
earlier shipment of merchandise required for selling during the spring
and Christmas seasons.
Registrant's basic raw materials are sheet metal, plastic resins,
fiber board, and corrugated containers and are generally readily
available from a number of sources. Although Registrant has at times
not been able to procure sufficient quantities of certain raw materials
to meet its needs, adequate supplies have been available in recent
years.
Registrant imports a variety of plastic and miscellaneous parts as
well as finished products from China, Taiwan, and Thailand as well as
steel from Japan for its lithography business. In 1996, these imports
accounted for approximately 27% of the total cost of goods sold.
Tariffs, internal affairs of foreign countries, and other restraints on
international trade have not materially affected Registrant to date but
no assurance can be given that these conditions will continue.
Registrant has utilized forward exchange contracts to cover requirements
for major purchase commitments based on foreign currencies. However,
the use of foreign exchange contracts has not been necessary in the past
five years.
Preventing competitors from copying Registrant's toy products is
important, and where possible, Registrant attempts to protect its
products by the use of patents, trademarks, copyrights, and exclusive
licensing agreements. Registrant believes its patents, trademarks,
trade names, copyrights, and exclusive licensing agreements are
important to its business, but it is unable to state what their value is
or that their validity will be maintained, or that any particular
pending application will be successful. It is believed that the loss of
proprietory rights for any important product might have a material
adverse effect on Registrant's business.
Registrant's Diversified Products segment sells products
manufactured to customers' specifications and does not rely on its own
patents, trademarks, or copyrights to any extent.
- 5 -
The Registrant has an established program for licensing others for
manufacture and/or distribution of its products outside the United
States. The relationship with a key European distributor became
strained and then terminated at the end of 1994. The Company had
developed new relationships in Europe for 1995, and significant
increases were realized in international sales and royalty income in
1995. However, it decreased again in 1996 because of excess inventories
carried over from the prior year at our overseas partners' facilities as
well as at their customers' facilities, and poor product acceptance at
the retail level.
Because of the seasonal nature of the Registrant's business, the
number of full-time employees at December 31 is not as indicative of
activity as the average number of employees during the year. The
average number of employees has been: 1996 - 315; 1995 - 304;
1994 - 302.
The Company has installed and upgraded equipment to control the
possible discharge of materials into the environment by its lithography
operations at the Bryan, Ohio manufacturing facility. The expense of
operation and depreciation of installed equipment have increased
manufacturing costs for the lithography operations, but these cost
increases have not impacted the competitive position of the Company.
Because of increased demand from its lithography customers, the
Company expanded its Lithography department in 1996 by purchasing a new
lithography system. The cost of the equipment, as well as modifications
to the existing plant will be approximately $6.6 million, with over $6.0
million capitalized in 1996. The system became operational in early
1997.
Registrant maintains its own design and development staff and, in
addition, utilizes contractual arrangements with outside development
groups. Approximately $610,000 in 1996, $650,000 in 1995, and $510,000
in 1994 was spent on such activities.
Customers of the toy segment include a number of large retailers.
A number of major toy retailers have, in recent years, experienced
financial difficulties resulting in either bankruptcy, restructuring, or
slow payment. The loss of any of these customers could have a material
adverse effect on this segment of Registrant's business. Registrant's
consolidated revenues for 1996 included approximately $3,800,000
($8,900,000 and $8,100,000 in 1995 and 1994, respectively) of sales to
Wal-Mart, and sales to Kmart of $3,200,000 ($5,300,000 and $4,200,000 in
1995 and 1994, respectively). Both customers are major toy retailers.
Registrant's Diversified Products segment sales are concentrated in
a limited number of accounts. Sales to the five largest customers
account for approximately 58% of the total sales of this segment. The
loss of any of these customers could have a material adverse effect on
the Diversified Products segment of Registrant's business.
- 6 -
Item 2. Properties
Registrant owns plants located at Bryan, Ohio, which consist of
approximately 50,000 square feet of office, 725,000 square feet of
production, and 235,000 square feet of warehouse space. Registrant also
owns a plant at Stryker, Ohio, which consists of approximately 134,000
square feet. The majority of Registrant's facilities are of masonry
construction and are adequate for its present operation. Production,
other than metal lithography, which is normally scheduled on a
two-shift, ten hour, four day week with overtime for Friday, Saturday,
and Sunday, is primarily on a one-shift basis at the Bryan, Ohio
facilities. The Bryan facilities run second shift operations on
selected toy items during seasonal demand peaks. The Stryker, Ohio
plant is normally scheduled on the basis of three-shift operations.
Because of the seasonal nature of its business and the fact that a
portion of its manufacturing facilities operate on a one-shift or
limited two-shift basis, the Registrant's facilities have operated below
maximum productive capacity in recent years, including 1996.
Item 3. Legal Proceedings
Neither the Registrant nor any of its subsidiaries is involved in
pending legal procedures which, in the aggregate, could materially
affect the Registrant's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
- 7 -
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
Market, Earnings, and Dividend Information on page 25 of Exhibit
(13) filed hereunder are incorporated herein by reference.
Item 6. Selected Financial Data
Selected Financial Data on page 18 of Exhibit (13) filed
hereunder is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 19 through 24 of Exhibit (13) filed
hereunder are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Registrant and its
subsidiaries on pages 26 through 45 of Exhibit (13) filed hereunder
are incorporated herein by reference.
Quarterly Results of Operations on page 24 of Exhibit (13) filed
hereunder are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
- 8 -
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
Information in regard to identification of Directors of the
Registrant is presented under the heading "Information With Respect to
Directors and Nominees" in the Registrant's Proxy Statement for the
1997 Annual Meeting of Shareholders as filed with the Securities and
Exchange Commission and is incorporated herein by reference.
(b) Executive Officers of the Registrant
First Year
Elected To
Present Position Present
Name Age With Registrant Position
- ---- --- ---------------- ----------
William C. Killgallon 58 Chairman 1989
Martin L. Killgallon II 49 President 1989
T. R. Bryan 47 Vice President 1996
International Operations
P. R. Manley 46 Vice President 1992
Manufacturing
P. R. McCusty 47 Vice President 1993
Finance/Treasurer
G. E. Thomas 37 Vice President 1996
Sales
L. T. Wilson 60 Vice President 1995
Diversified Products
W. E. Shaffer 74 Secretary 1995
W. C. Killgallon 84 Chairman, Board 1989
Executive Committee
T. R. Bryan was elected as Vice President of International
Operations in September 1996. He had previously served as Director of
International Operations since his date of employment with the Company
in July 1995. He had retired as a U.S. Naval Commander immediately
before joining the Company. G. E. Thomas was elected as Vice President
- 9 -
of Sales in September 1996. He had previously served as National Sales
Manager since his date of employment with the Company in January 1995.
He had previously been employed by Wilson Sporting Goods as Business
Director/Vice President of the Basketball, Volleyball, and Soccer
division from 1993 to 1995 and as Senior Marketing Manager from 1992 to
1993. Mr. Wayne E. Shaffer was elected to serve as Secretary in
September 1995 replacing L. F. Koerber who retired in June 1995. W. E.
