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, 1999.
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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(Sate 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 registered
Common Stock, $1 Par Value 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 _____
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 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 May 3, 1999 was approximately $4,400,000 (based upon the
closing price on The American Stock Exchange). The number of shares outstanding
of the issuer's Common Stock as of May 3 and August 27, 1999 was 886,784. It is
estimated that 32% of such 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.
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, 1999.
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, 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.
CLASS Year Ended
1/31/99 12/31/97 12/31/96
Writing and Drawing Toys.............. 29% 51% 49%
Activity Toys......................... 15% 10% 16%
Small Dolls........................... 23% 0% 0%
Diversified Products.................. 33% 39% 35%
The Company's fiscal year was changed from December 31 to January 31
effective in 1999.
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 1998 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.
Sales of the 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
60% to 70% of its sales have been made in the last six months of the calendar
year. Second half shipments in the last two fiscal years amounted to 61% and 64%
of annual sales respectively. Second half sales have shown particular strength
in recent years due to the introduction of new products supported with
television advertising concentrated in the primary selling season prior to
Christmas. The Company's customers in recent years tend to order later in the
year in an effort to control inventories, particularly in years with uncertain
economic conditions. The Diversified Products 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 order
backlog believed to be firm during the first calendar quarter.
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-August were:
1999 - approximately $22,900,000
1998 - approximately $30,900,000
However, approximately $15,200,000 of the mid-August 1998 orders were
cancelled in mid-fourth quarter by major toy retailers.
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
able to procure sufficient quantities of certain raw materials to meet its
needs, adequate supplies have been available in recent years.
Registrant imports a variety of plastic and miscellaneous parts as well
as finished products from China and Thailand as well as steel from Japan for its
lithography business. In the fiscal year ended January 31, 1999, these imports
accounted for approximately 20% 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 six 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 proprietary 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 for
manufacture and/or distribution of its products outside the United States.
Although international sales decreased in 1996 and 1997, the trend reversed
again in the fiscal year ended January 31, 1999 as new relationships in Europe
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, 1999 and December 31, 1997 and 1996 is not
as indicative of activity as the average number of employees during the year.
The average number of employees has been: 1999 - 323; 1997 - 303; 1996 - 315.
The Company has installed and upgraded equipment to control the
possible discharge of materials into the environment by its lithography
operations at the Bryan, Ohio manufacturing facility. The expense of operation
and depreciation of installed equipment have increased manufacturing costs for
the lithography operations, but these cost increases have not impacted the
competitive position of the Company.
Because of increased demand from its lithography customers, the Company
expanded its Lithography department during 1996 by purchasing a new lithography
system. The cost of the equipment, as well as modifications to the existing
plant amounted to approximately $6.6 million, with over $6.0 million capitalized
in 1996. The system was placed in service in 1997.
Registrant maintains its own design and development staff and, in
addition, utilizes contractual arrangements with outside development groups.
Approximately $710,000 as of January 31, 1999, $1,100,000 in 1997, and $610,000
in 1996, was spent on such activities. The increase in expense for 1997 was
because of a decision to use outside development groups to introduce product
concepts, engineer and build working prototypes, and refine the final product.
In 1997, approximately $400,000 was spent with two outside development groups.
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, 1999 included approximately $7,100,000 ($5,000,000
and $3,800,000 for the years ended December 31, 1997 and 1996, respectively) of
sales to Wal-Mart and sales to Toys R Us of $5,400,000 ($4,200,000 in 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 63% 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 50,000 square feet of office, 725,000 square feet of production,
and 235,000 square feet of warehouse space. Registrant also owns a plant at
Stryker, Ohio, which consists of approximately 134,000 square feet. The majority
of Registrant's facilities are of masonry construction and are adequate for its
present operation. Production, other than metal lithography, which is normally
scheduled on a 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.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
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, 1999 was 691. 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 1999
and 1997 by quarter, were as follows:
Fiscal Year Ended January 31, 1999
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Sales Prices Income Dividend
High Low (Loss) Declared
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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
Fiscal Year Ended December 31, 1997
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Sales Prices Income Dividend
High Low (Loss) Declared
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Jan - Mar...... $19.75 $15.50 $(1.34) $.08
Apr - Jun...... 20.00 15.88 (2.60) .04
Jul - Sep...... 17.25 14.75 (.31) .04
Oct - Dec...... 15.25 14.63 (1.43) .04
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, 1999, AND
DECEMBER 31, 1997, 1996, 1995, and 1994.
Amounts in thousands, except per share data
DECEMBER 31
JAN 31, --------------------------------------------------
1999 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Sales and Other
Income ............................... $ 47,149 $ 37,081 $ 37,527 $ 49,230 $ 41,073
Net Income (Loss) ...................... (1,827) (5,144) (1,701) 1,961 824
Net Income (Loss) per Share of Common
Stock(a) .......................... (2.10) (5.68) (1.86) 2.04 .83
Dividends Declares per Share of Common
Stock(b) .......................... .16 .20 .25 .24 .15
Book Value per Share of Common Stock (c) 5.82 9.71 15.24 17.51 15.97
Average Number of Shares Outstanding ... 869,307 904,903 915,630 963,048 994,154
Stockholders of Record (d) ............. 691 621 594 600 660
Working Capital ........................ $ (8,479) $ 8,207 $8,318 $ 10,375 $ 9,311
Property, Right and
Equipment (net) ...................... 11,478 12,241 11,465 5,464 5,544
Total Assets ........................... 30,773 31,731 28,083 25,572 25,174
Long-Term Obligations .................. 777 15,073 8,362 667 455
Stockholders' Equity ................... 5,164 8,668 14,055 16,832 15,886
Average Number of Employees ............ 323 303 315 304 302
Note: All prior periods have been restated to reflect the two for one stock split in 1996.
(a) Based upon 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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATIONS
The following table sets forth for the periods indicated selected
expense and earnings items, the percentage relationship to net sales, and the
percentage increase or decrease of such items as compared to the corresponding
period:
JAN 31, DEC 31. DEC 31, JAN 31, DEC 31,
1999 1997 1996 1999 1997
---- ---- ---- ---- ----
(Dollars in thousands) %Increase (Decrease)
Net Sales ......................... $ 45,937 $ 36,291 $ 36,420 26.6% (.4)%
Gross Margin ...................... 14,756 7,513 8,855 96.4% (15.2)%
Percent of Net Sales .............. 32.1% 20.7% 24.3%
Selling, Administrative and General $ 15,997 $ 12,260 $ 12,356 30.5% (.8)%
Percent of Net Sales .............. 34.8% 33.8% 33.9%
Loss from Operations .............. $ 28 $ 4,756 $ 2,394 99.4% (98.7)%
Percent of Net Sales .............. .1% 13.1% 6.6%
Interest Expense .................. $ 1,668 $ 1,124 $ 237 48.4% 374.3%
Percent of Net Sales .............. 3.6% 3.1% .7%
Income Tax Expense (Credit) ....... $ 130 $ (736) $ (930) (117.7%) 20.9%
Percent of Net Sales .............. 3% (2.0)% (2.6)%
Net Loss .......................... $ 1,827 $ 5,144 $ 1,701 64.5% (202.4)%
Percent of Net Sales .............. 4.0% 14.2% 4.7%
Net sales increased by approximately $9,600,000 for the twelve months
ended January 31, 1999 (1999) as compared to the twelve months ended December
31, 1997 (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.
