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 January 31, 2000.
Commission file number 0-4479.
THE OHIO ART COMPANY
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(Exact name of Registrant as specified in its charter)
Ohio 34-4319140
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 111, Bryan, Ohio 43506
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(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
Common Stock, $1 Par Value registered
American Stock Exchange
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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
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1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.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 in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ].
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of April 28, 2000 was approximately $3,805,440 (based upon the
closing price on The American Stock Exchange). The number of shares outstanding
of the issuer's Common Stock as of April 28, 2000 was 886,784. It is estimated
that 32% of that stock is held by non-affiliates. (Excludes shares beneficially
owned by officers and directors and their immediate families).
SAFE HARBOR STATEMENT
This document and supporting schedules contain "forward-looking" statements
as defined in the Private Securities Litigation Reform Act of 1995, and as such,
only reflects the Company's best assessment at this time. Investors are
cautioned the forward-looking statements involve risks and uncertainties, that
actual results may differ materially from such statements, and that investors
should not place undue reliance on such statements. For a discussion of factors
that may affect actual results, investors should refer to Item 1 of this Form
10-K.
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PART I
Item 1. Business
Registrant is principally engaged in two lines of business: (a) the
manufacture and distribution of toys (both domestically and internationally) and
(b) the manufacture and sale of custom metal lithography (Ohio Art Diversified)
and molded plastic products (Strydel Diversified) to other manufacturers and
consumer goods companies. (See Note 7 of Notes to Consolidated Financial
Statements included herein for the year ended January 31, 2000.)
Registrant manufactures and markets approximately 50 toy items including
the nationally advertised Etch A Sketch(R), Travel Etch A Sketch(R), Pocket Etch
A Sketch(R), and Zooper Sounds(TM) Etch A Sketch(R) drawing devices, Betty
Spaghetty(R) doll, Water T-Ball(TM), and drums.
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 segments manufacture specialty
plastic components and lithographic metal items such as parts for automobile
trim, lithographed metal serving trays, replica metal signs, photofilm
canisters, decorative tins, and metal food containers. 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
-------------------------------------------
CLASS 1/31/00 1/31/99 12/31/97
----- ------- ------- --------
Writing and Drawing Toys 24% 29% 51%
Activity Toys 12% 15% 10%
Small Dolls 33% 23% 0%
Diversified Products 31% 33% 39%
The Company's fiscal year was changed from December 31 to January 31
effective in 1998.
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 1999 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.
3
Diversified Products segments 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 55% to
70% of its sales have been made in the last six months of the fiscal year.
Second half shipments in the last two fiscal years amounted to 57% and 61% of
annual sales respectively. First half shipments were encouraging this year due
to the popularity of Water T-Ball(TM) and the Betty Spaghetty(TM) fashion doll;
however, the second half is historically particularly strong as the primary
selling season is prior to the Christmas holiday. The Company's customers in
recent years have ordered later in the year in an effort to control inventories.
This has been particularly true in years with uncertain economic conditions. The
Diversified Products segments do 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
"booking" 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 cancelable until shipped at no cost to the
customer. As the Registrant's product mix has changed to a higher percentage of
promotional type products in recent years, the dollar amount of orders in the
order backlog which have been canceled in the third and fourth calendar quarters
has been unpredictable. It is therefore difficult to state the level of firm
order backlog.
Order backlog at any point in time is 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-April were:
2000 - approximately $18,200,000
1999 - approximately $15,500,000
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, inks and coatings,
plastic resins, fiber board, and corrugated containers and are generally readily
available from a number of sources. Although Registrant has at times not been
4
able to procure sufficient quantities of certain raw materials to meet its
needs, however adequate supplies have been available in recent years.
Registrant imports a variety of plastic and miscellaneous parts as well as
finished products from China and steel from Japan for its lithography business.
In the fiscal year ended January 31, 2000, these imports accounted for
approximately 24% 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 seven 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 segments sell products manufactured to
customers' specifications and do not rely on its own patents, trademarks, or
copyrights to any extent.
The Registrant has an established program for licensing others to
manufacture and/or distribute its products outside the United States. Although
international sales declined in 2000, primarily due to economic weakness in the
Far East and South America, sales in Europe continued to increase based on the
strength of the Betty Spaghetty(TM) fashion doll. Sales increased strongly in
the fiscal year ended January 31, 2000 as new relationships were developed and
were successful, mainly due to new product introductions.
Because of the seasonal nature of the Registrant's business, the number of
full-time employees at January 31, 2000, and 1999 and December 31, 1997 is not
as indicative of activity as the average number of employees during the year.
The average number of employees has been: 2000 - 309, 1999 - 323; 1997 - 303.
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.
Registrant maintains its own design and development staff and, in addition,
utilizes contractual arrangements with outside development groups. Approximately
$514,000 as of January 31, 2000, $710,000 as of January 31, 1999, and $1,100,000
in 1997, was spent on such activities. The expense for 1997 was higher because
of a decision to use outside development groups to introduce product concepts,
5
engineer and build working prototypes, and refine the final product. Outside
development expenses for 2000, 1999 and 1997 were approximately $70,000,
$170,000 and $400,000 respectively.
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 the fiscal year
ended January 31, 2000 included approximately $7,700,000 ($7,100,000 and
$5,000,000 for the years ended January 31, 1999 and December 31, 1997,
respectively) of sales to Wal-Mart and sales to Toys R Us of $6,400,000
($5,400,000 and $4,200,000 for the years ended January 31, 1999 and December 31,
1997). These customers are major toy retailers.
Sales of the Registrant's Diversified Products segments are concentrated in
a limited number of accounts. Sales to the five largest customers account for
approximately 72% of the total sales of these segments. The loss of any of these
customers could have a material adverse effect on the Diversified Products
segments of Registrant's business.
Item 2. Properties
Registrant owns plants located at Bryan, Ohio, which consist of
approximately 60,000 square feet of office, 374,000 square feet of production,
and 227,000 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 three- shift, eight hour, five day week with overtime for
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.
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.
6
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
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 January 31, 2000 was 803. 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 2000
and 1999 by quarter, were as follows:
Fiscal Year Ended January 31, 2000
----------------------------------
Sales Prices Income Dividend
High Low (Loss) Declared
---- --- ------ --------
Feb - Apr $17.25 $10.50 $.28 $.00
May - Jul * * (1.08) .00
Aug - Oct 18.25 11.00 .97 .00
Nov - Jan 22.75 18.25 .33 .00
* Price data is not available due to the American Stock Exchange trading halt during this period.
