SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1997.
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
- ------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 111, Bryan, Ohio 43506
- ------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 419-636-3141
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $1 Par Value American Stock Exchange
- -------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (paragraph 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ X ].
Page 1 of 2 of Cover Page
<PAGE>
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of March 20, 1998 was approximately $5,190,000 (based
upon the closing price on The American Stock Exchange). The number of
shares outstanding of the issuer's Common Stock as of March 20, 1998 was
891,784. It is estimated that 29% of such stock is held by
non-affiliates. (Excludes shares beneficially owned by officers and
directors and their immediate families).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders' report for the year ended
December 31, 1997 are filed as Exhibit (13) filed hereto and are
incorporated by reference into Parts I, II, and IV.
Portions of the Ohio Art Company Proxy Statement for the 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III.
This document, including exhibits, contains 45 pages.
The cover page consists of two pages.
The Exhibit Index is located on page 15.
Page 2 of 2 of Cover Page
<PAGE>
PART I
Item 1. Business
Registrant is principally engaged in two lines of business: (a)
the manufacture and distribution of toys and (b) the manufacture and
sale of custom metal lithography and molded plastic products to other
manufacturers and consumer goods companies. (See Note 5 of Notes to
Consolidated Financial Statements included in the Annual Shareholders'
Report for the year ended December 31, 1997, and included in Exhibit
(13) filed hereunder.)
Registrant manufactures and markets approximately 50 toy items
including the nationally advertised Etch A Sketch(reg) Travel Etch A
Sketch(reg), Pocket Etch A Sketch(reg), and Zooper Sounds Etch A
Sketch(reg) drawing devices, Spray FX(TM) Power Air Brush, craft items,
drums, and a line of sports activity toys, primarily basketball sets.
Registrant maintains showrooms in Bryan, Ohio and New York City
and distributes its products through its own full-time sales force and
through manufacturers' representatives. The toy products are sold
directly to general and specialty merchandise chains, discount stores,
wholesalers, mail order houses, and both direct to customers and through
licensees in foreign countries.
The Registrant's Diversified Products segment manufactures
specialty plastic components and lithographic metal items such as parts
for automobile trim, lithographed metal serving trays, replica metal
signs, film canisters, and decorative cans. These products are sold to
others directly or through manufacturers' representatives.
The following table reflects the approximate percentage of total
sales contributed by each class of similar products of Registrant's
total sales in any of the last three fiscal years.
Year Ended December 31
CLASS 1997 1996 1995
- ----- ---- ---- ----
Writing and Drawing Toys ................... 51% 49% 52%
Activity Toys .............................. 7% 12% 21%
Traditional Toys ........................... 3% 4% 4%
Diversified Products ....................... 39% 35% 23%
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<PAGE>
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 1997 indicate the
Registrant accounted for less than one percent (1%) of the total toy
sales in the United States. Competition in Registrant's business is
believed to be based on novelty of product, customer appeal,
merchandising of character licenses, ability to deliver products on a
timely basis, price, and reputation for quality.
The Diversified Products segment sales are primarily products
manufactured to customers' specifications. Registrant believes that the
principal competitive factors in this business are price and
demonstrated ability to deliver quality products on a timely basis.
Registrant's toy business is seasonal and historically
approximately 65% to 75% of its sales have been made in the last six
months of the calendar year. Second half shipments in 1997 and 1996
amounted to 64% and 67% of annual sales respectively. Second half sales
have shown particular strength in recent years due to the introduction
of new products supported with television advertising concentrated in
the primary selling season prior to Christmas. Although customers
historically have ordered toy merchandise during the spring and summer
months for fall shipments in anticipation of Christmas sales, the
Company's customers in recent years tend to order later in the year
in an effort to control inventories, particularly in years with
uncertain economic conditions. The Diversified Products segment does
not have any established seasonal pattern.