Sales were flat in 1997 as compared to 1996 as the increase in sales for
the Diversified Products segments of approximately $1,400,000 was offset by the
loss of sales of approximately $1,500,000 for the toy segments.
The decrease in sales for the toy segments was primarily a decrease in
the sale of basketball games which decreased approximately $1,200,000 from 1996
to 1997, as major retailers did not list our basketball games. Also contributing
to the decrease in sales was the voluntary recall of the Splash Off Water
Rocket, a product which was introduced in early 1997. Potential sales of this
product in 1997 were eliminated due to the recall. It had been selling well at
retail prior to the voluntary recall.
The International Toy segment sales, foreign royalty income, and direct
shipments from foreign manufacturers to foreign customers included in
consolidated revenues amounted to approximately $6,640,000, $3,360,000, and
$4,222,000 in 1999, 1997, and 1996 respectively.
The decrease in revenues for the international toy business in 1997 from
1996 was the inability to develop key business relationships with overseas
partners because our products were not well received on the international
market.
The 1997 increase in sales for the Diversified Products segments of
approximately $1,400,000 consists of an increase of approximately $1,600,000 for
the Ohio Art Diversified Products segment, and a decrease of approximately
$200,000 for the Strydel Diversified Products segment injection molding
facility. Recognizing an opportunity to increase sales and profits in our
Lithography area, the Company expanded the lithography capacity by installing a
new lithography line in 1996. This resulted in the 1997 increased sales in the
Ohio Art Diversified Products segment.
Net revenues for the one-month period ended January 31, 1998 were flat
compared to the one-month period ended January 31, 1997, but resulted in a loss
after taxes of $1,084,000 versus a loss after taxes of $505,000 for the similar
period of 1997, or an increase of $579,000. In January 1997, a tax credit of
$272,000 was recorded in anticipation of future profits or a loss carryback if
the full year resulted in a loss. However, in January 1998, no tax credit was
recorded since losses could no longer be carried back for tax purposes. Selling
expenses increased approximately $176,000 for the one-month period ended January
31, 1998 as compared to the one-month period ended January 31, 1997. Of this
increase, outside product development expenses increased approximately $145,000
all of which was related to the bend sensor technology utilized in our Bull
Frogg interactive plush toy.
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.
The Company's gross profit margin percentage in 1997 (20.7%) decreased
from the previous year (24.3%). Unabsorbed overhead expense, primarily at the
Bryan, Ohio facility, increased approximately $2,400,000 from the 1996 level and
reduced the gross profit margin by approximately 6.7%. If unabsorbed overhead
expense had not increased, the gross profit margin percentage would have
increased to 27.4%, or 3.1% higher than the previous year.
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. Although advertising expense
would increase because the Company tries to control advertising expense to a
percentage of sales, 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.
Selling, administrative, and general expenses were at the same level in
1997 as compared to 1996, both in dollars and as a percent of net sales.
Advertising expense increased approximately $400,000, but was offset by a
decrease in royalty expense of approximately $400,000. Approximately $600,000
was invested in an advertising program for Splash Off Water Rocket in 1997 which
did not generate the level of sales anticipated because of the voluntary recall
of this product in the second quarter of 1997. Royalty expense decreased as the
sales of products subject to royalty decreased.
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.
Interest expense increased significantly in 1997 ($1,124,000) from 1996
($237,000) primarily due to the purchase of a new lithography system in 1996 for
approximately $6,000,000 which was financed through borrowings. In addition, the
losses generated in 1996 and 1997 increased the level of debt outstanding
throughout 1997.
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.
The 1997 loss resulted from reduced gross margins as previously
explained, the voluntary recall of the Splash Off Water Rocket, increased
interest expense, and a one time non-recurring charge of approximately $800,000
to write off the remaining value of goodwill.
Note 3 of Notes to Consolidated Financial Statements presents the
components of the income taxes (credits) for 1999, 1997, and 1996, and the
reconciliation of taxes at the statutory rate to the Company's income tax
expense.
LIQUIDITY AND SOURCES OF CAPITAL
Because of the seasonal nature of the toy business, the Company normally
requires a substantial build-up in working capital from the beginning of the
year to a seasonal peak during the third and early part of the fourth calendar
quarters. Extended payment terms are in general use in the toy industry to
encourage earlier shipments of merchandise required for selling during the
Christmas season. As a result, the Company's working capital requirements
typically increase with seasonal shipments as collection of a substantial
portion of accounts receivable is deferred until the fourth calendar quarter.
This increased working capital requirement has been financed in recent years by
bank borrowings under both a revolving line-of-credit and by short-term
lines-of-credit.
The Company's current ratio at 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 was not in
compliance with the loan covenants of the bank agreements and the bank would not
furnish waivers at January 31, 1999. The Company's lender formally declared a
default on April 30. 1999. The Company is currently negotiating with several
lenders to replace its current lender and obtain financing. The Company believes
that it will be able to do so.
The Company's current ratio at December 31, 1997 decreased to 2.1 to 1
from 2.6 to 1 at December 31, 1996. The decrease is attributable to the current
portion of long-term debt, based upon 1998 maturities ($1,000,000) and
anticipated paydowns of the revolver. At December 31, 1996, this debt had been
carried under the revolver agreement and classified as long-term. In addition,
accrued advertising at December 31, 1997 was approximately $1,000,000 higher
than at December 31, 1996 as a payment for television advertising was not made
until February 1998 in comparison to pre-year-end payments made in the prior
year. Somewhat offsetting these two negative impacts to the current ratio was an
increase of approximately $2,000,000 in accounts receivable. Shipments in
December 1997 were approximately $1,800,000 higher than December 1996 and
obviously were not collected by December 31, 1997.
In 1996, the Company began expanding its Lithography capacity by
purchasing a new lithography system. The cost of the equipment, as well as
modifications to the existing plant amounted to approximately $6.6 million, with
over $6.0 million capitalized in 1996, but not placed in service until 1997. In
typical years, investing activities consist primarily in the purchase of
tooling, equipment, and major repairs to existing facilities.
On May 20, 1998, the Company amended its existing three-year $13,000,000
Revolving Credit Agreement to extend the three-year term until May 2001. The
Bank also increased the line to $18,000,000. On December 23, 1998, the Bank met
with the Company and announced that they 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
by the Company's ESOP.
On June 27, 1997, the Company amended its existing three-year
$10,000,000 Revolving Credit Agreement to extend the three-year term until June,
2000 and increase the line to $13,000,000. The Company also entered into a
$6,000,000 five-year term loan secured by certain lithography equipment. Maximum
borrowings during 1997, including the term loan, amounted to $17,600,000 with an
outstanding balance at December 31, 1997 of $10,000,000 on the Revolving Credit
Agreement, approximately $5,700,000 on the term loan, and $363,000 in borrowings
by the Company's ESOP.
The decrease in the carryover of cash as well as the classification of
debt as a current liability did have a negative impact on liquidity during the
first and second quarter of 1999. The Company is now negotiating with lenders to
obtain financing to pay off the existing bank and provide additional funds for
operations.