Shaffer has been Of Counsel with the law firm of Newcomer, Shaffer,
Bird, & Spangler for more than the last five years. L. T. Wilson was
elected as Vice President of Diversified Products in June 1995. He had
served as Vice President of Product Development for at least the past
five years. P. R. McCusty was elected Vice President, Finance/Treasurer
in June 1993. He had previously served as Treasurer since June 1992 and
Controller since 1984. P. R. Manley was elected Vice President,
Manufacturing in June 1992. He had previously served as General Manager
of Manufacturing Operations since 1990. William C. Killgallon and
Martin L. Killgallon, II are the sons of W. C. Killgallon. Officers are
elected annually to serve until the first meeting of directors following
the annual meeting of shareholders in each year.
Item 11. Executive Compensation and Transactions
Information regarding Executive Compensation and Transactions is
stated under the heading "Compensation of Executive Officers" of the
Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders
as filed with the Securities and Exchange Commission and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Securities beneficially owned by principal shareholders and
management are stated under the heading "Securities Beneficially Owned
by Principal Shareholders and Management" of the Registrant's Proxy
Statement for the 1997 Meeting of Shareholders as filed with the
Securities and Exchange Commission and such information is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
Not applicable.
- 10 -
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as a part of this report.
(1) The following consolidated financial statements of The Ohio
Art Company and subsidiaries, included on pages 26 - 45 of
Exhibit (13) filed hereunder are incorporated by reference in
Item 8.
Report of Independent Auditors
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations - Years ended December
31, 1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flow - Years ended December
31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements - December 31, 1996
(2) The following consolidated financial statement schedule of The
Ohio Art Company and subsidiaries is filed under Item 14(d):
SCHEDULE PAGE
-------- ----
Schedule II - Valuation and Qualifying Accounts 14
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable,
and therefore have been omitted.
(3) See Item 14(c) below.
(b) Reports on Form 8-K
None
- 11 -
(c) The following exhibits are filed as part of this Form 10-K Annual
Report:
3 (a) Articles of Incorporation as amended, filed as Exhibit
3 (a) to Registrant's Form 10-K for the year ended December
31, 1986, and incorporated herein by reference.
(b) Code of Regulations filed as Exhibit 3 (b) to Registrant's
Form 10-K for the year ended December 31, 1990, and
incorporated herein by reference.
(c) By-Laws filed as Exhibit 3 to Registrant's Form 8-K dated
September 21, 1990, and incorporated herein by reference.
10 (a) Employee Stock Ownership Plan, filed as Exhibit 10 (c) to
Registrant's Form 10-K for the year ended December 31,
1987, and incorporated herein by reference.
(b) The Ohio Art Company Supplemental Retirement Plan, as
amended and restated effective January 1, 1992 filed as
Exhibit 10 (d) to Registrant's Form 10-K for the year ended
December 31, 1992, and incorporated herein by reference.
(c) Revolving Credit Agreement dated January 24, 1994 filed as
Exhibit 10 (c) to Registrant's Form 10-K for the year ended
December 31, 1993, and incorporated herein by reference.
(d) Amendment to the Revolving Credit Agreement dated May 10,
1996.
13 Portions of the 1996 Annual Report of The Ohio Art Company.
22 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(d) The financial statement schedule which is listed under Item 14
(a)(2) is filed hereunder.
- 12 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 21, 1997 By /s/ William C. Killgallon
-------------------------------
William C. Killgallon, Chairman
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date
indicated.
Signature Title Date
- ------------------------- --------------------- --------------
/s/ William C. Killgallon Chairman of the Board March 21, 1997
William C. Killgallon Principal Executive
Officer and Director
/s/ Martin L. Killgallon, II President and Director March 21, 1997
Martin L. Killgallon, II
/s/ Paul R. McCusty Vice President Finance/ March 21, 1997
Paul R. McCusty Treasurer and Principal
Financial Officer
/s/ W. C. Killgallon Chairman, Board Executive March 21, 1997
W. C. Killgallon Committee and Director
/s/ Neil H. Borden, Jr. Director March 21, 1997
Neil H. Borden, Jr.
/s/ Earl J. Wright Director March 21, 1997
Earl J. Wright
/s/ Frank L. Gallucci Director March 21, 1997
Frank L. Gallucci
/s/ Wayne E. Shaffer Secretary and Director March 21, 1997
Wayne E. Shaffer
- 13 -
The Ohio Art Company and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Additions
--------------------------------
Balance at Charged Charged Deductions- Balance
Beginning to Costs to Other Describe at End
Description of Period and Expenses Accounts-Describe (1) of Period
- --------------------------------- --------- ------------ ----------------- ----------- ---------
Year ended December 31, 1996:
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $415,000 $ 29,659 $ 79,659 $365,000
========================================================================
Year ended December 31, 1995:
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $465,000 $ 34,048 $ 84,048 $415,000
========================================================================
Year ended December 31, 1994:
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $415,000 $ 25,943 $(24,057) $465,000
========================================================================
<FN>
(1) Uncollectible accounts charged off and collection costs, less recoveries.
( ) Denotes credit.
</FN>
- 14 -
THE OHIO ART COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit # Page
- --------- --------
3 (a) Articles of Incorporation as amended, filed as --
Exhibit 3 (a) to Registrant's Form 10-K for the
year ended December 31, 1986, and incorporated
herein by reference.
3 (b) Code of Regulations filed as Exhibit 3 (b) to --
Registrant's Form 10-K for the year ended December
31, 1990, and incorporated herein by reference.
3 (c) By-Laws filed as Exhibit 3 to Registrant's Form --
8-K dated September 21, 1990, and incorporated
herein by reference.
10 (a) Employee Stock Ownership Plan, filed as Exhibit --
10 (c) to Registrant's Form 10-K for the year
ended December 31, 1987, and incorporated herein
by reference.
10 (b) The Ohio Art Company Supplemental Retirement Plan, --
as amended and restated effective January 1, 1992
filed as Exhibit 10 (d) to Registrant's Form 10-K
for the year ended December 31, 1992, and
incorporated herein by reference.
10 (c) Revolving Credit Agreement dated January 24, 1994 --
filed as Exhibit 10 (c) to Registrant's Form 10-K
for the year ended December 31, 1993, and
incorporated herein by reference.
10 (d) Amendment to the Revolving Credit Agreement dated 16-17
May 10, 1996.
13 Portions of the 1996 Annual Report to Shareholders 26-45
(to the extent incorporated by reference hereunder).
22 Subsidiaries of the Registrant. 46
23 Consent of Independent Auditors. 47
27 Financial Data Schedule. 48
- 15 -
AMENDMENT
Note #883798 The Fifth Third Bank of NW Ohio NA
606 Madison Avenue
$10,000,000.00 Toledo, OH 43604
Due Date: May 25, 1999
This Amendment, entered into the 10th date of May 1996, by The
Fifth Third Bank of Northwestern Ohio, N.A. ("Bank"), and THE OHIO ART
COMPANY ("Borrower").
WHEREAS, Borrower executed and delivered to The Fifth Third Bank
a Credit Agreement and a $10,000,000.00 Revolving Note, both dated
January 24, 1994, a copy of the $10,000,000.00 Revolving Note is
attached hereto as Exhibit "A" and made a part hereof; and
WHEREAS, The Fifth Third Bank assigned to Bank all of its right,
title and interest in the $10,000,000.00 Revolving Note and in that
part of the Credit Agreement which relates in any way to the loan
evidenced by the $10,000,000.00 Revolving Note; and
WHEREAS, the present balance due on the $10,000,000.00 Revolving
Note is $4,163,000.00; and
WHEREAS, Borrower and Bank have agreed to amend the $10,000,000.00
Revolving Note and the Credit Agreement, as follows.
