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, 2001
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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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 26, 2001 was approximately $2,333,176 (based upon the
closing price on The American Stock Exchange). The number of shares outstanding
of the issuer's Common Stock as of April 26, 2001 was 886,784. It is estimated
that 55% 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.
2
PART I
Item 1. Business
The Ohio Art Company and its subsidiaries (the "Company") 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, 2001.)
The Company manufactures and markets approximately 50 toy items including
the nationally advertised Etch A Sketch(R), Travel Etch A Sketch(R), and Pocket
Etch A Sketch(R) drawing devices, Betty Spaghetty(R) doll, Water T-Ball(TM),
basketball sets and drums.
The Company 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 Company'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 the Company's total sales in
any of the last three fiscal years.
Year Ended
-----------------------------------------
CLASS 1/31/01 1/31/00 1/31/99
----- ------- ------- -------
Writing and Drawing Toys 26% 24% 29%
Activity Toys 9% 12% 15%
Small Dolls 28% 33% 23%
Diversified Products 37% 31% 33%
The toy industry is highly competitive, and among the Company'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 2000 indicate the Company accounted for less than one percent (1%) of
the total toy sales in the United States. Competition in the Company'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. The Company believes that the principal competitive
factors in this business are price and demonstrated ability to deliver quality
products on a timely basis.
The Company's toy business is seasonal and historically approximately 55%
to 65% 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 58% and 57% of
annual sales respectively. Results for the first six months of fiscal year 2001
were significantly impacted by disappointing domestic toy shipments and domestic
sales deductions. International toy shipments were up substantially based on
favorable Betty Spaghetty(R) fashion doll retail sales in Europe. Historically
the second half is 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. The Diversified Products
segments do not have any established seasonal pattern.
The Company'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 Company's product mix has a high percentage of promotional type
products, the dollar amount of orders in the order backlog which have been
canceled in the third and fourth 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:
2001 - approximately $15,000,000
2000 - approximately $18,200,000
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.
The Company'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 the Company 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.
4
The Company 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, 2001, these imports accounted for
approximately 31% of the total cost of goods sold. Tariffs, internal affairs of
foreign countries, and other restraints on international trade have not
materially affected the Company to date but, no assurance can be given that
these conditions will continue. The Company 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 eight years.
Preventing competitors from copying the Company's toy products is
important, and where possible, the Company attempts to protect its products by
the use of patents, trademarks, copyrights, and exclusive licensing agreements.
The Company 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 proprietary rights for any important product might have a material
adverse effect on the Company's business.
The Company's Diversified Products segments sell products manufactured to
customers' specifications and does not rely on its own patents, trademarks, or
copyrights to any extent.
The Company has an established program for licensing others to manufacture
and/or distribute its products outside the United States. International sales
experienced double digit increases in 2001 on sales in Europe based on the
continued strength of the Betty Spaghetty(R) fashion doll.
Because of the seasonal nature of the Company's business, the number of
full-time employees at January 31, 2001, 2000, and 1999 is not as indicative of
activity as the average number of employees during the year. The average number
of employees has been: 2001 - 304, 2000 - 309, 1999 - 323.
The Company maintains its own design and development staff and, in
addition, utilizes contractual arrangements with outside development groups.
Approximately $328,000 as of January 31, 2001, $514,000 as of January 31, 2000,
and $710,000 as of January 31, 1999 was spent on such activities. Outside
development expenses for 2001, 2000, and 1999 were approximately $0, $70,000,
and $170,000 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 the
Company's business. The Company's consolidated revenues for the fiscal year
ended January 31, 2001 to two major toy retailers were approximately $6,700,000
($7,700,000 and $7,100,000 for the years ended January 31, 2000 and January 31,
1999, respectively) of sales to Wal-Mart and sales to Toys R Us of $4,500,000
($6,400,000 and $5,400,000 for the years ended January 31, 2000 and January 31,
1999, respectively).
Sales of the Company's Diversified Products segments are concentrated in a
limited number of accounts. Sales to the five largest customers account for
approximately 70% 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 the Company's business.
5
Item 2. Properties
The Company owns plants located in 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. The Company also owns a plant in
Stryker, Ohio, which consists of approximately 134,000 square feet. The majority
of the Company's facilities are of masonry construction and are adequate for its
present operations. Production of metal lithography is normally scheduled on a
two- shift, eight hour, five day week with overtime for Saturday and Sunday at
the Bryan, Ohio facilities. The Stryker, Ohio plant is normally scheduled on the
basis of three-shift operations.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries is involved in pending
legal procedures which, in the aggregate, could materially affect the Company's
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Company'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, 2001 was 908. 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 2001
and 2000 by quarter, were as follows:
Fiscal Year Ended January 31, 2001
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Sales Prices Income Dividend
High Low (Loss) Declared
---- --- ------ --------
Feb - Apr $18.00 $11.25 $(1.61) $.00
May - Jul 16.38 5.88 (.35) .00
Aug - Oct 10.25 5.13 .71 .00
Nov - Jan 6.50 2.00 (.34) .00
Fiscal Year Ended January 31, 2000
----------------------------------
Sales Prices Income Dividend
High Low (Loss) Declared
---- --- ------ --------
Feb - Apr $17.25 $10.50 $ .30 $.00
May - Jul * * (1.06) .00
6
Aug - Oct 18.25 11.00 .98 .00
Nov - Jan 22.75 18.25 .19 .00
* Price data is not available due to the American Stock Exchange suspending
trading during this period.