Fiscal Year Ended January 31, 1999
----------------------------------
Sales Prices Income Dividend
High Low (Loss) Declared
---- --- ------ --------
Feb - Apr $39.00 $21.50 $(1.04) $.04
May - Jul 28.50 21.88 .34 .04
Aug - Oct 30.88 21.75 1.11 .04
Nov - Jan 41.50 15.50 (2.51) .04
Given the financial condition of the Company, the Board of Directors suspended
dividend payments effective April 16, 1999.
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Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA YEARS ENDED
JANUARY 31, 2000 AND 1999, AND DECEMBER 31, 1997, 1996, AND 1995
Amounts in thousands, except per share data
JANUARY 31 DECEMBER 31
--------------------------- ------------------------------------------
2000 1999 1997 1996 1995
---- ---- ---- ---- ----
Net Sales and Other Income $54,777 $47,149 $37,081 $37,527 $49,230
Net Income (Loss) 431 (1,827) (5,144) (1,701) 1,961
Net Income (Loss) per Share of Common
Stock (a) .50 (2.10) (5.68) (1.86) (2.04)
Dividends Declared per Share of Common
Stock .00 .16 .20 .25 .24
Dividends Paid per Share of Common
Stock(b) .04 .16 .20 .31 .24
Book Value per Share of Common Stock
(c) 5.74 5.82 9.71 15.24 17.51
Average Number of Shares Outstanding
865,046 869,307 904,903 915,630 963,048
Stockholders of Record (d) 803 691 621 594 600
Working Capital (Deficit) $7,216 $(8,479) $8,207 $8,318 $10,375
Property, Plant and Equipment (net)
10,258 11.478 12,241 11,465 5,464
Total Assets 25,883 30,773 31,731 28,083 25,572
Long-Term Obligations 13,798 777 15,073 8,362 667
Stockholders Equity 5,086 5,164 8,668 14,055 16,832
Average Number of Employees
309 323 303 315 304
Note: All prior periods have been restated to reflect the two for one stock split in 1996.
(a) Based upon weighted average shares outstanding during the year.
(b) Stock or cash dividend paid every year since 1908.
(c) Based upon shares outstanding at year-end.
(d) Includes Employee Stock Ownership Plan participants who were 100% vested at year-end.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OPERATIONS
The following table sets forth for the periods indicated selected earnings and
expense items, the percentage relationship to net sales, and the percentage
increase or decrease of such items as compared to the corresponding period:
JAN 31 JAN 31 DEC 31 JAN 31 JAN 31
2000 1999 1997 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands) % Increase (Decrease)
Net Sales $52,539 $45,937 $36,291 14.4% 26.6%
Gross Margin 13,110 14,756 7,513 (11.2)% 96.4%
Percent of Net Sales 25.0% 32.1% 20.7%
Selling, Administrative and General $12,344 $15,997 12,260 (22.8)% 30.5%
Percent of Net Sales 23.5% 34.8% 33.8%
Income (Loss) from Operations $3,004 $(28) $(4,756) 10828.6% 99.4%
Percent of Net Sales 5.7% (.1)% (13.1)%
Interest Expense $2,240 $1,668 $1,124 34.3% 48.4%
Percent of Net Sales 4.3% 3.6% 3.1%
Income Tax Expense (Credit) $333 $130 $(736) 156.2% 117.7%
Percent of Net Sales .6% .3% (2.0)%
Net Income (Loss) $431 $(1,827) $(5,144) 123.6% 64.5%
Percent of Net Sales .8% (4.0)% (14.2)%
9
The Company's net sales for the year ended January 31, 2000 increased 14% over
the prior year reflecting significant sales increases in Domestic Toy and
Diversified Products segments. Gains in Domestic Toy sales were largely the
result of the continued success of the Betty Spaghetty(R) fashion doll and the
Etch A Sketch(R) drawing toy whose 40-year popularity was bolstered by the
release of the movie Toy Story II during the holiday season. International Toy
sales fell due primarily to market softness in the Far East and South America.
Sales in the European market continued to increase based on the strength of the
Betty Spaghetty(R) fashion doll. Ohio Art Diversified sales, excluding material
purchased and resold at cost to a major customer, reported a modest increase
over the previous year. Strydel Diversified sales were up 29% over the previous
year due to expansion of its customer base and increased sales to existing
customers.
Net sales increased by approximately $9,600,000 for the year ended January 31,
1999 as compared to the twelve months ended December 31, 1997. Effective
February 1, 1998, the Company elected to change its year end from December 31 to
January 31. All four reportable segments had an increase in net sales. Domestic
Toy increased approximately $5,300,000, International Toy increased
approximately $3,000,000, Ohio Art Diversified increased approximately $500,000,
and Strydel Diversified increased approximately $800,000. The increase in sales
in the toy segments ($8,300,000) was the result of a new product introduction,
the Betty Spaghetty(R) fashion doll whose sales amounted to approximately
$11,000,000 in 1999. This increase was offset by a decrease in sales of our Etch
A Sketch(R) line of products (Classic, Travel, and Pocket) of approximately
$2,900,000.
Aggregate 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 $5,850,000,
$6,657,000 and $3,360,000 in 2000, 1999, and 1997, respectively, of which
approximately $4,200,000, $3,570,000, and $1,565,000 in 2000, 1999, and 1997,
respectively, were to customers in the European community.
The Company's gross profit margin percentage in 2000 (25.0%) decreased from the
previous year (32.1%). All segments reported flat or lower gross margins. Toy
segment margins at standard fell 6.3% due to costs associated with the sell off
of discontinued toys and games. Ohio Art Diversified gross margin, excluding
material purchased and resold at cost to a major customer, was significantly
lower (23.5%) than the previous year due to increased unabsorbed labor and
overhead expenses.
The Company's gross profit margin percentage in 1999 (32.1%) increased
significantly from the level of the prior year (20.7%). Unabsorbed overhead
expense, primarily at the Bryan, Ohio facility decreased approximately
$2,400,000 from the 1997 level. The sales mix, especially for the Toy segments,
impacted the gross profit margin percentage favorably primarily because of sales
of the Betty Spaghetty(R) fashion doll and Water T-Ball.
10
Selling, administrative, and general expenses in 2000 were reduced by
approximately $3,700,000 from the preceding year. Advertising expense declined
approximately $2,700,000 as expenditures were limited to a percentage of sales
rather than committing funds with the expectation of higher sales. Royalty
expense decreased approximately $600,000 as the sales of products subject to
royalty decreased. Travel and entertainment expenses fell approximately $300,000
due to travel restrictions imposed by management.