During 1999, the Company has not borrowed additional funds from any
lending source, but has been operating on cash receipts received from operations
which have been sufficient to the date of this filing. The Company intends as a
result of cost savings from operations to continue without additional bank
borrowing until new financing is obtained.
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
responded and is negotiating a settlement and does not know whether the proposal
will be accepted by the EPA. The Company believes that the proposed settlement
will not have material adverse impact 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
The Company's current labor contracts and management compensation
policies have lessened the impact that wage inflation has on operations because
compensation above base wages has been based on overall Company performance.
Although the Company continued to be impacted by increased costs of materials
and services during the year ended January 31, 1999, 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 1999, 1997, and 1996 resulted in only a small
portion of these purchases being committed in foreign currencies and therefore
only minor exposure to exchange risk.
Some of the primary raw materials used in the manufacture of the
Company's products are petrochemical derivative plastics. Costs of these raw
materials are closely tied to the price of oil. Costs increased in 1997 from
1996 levels but decreased by the end of 1997 and remained relatively constant
throughout 1998. It is anticipated that there will be a minor (less than 5%)
increase in plastic prices in 1999. During a period of rapidly rising costs the
Company is not able to fully recover these cost increases through price
increases due to competitive conditions and trade practices.
IMPACT OF YEAR 2000
The Company's plan to resolve the Year 2000 issue has been segregated
into the following six areas:
Mainframe Computer System. Based on an assessment that was made in 1997, the
Company determined that it would be necessary to upgrade its current version of
software used on its mainframe computer system in order to be Year 2000
compliant. Since only minor modifications will be made internally to the
packaged software, implementation of the Year 2000 compliant software version
should be relatively straightforward. The Company has upgraded its hardware to
handle the new software. Costs incurred to date, the majority of which relate to
the mainframe computer and software, approximate $160,000, the majority of which
has been financed under an operating lease, will be expensed monthly over the
next two years. Future costs to implement the remaining phases are estimated to
be $50,000 to $100,000, although it is difficult to predict what problems the
Company will encounter. Previously, the current version of software was tested
by forwarding the dates into the year 2000, and the software did run, although
the year 00 came before the year 99. The major problems occurring because of
this would be in the Accounts Payable and Accounts Receivable areas. The
potential solution would be to double the staff in each department, from two
employees to four employees, to manually sort the dates for approximately three
to four months until the majority of the 99 dates are eliminated. However, there
is the risk, that the current updated software may not run at all virtually
shutting down the Company. If this remote possibility would happen, the Company
would revert to the older software version and hire the additional four people.
Personal Computers. The Company has also evaluated the personal computers and
related software used within the Company and, with minor upgrades, it is
believed there will be no problems experienced or if there are, they will be
minor and isolated. Approximately three to six personal computers must be
upgraded or replaced, at a cost of $5,000 to $10,000. The Company will back-up
all data on each computer just prior to January 1, 2000, and in the unlikely
event that certain computers will not function properly, the data could be run
on another personal computer.
Operating Equipment with Embedded Chips or Software. The Company has completed
an assessment of its manufacturing facilities for potential problems with
equipment. The Company has isolated any significant problems to the four-color
lithography line which was installed in 1997. The manufacturer of the equipment
is located in Germany, and they were at the Bryan facility during the April May
time frame to test and implement any changes needed to insure that the equipment
will be operational in January of 2000. Testing was performed and it appears
that no problems will be encountered. In the unlikely event that the equipment
would not function, the Company believes that most of the work scheduled for
this machine could be run on older equipment which is not programmable, since
the lithography department is not at full capacity in January.
Products. Based on a review of its product line, the Company has determined that
all of the products it has sold and will continue to sell do not require
remediation to be Year 2000 compliant. Accordingly, the Company does not believe
that the Year 2000 presents any exposure as it relates to the Company's
products.
Third Party Suppliers. The Company has initiated formal communications with all
of its significant suppliers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. There is no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's systems. However, the majority of
the Company's products are manufactured overseas, and the Company has sent
representatives to these facilities. These manufacturers do not have
sophisticated computer systems, and generally rely on personal computers. If
these personal computers are not Year 2000 compliant, the manufacturers have
assured the Company that they could still supply the products needed. However,
if they could not supply the products needed, it would have a material impact on
the Company.
Third Party Customers. The Company's top six customers account for approximately
50% of sales, and the major interface with these customers is the transmission
of orders via E.D.I. The Company has tested and implemented changes needed and
feels confident that January 2000 will not pose a problem. G.E. Information
Systems has certified that the Company is Year 2000 compliant on E.D.I. Costs
incurred to date approximate $1,000 to $2,000 and were charged to operations.
Future costs are estimated at $1,000 to $2,000 if additional customers request
that their E.D.I. systems be tested.
Item 7A. Market Risk Disclosures
The Company's earnings and cash flow are not directly impacted 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 an
unrelated party overseas and the price of the products is influenced by the
foreign exchange rate.
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors
Board of Directors and Stockholders
The Ohio Art Company
We have audited the accompanying consolidated balance sheets of The Ohio Art
Company and subsidiaries as of January 31, 1999 and December 31, 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended January 31, 1999, the one-month period ended January
31, 1998, and each of the two years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14a. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Ohio Art
Company and subsidiaries at January 31, 1999 and December 31, 1997 and the
consolidated results of their operations and their cash flows for the year ended
January 31, 1999, the one-month period ended January 31, 1998 and each of the
two years in the period ended December 31, 1997 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.
The accompanying financial statements have been prepared assuming that The Ohio
Art Company will continue as a going concern. As more fully described in Note 2,
the Company has incurred recurring operating losses and has a working capital
deficiency. In addition, the Company has not complied with certain covenants of
its loan agreement with its existing lenders. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Toledo, Ohio
March 12, 1999
CONSOLIDATED FINANCIAL STATEMENTS
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets
January 31 December 31
1999 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 182,329 $ 1,846,404
Accounts receivable, less allowances of
$515,000 in 1999 and $415,000 in 1997 6,582,457 8,295,072
Income taxes recoverable 1,034,734 1,066,346
Inventories:
Finished products 7,450,360 3,581,942
In process 497,894 312,434
Materials and purchased parts 2,220,077 2,356,891
----------- -----------
Inventories at FIFO 10,168,331 6,251,267
Less adjustment to reduce inventories to
last-in, first-out (LIFO) method 2,552,058 2,447,285
----------- -----------
Inventories at LIFO 7,616,273 3,803,982
Prepaid expenses 937,741 824,177
----------- -----------
Total current assets 16,353,534 15,835,981
Other assets:
Cash value of life insurance, less policy loans
of $455,076 in 1999 and $437,094 in 1997 445,914 649,649
Marketable equity security 1,312,770 1,590,563
Deposits and advances 245,260 181,242
Pension 937,611 871,731
----------- -----------
2,941,555 3,293,185
Property, plant and equipment:
Land 164,626 164,626
Land improvements 153,494 135,261
Leasehold improvements 132,920 132,920
Buildings and building equipment 7,485,543 7,103,551
Machinery and equipment 29,275,979 28,441,894
----------- -----------
37,212,562 35,978,252
Less allowances for depreciation and amortization 25,734,272 23,736,776
----------- -----------
11,478,290 12,241,476
----------- -----------
$30,773,379 $31,370,642
=========== ===========
See accompanying notes.