Given the financial condition of the Company, the Board of Directors suspended
dividend payments effective April 16, 1999.
Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA YEARS ENDED
JANUARY 31, 2001, 2000 AND 1999, AND DECEMBER 31, 1997, AND 1996
Amounts in thousands, except per share data
JANUARY 31 DECEMBER 31
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2001 2000 1999 1997 1996
----- ---- ---- ---- ----
Net Sales and Other Income $46,674 $54,777 $47,149 $37,081 $37,527
Net Income (Loss) (1,380) 356 (1,722) (5,144) (1,701)
Net Income (Loss) per Share of Common
Stock (a) (1.59) .41 (1.98) (5.68) (1.86)
Dividends Declared per Share of Common
Stock .00 .00 .16 .20 .25
Dividends Paid per Share of Common
Stock(b) .00 .04 .16 .20 .31
Book Value per Share of Common Stock
(c) 6.99 8.53 8.70 9.71 15.24
Average Number of Shares Outstanding
865,516 865,046 869,307 904,903 915,630
Stockholders of Record (d) 908 803 691 621 594
Working Capital (Deficit) $(3,349) $ 9,694 $(6,204) $8,207 $ 8,318
Property, Plant and Equipment (net)
8,985 10,258 11,478 12,241 11,465
Total Assets 22,944 28,361 33,220 31,731 28,083
Long-Term Obligations 971 13,798 777 15,073 8,362
Stockholders Equity 6,203 7,563 7,716 8,668 14,055
Average Number of Employees
304 309 323 303 315
Note: Amounts for the periods ended January 31, 2000 and 1999 have been restated
to reflect the change from the last-in-first-out (LIFO) method of valuing
inventories to the first-in-first-out (FIFO) method in fiscal year 2001.
7
(a) Based upon weighted average shares outstanding during the year.
(b) Stock or cash dividend paid every year since 1908 except fiscal year 2001.
(c) Based upon shares outstanding at year-end.
(d) Includes Employee Stock Ownership Plan participants who were 100% vested at
year-end.
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 JAN 31 JAN 31 JAN 31
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands) % Increase (Decrease)
Net Sales $45,947 $52,539 $45,937 (12.6)% 14.4%
Gross Margin 11,436 13,035 14,861 (12.3)% (12.3)%
Percent of Net Sales 24.9% 24.8% 32.4%
Selling, Administrative and General $11,804 $12,344 15,997 (4.4)% (22.8)%
Percent of Net Sales 25.7% 23.5% 34.8%
Income from Operations $358 $2,929 $76 (87.8)% 3753.9%
Percent of Net Sales .8% 5.6% .2%
Interest Expense $1,739 $2,240 $1,668 (22.4)% 34.3%
Percent of Net Sales 3.8% 4.3% 3.6%
Income Tax Expense (Credit) $0 $333 $130 (100.0)% 156.2%
Percent of Net Sales 0% .6% .3 %
Net Income (Loss) $(1,380) $356 $(1,722) (487.6)% 79.3%
Percent of Net Sales (3.0)% .7 % (3.8)%
8
The Company's net sales for the year ended January 31, 2001 decreased 13% from
the prior year due to significant decreases in Domestic Toy and in Diversified
Products segments. Sales of the Etch A Sketch(R) drawing toys were up over 20%,
but this gain was more than offset by softening demand for the Betty
Spaghetty(R) fashion doll due to reduced in-store promotional and national
advertising campaigns. International Toy sales rose over 26% on the strength of
the retail movement of Betty Spaghetty(R) fashion dolls in key European and
Australian markets. Ohio Art Diversified sales were down 9% from the previous
year because of reduced demand for lithographed metal sheets to the photographic
industry and due to a reduction in shipments to a major customer experiencing
financial difficulties. Strydel Diversified sales fell 10% from the prior year
due to decreasing sales to the automotive industry.
Net sales increased by approximately $6,600,000 for the twelve months ended
January 31, 2000 as compared to the twelve months ended January 31, 1999.
Domestic Toy sales increased approximately $3,500,000 as a 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
decreased approximately $600,000 due primarily to market softness in the Far
East and South America. Sales in the European market continued to increase on
the strength of the Betty Spaghetty(R) fashion doll. Ohio Art Diversified sales
increased approximately $2,900,000 over the previous year. Strydel Diversified
sales increased approximately $900,000 due to expansion of its customer base and
sales gains to existing customers.
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 $7,170,000,
$5,850,000, and $6,657,000 in 2001, 2000, and 1999, respectively, of which
approximately $4,700,000, $4,200,000, and $3,570,000 in 2001, 2000, and 1999,
respectively, were to customers in the European community.
The Company's gross profit margin percentage in 2001 (24.9%) was up slightly
from the level of the prior year (24.8%). Unabsorbed labor and overhead expenses
decreased approximately $800,000, but this gain was offset by a lower gross
margin for Ohio Art Diversified (20.0%) in comparison to the previous year
(22.2%). Gross margins increased for all other segments.
The Company's gross profit margin percentage in 2000 (24.8%) decreased from the
previous year (32.4%). 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.
Selling, administrative, and general expenses decreased by approximately
$500,000 in 2001 from 2000 levels. Reduced advertising expenditures and salary
expense accounted for nearly all of the decrease. In addition, royalty,
commission and travel expenses fell in direct proportion to the decline in sales
volume. The latter expenses were largely offset by increases in health insurance
costs absorbed by the Company.