NOW, THEREFORE, Borrower and Bank mutually agree to the following:
1. The following recitals, the $10,000,000.00 Revolving Note, the
Credit Agreement, and all documents pertaining thereto are incorporated
by reference.
2. The maturity date of the $10,000,000.00 Revolving Note is
hereby extended to May 25, 1999.
3. The Credit Agreement is amended to provide that Borrower may
utilize up to $600,000.00 of the loan proceeds for Employee Stock
Ownership Plan purposes.
4. The warrant of attorney to confess judgment and all waivers in
the $10,000,000.00 Revolving Note are hereby expressly granted to the
Bank by Borrower.
5. Except as amended hereby, the original terms and conditions of
the $10,000,000.00 Revolving Note and the Credit Agreement are and
remain in full force and effect.
- 16 -
WARNING - BY SIGNING THIS PAPER, YOU GIVE UP YOUR RIGHT TO NOTICE AND
COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN
AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN
BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE
AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAILURE ON HIS PART TO
COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.
THE OHIO ART COMPANY
By: __________________________________
Paul R. McCusty, Vice President Finance
- 17 -
EXHIBIT 13
PORTIONS OF THE 1996 ANNUAL REPORT TO SHAREHOLDERS
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 1996, 1995, 1994, 1993, AND 1992
Amounts in thousands, except per share data
1996 1995 1994 1993 1992
------- ------- ------- --------- ---------
Consolidated Net Sales
and Other Income ...... $37,527 $49,230 $41,073 $42,784 $56,927
Net Income (Loss) ...... (1,701) 1,961 824 416 3,442
Income (Loss) per Share
of Common Stock(a) .... (1.86) 2.04 .83 .41 3.34
Dividends Declared per
Share of Common Stock(b) .25 .24 .15 .45 .32
Book Value per Share of
Common Stock(c) ....... 15.24 17.51 15.97 14.82 15.10
Average Shares of
Common Stock .......... 915,630 963,048 994,154 1,015,992 1,031,094
Stockholders of Record
(d) ................... 594 600 660 670 650
Working Capital ........ $ 8,616 $10,375 $ 9,311 $ 8,348 $ 9,004
Property, Plant and
Equipment (net) ....... 11,465 5,464 5,544 6,195 6,137
Total Assets ........... 28,083 25,572 25,174 22,396 25,848
Long-Term Obligations .. 7,875 667 455 589 408
Stockholders' Equity ... 14,055 16,832 15,886 14,899 15,531
Average Number of
Employees ............. 315 304 302 311 358
Note: All prior periods have been restated to reflect the two for one
stock split in 1996.
<FN>
(a) Based upon average shares outstanding during the year ended
December 31.
(b) Stock or cash dividend paid every year since 1908.
(c) Based upon shares outstanding at December 31.
(d) Includes Employee Stock Ownership Plan participants who were
100% vested at December 31.
</FN>
- 18 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATIONS
The following table sets forth for the periods indicated selected
expense and earnings items, the percentage relationship to net sales and
the percentage increase or decrease of such items as compared to the
corresponding period:
YEAR ENDED DECEMBER 31
- ------------------------------------------------------------------------
% Increase(Decrease)
1996 1995 1994 1996 1995
------ ------ ------ --------- ---------
(Dollars in thousands)
Net Sales .............. $36,420 $47,354 $40,196 (23.1)% 17.8%
Gross Margin ........... 8,855 16,598 12,241 (46.7)% 35.6%
Percent of Net Sales ... 24.3% 35.1% 30.5%
Selling,Administrative
and General .......... $12,356 $15,151 $11,764 (18.4)% 28.8%
Percent of Net Sales ... 33.9% 32.0% 29.3%
Income(Loss) from
Operations ........... $(2,394) $3,323 $1,354 (172.0)% 145.4%
Percent of Net Sales ... (6.6)% 7.0% 3.4%
Interest Expense ....... $237 $201 $84 17.9% 139.3%
Percent of Net Sales ... .7% .4% .2%
Income Tax Expense
(Credit) ............. $(930) $1,161 $446 (180.1)% 160.3%
Percent of Net Sales ... (2.6)% 2.5% 1.1%
Net Income (Loss) ...... $(1,701) $1,961 $824 (186.7)% 138.0%
Percent of Net Sales ... (4.7)% 4.1% 2.0%
The Company's 1996 sales decrease of 23.1% from the prior year
reflected lower sales volume in both the domestic and international toy
divisions and a significant increase of approximately 15% in the
Diversified Products division. Domestic sales decreased approximately
$1.7 million in the first quarter of 1996 from the similar 1995 period
as key retailers carried over into 1996 significantly higher inventory
levels of the Company's product, especially activity toys. This was
reflected in the Company's rate of order receipt and order backlog
calling for shipment in early 1996 which was down significantly from the
prior year. Also contributing to the decrease in domestic sales
throughout the year was the termination of the Michael Jordan license
which significantly reduced the sale of basketball games in 1996. In
addition, two major retailers who had carried our "pocket" line of
products in 1995 did not carry them in 1996.
- 19 -
Sales were lackluster in the first and second quarters of 1995 but
came on strong in the third and fourth quarters resulting in a 17.8%
increase in sales over the previous year. Of the $7,158,000 increase in
sales for 1995, approximately $6,900,000 came in the third and fourth
quarters. Sales volume increased for both the domestic and
international toy divisions, but decreased by approximately 3% for the
Diversified Products segment. The majority of the sales increase for
toys, both domestic and international was primarily due to the increase
of our Making Creativity Funr category of toys, which includes the
world renowned Etch A Sketchr. Unlike 1994, when late customer demand
could not be fulfilled and orders were cancelled, product was available
for shipment in 1995. Although somewhat speculative, we believe the
movie, "Toy Story", released by Walt Disney in the fourth quarter of
1995, contributed to some of the increased demand for our Making
Creativity Funr category of toys, since Etch A Sketchr was featured in
the movie.
Toy segment export sales, foreign royalty income, and direct
shipments from foreign manufacturers to foreign customers included in
consolidated revenues amounted to approximately $4,222,000, $6,696,000,
and $3,567,000 in 1996, 1995, and 1994 respectively. The increase in
1995 over 1994, although still not at the levels attained in 1992
($11,410,000), was the result of the new relationship developed with
overseas partners in 1994 that produced results in 1995. The decrease
in 1996 shipments from 1995 was the result of excess inventories carried
over from the prior year at our overseas partners' facilities as well as
at their customers, and poor product acceptance at the retail level.
The increase in sales for the Diversified Products segment of
approximately 15% is made up of an increase of approximately 7% for our
Diversified business located at our Bryan, Ohio facility (primarily
lithography, metal stamping, and premium business) and an increase of
approximately 67% at Strydel, Inc., our injection molding facility which
increased its sales to automotive companies in 1996 to approximately
$2,400,000 from approximately $1,400,000 in 1995.