Registrant's order backlog at the end of any fiscal year is not a
meaningful predictor of financial results of the preceding or succeeding
year. Historically, new toy products have been introduced to the trade
at the annual industry trade fair in February in New York and at foreign
trade fairs which generally occur within a thirty day period prior to
the U.S. trade fair. In recent years there has been a trend to earlier
introduction of new items to major customers. Major customers normally
place tentative orders during the first and second calendar quarters
which indicate the items they will be buying for the coming season and
an indication of quantity. These orders are usually "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 cancellable until shipped at no cost
to the customer. As the Registrant's product mix was changed to a
higher percentage of promotional type products in recent years, the
dollar amount of orders in the order backlog which have been cancelled
in the third and fourth calendar quarters has been unpredictable. It is
therefore difficult to state the level of order backlog believed to be
firm during the first calendar quarter.
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<PAGE>
Order backlog at mid-March is also impacted by the timing of the
February trade fair and placing of initial tentative orders by major
accounts, the product mix between spring and fall items, the mix between
domestic versus international orders, and the year-end inventory
carry-over of the Company's products at the retail level on the part of
its customers. The order backlogs believed to be firm, subject to
comments above, as of mid-March were:
1998 - approximately $12,800,000
1997 - approximately $ 5,200,000
The seasonal nature of the business generally requires a
substantial build-up of working capital during the second and third
calendar quarters to carry inventory and accounts receivable. Extended
payment terms are in general use in the toy industry to encourage
earlier shipment of merchandise required for selling during the spring
and Christmas seasons.
Registrant's basic raw materials are sheet metal, 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 1997, these imports accounted
for approximately 19% of the total cost of goods sold. Tariffs,
internal affairs of foreign countries, and other restraints on
international trade have not materially affected Registrant to date but
no assurance can be given that these conditions will continue.
Registrant has utilized forward exchange contracts to cover requirements
for major purchase commitments based on foreign currencies. However,
the use of foreign exchange contracts has not been necessary in the past
five years.
Preventing competitors from copying Registrant's toy products is
important, and where possible, Registrant attempts to protect its
products by the use of patents, trademarks, copyrights, and exclusive
licensing agreements. Registrant believes its patents, trademarks,
trade names, copyrights, and exclusive licensing agreements are
important to its business, but it is unable to state what their value is
or that their validity will be maintained, or that any particular
pending application will be successful. It is believed that the loss of
proprietory rights for any important product might have a material
adverse effect on Registrant's business.
Registrant's Diversified Products segment sells products
manufactured to customers' specifications and does not rely on its own
patents, trademarks, or copyrights to any extent.
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<PAGE>
The Registrant has an established program for licensing others for
manufacture and/or distribution of its products outside the United
States. The relationship with a key European distributor became
strained and then terminated at the end of 1994. The Company had
developed new relationships in Europe for 1995, and significant
increases were realized in international sales and royalty income in
1995. However, it decreased again in 1996 and 1997 because of excess
inventories carried over from the prior year at our overseas partners'
facilities as well as at their customers' facilities, and poor product
acceptance at the retail level.
Because of the seasonal nature of the Registrant's business, the
number of full-time employees at December 31 is not as indicative of
activity as the average number of employees during the year. The
average number of employees has been: 1997 - 303; 1996 - 315;
1995 - 304.
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 $1,100,000 in 1997, $610,000 in 1996, and
$650,000 in 1995, 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 1997 included approximately $5,000,000
($3,800,000 and $8,900,000 in 1996 and 1995, respectively) of sales to
Wal-Mart and sales to Toys R Us of $4,200,000 in 1997. Consolidated
revenues for 1995 included approximately $5,300,000 of sales to Kmart.
These customers are major toy retailers.
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<PAGE>
Registrant's Diversified Products segment sales are concentrated in
a limited number of accounts. Sales to the five largest customers
account for approximately 64% of the total sales of this segment. The
loss of any of these customers could have a material adverse effect on
the Diversified Products segment of Registrant's business.
Item 2. Properties
Registrant owns plants located at Bryan, Ohio, which consist of
approximately 50,000 square feet of office, 725,000 square feet of
production, and 235,000 square feet of warehouse space. Registrant also
owns a plant at Stryker, Ohio, which consists of approximately 134,000
square feet. The majority of Registrant's facilities are of masonry
construction and are adequate for its present operation. Production,
other than metal lithography, which is normally scheduled on a
two-shift, ten hour, four day week with overtime for Friday, Saturday,
and Sunday, is primarily on a one-shift basis at the Bryan, Ohio
facilities. The Bryan facilities run second shift operations on
selected toy items during seasonal demand peaks. The Stryker, Ohio
plant is normally scheduled on the basis of three-shift operations.