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.
9
Interest expense decreased approximately $500,000 in 2001 from 2000 as the
Company entered into new term loan and revolving credit agreements at more
favorable interest rates. The Company repaid approximately $4,100,000 of the
long-term debt in 2001, nearly all of it in the fourth quarter.
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 met. As a result, the
bank charged the Company default interest amounting to approximately $758,000.
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 interest expense for the year by approximately $150,000.
The 2001 pre-tax loss of $1,380,000 resulted from significantly lower sales
volume primarily due to soft domestic demand for the Betty Spaghetty(R) fashion
doll and reduced demand for metal lithography and plastic injection molded parts
as previously explained.
The 2000 pre-tax income of $689,000 resulted from reduced selling,
administrative, and general expenses and a one-time gain on the sale of
marketable equity securities, offset by reduced gross margins and higher
interest expense as previously explained.
Note 3 of Notes to Consolidated Financial Statements presents the components of
the income taxes (credits) for 2001, 2000, and 1999, 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 quarter. 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 by borrowings under a revolving line-of-credit.
The Company's current ratio at January 31, 2001 decreased to .7 to 1 from 2.0 to
1 at January 31, 2000. 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 it appears
probable that the Company will not be able to meet this covenant requirement at
the end of the first quarter of fiscal year 2002. As a result, borrowings under
the credit agreement and term loans were classified as current liabilities. In
addition, accounts receivable decreased due to reduced sales volume and improved
collections late in the year. Inventories, prepaid expenses and accounts payable
all declined as the Company made a concerted effort to control purchases and
improve cash flow.
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
long-term debt as long-term obligations in 2000, less long-term debt due or
callable within one year, and as current liabilities in 1999.
10
Effective April 7, 2000, the Company entered into a three year revolving credit
agreement 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. In addition, at that time the Company executed a
$5,200,000 term loan to refinance its existing term loan. Amounts available
under the revolving credit agreements as of January 31, 2001 were $3,800,000.
The revolving credit facility and term loans are collateralized by the assets of
the Company. The outstanding loan balances at January 31, 2001 were
approximately $1,926,000 on the revolving credit agreement and approximately
$7,628,000 on the term loans.
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 on the
term loan, and $363,000 in borrowings on the Company's ESOP.
The Company was not in compliance with the minimum tangible net worth covenant
included in its Loan and Security Agreement at January 31, 2001. This event of
default was subsequently waived by the lender unconditionally.
Management is currently implementing an operating plan with the goal of reducing
overhead and other operating costs by approximately $2,500,000. This plan
includes workforce reduction and moving the production of the Company's Etch A
Sketch(R) overseas. Management is of the opinion that the implementation of this
operating plan along with the $3,800,000 currently available on the Company's
revolving line of credit agreement will be more than adequate to meet the
Company's cash flow requirements for the ensuing twelve months. Management
believes the current line of credit will continue to be available, despite a
possible future covenant violation, based on the expected asset base, which
collateralizes the lending arrangement.
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 received an EPA violation letter in May 1999. The Company is engaged
in ongoing negotiations to reach a settlement with the EPA and does not know the
outcome as yet. Based on these negotiations, the Company believes that the
settlement will not have a material adverse effect on its 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.
Impact Of Inflation And Changing Prices
11
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 2001, the magnitude of these increases other than the cost of
natural gas, over the past several years has not been significant in most areas
of the business. Average gas rates during the fiscal year were approximately 50%
higher than the preceding year. This increase most directly affects the
lithography business, which utilizes gas powered ovens; however, the impact to
overall lithography product cost remains less than 5%.
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 2001, 2000, and 1999 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 were relatively constant throughout
fiscal years 1999 and 2000, but have risen substantially in fiscal 2001. The
Company does not expect prices of raw materials to increase substantially in
fiscal 2002. During a period of rapidly rising costs the Company is not able to
fully recover cost increases through price increases due to competitive
conditions and trade practices.
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, either 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.
12
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Ohio Art Company, Inc.
Bryan, Ohio
We have audited the 2001 consolidated financial statements and financial
statement schedule of The Ohio Art Company and Subsidiaries, listed in Item
14(a) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audit. The financial statements of The Ohio Art Company
and Subsidiaries as of January 31, 2000 and for each of the two years ended
January 31, 2000 and 1999 prior to the restatement described in Note 1 were
audited by other auditors whose report dated March 10, 2000, except for note 2
as to which the date was April 7, 2000, expressed an unqualified opinion on
those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 2001 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Ohio Art
Company and Subsidiaries as of January 31, 2001 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles. 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.
We also audited the adjustments described in Note 1 that were applied to restate
the financial statements as of January 31, 2000 and for the two years ended
January 31, 2000 and 1999. In our opinion, such adjustments are appropriate and
have been properly applied.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for inventories in 2001.
Crowe, Chizek & Company LLP
Fort Wayne, Indiana
13
March 15, 2001
Report of Independent Auditors
Board of Directors and Shareholders
The Ohio Art Company
We have audited, before the restatement for the accounting change described in
Note 1, the accompanying consolidated balance sheet of The Ohio Art Company and
subsidiaries as of January 31, 2000, 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. Our audits also included the financial statement
schedule for the years ended January 31, 2000 and 1999 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. We have not audited the consolidated financial statements of The Ohio
Art Company and subsidiaries for any period subsequent to January 31, 2000.