The decrease in sales of approximately 3% in the Diversified
Products segment for 1995 was made up of an increase of approximately
10% in sales for our Lithography and Premium business at our Bryan
facility, and a decrease of approximately 47% for our automotive
business at Strydel, Inc. Injection molding customers, who in prior
years had farmed out some of their injection molding work to Strydel,
pulled this work back to their own facilities in 1995 resulting in a
decrease in sales of approximately $1,200,000 in 1995 from the 1994
level.
- 20 -
The Company's gross profit margin percentage in 1996 (24.3%)
decreased significantly from the level of the prior year (35.1%). The
Diversified Products segment gross profit margin increased slightly from
the prior year. Approximately 6.4% of the decrease is the result of the
change in product mix, primarily the decrease in sales of the Making
Creativity Funr category, which is at higher than average gross profit
margins. The majority of the remaining decrease in gross margins is due
to the increase in unabsorbed overhead because of the lower level of
domestic toy production at the Company's domestic facilities.
The Company's gross profit margin percentage in 1995 (35.1%)
improved significantly from the previous year (30.5%). Approximately
3.2% of the increase is due to overall price increases and the change
in product mix, primarily the increase in the sales of the Making
Creativity Funr category, which is at higher than average gross profit
margins. Unabsorbed overhead, although only decreasing slightly from
1994 levels, was spread over a higher level of sales and resulted in a
favorable increase in gross profit margin of 1.4%.
Selling, administrative, and general expenses decreased in dollars
in 1996 but increased as a percentage of net sales from the 1995 levels.
Of the total decrease of $2,795,000, advertising expense decreased
approximately $1,400,000, employee compensation expense decreased
approximately $500,000, and travel and entertainment expense decreased
approximately $300,000. The decrease in advertising expense was the
result of attempts to control expenditures to a percentage of sales,
rather than committing funds with the expectation of higher sales. The
decrease in employee compensation expense is directly related to the
Company's incentive compensation program, under which bonus payments are
dependant on the Company's profitability. The decrease in travel and
entertainment expense was due to close scrutiny by management.
Selling, administrative, and general expenses increased both in
dollars and as a percentage of sales in 1995 from 1994. Of the total
increase of $3,387,000, advertising expense accounted for approximately
$1,200,000 and employee compensation expense accounted for approximately
$850,000. All other increases for individual categories were less than
$400,000. In prior years, the Company controlled advertising
expenditures to a percentage of sales, rather that committing funds with
the expectation of higher sales. In 1995, funds were committed for
international advertising and some domestic promotional programs that
did not follow a percentage of sales. The increase in employee
compensation expense is related to bonus payments under the Company's
incentive compensation program. The higher level of profitability in
1995 accounted for the majority of the increase in employee compensation
expense.
- 21 -
Interest expense increased marginally in 1996 ($237,000) from 1995
($201,000). The higher levels of borrowing were somewhat offset by the
lower borrowing rate.
Interest expense increased in 1995 ($201,000) from 1994 ($84,000)
as the average borrowing levels, as well as the prime rate, increased
over the prior year levels.
The 1996 loss from operations resulted from lower sales volume and
reduced gross margins related to factors previously explained.
The 1995 earnings from operations more than doubled from the prior
year, and resulted from higher sales, increased gross margins, and an
increase in royalty income from the distribution of the Company's
products in foreign countries and licensing agreements entered into by
the Company domestically.
Note 4 of Notes to Consolidated Financial Statements presents the
components of the income taxes (credits) for 1996, 1995, and 1994, and
the reconciliation of taxes at the statutory rate to the Company's
income tax expense.
LIQUIDITY AND SOURCES OF CAPITAL
Because of the seasonal nature of the toy business, the Company
normally requires a substantial build-up in working capital from the
beginning of the year to a seasonal peak during the third and early part
of the fourth calendar quarters. Extended payment terms are in general
use in the toy industry to encourage earlier shipments of merchandise
required for selling during the Christmas season. As a result, the
Company's working capital requirements typically increase with seasonal
shipments as collection of a substantial portion of accounts receivable
is deferred until the fourth calendar quarter. This increased working
capital requirement has been financed in recent years by bank borrowings
under both a revolving line-of-credit and by short-term lines-of-credit.
The Company's current ratio at December 31, 1996 increased to 2.6
to 1 from 2.4 to 1 at December 31, 1995. The primary reason for the
increase was the change in income taxes from a current liability in 1995
due to the profitable year to a current asset in 1996 because of the
loss year. In addition, accounts receivable and inventories, as well as
accounts payable decreased because of the lower level of sales in 1996.
Accrued employee compensation also decreased significantly because of
the Company's incentive compensation program.
The Company's current ratio at December 31, 1995 increased to 2.4
to 1 from 2.2 to 1 at December 31, 1994. Two major factors increased
the current ratio. First, a payment of approximately $1.2 million was
made to our advertising agency on December 29, 1995 which had the effect
of reducing cash and accounts payable. The amount outstanding to our
- 22 -
advertising agency at the end of 1994 was approximately $400,000 and was
not paid until 1995. The timing of the payment was directly related to
the Company's receipt of cash from a customer. Secondly, inventories
increased approximately $2.5 million and were financed by the
profitability of the Company and the reduction of accounts receivable
From a historical viewpoint, inventories were high at the end of 1995
although product availability in the fourth quarter was a key element to
the Company's profitability.
In 1996, the Company expanded its Lithography capacity by
purchasing a new lithography system. The cost of the equipment, as well
as modifications to the existing plant will amount to approximately $6.6
million, with over $6.0 million capitalized in 1996. In typical years,
investing activities consist primarily in the purchase of tooling,
equipment, and major repairs to existing facilities. Major expenditures
for 1996, in addition to the lithography project mentioned above, were
for the purchase of tooling for new product in the 1996 and 1997 product
lines and other improvements to the Company's Lithography department.
Funding for these expenditures in 1996 was primarily through borrowings.
On May 10, 1996, the Company amended its existing three year
$10,000,000 Revolving Credit Agreement to extend the three year term
until May, 1999 and amended its $6,000,000 Demand Credit Agreement to
extend the term until May, 1997. Maximum borrowings during 1996
amounted to $10,600,000 with an outstanding balance at December 31,
1996 of $7,800,000 as well as $363,000 in borrowings by the Company's
ESOP.
The decrease in the carryover of cash was approximately the same as
the decrease in current liabilities at December 31, 1996 and therefore
had no impact on liquidity during the first quarter of 1997. It is
anticipated that the carryover of cash and the bank financing provided
for under the May 10, 1996 agreements will be more than adequate to meet
working capital requirements for the year ahead. The Company does
anticipate changing its mix of working capital in the coming year by
reducing current inventory levels, and will continue to strive for a
reduction of days sales outstanding in accounts receivable.
ENVIRONMENTAL MATTERS
The Company is subject to various laws and governmental
regulations concerning environmental matters and employee safety and
health in the United States. The Company is subject to the Occupational
Safety and Health Administration (OSHA) concerning employee safety and
health matters, and the United States Environmental Protection Agency.
These groups and other federal agencies have the authority to promulgate
regulations that could have an impact on the Company's operations.
The Company is committed to a long-term environmental protection
program that reduces emissions of hazardous materials into the
environment, as well as to the remediation of identified existing
environmental or OSHA concerns.