Because of the seasonal nature of its business and the fact that a
portion of its manufacturing facilities operate on a one-shift or
limited two-shift basis, the Registrant's facilities have operated below
maximum productive capacity in recent years, including 1997.
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.
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<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Market, Earnings, and Dividend Information on page 23 of Exhibit
(13) filed hereunder are incorporated herein by reference.
Item 6. Selected Financial Data
Selected Financial Data on page 16 of Exhibit (13) filed
hereunder is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 17 through 23 of Exhibit (13) filed
hereunder are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Registrant and its
subsidiaries on pages 24 through 43 of Exhibit (13) filed hereunder
are incorporated herein by reference.
Quarterly Results of Operations on page 23 of Exhibit (13) filed
hereunder are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
Information in regard to identification of Directors of the
Registrant is presented under the heading "Information With Respect to
Directors and Nominees" in the Registrant's Proxy Statement for the
1998 Annual Meeting of Shareholders as filed with the Securities and
Exchange Commission and is incorporated herein by reference.
(b) Executive Officers of the Registrant
First Year
Elected To
Present Position Present
Name Age With Registrant Position
- ---- --- ---------------- ----------
William C. Killgallon 59 Chairman 1989
Martin L. Killgallon II 50 President 1989
T. R. Bryan 48 Vice President 1996
International Operations
P. R. Manley 47 Vice President 1992
Manufacturing
P. R. McCusty 48 Vice President 1993
Finance/Treasurer
G. E. Thomas 38 Vice President 1996
Sales
L. T. Wilson 61 Vice President 1995
Diversified Products
W. E. Shaffer 75 Secretary 1995
W. C. Killgallon 85 Chairman, Board 1989
Executive Committee
T. R. Bryan was elected as Vice President of International
Operations in September 1996. He had previously served as Director of
International Operations since his date of employment with the Company
in July 1995. He had retired as a U.S. Naval Captain immediately
before joining the Company. G. E. Thomas was elected as Vice President
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<PAGE>
of Sales in September 1996. He had previously served as National Sales
Manager since his date of employment with the Company in January 1995.
He had previously been employed by Wilson Sporting Goods as Business
Director/Vice President of the Basketball, Volleyball, and Soccer
division from 1993 to 1995 and as Senior Marketing Manager from 1992 to
1993. Mr. Wayne E. Shaffer was elected to serve as Secretary in
September 1995 replacing L. F. Koerber who retired in June 1995. W. E.
Shaffer has been Of Counsel with the law firm of Newcomer, Shaffer,
Bird, & Spangler for more than the last five years. L. T. Wilson was
elected as Vice President of Diversified Products in June 1995. He had
served as Vice President of Product Development for at least the past
five years. P. R. McCusty was elected Vice President, Finance/Treasurer
in June 1993. He had previously served as Treasurer since June 1992 and
Controller since 1984. P. R. Manley was elected Vice President,
Manufacturing in June 1992. He had previously served as General Manager
of Manufacturing Operations since 1990. William C. Killgallon and
Martin L. Killgallon, II are the sons of W. C. Killgallon. Officers are
elected annually to serve until the first meeting of directors following
the annual meeting of shareholders in each year.
Item 11. Executive Compensation and Transactions
Information regarding Executive Compensation and Transactions is
stated under the heading "Compensation of Executive Officers" of the
Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders
as filed with the Securities and Exchange Commission and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Securities beneficially owned by principal shareholders and
management are stated under the heading "Securities Beneficially Owned
by Principal Shareholders and Management" of the Registrant's Proxy
Statement for the 1998 Meeting of Shareholders as filed with the
Securities and Exchange Commission and such information is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
Not applicable.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as a part of this report.
(1) The following consolidated financial statements of The Ohio
Art Company and subsidiaries, included on pages 24 - 43 of
Exhibit (13) filed hereunder are incorporated by reference in
Item 8.