In our opinion, the consolidated financial statements referred to above, before
the restatement for the accounting change described in Note 1, present fairly,
in all material respects, the consolidated financial position of The Ohio Art
Company and subsidiaries at January 31, 2000, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended January 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule for the years ended January 31, 2000 and 1999, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ERNST & YOUNG LLP
Toledo, Ohio
March 10, 2000, except for
Note 2, as to which the date
is April 7, 2000
14
Consolidated Financial Statements
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets
January 31
2001 2000
----------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 535,552 $ 2,409,429
Accounts receivable, less allowances of $475,289
in 2001 and $449,000 in 2000 5,966,155 7,341,404
Inventories:
Finished products 3,804,732 4,230,705
In process 102,609 504,695
Materials and purchased parts 1,715,670 1,903,904
----------------------------------------
Inventories at first in, first out (FIFO) method 5,623,011 6,639,304
Prepaid expenses 295,991 303,258
----------------------------------------
Total current assets 12,420,709 16,693,395
Other assets:
Cash value of life insurance, less policy loans of $185,271 in
2001 and $699,495 in 2000 36,607 158,711
Restricted cash 100,000 -
Deposits and advances 602,839 230,194
Pension 798,773 1,020,504
----------------------------------------
1,538,219 1,409,409
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 7,774,879 7,657,974
Machinery and equipment 30,075,562 29,717,457
----------------------------------------
38,301,481 37,826,471
Less allowances for depreciation and amortization 29,316,342 27,568,540
----------------------------------------
8,985,139 10,257,931
----------------------------------------
Total assets $ 22,944,067 $ 28,360,735
========================================
See accompanying notes to financial statements.
15
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets (Continued)
January 31
2001 2000
----------------------------------------
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 3,959,370 $ 4,016,226
Employees' compensation and amounts withheld therefrom 348,493 405,170
Taxes, other than income taxes 239,503 217,148
Other liabilities 1,668,348 1,531,133
Long-term debt due or callable within one year 9,554,420 830,000
----------------------------------------
Total current liabilities 15,770,134 6,999,677
Long-term obligations, less amounts due or callable within one year - 12,811,358
Pension liability 749,578 834,196
Other 221,520 152,181
----------------------------------------
Total liabilities 16,741,232 20,797,412
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 5,462,153 6,842,641
Reduction for ESOP loan guarantee (343,000) (363,000)
----------------------------------------
Total stockholders' equity 6,202,835 7,563,323
----------------------------------------
Total liabilities and stockholders' equity $ 22,944,067 $ 28,360,735
========================================
See accompanying notes to financial statements.
16
The Ohio Art Company and Subsidiaries
Consolidated Statements of Operations
Year Ended January 31,
2001 2000 1999
------------------------------------------------------------------------
Net sales $ 45,946,832 $ 52,538,669 $ 45,936,531
Royalty income 612,925 908,341 902,265
Other income 114,034 1,330,118 309,902
------------------------------------------------------------------------
46,673,791 54,777,128 47,148,698
Costs and expenses:
Cost of products sold 34,511,292 39,503,555 31,075,763
Selling, general and administrative 11,804,345 12,344,158 15,996,639
Interest 1,738,642 2,240,276 1,668,189
------------------------------------------------------------------------
48,054,279 54,087,989 48,740,591
------------------------------------------------------------------------
Income (loss) before income taxes (1,380,488) 689,139 (1,591,893)
Income taxes - 333,000 130,000
------------------------------------------------------------------------
Net income ( loss) $ (1,380,488) $ 356,139 $ (1,721,893)
Net income (loss) per share $ (1.59) $ .41 $ (1.98)
Average number of shares outstanding 865,516 865,046 869,307
========================================================================
See accompanying notes to financial statements.
17
The Ohio Art Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Accumulated Other Guaranteed
Common Paid-In Retained Comprehensive ESOP
Stock Capital Earnings Income (Loss) Obligation Totals
-----------------------------------------------------------------------------
Balances at February 1, 1998 $892,108 $204,566 $8,506,359 $856,691 $(363,000) $10,096,724
Net loss (1,721,893) (1,721,893)
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 $41,000 income tax effect (78,985) (78,985)
Pension liability adjustment (95,106) (95,106)
Cash dividends declared ($.16 per share) (142,485) (142,485)
Treasury stock transactions (5,324) (7,668) (155,479) (168,471)
--------------------------------------------------------------------------------
Balances at January 31, 1999 886,784 196,898 6,486,502 508,499 (363,000) 7,715,683
Net income 356,139 356,139
Other comprehensive income (loss), net of tax:
Reclassification of realized gain on
marketable equity security included in net
income, net of $333,000 income (645,937) (645,937)
tax effect
Pension liability adjustment 137,438 137,438
--------------------------------------------------------------------------------
Balances at January 31, 2000 886,784 196,898 6,842,641 - (363,000) 7,563,323
Net loss (1,380,488) (1,380,488)
Adjustment to guaranteed ESOP obligation 20,000 20,000
--------------------------------------------------------------------------------
Balance at January 31, 2001 $886,784 $196,898 $5,462,153 $ - $ (343,000) $ 6,202,835
================================================================================
See accompanying notes to financial statements.