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets (continued)
January 31 December 31
1999 1997
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,870,300 $ 3,609,799
Employees' compensation and amounts withheld therefrom 392,626 660,115
Taxes, other than income taxes 339,090 426,026
Other liabilities 1,394,220 1,338,633
Dividend payable 35,452 35,691
Long-term debt due or callable within one year 17,800,792 1,559,000
------------ ------------
Total current liabilities 24,832,480 7,629,264
Long-term obligations, less amounts due or callable within
one year 777,274 15,073,338
Stockholders' equity:
Common Stock, par value $1.00 per share:
Authorized - 1,935,552 shares
Outstanding - 886,784 shares in 1999 and 892,271
shares in 1997 (excluding 72,976 and 67,489
treasury shares, respectively) 886,784 892,271
Additional paid-in capital 196,898 204,671
Retained earnings 3,934,444 7,145,602
Accumulated other comprehensive income, net of tax 508,499 788,496
Reduction for ESOP loan guarantee (363,000) (363,000)
------------ ------------
Total stockholders' equity 5,163,625 8,668,040
------------ ------------
$ 30,773,379 $ 31,370,642
============ ============
See accompanying notes.
The Ohio Art Company and Subsidiaries
Consolidated Statements of Operations
Year ended
-------------------------------------------- Month ended
January 31 December 31 January 31,
1999 1997 1996 1998
------------ ------------ ------------ ------------
Net sales $ 45,936,531 $ 36,290,922 $ 36,419,719 $ 1,415,598
Royalty income 902,265 521,126 705,966 13,221
Other income 309,902 268,478 401,507 12,933
------------ ------------ ------------ ------------
47,148,698 37,080,526 37,527,192 1,441,752
============ ============ ============ ============
Costs and expenses:
Cost of products sold 31,180,536 28,777,624 27,565,050 1,554,397
Selling, general and administrative 15,996,639 12,259,562 12,355,881 825,923
Interest 1,668,189 1,124,149 237,193 110,834
Charge for impairment of goodwill -- 799,320 -- --
------------ ------------ ------------ ------------
48,845,364 42,960,655 40,158,124 2,491,154
------------ ------------ ------------ ------------
Loss before income taxes (1,696,666) (5,880,129) (2,630,932) (1,049,402)
Income taxes (credit) 130,000 (736,000) (929,847) 35,000
------------ ------------ ------------ ------------
Net loss $ (1,826,666) $ (5,144,129) $ (1,701,085) $ (1,084,402)
============ ============ ============ ============
Net loss per share $ (2.10) $ (5.68) $ (1.86) $ (1.19)
============ ============ ============ ============
Average number of shares outstanding 869,307 904,903 915,630 913,914
See accompanying notes.
The Ohio Art Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional
Common Stock Paid-In Capital Retained Earnings
-----------------------------------------------------------
Balances at January 1, 1996 $480,633 $732,995 $15,573,728
Net loss (1,701,085)
Other comprehensive loss, net of tax:
Unrealized gain on marketable equity security of
$64,452 net of reclassification adjustment for
gain of $79,384 included in net loss
Pension liability adjustment
Comprehensive loss
Cash dividends declared ($.25 per share) (234,281)
Stock split 470,751 (470,751)
Purchase of 29,107 treasury shares (29,107) (36,936) (749,552)
-----------------------------------------------------------
Balances at December 31, 1996 922,277 225,308 12,888,810
Net loss (5,144,129)
Other comprehensive loss, net of tax:
Unrealized gain on marketable equity security
Pension liability adjustment
Comprehensive loss
Cash dividends declared ($.20 per share) (180,673)
Purchase of 30,006 treasury shares (30,006) (20,637) (418,406)
-----------------------------------------------------------
Balances at December 31, 1997 892,271 204,671 7,145,602
Net loss for the month (1,084,402)
Other comprehensive loss, net of tax:
Unrealized gain on marketable equity
security
Comprehensive loss
Purchase of 163 treasury shares (163) (105) (2,126)
-----------------------------------------------------------
Balances at January 31, 1998 892,108 204,566 6,059,074
Accumulated Other Reduction for
Comprehensive Income ESOP Loan Guaranty Totals
-----------------------------------------------------------
Balances at January 1, 1996 $407,587 $ (363,000) $16,831,943
Net loss (1,701,085)
Other comprehensive loss, net of tax:
Unrealized gain on marketable equity security of
$64,452 net of reclassification adjustment for
gain of $79,384 included in net loss (14,932) (14,932)
Pension liability adjustment (10,565) (10,565)
------------
Comprehensive loss (1,726,582)
Cash dividends declared ($.25 per share) (234,281)
Stock split
Purchase of 29,107 treasury shares (815,595)
-----------------------------------------------------------
Balances at December 31, 1996 382,090 (363,000) 14,055,485
Net loss (5,144,129)
Other comprehensive 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)
Purchase of 30,006 treasury shares (469,049)
-----------------------------------------------------------
Balances at December 31, 1997 788,496 (363,000) 8,668,040
Net loss for the month (1,084,402)
Other comprehensive loss, net of tax:
Unrealized gain on marketable equity
security 68,195 68,195
------------
Comprehensive loss (1,016,207)
Purchase of 163 treasury shares (2,394)
-----------------------------------------------------------
Balances at January 31, 1998 856,691 (363,000) 7,649,439
The Ohio Art Company and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
Additional
Common Stock Paid-In Capital Retained Earnings
-----------------------------------------------------------
Net loss (1,826,666)
Other comprehensive loss, net of tax:
Unrealized loss on marketable equity security,
net of reclassification adjustment for gain
of $78,985 included in net loss
Pension liability adjustment
Comprehensive loss
Cash dividends declared ($.16 per share) (142,485)
Purchase of 5,324 treasury shares (5,324) (7,668) (155,479)
------- ------- ---------
Balances at January 31, 1999 $886,784 $196,898 $ 3,934,444
======== ======== ===========
Accumulated Other
Comprehensive Reduction for
Income ESOP Loan Guaranty Totals
-----------------------------------------------------------
Net loss (1,826,666)
Other comprehensive loss, net of tax:
Unrealized loss on marketable equity security,
net of reclassification adjustment for gain
of $78,985 included in net loss (253,086) (253,086)
Pension liability adjustment (95,106) (95,106)
--------------
Comprehensive loss (2,174,858)
Cash dividends declared ($.16 per share) (142,485)
Purchase of 5,324 treasury shares (168,471)
---------
Balances at January 31, 1999 $508,499 $(363,000) $ 5,163,625
======== ========== ===========
See accompanying notes.