- 23 -
IMPACT OF INFLATION AND CHANGING PRICES
The Company's current labor contracts and management compensation
policies have lessened the impact that wage inflation has on operations
because compensation above base wages has been based on overall Company
performance. Although the Company continued to be impacted by increased
costs of materials and services during 1996, the magnitude of these
increases, other than costs of employee health care, over the past
several years has not been significant in most areas of the business.
In recent years a higher percentage of component parts used in the
Company's products have been purchased from sources outside of the
United States. Changes in product mix in 1996, 1995, and 1994 resulted
in only a small portion of these purchases being committed in foreign
currencies and therefore only minor exposure to exchange risk.
Some of the primary raw materials used in the manufacture of the
Company's products are petrochemical derivative plastics. Costs of
these raw materials are closely tied to the price of oil. Costs
increased in 1995 and continued to increase and peak in the third
quarter of 1995, subsequently decreasing for the remainder of the year,
ending at a lower price than the end of the prior year. Costs again
increased approximately 10% during 1996 over 1995 levels. It is
anticipated that there will be a minor (less than 10%) increase in
plastic prices in 1997. During a period of rapidly rising costs the
Company is not able to fully recover these cost increases through price
increases due to competitive conditions and trade practices.
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations
for the years ended December 31, 1996, and 1995 (in thousands of
dollars, except per share amounts):
Net Income
Cost of Net (Loss) Per
Net Products Income Share of
1996 Sales Sold (Loss) Common Stock
- ---- ------- ------- -------- ------------
March 31 ................... $ 5,321 $ 4,933 $(1,434) $(1.55)
June 30 .................... 6,785 5,793 (1,094) (1.18)
September 30 ............... 12,530 8,857 (33) (.04)
December 31 ................ 11,784 7,982 860 .91
------- ------- ------- -------
TOTALS $36,420 $27,565 $(1,701) $(1.86)
======= ======= ======== =======
1995
- ----
March 31 ................... $ 7,011 $ 5,651 $ (797) $ (.80)
June 30 .................... 6,811 5,242 (658) (.68)
September 30 ............... 15,513 10,103 916 .93
December 31 ................ 18,019 9,760 2,500 2.59
------- ------- ------- -------
TOTALS $47,354 $30,756 $1,961 $ 2.04
======= ======= ======= =======
- 24 -
COMMON STOCK - MARKET, EARNINGS, AND DIVIDEND INFORMATION
The principal market for the Common Stock of The Ohio Art Company
is the American Stock Exchange under Ticker Symbol OAR. The approximate
number of record holders of the Company's Common Stock at December 31,
1996 was 594. The high and low sales prices of the stock on that
Exchange, as reported by the Exchange, and earnings (loss) and dividends
per share paid on the stock in 1996 and 1995 by quarter, were as
follows:
1996 1995
------------------------------ ------------------------------
Sales Prices Earnings Dividend Sales Prices Earnings Dividend
High Low (Loss) Declared High Low (Loss) Declared
------ ----- -------- -------- ------ ----- -------- --------
Jan-Mar $28.50 $22 $(1.55) $.13 $18.50 $14 $(.80) $.15
Apr-Jun 26.25 16 (1.18) .04 17.50 14.75 (.68) .03
Jul-Sep 19 15.50 (.04) .04 19.50 15.75 .93 .03
Oct-Dec 17.75 14.50 .91 .04 28 17 2.59 .03
The Company expects to continue its policy of paying regular cash
dividends, although there is no assurance as to future dividends because
they are dependent on future earnings, capital requirements, and
financial condition. Foregoing prices are retroactively adjusted to
reflect the 1996 two for one stock split.
- 25 -
Report of Independent Auditors
To The Board of Directors and Stockholders
The Ohio Art Company
We have audited the accompanying consolidated balance sheets of The Ohio
Art Company and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of The Ohio Art Company and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Notes 2 and 5 to the financial statements, the Company
changed its methods of accounting for investments and the employee stock
ownership plan in 1994.
ERNST & YOUNG LLP
Toledo, Ohio
February 6, 1997
- 26 -
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets
December 31
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,077,835 $ 2,800,076
Accounts receivable, less allowances of
$365,000 in 1996 and $415,000 in 1995 6,221,932 7,123,264
Income taxes recoverable 711,348 -
Inventories:
Finished products 3,996,972 5,067,172
In process 393,464 444,621
Materials and purchased parts 2,328,956 2,991,169
----------- -----------
Inventories at FIFO 6,719,392 8,502,962
Less adjustment to reduce inventories to
last-in, first-out (LIFO) method 2,429,182 2,420,429
----------- -----------
Inventories at LIFO 4,290,210 6,082,533
Prepaid expenses 1,042,708 915,099
Deferred federal income taxes (Note 4) 692,000 640,100
----------- -----------
Total current assets 14,036,033 17,561,072
Other assets:
Cash value of life insurance, less
policy loans of $425,280 in 1996
and $457,833 in 1995 589,208 543,699
Marketable equity security (Note 2) 931,750 972,664
Deposits and advances 240,450 189,672
Goodwill 820,323 841,326
----------- -----------
2,581,731 2,547,361
Property, plant and equipment:
Land 164,626 164,626
Land improvements 121,930 121,362
Leasehold improvements 132,920 132,920
Buildings and building equipment 5,942,491 5,885,738
Machinery and equipment 27,279,286 19,894,216
----------- -----------
33,641,253 26,198,862
Allowances for depreciation and
amortization 22,176,164 20,735,232
----------- -----------
11,465,089 5,463,630
----------- -----------
$28,082,853 $25,572,063
=========== ===========
<FN>
See accompanying notes
</FN>
- 27 -
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets (continued)
December 31
1996 1995
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,168,953 $ 3,586,461
Income taxes payable - 900,541
Employees' compensation and amounts
withheld therefrom 503,675 1,361,720
Taxes, other than federal income taxes 334,046 475,528
Other liabilities 876,117 832,896
Dividend payable 36,904 28,838
Current portion of long-term debt 500,000 -
----------- -----------
Total current liabilities 5,419,695 7,185,984
Long-term obligations, less current portion 7,874,822 667,252
(Note 3)
Deferred federal income taxes (Note 4) 732,851 886,884
Stockholders' equity (Notes 3 and 8):
Common Stock, par value $1.00 per share:
Authorized - 1,935,552 shares
Outstanding - 922,277 shares in 1996 and
961,266 shares in 1995 as restated
(excluding 37,483 and 198,376 treasury
shares, respectively) 922,277 480,633
Additional paid-in capital 225,308 732,995
Retained earnings 12,888,810 15,573,728
Unrealized gains, net of income taxes of
$216,500 in 1996 and $225,100 in 1995
(Note 2) 420,232 435,164
Reduction for:
Minimum pension liability (38,142) (27,577)
ESOP loan guarantee (363,000) (363,000)
----------- -----------
Total stockholders' equity 14,055,485 16,831,943
----------- -----------
$28,082,853 $25,572,063
=========== ===========
<FN>
See accompanying notes.