Selling, administrative, and general expenses increased both in dollars and as a
percentage of net sales in 1999 from the 1997 levels. Advertising expense
accounted for approximately $2,700,000 of the total increase of approximately
$3,700,000 for 1999 versus 1997. Unforeseen and substantial order cancellations
late in the 1999 fiscal year by major toy retailers occurred too late to cancel
advertising commitments made during the summer months. Royalty expense increased
approximately $1,100,000 as the sales of products subject to royalty,
particularly the Betty Spaghetty(R) fashion doll, increased.
Interest expense increased significantly in 2000 ($2,240,000) from 1999
($1,668,000). The Company's loan agreements contained certain financial
covenants, of which one or more covenants had not been technically met. As a
result, the bank charged the Company default interest amounting to approximately
$758,000 even though the Company made timely interest and principal payments.
The Company repaid approximately $4,200,000 of the long-term debt in 2000,
primarily in the third and fourth quarters. The debt repayment reduced the
Company's potential interest expense for the year by approximately $150,000.
Interest expense increased approximately $500,000 in 1999 over 1997 as the
Company carried over a higher level of debt from the previous year due to the
financing of a new lithography system and previous years' losses. The Company
then maintained a higher level of borrowing throughout the year resulting in the
increased interest expense.
The 2000 net income of $431,000 resulted from reduced selling, administrative,
and general expenses and a one-time gain on the sale of marketable equity
securities ($988,000), offset by reduced gross margins and higher interest
expense as previously explained. The Company has restated the reported results
of operations for the first three quarters of 2000 as a result of inventory
adjustments discovered during its year-end physical inventory reconciliation
process. The Company determined that amounts in excess of standard costs were
recorded in inventory because of incorrect monthly cost reporting, and those
costs were not relieved from inventory in the standard cost of sales system used
for calculations of interim results of operations.
The 1999 loss occurred primarily in the fourth quarter of the year as the
Company had reported a profit of $356,000 for the nine months ended October 31,
1998. This was the first time in 15 years that the Company had reported a loss
for the year after having reported a profit for the first nine months and was
due to toy retailers, without advance notice, unpredictably reducing their
historical toy inventory levels instead of pursuing incremental sales during the
holiday season.
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Note 3 of Notes to Consolidated Financial Statements presents the components of
the income taxes (credits) for 2000, 1999, and 1997, 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 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 quarter. This increased working
capital requirement has been financed in recent years (except for 2000) by bank
borrowings under both a revolving line-of-credit and by short-term
lines-of-credit.
The Company's current ratio at January 31, 2000 increased to 2.0 to 1 from .7 to
1 at January 31, 1999. The increase is attributable to the classification of
bank debt as long-term obligations in 2000, versus the current liability
classification because of the default situation in 1999. In addition, accounts
receivable increased due to increased sales volume and a slow down in
collections late in the year. Inventories, prepaid expenses and accounts payable
all declined as the Company made a concerted effort to control material
purchases and improve cash flow.
The Company's current ratio at January 31, 1999 decreased to .7 to 1 from 2.1 to
1 at December 31, 1997. The decrease is directly attributable to the
classification of bank debt as a current liability. The Company had not complied
with certain covenants of its loan agreement with its lenders and, as a result,
borrowings under the credit agreement, term loan, and note payable by the ESOP
were classified as current liabilities.
On December 23, 1998, the Bank met with the Company and announced that it no
longer wanted to participate in the revolving credit or term agreements. Maximum
borrowings during fiscal 1999, including the term loan, amounted to
approximately $23,000,000 with an outstanding balance at January 31, 1999 of
$12,500,000 on the revolving credit agreement, approximately $4,900,000 on the
term loan, and $363,000 in borrowings on the Company's ESOP.
On April 7, 2000, the Company entered into a three year revolving credit
agreement with The CIT Group/Business Credit, Inc. that provides for borrowings
of up to $12,000,000 based on various percentages of eligible inventory and
accounts receivable and six year term loans aggregating $3,279,000. On April 7,
2000, the Company executed a $5,200,000 term loan to refinance its existing term
loan. The revolving credit facility and term loans are collateralized by the
assets of the Company. Borrowings under the loan agreement with the Company's
former lenders were prohibited during fiscal 2000 due to the Company's violation
of certain financial covenants. The outstanding loan balances at January 31,
2000 were $8,800,000 on the revolving credit agreement, approximately $4,478,000
12
on the term loan, and $363,000 in borrowings on the Company's ESOP. The loans
with the former lender were repaid with funds available under the new loans on
April 7, 2000.
The increase in the carryover of cash coupled with a decrease in current
liabilities at January 31, 2000 has had a positive impact on liquidity during
the first quarter of fiscal 2001. The Company expects that the loan agreements
executed on April 7, 2000 will provide adequate funds to meet working capital
requirements for the year ahead.
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 (EPA). These groups and other federal agencies
have the authority to promulgate regulations that could have an impact on the
Company's operations.
The Company received a letter from the EPA in May 1999 alleging a violation of
certain air standards. The Company is negotiating a settlement with the EPA and
does not know the outcome of these negotiations as yet. The Company believes
that the results of these negotiations will not have a material adverse effect
on its financial position.
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.
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 affected by increased costs of materials and services
during fiscal 2000, 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 2000, 1999, and 1997 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 have remained relatively constant
throughout fiscal years 1999 and 2000 but may increase substantially in 2001.
Packaging materials are expected to increase as well, and may exceed 2000 cost
levels by more than 20%. During a period of rapidly rising costs the Company is
not able to fully recover cost increases through price increases due to
13
competitive conditions and trade practices.
IMPACT OF YEAR 2000
The Company developed and initiated plans that addressed the possible exposures
related to the impact of the Year 2000 on its computer systems, equipment,
business and operations. The Company completed all Year 2000 readiness work on
time and experienced no significant problems. Costs incurred were approximately
$250,000, the majority of which related to the mainframe computer and software
and a network server. There are no material expenditures expected to be incurred
in the future related to the Year 2000 problem.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
The Company's earnings and cash flow are not directly affected by foreign
currency exchange since all purchases and sales are made in U.S. currency.
However, the Company could be affected indirectly, both positively or
negatively, since the majority of its toy products are manufactured by unrelated
vendors overseas and the price of the products is influenced by the foreign
exchange rate.
The Company's interest expense is sensitive to the level of the U.S. prime rate
as described in Note 2 to the Consolidated Financial Statements. The Company is
not a party to any material derivative financial instruments.