Report of Independent Auditors
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flow - Years ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements - December 31, 1997
(2) The following consolidated financial statement schedule of The
Ohio Art Company and subsidiaries is filed under Item 14(d):
SCHEDULE PAGE
-------- ----
Schedule II - Valuation and Qualifying Accounts 14
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable,
and therefore have been omitted.
(3) See Item 14(c) below.
(b) Reports on Form 8-K
None
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<PAGE>
(c) The following exhibits are filed as part of this Form 10-K Annual
Report:
3 (i) Articles of Incorporation as amended, filed as Exhibit
3 (a) to Registrant's Form 10-K for the year ended December
31, 1986, and incorporated herein by reference.
3 (b) Code of Regulations filed as Exhibit 3 (b) to Registrant's
Form 10-K for the year ended December 31, 1990, and
incorporated herein by reference.
3(ii) By-Laws filed as Exhibit 3 to Registrant's Form 8-K dated
September 21, 1990, and incorporated herein by reference.
10 (a) Employee Stock Ownership Plan, filed as Exhibit 10 (c) to
Registrant's Form 10-K for the year ended December 31,
1987, and incorporated herein by reference.
10 (b) The Ohio Art Company Supplemental Retirement Plan, as
amended and restated effective January 1, 1992 filed as
Exhibit 10 (d) to Registrant's Form 10-K for the year ended
December 31, 1992, and incorporated herein by reference.
10 (c) Revolving Credit Agreement dated January 24, 1994 filed as
Exhibit 10 (c) to Registrant's Form 10-K for the year ended
December 31, 1993, and incorporated herein by reference.
10 (d) Amendment to the Revolving Credit Agreement dated June 27,
1997.
10 (e) Term Note dated June 27, 1997.
10 (f) Security Agreement dated June 27, 1997.
10 (g) Revolving note dated June 27, 1997.
13 Portions of the 1997 Annual Report of The Ohio Art Company.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(d) The financial statement schedule which is listed under Item 14
(a)(2) is filed hereunder.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE OHIO ART COMPANY
Date: March 20, 1998 By /s/ William C. Killgallon
-------------------------------
William C. Killgallon, Chairman
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date
indicated.
Signature Title Date
- ------------------------- --------------------- --------------
/s/ William C. Killgallon Chairman of the Board March 20, 1998
William C. Killgallon Principal Executive
Officer and Director
/s/ Martin L. Killgallon, II President and Director March 20, 1998
Martin L. Killgallon, II
/s/ Paul R. McCusty Vice President Finance/ March 20, 1998
Paul R. McCusty Treasurer and Principal
Financial Officer
/s/ W. C. Killgallon Chairman, Board Executive March 20, 1998
W. C. Killgallon Committee and Director
/s/ Joseph A. Bockerstette Director March 20, 1998
Joseph A. Bockerstette
/s/ Neil H. Borden, Jr. Director March 20, 1998
Neil H. Borden, Jr.
/s/ Frank L. Gallucci Director March 20, 1998
Frank L. Gallucci
/s/ Wayne E. Shaffer Secretary and Director March 20, 1998
Wayne E. Shaffer
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<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<CAPTION>
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
- --------------------------------- --------- ------------ ----------------- ----------- ---------
<S> <C> <C> <C> <C>
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
========================================================================
Year ended December 31, 1995:
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $465,000 $ 34,048 $ 84,048 $415,000
========================================================================
<FN>
(1) Uncollectible accounts charged off and collection costs, less recoveries.
</FN>
</TABLE>
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<PAGE>
THE OHIO ART COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit # Page
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3 (i) Articles of Incorporation as amended, filed as --
Exhibit 3 (a) to Registrant's Form 10-K for the
year ended December 31, 1986, and incorporated
herein by reference.
3 (b) Code of Regulations filed as Exhibit 3 (b) to --
Registrant's Form 10-K for the year ended December
31, 1990, and incorporated herein by reference.
3(ii) By-Laws filed as Exhibit 3 to Registrant's Form --
8-K dated September 21, 1990, and incorporated
herein by reference.
10 (a) Employee Stock Ownership Plan, filed as Exhibit --
10 (c) to Registrant's Form 10-K for the year
ended December 31, 1987, and incorporated herein
by reference.