</FN>
- 28 -
The Ohio Art Company and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
1996 1995 1994
----------- ----------- -----------
Net sales $36,419,719 $47,354,141 $40,195,811
Royalty income 705,966 1,617,032 704,027
Other income 401,507 258,948 172,808
----------- ----------- -----------
37,527,192 49,230,121 41,072,646
Costs and expenses:
Cost of products sold 27,565,050 30,756,599 27,955,062
Selling, general and
administrative 12,355,881 15,150,917 11,764,327
Interest 237,193 201,024 83,740
----------- ----------- -----------
40,158,124 46,108,540 39,803,129
----------- ----------- -----------
Income(loss) before income taxes (2,630,932) 3,121,581 1,269,517
Income taxes (credit) (Note 4) (929,847) 1,160,900 446,000
----------- ----------- -----------
Net income (loss) $(1,701,085) $ 1,960,681 $ 823,517
=========== =========== ===========
Net income (loss) per share $(1.86) $2.04 $.83
=========== =========== ===========
Average number of shares
outstanding (Notes 1 and 8) 915,630 963,048 994,154
=========== =========== ===========
<FN>
See accompanying notes.
</FN>
- 29 -
The Ohio Art Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Reduction for Reduction for
Common Paid-In Retained Unrealized Minimum Pension ESOP Loan
Stock Capital Earnings Gains Liability Guaranty
-------- -------- ----------- ---------- -------------- -------------
Balances at January 1, 1994 $502,682 $762,032 $13,846,334 $(159,296) $ (53,197)
Net income 823,517
Unrealized gain from change in accounting
for marketable equity security, net of
income taxes of $180,000 (Note 2) $351,383
Cash dividends declared($.15 per share) (150,323)
Change in ESOP loan guarantee (Note 5) (43,552)
Purchase of 5,212 treasury shares (5,212) (7,297) (130,370)
Pension liability adjustment (Note 5) 119,085
ESOP credit 4,897
Change in unrealized gain on marketable
equity security 25,392
-------- -------- ----------- ---------- -------------- -------------
Balances at December 31, 1994 497,470 759,632 14,389,158 376,775 (40,211) (96,749)
Net income 1,960,681
Cash dividends declared ($.24 per share) (236,534)
Change in ESOP loan guarantee (Note 5) (266,251)
Purchase of 16,837 treasury shares (16,837) (26,637) (539,577)
Pension liability adjustment (Note 5) 12,634
Change in unrealized gain on marketable
equity security 58,389
-------- -------- ----------- ---------- -------------- -------------
Balances at December 31, 1995 480,633 732,995 15,573,728 435,164 (27,577) (363,000)
Net loss (1,701,085)
Cash dividends declared ($.25 per share) (234,281)
Stock split 470,751 (470,751)
Purchase of 29,107 treasury shares (29,107) (36,936) (749,552)
Pension liability adjustment (Note 5) (10,565)
Change in unrealized gain on marketable
equity security (14,932)
-------- ------- ------------ ---------- -------------- -------------
Balances at December 31, 1996 $922,277 $225,308 $12,888,810 $420,232 $(38,142) $(363,000)
======== ======== =========== ========== ============== =============
<FN>
See accompanying notes.
</FN>
- 30 -
The Ohio Art Company and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995 1994
---------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss) $(1,701,085) $1,960,681 $ 823,517
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 1,584,729 1,588,818 1,896,623
Provision for losses on accounts receivable 29,659 34,048 25,943
Gain on sale of property, plant and equipment (55,782) (13,762) (7,053)
Gain on sale of marketable equity security (120,384)
Deferred federal income taxes (204,900) 127,800 (168,000)
Increase (decrease) in scholarship obligation 3,638 (1,579) 8,279
Credit for ESOP - - 4,897
Changes in operating assets and liabilities:
Accounts receivable 871,673 387,798 (1,558,043)
Inventories 1,792,323 (2,503,471) 339,089
Accounts payable (417,508) (1,242,334) 1,224,652
Prepaid expenses, accrued expenses and other liabilities (2,872,616) 408,992 457,037
---------- ---------- ----------
Net cash provided by (used in) operating activities (1,090,253) 746,991 3,046,941
INVESTING ACTIVITIES
Purchases of plant and equipment (7,584,653) (1,506,274) (1,226,833)
Proceeds from sale of property, plant, and equipment 75,250 32,550 9,575
Proceeds on sale of marketable equity security 172,800 - -
Changes in net cash value of life insurance (45,509) (53,716) (44,613)
---------- ---------- ----------
Net cash used in investing activities (7,382,112) (1,527,440) (1,261,871)
FINANCING ACTIVITIES
Borrowings 38,100,000 7,400,000 2,700,000
Repayments (30,300,000) (7,400,000) (2,810,680)
Cash dividends paid (234,281) (236,534) (150,323)
Purchase of treasury shares (815,595) (583,051) (142,879)
---------- ---------- ----------
Net cash provided by (used in) financing activities 6,750,124 (819,585) (403,882)
- 31 -
The Ohio Art Company and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995 1994
---------- ---------- ----------
Cash and cash equivalents:
Increase (decrease) during year (1,722,241) (1,600,034) 1,381,188
At beginning of year 2,800,076 4,400,110 3,018,922
---------- ---------- ----------
Cash and cash equivalents at end of year $1,077,835 $2,800,076 $4,400,110
========== ========== ==========
Supplemental disclosure of noncash transaction:
During 1995, the Company was eligible to receive the death benefits of four life insurance policies
with net cash values totalling $51,534, which have been included in accounts receivable at December
31, 1995.
<FN>
See accompanying notes
</FN>
- 32 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of The Ohio
Art Company and its subsidiaries (the Company) after elimination of
significant intercompany accounts, transactions and profits.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents
Cash equivalents consist of investments with an original maturity of
three months or less when purchased.
Property, Plant and Equipment
Property, plant and equipment are stated on the basis of cost.
Depreciation and amortization are computed by the straight-line method
over the estimated useful lives of the respective assets.
Goodwill
Goodwill represents the excess of cost over equity in net assets of
businesses acquired. The portion of such excess which relates to
acquisitions prior to October 31, 1970 ($477,283) is not being amortized
because, in the opinion of the Company's management, there has been no
diminution in value. The remaining portion is being amortized over 40
years. Accumulated amortization is $497,059 and $476,056 at December
31, 1996 and 1995, respectively.
Product Development Costs
Costs related to the development of new products and changes to existing
products are charged to operations as incurred.
- 33 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (continued)
Advertising and Sales Promotion
Advertising and sales promotion expenditures are charged to operations
in the year incurred. Advertising expense was approximately $2,838,000,
$4,189,000 and $3,000,000 in 1996, 1995 and 1994, respectively.
Net Income (Loss) Per Share
Net income (loss) per share is computed based upon the average number of
shares outstanding during the year after giving effect to unallocated
shares held by the Company's Employee Stock Ownership Plan.
2. MARKETABLE EQUITY SECURITY
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". The adoption of SFAS No. 115 resulted
in an increase in stockholders' equity in 1994 of $351,383 (net of
income taxes of $180,000).
The marketable equity security is categorized as available for sale and
as a result is stated at fair value. Unrealized gains and losses, net
of deferred income taxes, are included as a component of stockholders'
equity until realized. The Company disposed of a portion of its
marketable equity security during 1996 resulting in a gain of $120,384.