18
The Ohio Art Company and Subsidiaries
Consolidated Statements of Cash Flows
Year ended January 31,
2001 2000 1999
-----------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (1,380,488) $ 356,139 $ (1,721,893)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Provision for depreciation and amortization 1,839,775 1,986,693 1,968,770
Gain on sale of marketable equity security - (988,326) (119,675)
Deferred federal income taxes - 333,000 130,000
Provision for losses on accounts receivable 112,773 166,020 104,014
Scholarship obligation expense 97,465 26,915 27,228
Gain on sale of property, plant and
equipment (6,000) (1,160) (11,396)
Changes in operating assets and liabilities:
Accounts receivable 1,262,476 ( 926,967) (1,569,043)
Inventories 1,016,293 3,529,027 (3,432,596)
Accounts payable (56,856) (854,074) 944,416
Prepaid expenses, other assets, accrued
expenses and other liabilities (722,486) 1,938,320 (283,222)
-----------------------------------------------------
Net cash provided by (used in) operating
activities 2,162,952 5,565,587 (3,963,397)
Cash flows from investing activities
Proceeds on sale of marketable equity security - 1,332,370 156,990
Purchases of property, plant and equipment (622,907) (797,918) (1,251,640)
Changes in net cash value of life insurance 122,104 287,203 205,234
Proceeds from sale of property, plant and
equipment 6,000 32,744 40,750
-----------------------------------------------------
Net cash provided by (used in) investing
activities (494,803) 854,399 (848,666)
Cash flows from financing activities
Borrowings 39,186,959 - 17,600,000
Repayments (42,728,985) (4,157,434) (15,072,645)
Cash dividends paid - (35,452) (142,724)
Purchase of treasury shares - - (168,471)
-----------------------------------------------------
Net cash provided by (used in) financing
activities (3,542,026) (4,192,886) 2,216,160
-----------------------------------------------------
Cash
Increase (decrease) during year (1,873,877) 2,227,100 (2,595,903)
At beginning of year 2,409,429 182,329 2,778,232
-----------------------------------------------------
Cash end of year $ 535,552 $ 2,409,429 $ 182,329
=====================================================
See accompanying notes to financial statements.
19
The Ohio Art Company and Subsidiaries
Notes To Consolidated Financial Statements
1. Summary of Significant 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and
amortization are computed by the straight-line method over the estimated useful
lives of the respective assets.
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.
Advertising and Sales Promotion
Advertising and sales promotion expenditures are charged to operations in the
year incurred. Advertising expense was approximately $2,981,000, $3,243,000, and
$5,973,000 for the years ended January 31, 2001, 2000 and 1999 respectively.
Prepaid advertising and sales promotion expenditures amounted to approximately
$61,000 and $122,000 at January 31, 2001 and 2000, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for operating loss and tax credit carryforwards and for the estimated
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets to an amount that is more likely than not to be
realized.
Net Income (Loss) Per Share
20
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
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 carrying amounts for cash, accounts receivable, accounts payable, and short
and long term debt approximate fair market value. The carrying value of debt
approximates market based on current borrowing rates.
Inventory Valuation
Inventories are valued at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method (see Change in Accounting Principle
note that follows).
Treasury Stock
Treasury Stock is recorded as a reduction of the Company's equity at the cost of
the acquired shares. The common shares are reduced by the par value of the
treasury shares acquired with the remaining cost recorded as a reduction of
additional paid in capital.
Change in Accounting Principle
During fiscal 2001, the company changed its method of valuing inventories from
the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
The change was made because the company had begun to realize and expects to
continue to experience cost reductions as a result of technological improvements
in its manufacturing process. The Company believes the FIFO method is preferable
to the LIFO method, as inventories are reflected in the Company's balance sheet
at their most recent value and the FIFO method will result in a better
measurement of operating results. Also, the FIFO method is the predominant
method used in the industry in which the Company operates. This change in the
method of valuing inventories has been applied retroactively, and comparative
amounts for prior periods presented have been restated. The change was applied
as of the beginning of fiscal 1999, which increased inventories as previously
reported, by $2,447,285 at February 1, 1998, and increased retained earnings
from $6,059,074 to $8,506,359 at that date.
The effect of the accounts change on income for the years ended January 31, 2000
and 1999 is as follows:
2000 1999
---- ----
Net income (loss), as previously reported $ 430,695 $ (1,826,666)
---------- ------------
Adjustment for effect of a change in accounting
principle that is applied retroactively (74,556) 104,773
---------- ------------
Net income (loss), as adjusted $ 356,139 $ (1,721,893)
========== ============
Effect on earnings per share:
Net income (loss), as previously reported $ .50 $ (2.10)
Adjustment for effect of a change in accounting
principle that is applied retroactively $ (0.09) $ 0.12
---------- ------------
Net income (loss), as adjusted $ .41 $ (1.98)
========== ============
21
New Accounting Pronouncement
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (hereinafter referred to as Statement) which will be applicable to
the Company beginning on February 1, 2001. Under this Statement, all derivative
instruments will be recorded at their fair values. If the derivative instruments
are designated as hedges of fair values, both the change in the fair value of
the hedge and the hedged item will be included in current earnings. Fair value
adjustments related to cash flow hedges will be recorded in other comprehensive
income and reclassified to earnings when the hedged transaction is reflected in
earnings. Ineffective portions of hedges are reflected in income currently.