The Ohio Art Company and Subsidiaries
Consolidated Statements of Cash Flows
Year ended
---------------------------------------------- Month ended
January 31 December 31 January 31
1999 1997 1996 1998
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $ (1,826,666) $ (5,144,129) $ (1,701,085) $ (1,084,402)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 1,968,770 1,643,777 1,584,729 157,448
Deferred federal income taxes 130,000 (272,000) (204,900) 35,000
Gain on sale of marketable equity security (119,675) -- (120,384) --
Provision for losses on accounts receivable 104,014 108,808 29,659 20,141
Scholarship obligation expense 27,228 43,132 3,638 2,473
Gain on sale of property, plant and equipment (11,396) (14,709) (55,782) --
Charge for impairment of goodwill -- 799,320 -- --
Changes in operating assets and liabilities:
Accounts receivable (1,569,043) (2,181,948) 871,673 3,157,503
Inventories (3,327,823) 486,228 1,792,323 (484,468)
Accounts payable 944,416 268,005 (417,508) (25,103)
Prepaid expense, other assets, accrued expenses
and other liabilities (283,222) 241,633 (2,880,682) 51,449
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (3,963,397) (4,021,883) (1,098,319) 1,830,041
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,251,640) (2,434,663) (7,584,653) (140,746)
Changes in net cash value of life insurance 205,234 (60,441) (45,509) (1,499)
Proceeds on sale of marketable equity security 156,990 -- 172,800 --
Proceeds from sale of property, plant and equipment 40,750 50,211 75,250 --
Net cash used in investing activities (848,666) (2,444,893) (7,382,112) (142,245)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Borrowings 17,600,000 27,500,000 38,100,000 1,200,000
Repayments (15,072,645) (19,613,720) (30,300,000) (1,953,574)
Purchase of treasury shares (168,471) (469,049) (815,595) --
Cash dividends paid (142,724) (181,886) (226,215) (2,394)
Net cash provided by (used in) financing activities 2,216,160 7,235,345 6,758,190 (755,968)
------------ ------------ ------------ ------------
Cash and cash equivalents:
Increase (decrease) during year $ (2,595,903) $ 768,569 $ (1,722,241) $ 931,828
At beginning of year 2,778,232 1,077,835 2,800,076 1,846,404
------------ ------------ ------------ ------------
Cash and cash equivalents at end of year $ 182,329 $ 1,846,404 $ 1,077,835 $ 2,778,232
============ ============ ============ ============
See accompanying notes.
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1999
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, 1999 and December 31, 1997 and 1996 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
is no longer manufacturing products related to this acquisition.
Revenue Recognition
Revenue is recognized when products are shipped to customers. Royalty income is
recognized as earned.
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (continued)
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 $5,973,000, $3,283,000, and
$2,838,000 for the years ended January 31, 1999 and December 31, 1997 and 1996,
respectively, and $90,000 for the one month ended January 31, 1998. Prepaid
advertising and sales promotion expenditures amounted to approximately $514,000
and $173,000 at January 31, 1999 and December 31, 1997.
Net Loss Per Share
Net 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 is categorized as available for sale and as a
result is stated at fair value. Unrealized gains and losses, net of deferred
income taxes, are included as a component of stockholders' equity until
realized. The average cost of the security sold is used to determine the
realized gain or loss.
Reclassification
Certain amounts in the December 31, 1997 financial statements have been
reclassified to conform to the January 31, 1999 presentation. These
reclassifications had no effect on the net loss for the year, working capital or
equity.
2. LONG-TERM OBLIGATIONS
January 31 December 31
1999 1997
----------- ------------
Revolving credit agreements $12,500,000 $10,000,000
Term loan 4,937,792 5,686,208
Long-term obligation--scholarships 156,517 158,066
Long-term obligation--pension 620,757 425,064
Note payable by ESOP, guaranteed by the Company 363,000 363,000
------- -------
18,578,066 16,632,338
Less current portion 17,800,792 1,559,000
----------- ------------
$ -777,274 $15,073,338
=========== ===========
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. LONG-TERM OBLIGATIONS (continued)
The Company has a credit agreement that provides for borrowings up to
$18,000,000 on a revolving credit basis to May 2001 at the Bank's prime rate
(increased to prime plus 1% effective February 1, 1999). The credit agreement is
collateralized by certain assets of the Company and including certain real
estate.
The term loan is payable to a bank in monthly installments of $96,535 including
interest at 9.0% through June 2002, with a balloon payment due in June 2002
totaling $2,193,000. The loan is collateralized by certain lithography
equipment.
The credit agreement, term loan and the term loan payable by ESOP contain
certain financial covenants that require, among other things, maintenance of
minimum amounts and ratios of working capital, minimum amounts of tangible net
worth and maximum ratio of indebtedness to tangible net worth and that limit
purchases of property, plant and equipment. Certain financial covenants have not
been met. As a result, borrowings under the credit agreement, term loan and note
payable by the ESOP have been classified as current liabilities.
As described above, the Company has not complied with certain covenants of its
loan agreement with its existing lenders, and the Company has incurred recurring
operating losses and has a working capital deficiency. The existing lenders have
indicated they will not be extending their loan commitments. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The Company is in the process of discussing financing with new lenders
beyond the end of fiscal 2000. Until a commitment is signed with new lenders,
such borrowings will be shown as short-term in the financial statements.
Management is confident that they will obtain new lending commitments. In
addition, management has instituted cost controls and has operational plans in
place that they believe will return the Company to a profitable status.
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 loan for the years subsequent to January 31,
1999 are as follows: 2000 - $743,000; 2001 - $813,000; 2002 - $889,000; 2003 -
$2,493,000. However, such amounts have been classified as current based upon not
meeting certain financial covenants as of January 31, 1999.
Interest paid during the years ended January 31, 1999 and December 31, 1997 and
1996 and the month ended January 31, 1998 was $1,640,287, $1,037,668, $455,594
and $110,834, respectively. The Company capitalized $216,989 of construction
period interest into plant and equipment in 1996.
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 December 31
1999 1997
------- -------
Deferred tax assets: (In Thousands)
Net operating loss carryforward (expires 2012) $ 1,860 $ 1,046
Inventories 609 184
Supplemental benefit accrual 213 131
Charitable contribution carryover 201 145
Allowance from collectible accounts receivable 175 141
Nondeductible accruals 141 174
Other 129 190
------- -------
3,328 2,011
------- -------
Deferred tax liabilities:
Depreciation 976 670
Unrealized gain on marketable equity security 333 428
Pension accrual 259 280
------- -------
1,568 1,378
------- -------
1,760 633
Valuation allowance (1,760) (633)
------- -------
Net deferred taxes $ -- $ --
======= =======
Significant components of the provision (credit) for federal income taxes
attributable to operations are as follows:
Year ended
-------------------------------------
Month Ended
January 31
January 31 December 31 1998
1999 1997 1996
----------------------------------------------------------
(In Thousands)
Current $(464) $(725)
Deferred $ 130 (272) (205) $ 35
----------------------------------------------------------
$ 130 $(736) $(930) $ 35
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INCOME TAXES (continued)
The reasons for the difference between total income tax expense (credit) and the
amount computed by applying the statutory federal income tax rate to income
(loss) before income taxes follows:
Year ended
---------------------------------------
Month Ended
January 31 December 31 January 31
1999 1997 1996 1998
------------------------------------------------------------------
(In Thousands)
Income taxes (credit) at statutory rate $(577) $(1,999) $(895) $ (357)
Charge for goodwill impairment 272
Valuation allowance 758 633 369
Effect of tax rate difference on net
operating loss carryback 200
Other items (credit) (51) 158 (35) 23
------------------------------------------------------------------
Total income tax expense $ 130 $ (736) $(930) $ 35
Total income tax payments (refunds) for the years ended December 31, 1997, and
1996 were $(128,178) and $887,500, respectively.