14
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors
The Board of Directors and Shareholders
The Ohio Art Company
We have audited the accompanying consolidated balance sheets of The Ohio Art
Company and subsidiaries as of January 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended January 31, 2000, the one month period
ended January 31, 1998 and the year ended December 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 January 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended January 31, 2000, the one month period ended January 31, 1998
and the year ended December 31, 1997 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, 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
March 10, 2000, except for
Note 2 as to which the date
is April 7, 2000
15
Consolidated Financial Statements
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets
January 31
2000 1999
----------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,409,429 $ 182,329
Accounts receivable, less allowances of $449,000
in 2000 and $515,000 in 1999 7,341,404 6,582,457
Income taxes recoverable - 1,034,734
Inventories:
Finished products 4,230,705 7,450,360
In process 504,695 497,894
Materials and purchased parts 1,903,904 2,220,077
----------------------------------------
Inventories at first in, first out (FIFO) method 6,639,304 10,168,331
Less adjustment to reduce inventories to last-in, first-out
(LIFO) method 2,477,502 2,552,058
----------------------------------------
Inventories at LIFO 4,161,802 7,616,273
Prepaid expenses 303,258 937,741
----------------------------------------
Total current assets 14,215,893 16,353,534
Other assets:
Cash value of life insurance, less policy loans of $699,495 in
2000 and $455,076 in 1999 158,711 445,914
Marketable equity security - 1,312,770
Deposits and advances 230,194 245,260
Pension 1,020,504 937,611
----------------------------------------
1,409,409 2,941,555
Property, plant and equipment:
Land 164,626 164,626
Land improvements 153,494 153,494
Leasehold improvements 132,920 132,920
Buildings and building equipment 7,657,974 7,485,543
Machinery and equipment 29,717,457 29,275,979
----------------------------------------
37,826,471 37,212,562
Less allowances for depreciation and amortization 27,568,540 25,734,272
----------------------------------------
10,257,931 11,478,290
----------------------------------------
$ 25,883,233 $ 30,773,379
========================================
16
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets (Continued)
January 31
2000 1999
----------------------------------------
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 4,016,226 $ 4,870,300
Employees' compensation and amounts withheld therefrom 405,170 392,626
Taxes, other than income taxes 217,148 339,090
Other liabilities 1,531,133 1,394,220
Dividend payable - 35,452
Long-term debt due or callable within one year 830,000 17,800,792
----------------------------------------
Total current liabilities 6,999,677 24,832,480
Long-term obligations, less amounts due or callable within one year 13,797,735 777,274
Stockholders' equity:
Common Stock, par value $1.00 per share:
Authorized - 1,935,552 shares
Outstanding - 886,784 shares (excluding 72,976
treasury shares) 886,784 886,784
Additional paid-in capital 196,898 196,898
Retained earnings 4,365,139 3,934,444
Accumulated other comprehensive income,
net of tax - 508,499
Reduction for ESOP loan guarantee (363,000) (363,000)
----------------------------------------
Total stockholders' equity 5,085,821 5,163,625
----------------------------------------
$ 25,883,233 $ 30,773,379
========================================
See accompanying notes.
17
The Ohio Art Company and Subsidiaries
Consolidated Statements of Operations
Month ended
January 31, December 31, January 31,
2000 1999 1997 1998
---------------------------------------------------------------------------------------------
Net sales $ 52,538,669 $ 45,936,531 $ 36,290,922 $ 1,415,598
Royalty income 908,341 902,265 521,126 13,221
Other income 1,330,118 309,902 268,478 12,933
---------------------------------------------------------------------------------------------
54,777,128 47,148,698 37,080,526 1,441,752
Costs and expenses:
Cost of products sold 39,428,999 31,180,536 28,777,624 1,554,397
Selling, general and administrative 12,344,158 15,996,639 12,259,562 825,923
Interest 2,240,276 1,668,189 1,124,149 110,834
Charge for impairment of goodwill - - 799,320 -
---------------------------------------------------------------------------------------------
54,013,433 48,845,364 42,960,655 2,491,154
---------------------------------------------------------------------------------------------
Income (loss) before income taxes 763,695 (1,696,666) (5,880,129) (1,049,402)
Income taxes (credit) 333,000 130,000 (736,000) 35,000
---------------------------------------------------------------------------------------------
Net income ( loss) $ 430,695 $ (1,826,666) $ (5,144,129) $ (1,084,402)
Net income (loss) per share $ .50 $ (2.10) $ (5.68) $ (1.19)
Average number of shares outstanding 865,046 869,307 904,903 913,914
=============================================================================================
See accompanying notes.
18
The Ohio Art Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Accumulated Other Reduction for
Common Paid-In Retained Comprehensive ESOP Loan
Stock Capital Earnings Income (Loss) Guaranty Totals
-------------------------------------------------------------------------------------------
Balances at January 1, 1997 $ 922,277 $ 225,308 $ 12,888,810 $ 382,090 $ (363,000) $ 14,055,485
Net loss (5,144,129) (5,144,129)
Other comprehensive income
(loss), net of tax:
Unrealized gain on
marketable equity security 410,596 410,596
Pension liability adjustment (4,190) (4,190)
---------------
Comprehensive loss (4,737,723)
Cash dividends declared
($.20 per share) (180,673) (180,673)
Purchase of 30,006 treasury shares (30,006) (20,637) (418,406) (469,049)
-------------------------------------------------------------------------------------------
Balances at December 31, 1997 892,271 204,671 7,145,602 788,496 (363,000) 8,668,040
Net loss for the month (1,084,402) (1,084,402)
Other comprehensive income,
net of tax:
Unrealized gain on marketable
equity security 68,195 68,195
---------------
Comprehensive loss (1,016,207)
Purchase of 163 treasury shares (163) (105) (2,126) (2,394)
-------------------------------------------------------------------------------------------
Balances at January 31, 1998 892,108 204,566 6,059,074 856,691 (363,000) 7,649,439
Net loss (1,826,666) (1,826,666)
Other comprehensive loss,
net of tax:
Unrealized loss on marketable
equity security (174,101) (174,101)
Reclassification of realized
gain on marketable equity
security included in net
loss, net of $41,000 income
tax effect (78,985) (78,985)
Pension liability adjustment (95,106) (95,106)
---------------
Comprehensive loss (2,174,858)
Cash dividends declared
($.16 per share) (142,485) (142,485)
Purchase of 5,324 treasury shares (5,324) (7,668) (155,479) (168,471)
-------------------------------------------------------------------------------------------
Balances at January 31, 1999 886,784 196,898 3,934,444 508,499 (363,000) 5,163,625
Net income 430,695 430,695
Other comprehensive income
(loss), net of tax:
Reclassification of realized
gain on marketable equity
security included in net
income, net of $333,000
income tax effect (645,937) (645,937)
Pension liability adjustment 137,438 137,438
---------------
Comprehensive loss (77,804)
-------------------------------------------------------------------------------------------
Balances at January 31, 2000 $ 886,784 $ 196,898 $ 4,365,139 $ - $ (363,000) $ 5,085,821
===========================================================================================
See accompanying notes.