Adoption of this Statement on February 1, 2001 did not have a significant impact
on its financial statements since the Company currently does not use derivative
instruments in its business.
2. Long-Term Obligations
January 31
2001 2000
-------------------------------
Revolving credit agreement $ 1,926,341 $ 8,800,000
Term loan 7,285,079 4,478,358
Note payable by ESOP, guaranteed
by the Company 343,000 363,000
-------------------------------
9,554,420 13,641,358
Less amounts due or callable within one year (9,554,420) 830,000
-------------------------------
- $ 12,811,358
===============================
The Company executed a loan and security agreement on April 7, 2000 that
provides for borrowings up to $12,000,000 for three years on a revolving credit
basis based on various percentages of eligible inventory and accounts receivable
and term loans aggregating $3,279,000 with interest payable monthly at prime
plus 1.25% and an unused line fee of 0.5%. The term loans require monthly
principal payments of $45,542 plus interest in seventy-two consecutive payments
commencing May 1, 2000. The loan and security agreement is collateralized by all
real and personal property of the Company.
On April 7, 2000, the Company executed a $5,200,000 term loan to refinance its
existing term loan. The new term loan is payable in monthly installments of
$91,500 including interest at prime plus 2%, increasing by 0.5% on each
anniversary date through April 1, 2007. The loan is collateralized by all real
and personal property of the Company.
The various financing agreements contain certain financial covenants common to
such agreements that require, among other things, maintenance of minimum amounts
of tangible net worth and limit dividend payments and purchases of property,
plant and equipment.
At January 31, 2001, the Company was not in compliance with one of its covenants
for which it has received a waiver from the lender. However, it appears probable
that the Company will not be able to meet this covenant requirement at the end
of the first quarter of fiscal year 2002 and as a result the debt has been
classified as a current liability in the January 31, 2001 balance sheet.
Management is implementing an operating plan with the goal of reducing overhead
and other operating costs by approximately $2,500,000. The Company has begun to
reduce its workforce and has moved production of the Company's Etch A Sketch
overseas. Management is of the opinion that the implementation of this operating
plan along with the $3,800,000 currently available on the Company's revolving
line of credit agreement will be more than adequate to meet the Company's cash
flow requirements for the ensuing twelve months. Management believes the current
line of credit will continue
22
to be available despite a possible future covenant violation, based on the
expected asset base which securitizes the lending arrangement.
During fiscal year 2000, as a result of the Company's failure to meet its
financial covenants, pursuant to its former lending agreement, the agent bank
charged the Company additional incremental default interest at 6% 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.
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. Components of the
deferred tax assets and liabilities as of January 31, 2001 and 2000 are as
follows:
January 31
2001 2000
------------------------------
(In Thousands)
Gross deferred tax assets:
Net operating loss carryforwards $ 2,379 $ 2,088
Supplemental retirement plan 186 183
Inventory 179 204
Charitable contribution carryover 210 182
Accounts receivable 162 152
Other - 80
Accrued expenses 224 105
Valuation allowance (1,447) (794)
------------------------------
Total deferred tax asset 1,893 2,200
Gross deferred tax liabilities:
Property, plant and equipment 1,061 1,111
Pension assets and liabilities 200 247
LIFO recapture 632 842
------------------------------
1,893 2,200
------------------------------
Net deferred taxes $ - $ -
==============================
Significant components of income tax expense attributable to continuing
operations consist of the following:
Year ended January 31
2001 2000 1999
-------------------------------------------------------
(In Thousands)
Current $ - $ - $ -
Deferred - 333 130
-------------------------------------------------------
$ - $ 333 $ 130
=======================================================
Reconciliation of reported income tax expense (benefit) and the amount computed
by applying the statutory U.S. federal income tax rate of 34% to income (loss)
before income taxes is stated below:
Year ended January 31
2001 2000 1999
----------------------------------------------
(In Thousands)
23
Tax provision (benefit) at
federal statutory rate $ (469) $ 260 $ (577)
Change in valuation allowance 653 (13) 758
Change in comprehensive
income portion of
additional - 71 (50)
minimum pension liability
Other (184) 15 (1)
----------------------------------------------
$ - $ 333 $ 130
==============================================
Total income tax refunds for the year ended January 31, 2000 were $1,232,779.
For domestic federal income tax purposes, the net operating loss ("NOL")
carryforwards amount to approximately $6,997,000, which will expire from 2012 to
2021.
At January 31, 2001, the Company's net deferred tax assets are offset in full by
a valuation allowance due largely to uncertainty associated with the Company's
ability to fully use these tax benefits. The Company continues to evaluate the
likelihood that all or part of the deferred tax asset will be realized through
the generation of future taxable earnings. If, in the future, the Company is
able to generate sufficient levels of taxable income, the valuation allowance
will be adjusted accordingly.
4. Pension Plans and Employees' Stock Ownership (ESOP) Plan
The Company has various defined benefit 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.