4. PENSION PLANS
The Company adopted FASB Statement No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (Statement 132) for the year ended
January 31, 1999. This statement supersedes the disclosure requirements of
Statements Nos. 87 and 88. Statement 132 addresses disclosure issues only and
does not change the measurement or recognition requirements of Statements Nos.
87 and 88.
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 December 31
1999 1997
---------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $11,891,715 $11,339,429
Service cost 302,864 316,479
Interest cost 871,746 831,153
Actuarial (gains) losses 945,513 (25,242)
Benefits paid (927,997) (570,104)
---------------------------------
Benefit obligation at end of year $13,083,841 $11,891,715
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PENSION PLANS (continued)
January 31 December 31
1999 1997
---------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $11,934,277 $11,112,605
Actual return on plan assets 851,972 1,254,585
Contributions 37,089 137,191
Benefits paid (927,997) (570,104)
---------------------------------
Fair value of plan assets at end of year 11,895,341 $11,934,277
=================================
Components of prepaid benefit cost:
Funded status of the plans (underfunded) (1,188,500) $ 42,562
Unrecognized net actuarial loss 1,345,856 276,758
Unrecognized transition obligation 166,961 152,448
Unrecognized prior service cost 59,211 74,745
Prepaid benefit cost 383,528 $ 546,513
=================================
Amounts recognized in the consolidated balance
Prepaid benefit cost $ 975,666 $ 896,033
Accrued benefit liability (835,444) (449,366)
Intangible asset 35,066 35,706
Accumulated other comprehensive income 208,211 64,140
---------------------------------
Net amount recognized 383,528 $ 546,513
=================================
Weighted-average assumptions:
Discount rate 7.50% 9.00%
Expected return on plan assets 8.50% 10.00%
Rate of compensation increase 5.50% 5.00%
Components of net periodic benefit cost:
Service cost $ 302,864 $ 316,479
Interest cost 871,746 831,153
Expected return on plan assets (993,671) (928,608)
Amortization of prior service cost 15,534 15,534
Amortization of transition amount (14,513) (30,198)
Recognized net actuarial loss 11,086 --
---------------------------------
Benefit cost $ 193,046 $ 204,360
=================================
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $1,795,794, $1,683,859, and $1,009,446, respectively,
as of January 31, 1999, and $1,721,084, $1,355,516, and $922,720, respectively,
as of December 31, 1997.
The Company has no nonpension postretirement benefit plans.
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PENSION PLANS (continued)
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 $345,091 and $323,353 at January 31, 1999 and
December 31, 1997, 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
In the fourth quarter ended January 31, 1999, the Company adopted FASB Statement
No. 130, "Reporting Comprehensive Income" which 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
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 loss are reclassified to net
loss in the period realized. Disclosure of comprehensive loss is incorporated
into the Statement of Stockholders' Equity.
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. OTHER COMPREHENSIVE INCOME (continued)
The following shows the before and after tax amounts allocated to each component
of other comprehensive loss:
January 31, 1999 December 31, 1997
-----------------------------------------------------------------------------------------
Tax (Benefit) Before-Tax Tax (Benefit)
Before-Tax Amount Expense Net Amount Amount Expense Net Amount
----------------- ------- ---------- ------ ------- ----------
Unrealized gain on marketable security $ 978,937 $ 333,000 $ 645,937 $ 1,258,828 $ 428,000 $ 830,828
Pension liability adjustment (208,240) (70,802) (137,438) (64,140) (21,808) (42,332)
----------- ----------- ----------- ----------- ----------- -----------
Other comprehensive loss $ 770,697 $ 262,198 $ 508,499 $ 1,194,688 $ 406,192 $ 788,496
=========== =========== =========== =========== =========== ===========
The accumulated balances related to each component of other comprehensive loss
is as follows:
Unrealized Gain on
Marketable Equity Pension Liability Accumulated Other
Security Adjustment Comprehensive Income
Balance at January 1, 1996 $ 435,164 $ (27,577) $ 407,587
Other comprehensive loss for year ended December 31, 1996 (14,932) (10,565) (25,497)
--------- --------- ---------
Balance at December 31, 1996 420,232 (38,142) 382,090
Other compensation income for year ended December 31, 1997 410,596 (4,190) 406,406
--------- --------- ---------
Balance at December 31, 1997 830,828 (42,332) 788,496
Other comprehensive income for month ended January 31, 1998 68,195 -- 68,195
--------- --------- ---------
Balance at January 31, 1998 899,023 (42,332) 856,691
Other comprehensive loss for year ended January 31, 1999 (253,086) (95,106) (348,192)
--------- --------- ---------
Balance at January 31, 1999 $ 645,937 $(137,438) $ 508,499
========= ========= =========
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. OPERATING LEASES
The Company leases office space and equipment pursuant to operating leases.
Total rent expense is less than 1% of total revenues. The lease term for the
office space extends through April, 2006 with monthly lease payments of $10,670.
In addition, rent for the office lease is subject to escalation based upon the
Consumer Price Index. Future commitments under the leases as of January 31, 1999
are:
Office Equipment Total
2000 $141,348 $402,593 $543,941
2001 145,621 392,577 538,198
2002 150,022 363,826 513,848
2003 154,556 126,948 281,504
2004 159,228 -- 159,228
Thereafter 390,143 -- 390,143
---------------------------------------------------------------
$1,140,918 $1,285,944 $2,426,862
===============================================================
7. INDUSTRY SEGMENTS
In the fourth quarter ended January 31, 1999, the Company adopted FASB Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(Statement 131). Statement 131 superseded Statement No. 14, "Financial Reporting
for Segments of a Business Enterprise". Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. Statement 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. The adoption of
Statement 131 did not affect results of operations or financial position, but
does affect the disclosure of segment information.
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
licensees 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 Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INDUSTRY SEGMENTS (continued)
The Company's reportable segments offer either different products in the case of
the diversified products segments, or different geographic areas in the case of
the two toy segments.