3. LONG-TERM OBLIGATIONS
December 31
1996 1995
---------- ----------
Revolving credit agreements $7,800,000 $ -
Long-term obligation--scholarships 207,448 246,527
Long-term obligation--pension 4,374 57,725
Note payable by ESOP, guaranteed by
the Company (Note 5) 363,000 363,000
---------- ----------
8,374,822 667,252
Less current portion 500,000 -
---------- ----------
$7,874,822 $ 667,252
========== ==========
- 34 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM OBLIGATIONS (continued)
The Company has two credit agreements that provide for borrowings on a
revolving credit basis to May 1999 ($10,000,000) and to May 1997
($6,000,000) at the Bank's prime rate or a fixed rate based on the
federal funds rate plus 175 to 225 basis points. A quarterly facility
fee is payable equal to .125% of the unused $10,000,000 facility.
Outstanding borrowings under the agreements were $6,000,000 and
$1,800,000, respectively, at December 31, 1996. The Company's intention
is to pay down borrowings in the amount of $500,000 during 1997.
The credit agreements contain certain financial covenants that require,
among other things, maintenance of minimum amounts and ratios of working
capital, minimum amounts of tangible net worth, maximum ratio of
indebtedness to tangible net worth and limits purchases of property,
plant and equipment.
The Company has recorded the present value of the long-term obligations
related to ETCH A SKETCHr scholarship contests conducted in 1985 and
1990. Future payments to the contest winners are payable by the
Company through 2012.
Interest paid during the years December 31, 1996, 1995 and 1994 were
$455,594, $190,714 and $126,122, respectively. The Company capitalized
$216,989 of construction period interest into plant and equipment in
1996.
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows:
December 31
1996 1995
------ ------
Deferred tax assets: (In Thousands)
Inventories $ 242 $ 233
Supplemental benefit accrual 139 116
Allowance for uncollectible accounts receivable 124 136
Charitable contribution carryover 84 -
Trademarks 83 50
Self insurance accrual 58 27
Advertising costs 53 25
Vacation accrual 48 39
Other 87 129
------ ------
918 755
- 35 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES (continued)
December 31
1996 1995
------ ------
(In Thousands)
Deferred tax liabilities:
Depreciation $ 489 $ 524
Pension accrual 253 253
Unrealized gains on marketable equity security 217 225
------ ------
959 1,002
------ ------
Net deferred tax liabilities $ (41) $ (247)
====== ======
The above are reflected in the consolidated balance sheets as follows:
December 31
1996 1995
------ ------
Current deferred tax asset $ 692 $ 640
Noncurrent deferred tax liability (733) (887)
------ ------
$ (41) $ (247)
====== ======
Significant components of the provision (credit) for income taxes
attributable to operations are as follows:
Year ended December 31
1996 1995 1994
------ ------ ------
(In Thousands)
Federal:
Current $ (725) $ 898 $ 588
Deferred (205) 128 (168)
------ ------ ------
(930) 1,026 420
State and local - 135 26
------ ------ ------
$ (930) $1,161 $ 446
====== ====== ======
- 36 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES (continued)
The reasons for the difference between total income tax expense (credit)
and the amount computed by applying the statutory federal income tax
rate to income (loss) before income taxes follows:
Year ended December 31
1996 1995 1994
------ ------ ------
(In Thousands)
Income taxes (credit) at statutory rate $(895) $1,061 $ 432
State and local income taxes - 89 17
Other items (credit) (35) 11 (3)
------ ------ ------
Total income tax expense $(930) $1,161 $ 446
Total income tax payments during 1996, 1995 and 1994 were $887,500,
$729,349, and $18,302, respectively.
5. PENSION PLANS
The Company has pension plans covering substantially all of its
employees. Benefits provided by the plans are based on compensation,
years of service, and a negotiated rate per year of service for
collectively-bargained plans. The Company generally funds pension costs
based upon amortization of prior service costs over 25 years, but not in
excess of the amount deductible for income tax purposes. One plan,
which has a limited number of participants, is unfunded.
- 37 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. PENSION PLANS (continued)
The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated
balance sheets at December 31:
1996 1995
-------------------------- --------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested benefits $ 8,489,193 $ 1,304,352 $ 8,344,674 $ 1,121,205
Nonvested benefits 79,917 805 81,352 11,925
----------- ----------- ----------- -----------
8,569,110 1,305,157 8,426,026 1,133,130
Effect of future salary increases 1,309,818 155,344 1,230,148 163,966
----------- ----------- ----------- -----------
Projected benefit obligation for service rendered
to date 9,878,928 1,460,501 9,656,174 1,297,096
Plan assets (principally invested in immediate
participation guaranteed fixed income insurance
contracts) at fair value 10,265,209 814,065 10,544,529 710,541
----------- ----------- ----------- ----------
Plan assets in excess of (less than) projected
benefit obligation 386,281 (646,436) 888,355 (586,555)
Unrecognized net (asset) liability at the
transition date (137,368) 259,618 (211,084) 289,517
Prior service cost not yet recognized in net
periodic pension cost 80,990 9,289 95,103 10,710
Unrecognized net (gain) loss 515,265 105,684 35,532 (47,759)
Adjustment required to recognize minimum liability - (219,247) - (66,344)
----------- ----------- ----------- -----------
Net pension asset (liability) $ 845,168 $ (491,092) $ 807,906 $ (400,431)
=========== =========== =========== ===========
- 38 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. PENSION PLANS (continued)
1996 1995
-------------------------- --------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
Pension assets (liabilities) included in:
Prepaid expenses $ 845,168 $ 807,906
Accounts payable $ (486,718) $ (349,206)
Long-term obligations (4,374) (51,225)
----------- ----------- ----------- -----------
Net pension asset (liability) $ 845,168 $ (491,092) $ 807,906 $ (400,431)
=========== =========== =========== ===========
- 39 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. PENSION PLANS (continued)
Amounts relating to the minimum pension liability have been recorded as
follows at December 31:
1996 1995
-------- --------
Minimum pension liability $(74,002) $(66,344)
Intangible pension asset $ 16,211 $ 24,558
Equity reduction, net of deferred federal income
taxes of $19,649 in 1996 and $14,216 in 1995 $ 38,142 $ 27,577
Net periodic pension cost includes the following components:
Year ended December 31
1996 1995 1994
---------- ---------- ----------
Service cost--benefits earned
during the period $ 261,233 $ 309,378 $ 342,690
Interest cost on projected
benefit obligation 767,158 742,749 696,327
Return on plan assets (648,627) (1,474,904) 221,873
Net amortization and deferral (277,809) 617,028 (1,011,349)
---------- ---------- ----------
Net periodic pension cost $ 101,955 $ 194,251 $ 249,541
========== ========== ==========
Actuarial assumptions:
Discount rate 7.5% 7.5% 7.5%
Long-term rate of return 8.5% 8.5% 8.5%
Rate of increase of future
compensation 5.5% 5.5% 5.5%
The Company has an Employee Stock Ownership Plan (ESOP) for eligible
employees. Effective January 1, 1994, the Company elected to adopt new
accounting for its ESOP in accordance with Statement of Position (SOP)
93-6 of the Accounting Standards Division of the American Institute of
Certified Public Accountants, issued in November 1993. During 1994,
14,252 shares were allocated to the employees, leaving 5,238 unallocated
shares in the ESOP at December 31, 1994. An additional 16,500 shares
were acquired by the ESOP during 1995. The fair market value of
unallocated shares is $374,981 and $576,050 at December 31, 1996 and
1995, respectively. No unallocated shares are committed to be released
within one year. The ESOP has outstanding borrowings which the Company
has guaranteed. Accordingly, the Company has recorded the loans as
long-term obligations and as reductions of stockholders' equity.