The following tables set forth aggregated information related to the various
pension plans:
January 31
2001 2000
------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 11,543,687 $ 13,083,841
Service cost 302,222 333,571
Interest cost 707,518 862,915
Actuarial gains (118,000) (2,029,162)
Benefits paid (3,919,016) (707,478)
------------------------------------------
Benefit obligation at end of year $ 8,516,411 $ 11,543,687
==========================================
Change in plan assets
Fair value of plan assets at beginning of year $ 12,387,578 $ 11,895,341
Actual return on plan assets (6,695) 1,147,082
Company contributions 48,542 52,633
Benefits paid (3,919,016) (707,478)
------------------------------------------
Fair value of plan assets at end of year $ 8,510,409 $ 12,387,578
==========================================
Components of prepaid benefit cost
Funded status of the plans $ 6,002 $ 843,891
24
Unrecognized net actuarial gain (181,555) (878,208)
Unrecognized transition obligation 183,777 177,930
Unrecognized prior service cost 40,971 42,695
------------------------------------------
Prepaid benefit cost $ 49,195 $ 186,308
==========================================
January 31
2001 2000 1999
----------------------------------
Weighted-average assumptions
Discount rate 7.5% 7.5% 7.5%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 3.0% 3.0% 5.5%
Year ended January 31
2001 2000 1999
----------------------------------
Components of net periodic benefit cost
Service cost $ 302,222 $ 333,571 $ 302,864
Interest cost 707,518 862,915 871,746
Expected return on plan assets (854,806) (973,441) (993,671)
Amortization of prior service cost 38,470 16,516 15,534
Amortization of transition amount (5,847) (10,969) (14,513)
Recognized net actuarial loss (24,121) 21,261 11,086
-----------------------------------
Benefit cost $ 163,436 $ 249,853 $ 193,046
===================================
The pension plan with an accumulated benefit obligation in excess of plan assets
recorded the following:
2001 2000
-------------- --------------
Projected benefit obligation $ 346,352 $ 384,328
============== ==============
Accumulated benefit obligation $ 419,822 $ 381,657
============== ==============
Fair value of plan assets $ - $ -
============== ==============
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
16,189 and 21,738 unallocated shares is $45,324 and $396,719 at January 31, 2001
and 2000, 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.
25
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 or 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 and the table below.
2001 2000 1999
---- ---- ----
Net income (loss) $ (1,380,488) $ 356,139 $ (1,721,893)
Net adjustments to arrive at
comprehensive income (loss) - (508,499) (348,192)
----------------------------------------------
Comprehensive income (loss) $ (1,380,488) $ (152,360) $ (2,070,085)
==============================================
6. Operating Leases
The Company leases office space and equipment pursuant to various noncancelable
operating lease agreements. Total rent expense approximated $671,000, $615,000,
and $286,000 for fiscal 2001, 2000, and 1999 respectively. The lease term for
the office space extends through April, 2006 with monthly lease payments of
$11,966. 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, 2001 are as follows:
Office Equipment Total
---------------------------------------------------
2002 $ 146,980 $ 409,328 $ 556,308
2003 151,422 146,000 297,422
2004 155,999 9,397 165,396
2005 160,714 - 160,714
2006 55,190 - 55,190
---------------------------------------------------
$ 670,305 $ 564,725 $ 1,235,030
===================================================
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.
26
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.
Financial information relating to reportable segments is as follows:
Domestic International Ohio Art Strydel
Toy Toy Diversified Diversified Total
----------------------------------------------------------------------------------
Year ended January 31, 2001:
Net sales to external customers $ 21,803,380 $ 6,824,242 $ 13,894,558 $ 3,424,652 $ 45,946,832
Intersegment revenues 113,038 - - 972,175 1,085,213
Interest expense (975,120) (165,617) (372,638) (225,267) (1,738,642)
Provision for depreciation and
amortization (715,226) - (965,226) (159,323) (1,839,775)
Segment profit (loss) (689,981) (228,718) (282,197) (179,592) (1,380,488)
Segment assets 13,591,137 2,166,906 10,123,476 3,896,600 29,778,119
Expenditures for long-lived 427,267 - 53,726 141,914 622,907
assets
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) 498,275 (959,646) 75,240 79,476 (306,655)
Segment assets 17,848,194 1,376,461 11,805,632 2,904,503 33,934,790
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) (3,666,590) (613,868) 2,485,321 (225) (1,795,362)
Segment assets 21,911,046 2,006,326 11,967,205 2,783,073 38,667,650
Expenditures for long-lived 238,415 - 936,372 76,853 1,251,640
assets
27
The following are reconciliations between total segment and consolidated totals
for revenues, income (loss) before income taxes, and assets:
Year Ended January 31
2001 2000 1999
--------------------------------------------------------
Revenues:
Total external net sales for reportable
segments $ 45,946,832 $ 52,538,669 $ 45,936,531
Other revenues 726,959 2,238,459 1,212,167
--------------------------------------------------------
Total consolidated revenues $ 46,673,791 $ 54,777,128 $ 47,148,698
========================================================
Profit and loss:
Total loss for reportable segments $ (1,380,488) $ (306,655) $ (1,795,362)
Other profit (loss) - elimination of
intersegment profit (loss) 7,468 83,794
Unallocated amounts:
Gain on sale of marketable equity
security 988,326 119,675
--------------------------------------------------------
Income (loss) before income taxes $ (1,380,488) $ 689,139 $ (1,591,893)
========================================================
Assets:
Total assets for reportable segments $ 29,778,121 $ 33,934,790 $ 38,667,650
Elimination of:
Intercompany receivables (4,591,634) (3,331,635) (3,092,325)
Intercompany profit in inventory (19,767) (19,767) (27,235)
Investment in subsidiaries (2,222,653) (2,222,653) (2,222,653)
--------------------------------------------------------
Total consolidated assets $ 22,944,067 $ 28,360,735 $ 33,325,437
========================================================
A substantial portion 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 $110,000, $198,000, and $4,000 during fiscal 2001,
2000, and 1999, respectively. Net domestic toy segment sales includes
approximately $11,234,000, $14,132,000, and $12,487,000 for 2001, 2000, and
1999, respectively, to two major retailers. Amounts included in accounts
28
receivable for these two customers were $1,719,000 and $2,747,000 at January 31,
2001 and 2000 respectively.