Financial information relating to reportable segments is as follows:
International Ohio Art Strydel
Domestic Toy Toy Diversified Diversified Total
------------ --- ----------- ----------- -----
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) (3,614,568) (613,868) 2,480,082 (7,681) (1,756,035)
Segment assets 19,741,796 2,006,326 11,839,602 2,527,868 36,115,592
Expenditures for long-lived assets 238,415 936,372 76,853 1,251,640
- ------------------------------------------------------------------------------------------------------------------------------------
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) (4,638,431) (1,930,468) 1,763,742 (261,319) (5,066,476)
Other significant non-cash 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 assets 813,090 1,492,608 128,965 2,434,663
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996
Net sales to external customers $ 20,074,383 $ 3,693,186 $ 10,301,205 $ 2,350,945 $ 36,419,719
Intersegment revenues 197,000 2,059,271 2,256,271
Interest expense (153,082) (5,628) (78,483) (237,193)
Provision for depreciation and amortization 1,151,578 353,951 79,200 1,584,729
Segment profit (loss) (3,046,452) (1,742,100) 1,864,074 152,378 (2,772,100)
Segment assets 16,681,048 2,460,638 9,833,952 2,413,421 31,389,059
Expenditures for long-lived assets 792,404 6,723,756 68,493 7,584,653
- ------------------------------------------------------------------------------------------------------------------------------------
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INDUSTRY SEGMENTS (continued)
The following are reconciliations between total segment and consolidated totals
for revenues, income before income taxes, and assets:
Year ended
---------------------------------------------------------------
January 31 December 31
1999 1997 1996
---------------------------------------------------------------
Revenues
Total external net sales for
reportable segments $45,936,531 $36,290,922 $36,419,719
Intersegment revenues for
reportable segments 1,211,736 1,742,772 2,256,271
Other revenues 1,212,167 789,604 1,107,473
Elimination of intersegment
revenues (1,211,736) (1,742,772) (2,256,271)
---------------------------------------------------------------
Total consolidated revenues $47,148,698 $37,080,526 $37,527,192
===============================================================
Profit and loss
Total profit or loss for
reportable segments $(1,756,035) $(5,066,476) $(2,772,100)
Other profit or loss - elimination of
intersegment profit/loss 83,794 (7,985) 36,792
Unallocated amounts:
Gain on sale of marketable security 119,675 120,384
Adjustment to pension expense in
consolidation (144,100) (6,348) (16,008)
Charge for impairment of Goodwill -- (799,320) --
---------------------------------------------------------------
Loss before income taxes $(1,696,666) $(5,880,129) $(2,630,932)
===============================================================
Assets
Total assets for reportable segments $36,115,592 $36,402,998 $31,389,059
Elimination of:
Intercompany receivables (3,092,325) (2,703,674) (1,784,829)
Intercompany profit in inventory (27,235) (106,029) (119,047)
Investment in subsidiaries (2,222,653) (2,222,653) (2,222,653)
Other assets - goodwill -- -- 820,323
---------------------------------------------------------------
Total consolidated assets $30,773,379 $31,370,642 $28,082,853
===============================================================
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INDUSTRY SEGMENTS (continued)
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 $6,657,000,
$3,360,000 and $4,222,000 in 1999, 1997 and 1996, respectively, of which
approximately $3,570,000, $1,565,000 and $2,412,000 in 1999, 1997 and 1996,
respectively, were to customers in the European community. Identifiable assets
located outside the United States are less than 10% of consolidated assets at
January 31, 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 $4,000, $59,000 and $80,000 during fiscal 1999, 1997 and 1996,
respectively and $20,000 for the month ended January 31, 1998. Net domestic toy
segment sales includes approximately $12,487,000, $9,203,000 and $7,000,000 for
fiscal 1999, 1997 and 1996, respectively, to two major retailers.
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 $ (.87)
Weighted average shares outstanding 895,343
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for
the years ended January 31, 1999, and December 31, 1997 (in thousands of
dollars, except per share amounts):
Net Income
Cost of Net (Loss) Per
Net Products Income Share of
1999 Sales Sold (Loss) Common Stock
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)
======= ======= ======= ========
1997
March 31 ................... $ 6,111 $ 5,380 $(1,223) $ (1.34)
June 30 .................... 6,871 6,661 (2,364) (2.60)
September 30 ............... 11,369 8,292 (272) (.31)
December 31 ................ 11,940 8,445 (1,285) (1.43)
------- ------- ------- --------
TOTALS $36,291 $28,778 $(5,144) $ (5.68)
======= ======= ======= ========
In the 1997 fourth quarter, the effective income tax rate for the year
was reduced. The cumulative year-to-date adjustment increased the fourth quarter
net loss by $515,000 or $.57 per share.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
Position with the Company
or Other Principal Occupation Director
Name and Age and Other Directorships Since
------------ ----------------------- -----
DIRECTORS TO BE PROPOSED FOR RE-ELECTION TO SERVE UNTIL 2001
W. C. Killgallon (86).......................... Chairman, Executive Committee of the Board and 1955
Consultant to the Company.
Martin L. Killgallon II (51)................... President since June 1989. 1981
Frank L. Galucci (74).......................... Attorney; Chairman and Managing Director 1995
Devonshire Limited (an investment company).
Previously served as Senior Partner of Gallucci,
Hopkins & Theisen ( a law firm) from 1976 to 1993.
Joseph A. Bockerstette (41).................... President, Seyfert Foods, Inc. Previously 1997
President of Mullinix Packaging in 1993 and 1994.
DIRECTORS CONTINUING TO SERVE UNTIL 2000
Neil J. Borden, Jr. (68)....................... Professor of Business Administration, Darden 1988
Graduate School of Business Administration,
University of Virginia, 1963 to present.
William C. Killgallon (60)..................... Chairman of the Board and Chief Executive Officer 1965
since June 1989. Also Director of Columbia
Ventures.
Wayne E. Shaffer (77).......................... Senior Partner of Newcomer, Shaffer & Spangler (a 1996
law firm).
W. C. Killgallon is the father of William C. Killgallon and Martin L.
Killgallon, II. The Messrs. Killgallon are "control" persons at the Company, as
such term is defined by regulations of the Securities and Exchange Commission.
(b) Executive Officers of the Registrant
First Year
Elected To
Present Position Present
Name Age With Registrant Position
William C. Killgallon 60 Chairman 1989
Martin L. Killgallon II 51 President 1989
T. R. Bryan 49 Vice President
International Operations 1996
P. R. Manley 48 Vice President
Manufacturing 1992
P. R. McCusty 49 Vice President
Finance/Treasurer 1993
G. E. Thomas 39 Vice President
Sales 1996
L. T. Wilson 62 Vice President
Diversified Products 1995
W. E. Shaffer 76 Secretary 1995
W. C. Killgallon 86 Chairman, Board
Executive Committee 1989
T. R. Bryan was elected as Vice President of International Operations
in September 1996. He had previously served as Director of International
Operations since his date of employment with the Company in July 1995. He had
retired as a U.S. Naval Captain immediately before joining the Company. 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 s served as Vice
President of Product Development for at least the past five years. P. R. McCusty
was elected Vice President, Finance/Treasurer in June 1993. P. R. Manley left
the Company in April 1999. 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 following table sets forth the annual compensation for the
Company's Chief Executive Officer and the Chief Operating Officer as well as the
total compensation paid to each individual for the Company's last three previous
fiscal years:
ANNUAL COMPENSATION
-------------------
NAME AND (a) (b)
PRINCIPAL POSITION YEAR SALARY OTHER
------------------ ---- ------ -----
William C. Killgallon 1999 $233,620 $-0-
Chairman of the Board 1997 232,259 -0-
1996 227,858 95,297
Martin L. Killgallon, II 1999 233,620 -0-
President 1997 232,259 -0-
1996 227,858 95,286
(a)..The Company's fiscal year was changed from December 31 to January 31
effective in 1999.
(b) In 1996, both William C. and Martin L. Killgallon received 4,800 shares
of Mid-American stock from the Company with a market value of $86,400
each as an additional bonus for 1995 performance.
For the year ended January 31, 1999, 37 shares were reallocated to all
participants under the ESOP, of which 2 shares were allocated to William C.
Killgallon and 1 share to Martin L. Killgallon, II. As of May 3, 1999, the
closing price per share on the American Stock Exchange was $15 5/8. The value of
these shares is not included in compensation above.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Under regulations of the Securities and Exchange Commission, persons
who have power to vote or dispose of shares of the Company, either alone or
jointly with others, are deemed to be beneficial owners of such shares.