19
The Ohio Art Company and Subsidiaries
Consolidated Statements of Cash Flows
Year ended Month
----------------------------------------------------- Ended
January 31 December 31, January 31,
2000 1999 1997 1998
-----------------------------------------------------------------------
Operating activities
Net income (loss) $ 430,695 $ (1,826,666) $ (5,144,129) $ (1,084,402)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Provision for depreciation and amortization 1,986,693 1,968,770 1,643,777 157,448
Gain on sale of marketable equity security (988,326) (119,675) - -
Deferred federal income taxes 333,000 130,000 (272,000) 35,000
Provision for losses on accounts receivable 166,020 104,014 108,808 20,141
Scholarship obligation expense 26,915 27,228 43,132 2,473
Gain on sale of property, plant and
equipment (1,160) (11,396) (14,709) -
Charge for impairment of goodwill - - 799,320 -
Changes in operating assets and liabilities:
Accounts receivable (926,967) (1,569,043) (2,181,948) 3,157,503
Inventories 3,454,471 (3,327,823) 486,228 (484,468)
Accounts payable (854,074) 944,416 268,005 (25,103)
Prepaid expenses, other assets, accrued
expenses and other liabilities 1,938,320 (283,222) 241,633 51,449
------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 5,565,587 (3,963,397) (4,021,883) 1,830,041
Investing activities
Proceeds on sale of marketable equity security 1,332,370 156,990 - -
Purchases of property, plant and equipment (797,918) (1,251,640) (2,434,663) (140,746)
Changes in net cash value of life insurance 287,203 205,234 (60,441) (1,499)
Proceeds from sale of property, plant and
equipment 32,744 40,750 50,211 -
-----------------------------------------------------------------------
Net cash provided by (used in) investing
activities 854,399 (848,666) (2,444,893) (142,245)
Financing activities
Borrowings - 17,600,000 27,500,000 1,200,000
Repayments (4,157,434) (15,072,645) (19,613,720) (1,953,574)
Cash dividends paid (35,452) (142,724) (181,886) (2,394)
Purchase of treasury shares - (168,471) (469,049) -
-----------------------------------------------------------------------
Net cash provided by (used in) financing
activities (4,192,886) 2,216,160 7,235,345 (755,968)
-----------------------------------------------------------------------
Cash and cash equivalents:
Increase (decrease) during year 2,227,100 (2,595,903) 768,569 931,828
At beginning of year 182,329 2,778,232 1,077,835 1,846,404
-----------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 2,409,429 $ 182,329 $ 1,846,404 $ 2,778,232
=======================================================================
See accompanying notes.
20
The Ohio Art Company and Subsidiaries
Notes To Consolidated Financial Statements
January 31, 2000
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.
Change in Fiscal Year
During 1997, the Board of Directors approved a fiscal year end change from
December 31st to January 31st. The accompanying consolidated financial
statements include the results of operations and cash flows for the years ended
January 31, 2000 and 1999 and December 31, 1997, and the one-month period ended
January 31, 1998.
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
In 1997, as a result of operating losses, cash flow reductions and review of
specific products, the Company determined that it had an impairment in value of
goodwill under the criteria of Financial Accounting Standards Board (FASB)
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of." Accordingly, the Company recorded an
impairment charge of $799,320 ($.88 per share) to write-off goodwill in the
fourth quarter of 1997 related to a previous business acquisition. The Company
no longer manufacturers products related to this acquisition.
Revenue Recognition
Revenue is recognized when products are shipped to customers. Royalty income is
recognized as earned.
Product Development Costs
Costs related to the development of new products and changes to existing
products are charged to operations as incurred.
21
Advertising and Sales Promotion
Advertising and sales promotion expenditures are charged to operations in the
year incurred. Advertising expense was approximately $3,243,000, $5,973,000, and
$3,283,000 for the years ended January 31, 2000 and 1999 and December 31, 1997,
respectively, and $90,000 for the one month ended January 31, 1998. Prepaid
advertising and sales promotion expenditures amounted to approximately $122,000
and $514,000 at January 31, 2000 and 1999, 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 released shares held by the
Company's Employee Stock Ownership Plan. The Company has no potentially dilutive
securities.
Marketable Equity Security
The marketable equity security was categorized as available for sale and as a
result was stated at fair value. Unrealized gains and losses, net of deferred
income taxes, were included as a component of stockholders' equity until
realized. The average cost of the security sold was used to determine the
realized gain.
Financial Instruments
The fair values of cash, accounts receivable and long-term debt approximate the
carrying values thereof.
Reclassification
Certain amounts in the January 31, 1999 financial statements have been
reclassified to conform to the January 31, 2000 presentation. These
reclassifications had no effect on the net loss for the year, working capital
(deficit) or equity.
2. Long-Term Obligations
January 31
2000 1999
----------------------------------------
Revolving credit agreement $ 8,800,000 $ 12,500,000
Term loan 4,478,358 4,937,792
Long-term obligation - pension 834,196 620,757
Note payable by ESOP, guaranteed
by the Company 363,000 363,000
Long-term obligation - scholarships 152,181 156,517
----------------------------------------
14,627,735 18,578,066
Less current portion 830,000 17,800,792
----------------------------------------
$ 13,797,735 $ 777,274
========================================
The Company executed a loan and security agreement on April 7, 2000 that
provides for borrowings up to $12,000,000 for three years on a revolving credit
basis based on various percentages of eligible inventory and accounts receivable
and term loans aggregating $3,279,000 with interest payable monthly at prime
plus 1.25% and an unused line fee of 0.5%. The term loans are payable $45,542
per month 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.
22
On April 7, 2000, the Company executed a $5,200,000 term loan to refinance its
existing term loan. The new term loan is payable in monthly installments of
$91,500 including interest at prime plus 2%, increasing by 0.5% on each
anniversary date through April 1, 2007. The loan is collateralized by all real
and personal property of the Company.
The loan and security agreement and term loans contain certain financial
covenants that require, among other things, minimum amounts of tangible net
worth and limit dividend payments and purchases of property, plant and
equipment.
The Company had not complied with certain covenants of its loan agreement with
its former lenders and, as a result, borrowings under the former credit
agreement, term loan and note payable by the ESOP were classified as current
liabilities as of January 31, 1999. As a result of the Company's failure to meet
the financial covenants, pursuant to its former lending agreement, the agent
bank has charged the Company additional incremental default interest at 6%
beginning in fiscal 2000 amounting to approximately $758,000 for the year ended
January 31, 2000. Loans with its former lenders were repaid with funds available
under the new loans on April 7, 2000.