8. Statement of Cash Flows
Noncash transactions excluded from the statement of cash flows:
2001 2000 1999
---- ---- ----
Refinancing of long term debt due
or callable within one year $13,157,116 - -
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of operations
for the years ended January 31, 2001 and 2000 (as restated) (in thousands of
dollars, except per share amounts):
Net
Income
(Loss) Per
2001 Cost of Net Share of
Products Income Common
Net Sales Sold (Loss) Stock
--------- ---- ------ -----
April 30 $ 9,091 $7,644 $(1,390) $(1.61)
July 31 12,338 9,341 (305) (.35)
October 31 14,639 10,357 612 .71
January 31 9,879 7,169 (297) (.34)
-------- ------- -------- -------
TOTALS $45,947 $34,511 $(1,380) $(1.59)
======= ======= ======== =======
2000
April 30 $10,497 $7,942 $ 256 $ .30
July 31 12,221 9,580 (921) (1.06)
October 31 18,324 12,968 852 .98
January 31 11,497 8,939 169 .19
------- ------- ------ ------
29
TOTALS $52,539 $39,429 $ 356 $ .41
======= ======= ====== ======
The Company 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.
PART III
Item 10. Directors and Executive Officers of the Company
(a) Identification of Directors
The identification of directors and all persons nominated to become directors is
included in the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders as filed with the Securities and Exchange Commission and is
incorporated herein by reference.
(b) Executive Officers of the Company
First Year
Present Position Elected To
Name Age With Company Present Position
---- --- ------------ ----------------
William C. Killgallon 62 Chairman 1989
Martin L. Killgallon II 53 President 1989
J. D. Kneipp 56 Chief Financial Officer 1999
G. E. Thomas 41 Vice President Sales 1996
30
E. A. Clark, Jr. 60 Vice President 2000
Manufacturing
J. D. Wood 47 Vice President 2000
Product Development
W. E. Shaffer 78 Secretary 1995
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. J. D. Kneipp was elected Chief Financial Officer in
December 1999. He had previously served as 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. E. A. Clark, Jr. was
elected Vice President of Manufacturing in July 2000. He had previously served
as General Manager of Manufacturing Operations since April of 1999 and as Labor
Relations Coordinator since his date of employment in May 1995. J. D. Wood was
elected Vice President of Research and Development in July 2000. She had
previously served as Director of the Design Group since her date of employment
in November 1995. 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 Company's Proxy
Statement for the 2001 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 Company's Proxy
Statement for the 2001 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.
31
(1) Reports of Independent Auditors
The consolidated financial statements of The Ohio Art Company and
subsidiaries:
Consolidated Balance Sheets - January 31, 2001 and January 31, 2000
Consolidated Statements of Operations - Years ended January 31,
2001, January 31, 2000 and January 31, 1999
Consolidated Statements of Stockholders' Equity - Years ended
January 31, 2001, January 31, 2000 and January 31, 1999
Consolidated Statements of Cash Flow - Years ended January 31,
2001, January 31, 2000 and January 31, 1999
Notes to Consolidated Financial Statements - January 31, 2001
(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 34
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 November 3, 2000 was filed to announce
that the Company's principal accountants, PricewaterhouseCoopers LLP
(PwC), had sold their Fort Wayne, Indiana practice to Crowe, Chizek and
Company LLP (CC). Effective November 3, 2000, the Company terminated its
appointment of PwC and approved the appointment of CC as its principal
accountants. A letter from PwC indicating their response to the statements
made by the Company in Form 8-K 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.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE OHIO ART COMPANY
Date: April 30, 2001 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 Company
and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/William C. Killgallon Chairman of the Board Principal April 30, 2001
Executive Officer and Director
/s/Martin L. Killgallon II President and Director April 30, 2001
Martin L. Killgallon
/s/Jerry D. Kneipp Chief Financial Officer April 30, 2001
Jerry D. Kneipp
33
/s/ Joseph A. Bockerstette Director April 30, 2001
Joseph A. Bockerstette
/s/Neil H. Borden, Jr. Director April 30, 2001
Neil H . Borden, Jr.
/s/Frank L. Gallucci Director April 30, 2001
Frank L. Gallucci
/s/Wayne E. Shaffer Secretary and Director April 30, 2001
Wayne E. Shaffer
34
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, 2001:
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $449,000 $136,197 $109,908 $475,289
=============================================================================
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
=============================================================================
(1) Uncollectible accounts charged off and collection costs, less recoveries.
35
THE OHIO ART COMPANY AND SUBSIDIARIES EXHIBIT INDEX
Exhibit # Page
- --------- ----
3(i)(a) Articles of Incorporation as amended, filed as --
Exhibit 3(a) to Company'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 --
Company'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 Company'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 Company'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 Company'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 Company's Form 8-K dated April 17, 2000 and
incorporated herein by reference.
18 Letter regarding a change in accounting principles 36
21 Subsidiaries of the Company. 37