Set forth in the following table are the beneficial holdings on the
basis described above as of April 29, 1999 of: (a) each person known by the
Company to own beneficially more than 5% of its outstanding stock, (b) directors
or nominees not listed in (a), and (c) officers and directors as a group and
certain members of the Killgallon family, the owners in each case having the
sole voting and investment power, except as otherwise noted.
% OF
NAME SHARES CLASS
---- ------ -----
(a) W.C. Killgallon*...................... 63,662 (1) (2) 7.2%
P.O. Box 111
Bryan, Ohio 43506
William C. Killgallon*................ 228,273 (1)(2)(3)(4) 25.7%
P. O. Box 111
Bryan, Ohio 43506
Martin L. Killgallon, II*............. 291,669 (1)(2)(4)(5) 32.9%
P. O. Box 111
Bryan, Ohio 43506
Ruth K. Gilbert....................... 30,992 (1)(6) 3.5%
P. O. Box 111
Bryan, Ohio 43506
Katherine K. Michelsen................ 19,350 (1)(8) 2.2%
P. O. Box 111
Bryan, Ohio 43506
William C. Killgallon and Martin
L. Killgallon, II as Trustees of
the Company's Employee Stock
Ownership Plan........................ 83,863 (4) 9.5%
P. O. Box 111
Bryan, Ohio 43506
(b)..Joseph A. Bockerstette*.............. 0 **
Neil H. Borden, Jr.*.................. 604 **
Frank L. Galucci*..................... 1,000 **
Wayne E. Shaffer*..................... 1,000 **
(c) Officers and Directors as a Group 500,569 (7) 56.4%
(12 Persons)
* A director
** Less than 1%
(1) W. C. Killgallon is the father of William C. Killgallon, Martin L.
Killgallon, II, Ruth K. Gilbert, and Katherine K. Michelsen. The total
number of shares beneficially owned by members of the Killgallon Family
listed above and their spouses and children (the "Killgallon Family"),
excluding duplications, is 528,731 or approximately 60% of the number
outstanding. Beneficial ownership of shares held by spouses and children is
disclaimed.
(2) Includes 1,200 shares held by the Killgallon Foundation, of which W. C.
Killgallon, William C. Killgallon, and Martin L. Killgallon, II are
officers and directors, and as to which beneficial ownership is disclaimed.
(3) Includes 11,900 shares held for a child of William C. Killgallon, as to
which beneficial ownership is disclaimed, but does not include 3,890 shares
owned by his wife or 58,000 shares held by his wife as trustee for the
benefit of children. Also includes 8,654 shares held in a revocable trust
for the benefit of Ruth K. Gilbert. William C. Killgallon is a trustee of
this trust and disclaims any beneficial ownership to the shares held by the
trust.
(4) Includes 83,863 shares which reflect allocated and unallocated shares held
in the ESOP (as defined below) as to which William C. Killgallon and Martin
L. Killgallon, II, as trustees and members of the ESOP's Plan Committee
have shared investment power. Of these 83,863 shares, 21,738 shares reflect
shares that have not been allocated to participants' accounts and to which
William C. Killgallon and Martin L. Killgallon, II, as trustees and members
of the Plan Committee have shared voting power. Of the 62,125 allocated
shares, 5,359 and 5,187 shares have been allocated to the accounts of
William C. Killgallon and Martin L. Killgallon, II, respectively, as to
which they have sole voting power. Messrs. Killgallon have no voting power
with respect to the remaining 51,579 shares in the ESOP. Messrs. Killgallon
disclaim beneficial ownership of all the shares held in the ESOP other than
those allocated to their respective accounts.
(5) Includes 53,610 shares held for children of Martin L. Killgallon, II as to
which beneficial ownership is disclaimed, but does not include 1,129 shares
owned by his wife.
(6) Includes 8,654 shares held in trust as described in Note 3 above. Includes
44 shares in an IRA. Includes 22,294 shares held for a child as to which
beneficial ownership is disclaimed.
(7) Includes shares held by directors in (a) and (b) above, but excludes
duplications.
(8) Includes 18,156 shares held for children as to which beneficial ownership
is disclaimed.
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, 1999 and
December 31, 1997
Consolidated Statements of Operations - Years ended
January 31, 1999, December 31, 1997 and 1996, and the
month ended January 31, 1998
Consolidated Statements of Stockholders' Equity - Years
ended January 31, 1999, December 31, 1997 and 1996, and
the month ended January 31, 1998
Consolidated Statements of Cash Flow - Years ended January
31, 1999, December 31, 1997 and 1996, and the month ended
January 31, 1998
Notes to Consolidated Financial Statements - January 31,
1999
(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
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(3) See Item 14(c) below.
(b) Reports on Form 8-K
None
(c) See Exhibit Index for list of exhibits.
(d) The financial statement schedule which is listed under Item 14 (a) (2)
is filed hereunder.
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: September 3, 1999. 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 September 3, 1999
William C. Killgallon Principal Executive
Officer and Director
/s/ Martin L. Killgallon, II President and Director September 3, 1999
Martin L. Killgallon, II
/s/ Paul R. McCusty Vice President Finance September 3, 1999
Paul R. McCusty Treasurer and Principal
Financial Officer
/s/ W. C. Killgallon Chairman, Board Executive September 3, 1999
W. C. Killgallon Committee and Director
/s/ Joseph A. Bockerstette Director September 3, 1999
Joseph A. Bockerstette
/s/ Neil H. Borden, Jr. Director September 3, 1999
Neil H. Borden, Jr.
/s/ Frank L. Gallucci Director September 3, 1999
Frank L. Gallucci
/s/ Wayne E. Shaffer Secretary and Director September 3, 1999
Wayne E. Shaffer
The Ohio Art Company and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(1) Uncollectible accounts charged off and collection costs, less recoveries.
Additions
-------------------------------
Balance at Charged Charged Deductions- Balance
Beginning to Costs to Other Describe at End
Description of Period and Expenses Accounts-Describe (1) of Period
----------- --------- ------------ ----------------- ---------- ---------
Year ended 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
- --------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Reserves and allowances deducted from asset
accounts:
Allowances for uncollectible accounts $415,000 $ 29,659 $ 79,659 $365,000
- --------------------------------------------------------------------------------------------------------------------
(1) Uncollectible accounts charged off and collection costs, less revenues.
THE OHIO ART COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number 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.
10 (a) Employee Stock Ownership Plan, filed as Exhibit --
10 (c) to Registrant's Form 10-K for the year
ended December 31, 1987, and incorporated herein
by reference.
10 (b) The Ohio Art Company Supplemental Retirement Plan, --
as amended and restated effective January 1, 1992
filed as Exhibit 10 (d) to Registrant's Form 10-K
for the year ended December 31, 1992, and
incorporated herein by reference.
10 (c) Revolving Credit Agreement dated January 24, 1994 --
filed as Exhibit 10 (c) to Registrant's Form 10-K
for the year ended December 31, 1993, and
incorporated herein by reference.
10 (d) Second amendment to the Revolving Credit Agreement --
dated May 20, 1998 filed as Exhibit 1 to Registrant's
Form 10-Q for the quarter ended April 30, 1998 and
incorporated herein by reference.
10 (e) Revolving note dated May 20, 1998 filed as Exhibit --
2 to Registrant's Form 10-Q for the quarter ended
April 30, 1998 and incorporated herein by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.