- 40 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. PENSION PLANS (continued)
Compensation expense in 1995 measured using the fair market value when
the shares are committed to be released amounted to $1,098. Dividends
paid on unallocated shares in the trust are recorded as compensation
rather than as dividends. ESOP funding, as determined by the Board of
Directors, amounted to $1,098 and $200,000 in 1995 and 1994,
respectively (none in 1996).
6. INDUSTRY SEGMENTS
The Company is principally engaged in two lines of business which are
the manufacture and distribution of toys and the manufacture and sale of
custom lithographed products and molded plastic products to other
manufacturers and consumer goods companies. The toy segment principally
includes drawing activity toys, sports activity toys, pre-school
activity toys, and other inexpensive toys. The Company's principal
market includes retailers throughout the United States. In addition,
revenue is derived from international markets.
- 41 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INDUSTRY SEGMENTS (continued)
Financial information relating to industry segments is as follows:
Depreciation
and
Operating Identifiable Amortization Capital
Business Segment Net Sales Earnings(Loss) Assets Expense Expenditures
- ---------------------------- ----------- ------------- ------------ ------------ ------------
1996
- ----
Toy Segment $23,767,569 $(2,996,522) $11,393,449 $1,151,578 $ 792,404
Diversified Products Segment 12,652,150 1,324,557 10,322,133 433,151 6,792,249
----------- ----------- ----------- ---------- ----------
$36,419,719 (1,671,965) 21,715,582 $1,584,729 $7,584,653
=========== ========== ==========
General corporate amounts (721,774) 6,367,271
Interest expense (237,193)
----------- -----------
Totals $(2,630,932) $28,082,853
=========== ===========
1995
- ----
Toy Segment $36,356,222 $ 2,219,434 $14,064,941 $1,163,628 $ 952,512
Diversified Products Segment 10,997,919 1,661,952 4,604,486 425,190 553,762
----------- ----------- ----------- ---------- ----------
$47,354,141 3,881,386 18,669,427 $1,588,818 $1,506,274
=========== ========== ==========
General corporate amounts (558,781) 6,902,636
Interest expense (201,024)
----------- -----------
Totals $ 3,121,581 $25,572,063
=========== ===========
- 42 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INDUSTRY SEGMENTS (continued)
Depreciation
and
Operating Identifiable Amortization Capital
Business Segment Net Sales Earnings(Loss) Assets Expense Expenditures
- ---------------------------- ----------- ------------- ------------ ------------ ------------
1994
- ----
Toy Segment $28,849,075 $ 647,594 $11,385,344 $1,421,177 $ 634,923
Diversified Products Segment 11,346,736 1,185,294 5,231,255 475,446 591,910
----------- ----------- ----------- ---------- ----------
$40,195,811 1,832,888 16,616,599 $1,896,623 $1,226,833
=========== ========== ==========
General corporate amounts (479,631) 8,557,482
Interest expense (83,740)
----------- -----------
Totals $ 1,269,517 $25,174,081
=========== ===========
- 43 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INDUSTRY SEGMENTS (continued)
Operating earnings are net sales less operating expenses directly
attributable to the segments and general corporate expenses which are
allocated to the segments. Identifiable assets by business segment
include all assets directly identified with those operations (accounts
receivable, inventories and property, plant and equipment and
intangibles). General corporate expenses consist of the costs of
operating the corporate headquarters and other corporate expenses not
directly attributable to the operations of the two segments.
Toy segment export sales from the United States, foreign royalty income,
and direct shipments from foreign manufacturers to foreign customers
included in consolidated revenues amounted to approximately $4,222,000,
$6,696,000 and $3,567,000 in 1996, 1995 and 1994, respectively, of
which approximately $2,412,000, $2,595,000 and $610,000 were to
customers in the European community. Identifiable assets located
outside the United States are less than 10% of consolidated assets at
December 31, 1996 and 1995.
Substantially all of the Company's accounts receivable are from toy
retailers, wholesalers, and other toy manufacturers. The Company has
credit insurance to cover a portion of its losses on accounts
receivable. The Company had net credit losses (recoveries) of $50,000,
$84,000 and ($24,000) during 1996, 1995 and 1994, respectively. Net
toy segment sales includes approximately $7,000,000, $14,200,000 and
$12,310,000 in 1996, 1995 and 1994, respectively, to two major
retailers.
7. OPERATING LEASES
The Company leases office space and equipment pursuant to operating
leases. Total rent expense is less than 1% of total revenues. The
lease term for the office space extends through April, 2006 with monthly
lease payments of $10,670. In addition, rent for the office lease is
subject to escalation based upon the Consumer Price Index. Future
commitments under the leases as of December 31, 1996 are as shown below:
- 44 -
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. OPERATING LEASES (continued)
Office Equipment Total
---------- ---------- ----------
1997 $ 133,270 $ 60,929 $ 194,199
1998 136,353 47,540 183,893
1999 139,507 23,770 163,277
2000 142,734 142,734
2001 146,036 146,036
Thereafter 672,980 672,980
---------- ---------- ----------
$1,370,880 $ 132,239 $1,503,119
========== ========== ==========
8. COMMON STOCK
During 1996 the Company declared a two for one stock split by way of a
dividend on all outstanding common stock excepting shares held in the
treasury. The Company used 190,000 shares of treasury stock and 280,751
of authorized but previously unissued common stock to effect the
dividend. All share (excepting treasury shares) and per share amounts
have been retroactively adjusted for the stock split.
- 45 -
Exhibit 22
THE OHIO ART COMPANY AND SUBSIDIARIES
Percentage
of Voting
Name of Subsidiaries and Jurisdiction Control Owned
of Incorporation by Registrant
------------------------------------- -------------
Strydel, Inc. (Ohio) 100%
Trinc Company (Ohio) 100%
- 46 -
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of The Ohio Art Company for the year ended December 31,
1996, of our report dated February 6, 1997, included in Exhibit 13 to
Form 10-K.
Our audits also included the financial statement schedule of The Ohio
Art Company and Subsidiaries listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Toledo, Ohio
February 6, 1997
- 47 -
Exhibit 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Consolidated Statement of Income and is
qualified in its entirety by reference to such financial statements.
Period Type Year
Fiscal Year End Dec. 31, 1996
Period End Dec. 31, 1996
Cash $ 1,077,835
Securities 0
Receivables 6,586,932
Allowances 365,000
Inventory 4,290,210
Current Assets 14,036,033
PP&E 33,641,253
Depreciation 22,176,164
Total Assets 28,082,853
Current Liabilities 5,419,695
Bonds 0
Preferred Mandatory 0
Preferred 0
Common 922,277
Other SE 13,133,208
Total Liability and Equity 28,082,853
Sales 36,419,719
Total Revenues 37,527,192
Cost of Goods Sold 27,565,050
Total Costs 27,505,050
Other Expenses 0
Loss Provision 0
Interest Expense 237,193
Loss Pretax (2,630,932)
Income Tax Credit (929,847)
Loss Continuing (1,701,085)
Discontinued 0
Extraordinary 0
Changes 0
Net Loss (1,701,085)
Loss Per Share Primary (1.86)
Loss Per Share Diluted (1.86)
- 48 -