The Company has recorded the present value of the long-term obligations related
to ETCH A SKETCH(R) scholarship contests conducted in 1985 and 1990. Future
payments to the contest winners are payable by the Company through 2012.
Scheduled maturities of the term loans executed April 7, 2000 for the years
subsequent to January 31, 2000 are as follows: 2001 - $830,000; 2002 -
$1,148,000; 2003 - $,218,000; 2004 - $1,296,000; 2005 - $1,383,000; and
$2,704,000 thereafter.
Interest paid during the years ended January 31, 2000 and 1999 and December 31,
1997, and the month ended January 31, 1998 was $2,186,208, $1,640,287,
$1,037,668 and $110,834, respectively.
3. 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:
January 31
2000 1999
----------------------------
(In Thousands)
Deferred tax assets:
Net operating loss carryforwards $ 2,088 $ 1,860
Supplemental benefit plan 183 213
Inventories 204 609
Charitable contribution carryover 182 201
Allowance for uncollectible accounts receivable 152 175
Other 80 129
Nondeductible accruals 105 141
----------------------------
2,994 3,328
Deferred tax liabilities:
Depreciation 1,111 976
Pension accrual 247 259
Unrealized gain on marketable equity security - 333
----------------------------
1,358 1,568
----------------------------
1,636 1,760
Valuation allowance 1,636 1,760
----------------------------
Net deferred taxes $ - $ -
----------------------------
23
Significant components of the provision (credit) for federal income taxes
attributable to operations are as follows:
Year ended Month
--------------------------------------------------------- ended
January 31 December 31, January 31,
2000 1999 1997 1998
--------------------------------------------------------------------------
(In Thousands)
Current $ - $ - $ (464) $ -
Deferred 333 130 (272) 35
--------------------------------------------------------------------------
$ 333 $ 130 $ (736) $ 35
==========================================================================
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 Month
------------------------------------------------------ ended
January 31 December 31, January 31,
2000 1999 1997 1998
----------------------------------------------------------------------
(In Thousands)
Income taxes (credit) at
statutory rate $ 260 $ (577) $ (1,999) $ (357)
Charge for goodwill
impairment - - 272 -
Valuation allowance, net (13) 758 633 369
Effect of tax rate difference on
net operating loss carryback - - 200 -
Effect of change in comprehensive
income portion of additional
minimum pension liability
71 (50) (2) -
Other items (credit) 15 (1) 160 23
----------------------------------------------------------------------
Total income tax expense $ 333 $ 130 $ (736) $ 35
======================================================================
Total income tax refunds for the years ended January 31, 2000 and December 31,
1997 were $1,232,779 and $128,178, respectively. The Company has net operating
loss carryforwards of approximately $6,100,000 that expire from 2012 to 2020.
24
4. 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.
January 31
2000 1999
------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 13,083,841 $ 11,891,715
Service cost 333,571 302,864
Interest cost 862,915 871,746
Actuarial (gains) losses (2,029,162) 945,513
Benefits paid (707,478) (927,997)
------------------------------------------
Benefit obligation at end of year $ 11,543,687 $ 13,083,841
==========================================
Change in plan assets
Fair value of plan assets at beginning of year $ 11,895,341 $ 11,934,277
Actual return on plan assets 1,147,082 851,972
Contributions 52,633 37,089
Benefits paid (707,478) (927,997)
------------------------------------------
Fair value of plan assets at end of year $ 12,387,578 $ 11,895,341
==========================================
Components of prepaid benefit cost
Funded status of the plans (underfunded) $ 843,891 $ (1,188,500)
Unrecognized net actuarial (gain) loss (878,208) 1,345,856
Unrecognized transition obligation 177,930 166,961
Unrecognized prior service cost 42,695 59,211
------------------------------------------
Net prepaid benefit cost $ 186,308 $ 383,528
==========================================
Amounts recognized in the consolidated
balance sheets
Prepaid benefit cost $ 1,020,504 $ 937,611
Accrued benefit liability (834,196) (797,389)
Intangible asset - 35,066
Accumulated other comprehensive income - 208,240
------------------------------------------
Net amount recognized $ 186,308 $ 383,528
==========================================
25
January 31
2000 1999
------------------------------------------
Weighted-average assumptions
Discount rate 7.5% 6.5%
Weighted average expected return on plan assets 8.5 8.0
Rate of compensation increase 3.0 4.5
Year ended
------------------------------------------------------
January 31 December 31,
2000 1999 1997
------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 333,571 $ 302,864 $ 316,479
Interest cost 862,915 871,746 831,153
Expected return on plan assets (973,441) (993,671) (928,608)
Amortization of prior service cost 16,516 15,534 15,534
Amortization of transition amount (10,969) (14,513) (30,198)
Recognized net actuarial loss 21,261 11,086 -
------------------------------------------------------
Benefit cost $ 249,853 $ 193,046 $ 204,360
======================================================
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $384,328, $381,657, and $-0-, respectively as of
January 31, 2000 and $1,795,794, $1,683,859, and $1,009,446, respectively, as of
January 31, 1999.
The Company has no nonpension postretirement benefit plans.
The Company has an Employee Stock Ownership Plan (ESOP) for eligible employees
which is accounted for in accordance with Statement of Position 93-6 of the
American Institute of Certified Public Accountants. The fair market value of the
21,738 unallocated shares is $396,719 and $345,091 at January 31, 2000 and 1999,
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.
Dividends paid on unallocated shares in the trust are recorded as compensation
rather than as dividends.
5. Other Comprehensive Income
FASB Statement No. 130, Reporting Comprehensive Income requires that
comprehensive income or loss, which is the total of net income or loss and other
comprehensive income or loss, be reported in the financial statements. Other
comprehensive income of loss for the Company consists of minimum pension
liability adjustments and unrealized gains and losses on certain security
investments. Amounts that had previously been recognized in other comprehensive
income or loss are reclassified to net income or loss in the period realized.
Disclosure of comprehensive income or loss is incorporated into the Statement of
Stockholders' Equity.
26
The following shows the before and after tax amounts allocated to the components
of accumulated other comprehensive income or loss:
January 31, 1999
------------------------------------------------------
Before-Tax Tax (Benefit) Net
Amount Expense Amount
------------------------------------------------------
Pension liability adjustment $ (208,240) $ (70,802) $ (137,438)
Unrealized gain on marketable equity security 978,937 333,000 645,937
------------------------------------------------------
Accumulated other comprehensive income $ 770,697 $ 262,198 $ 508,499
======================================================
6. Operating Leases
The Company leases office space and equipment pursuant to operating leases.
Total rent expense is $615,658 for fiscal 2000 (less than 1% of total revenues
for fiscal 1999 and 1997 and the month ended January 31, 1998.) The lease term
for the office space extends through April, 2006 with monthly lease payments of
$11,698. In addition, rent for the office lease is subject to escalation based
upon the Consumer Price Index. Future commitments under the leases as of January
31, 2000 are as follows:
Office Equipment Total
-----------------------------------------------------
2001 $ 142,668 $ 451,081 $ 593,749
2002 146,980 403,986 550,966
2003 151,422 145,555 296,977
2004 155,999 9,397 165,396
2005 160,714 - 160,714
Thereafter 207,530 - 207,530
-----------------------------------------------------
$ 965,313 $ 1,010,019 $ 1,975,332
=====================================================
7. 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 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 molded plastic parts to other manufacturers, including Ohio Art.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, not including gains and losses on the
Company's investment portfolio. 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, and as such, there is no intercompany
profit or loss on intersegment sales or transfers.
The Company's reportable segments offer either different products in the case of
the diversified products segments, or utilize different distribution channels in
the case of the two toy segments.
27
Financial information relating to reportable segments is as follows:
Domestic International Ohio Art Strydel
Toy Toy Diversified Diversified Total
----------------------------------------------------------------------------------
Year ended January 31, 2000:
Net sales to external customers $ 28,079,884 $ 5,396,780 $ 15,274,323 $ 3,787,682 $ 52,538,669
Intersegment revenues 108,902 1,292,783 1,401,685
Interest expense (1,344,166) (224,027) (504,062) (168,021) (2,240,276)
Provision for depreciation and
amortization (934,244) (949,455) (102,994) (1,986,693)
Segment profit (loss) 561,648 (959,646) 78,967 86,932 (232,099)
Segment assets 15,737,784 1,376,461 11,683,268 2,659,775 31,457,288
Expenditures for long-lived 284,495 482,340 31,083 797,918
assets
Year ended January 31, 1999:
Net sales to external customers $ 24,557,271 $ 6,065,091 $ 12,382,223 $ 2,931,946 $ 45,936,531
Intersegment revenues 181,220 1,030,516 1,211,736
Interest expense (1,073,841) (53,030) (541,318) (1,668,189)
Provision for depreciation and
amortization (986,287) (878,967) (103,516) (1,968,770)
Segment profit (loss) (3,758,668) (613,868) 2,480,082 (7,681) (1,900,135)
Segment assets 19,741,796 2,006,326 11,839,602 2,527,868 36,115,592
Expenditures for long-lived 238,415 936,372 76,853 1,251,640
assets
Year ended December 31, 1997:
Net sales to external customers $ 19,191,404 $ 3,069,149 $ 11,905,409 $ 2,124,960 $ 36,290,922
Intersegment revenues 213,920 1,528,852 1,742,772
Interest expense (680,543) (21,750) (421,856) (1,124,149)
Provision for depreciation and
amortization (1,065,564) (483,741) (94,472) (1,643,777)
Segment profit (loss) (4,644,779) (1,930,468) 1,763,742 (261,319) (5,072,824)
Other significant noncash
items - charge for
impairment of goodwill (799,320) (799,320)
Segment assets 20,261,150 2,435,436 11,517,117 2,549,454 36,763,157
Expenditures for long-lived 813,090 1,492,608 128,965 2,434,663
assets
28
The following are reconciliations between total segment and consolidated totals
for revenues, income (loss) before income taxes, and assets:
Year ended
--------------------------------------------------------
January 31 December 31,
2000 1999 1997
--------------------------------------------------------
Revenues:
Total external net sales for reportable
segments $ 52,538,669 $ 45,936,531 $ 36,290,922
Other revenues 2,238,459 1,212,167 789,604
--------------------------------------------------------
Total consolidated revenues $ 54,777,128 $ 47,148,698 $ 37,080,526
========================================================
Profit and loss:
Total loss for reportable segments $ (232,099) $ (1,900,135) $ (5,072,824)
Other profit (loss) - elimination of
intersegment profit (loss) 7,468 83,794 (7,985)
Unallocated amounts:
Gain on sale of marketable equity
security 988,326 119,675 -
Charge for impairment of goodwill - - (799,320)
--------------------------------------------------------
Income (loss) before income taxes $ 763,695 $ (1,696,666) $ (5,880,129)
========================================================
Assets:
Total assets for reportable segments $ 31,457,288 $ 36,115,592 $ 36,763,157
Elimination of:
Intercompany receivables (3,331,635) (3,092,325) (2,703,674)
Intercompany profit in inventory (19,767) (27,235) (106,029)
Investment in subsidiaries (2,222,653) (2,222,653) (2,222,653)
--------------------------------------------------------
Total consolidated assets $ 25,883,233 $ 30,773,379 $ 31,730,801
========================================================
Aggregate 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 $5,850,000,
$6,657,000 and $3,360,000 in 2000, 1999, and 1997, respectively, of which
approximately $4,200,000, $3,570,000 and $1,565,000 in 2000, 1999 and 1997,
respectively, and were to customers in the European community. Identifiable
assets located outside the United States are less than 10% of consolidated
assets at January 31, 2000 and 1999 and December 31, 1997.
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 of $198,000, $4,000 and $59,000 during fiscal 2000, 1999 and 1997,
respectively. Net domestic toy segment sales includes approximately $14,132,000,
$12,487,000 and $9,203,000 for 2000, 1999 and 1997, respectively, to two major
retailers.
29
8. One Month Ended January 31, 1997 Data (Unaudited)
Effective February 1, 1998 the Company elected to change its year end from
December 31 to January 31. Therefore, the one month ended January 31, 1998 has
been treated as a transition period. The following is a summary of the unaudited
financial results for the comparative one-month period ended January 31, 1997:
Net revenues $ 1,497,367
Operating loss $ (593,069)
Net loss $ (504,540)
Net loss per share $ (.56)
Weighted average shares outstanding 895,343
30
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of operations
for the years ended January 31, 2000 (as restated) and 1999 (in thousands of
dollars, except per share amounts):
Net
Income
(Loss) Per
2000 Cost of Net Share of
Products Income Common
Net Sales Sold (Loss) Stock
--------- ---- ------ -----
April 30 $10,497 $ 7,942 $241 $.28
July 31 12,221 9,580 (936) (1.08)
October 31 18,324 12,968 837 .97
January 31 11,497 8,939 289 .33
------- ------- ---- ----
TOTALS $52,539 $39,429 $431 $.50
======= ======= ==== ====
1999
April 30 $ 6,286 $ 4,690 $(908) $(1.04)
July 31 11,605 7,427 301 .34
October 31 17,937 10,981 963 1.11
January 31 10,109 8,083 (2,183) (2.51)
------- ------- ---- ----
TOTALS $45,937 $31,181 $(1,827) $(2.10)
======= ======= ======== =======
The Company has restated the reported results of operations for the first three
quarters of fiscal 2000 as a result of inventory adjustments discovered during
its year-end physical inventory reconciliation process. The Company determined
that amounts in excess of standard costs were recorded in inventory because of
incorrect monthly cost reporting, and those costs were not relieved from
inventory in the standard cost of sales system used for calculations of interim
results of operations.
31
Reported results of operations have been revised as follows:
As Originally Reported As Adjusted
---------------------- -----------
Net Net Income Net Net Income
Quarter ended Income (Loss) Income (Loss)
(Loss) Per Share (Loss) Per Share
------ --------- ------ ---------
(In 000's except per share amounts)
April 30, 1999 $737 $ .85 $241 $ .28
July 31, 1999 (125) (.14) (936) (1.08)
October 31, 1999 1,197 1.38 837 .97
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
32
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
The identification of directors and all persons nominated to become directors is
included in the Registrant's Proxy Statement for the 2000 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
Present Position Elected To
Name Age With Registrant Present Position
---- --- --------------- ----------------
William C. Killgallon 61 Chairman 1989
Martin L. Killgallon II 52 President 1989
Jerry D. Kneipp 55 Chief Financial Officer 1999
G. E. Thomas 40 Vice President Sales 1996
L. T. Wilson 63 Vice President 1995
Diversified
Products
W. E. Shaffer 77 Secretary 1995
W. C. Killgallon 87 Chairman, Board 1989
Executive
Committee
G. E. Thomas was elected as Vice President of Sales in September 1996. He had
previously served as National Sales Manager since his date of employment with
the Company in January 1995. 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. J. D. Kneipp was
elected Chief Financial Officer in December 1999. He had previously served as
33
Controller since his election in July 1998 and as Accounting Manager since his
date of employment in April 1997 to July 1998. He had previously been employed
by White Consolidated Industries as Controller of the Washex Division from 1992
to 1996. 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
The information required under this item is included in the Registrant's Proxy
Statement for the 2000 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
The information required under this item is included in the registrant's Proxy
Statement for the 2000 Annual Meeting of Shareholders as filed with the
Securities and Exchange Commission and is incorporated here in by reference.
Item 13. Certain Relationships and Related Transactions
Not applicable.
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) Report of Independent Auditors
The consolidated financial statements of The Ohio Art Company and
subsidiaries:
Consolidated Balance Sheets - January 31, 2000 and
January 31, 1999
Consolidated Statements of Operations - Years ended January 31,
2000, January 31, 1999 and December 31, 1997, and the month
ended January 31, 1998
Consolidated Statements of Stockholders' Equity - Years ended
January 31, 2000, January 31, 1999 and December 31, 1997 and the
month ended January 31, 1998
Consolidated Statements of Cash Flow - Years ended January 31,
2000, January 31, 1999 and December 31, 1997, and the month
ended January 31, 1998
34
Notes to Consolidated Financial Statements - January 31, 2000
(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 37
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
A current report on Form 8-K dated April 17, 2000 was filed to announce
the refinancing of the Company's existing working capital line with Fifth
Third Bank, Northwestern Ohio, N.A. with new credit facilities with The
CIT Group/Business Credit, Inc. and with Fifth Third Bank, Northwestern
Ohio, N.A., respectively. The Loan and Security Agreement, dated April 7,
2000, with The CIT Group/Business Credit, Inc. and the Loan Agreement
dated April 7, 2000, with Fifth Third Bank, Northwestern Ohio, N.A. were
also filed. A press release dated April 7, 2000 reporting the Company's
operating results for its fourth quarter and year-ended January 31, 2000
and the completion of the refinancing of its working capital was also
filed.
(c) See Exhibit Index for list of exhibits.
(d) The Financial statement schedule which is listed under Item 14(a)(2) is
filed hereunder.
35
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: April 14, 2000 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 Principal April 14, 2000
Executive Officer and Director
/s/Martin L. Killgallon II President and Director April 14, 2000
Martin L. Killgallon
/s/Jerry D. Kneipp Chief Financial Officer April 14, 2000
Jerry D. Kneipp
/s/W. C. Killgallon Chairman, Board Executive April 14, 2000
W. C. Killgallon Committee and Director
/s/ Joseph A. Bockerstette Director April 14, 2000
Joseph A. Bockerstette
/s/Neil H. Borden, Jr. Director April 14, 2000
Neil H . Borden, Jr.
/s/Frank L. Gallucci Director April 14, 2000
Frank L. Gallucci
/s/Wayne E. Shaffer Secretary and Director April 14, 2000
Wayne E. Shaffer
36
The Ohio Art Company and Subsidiaries Schedule II -
Valuation and Qualifying Accounts
Additions
---------
Balance at Charged to Charged to Balance
Beginning Costs and Other Deductions- at End
Description of Period Expenses Accounts-Describe Describe(1) of Period
- ----------- --------- -------- ----------------- ----------- ---------
Year ended January 31, 2000:
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $515,000 $166,020 $232,020` $449,000
=================================================================================
Year ended January 31, 1999
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $415,000 $104,014 $4,014 $515,000
=================================================================================
Month ended January 31, 1998
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $415,000 $20,141 $20,141 $415,000
=================================================================================
Year ended December 31, 1997
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $365,000 $108,808 $58,808 $415,000
=================================================================================
(1) Uncollectible accounts charged off and collection costs, less recoveries.
37
THE OHIO ART COMPANY AND SUBSIDIARIES EXHIBIT INDEX
Exhibit # Page
- --------- ----
3(i)(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(i)(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(ii) The Ohio Art Company ByLaws approved by the Board --
of Directors on June 20, 1997, 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) Loan and Security Agreement dated April 7, 2000 --
filed as Exhibit 10.1 to Registrant's Form 8-K dated
April 17, 2000, and incorporated herein by reference.
10(d) Loan agreement dated April 7, 2000 filed as Exhibit 10.2 --
to Registrant's Form 8-K dated April 17, 2000 and
incorporated herein by reference.
21 Subsidiaries of the Registrant. --
27 Financial Data Schedule. --
38