10 (b) The Ohio Art Company Supplemental Retirement Plan, --
as amended and restated effective January 1, 1992
filed as Exhibit 10 (d) to Registrant's Form 10-K
for the year ended December 31, 1992, and
incorporated herein by reference.
10 (c) Revolving Credit Agreement dated January 24, 1994 --
filed as Exhibit 10 (c) to Registrant's Form 10-K
for the year ended December 31, 1993, and
incorporated herein by reference.
10 (d) Amendment to the Revolving Credit Agreement dated --
June 27, 1997.
10 (e) Term Note dated June 27, 1997.
10 (f) Security Agreement dated June 27, 1997.
10 (g) Revolving note dated June 27, 1997.
13 Portions of the 1997 Annual Report to Shareholders 16-43
(to the extent incorporated by reference hereunder).
21 Subsidiaries of the Registrant. 44
23 Consent of Independent Auditors. 45
27 Financial Data Schedule. 46
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<PAGE>
EXHIBIT 13
<TABLE>
PORTIONS OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 1997, 1996, 1995, 1994, AND 1993
Amounts in thousands, except per share data
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Net Sales
and Other Income ...... $37,081 $37,527 $49,230 $41,073 $42,784
Net Income (Loss) ...... (5,144) (1,701) 1,961 824 416
Income (Loss) per Share
of Common Stock(a) .... (5.68) (1.86) 2.04 .83 .41
Dividends Declared per
Share of Common Stock(b) .20 .25 .24 .15 .45
Book Value per Share of
Common Stock(c) ....... 9.71 15.24 17.51 15.97 14.82
Average Shares of
Common Stock .......... 904,903 915,630 963,048 994,154 1,015,992
Stockholders of Record
(d) ................... 594 600 660 670
Working Capital ........ $ 8,740 $ 8,318 $10,375 $ 9,311 $ 8,348
Property, Plant and
Equipment (net) ....... 12,241 11,465 5,464 5,544 6,195
Total Assets ........... 31,731 28,083 25,572 25,174 22,396
Long-Term Obligations .. 15,073 8,362 667 455 589
Stockholders' Equity ... 8,668 14,055 16,832 15,886 14,899
Average Number of
Employees ............. 303 315 304 302 311
Note: All prior periods have been restated to reflect the two for one
stock split in 1996.
<FN>
(a) Based upon average shares outstanding during the year ended
December 31.
(b) Stock or cash dividend paid every year since 1908.
(c) Based upon shares outstanding at December 31.
(d) Includes Employee Stock Ownership Plan participants who were
100% vested at December 31.
</FN>
</TABLE>
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<PAGE>
<TABLE>
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:
<CAPTION>
YEAR ENDED DECEMBER 31
- ------------------------------------------------------------------------
(Dollars in thousands) % Increase(Decrease)
1997 1996 1995 1997 1996
------ ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales .............. $36,291 $36,420 $47,354 (.4)% (23.1)%
Gross Margin ........... 7,513 8,855 16,598 (15.2)% (46.7)%
Percent of Net Sales ... 20.7% 24.3% 35.1%
Selling,Administrative
and General .......... $12,260 $12,356 $15,151 (.8)% (18.4)%
Percent of Net Sales ... 33.8% 33.9% 32.0%
Income(Loss) from
Operations ........... $(4,756) $(2,394) $3,323 (98.7)% (172.0)%
Percent of Net Sales ... (13.3)% (6.6)% 7.0%
Interest Expense ....... $1,124 $237 $201 374.3% 17.9%
Percent of Net Sales ... 3.1% .7% .4%
Income Tax Expense
(Credit) ............. $(736) $(930) $1,161 20.9% (180.1)%
Percent of Net Sales ... (2.0)% (2.6)% 2.5%
Net Income (Loss) ...... $(5,144) $(1,701) $1,961 (202.4)% (186.7)%
Percent of Net Sales ... (14.2)% (4.7)% 4.1%
</TABLE>
Sales were flat in 1997 as compared to 1996 as the increase in
sales for the Diversified Products division of approximately $1,400,000
was offset by the loss of sales of approximately $1,500,000 for the toy
division.
The loss of sales for the toy division 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 Company's 1996 sales decrease of 23.1% from the prior year
reflected lower sales volume in both the domestic and international toy
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<PAGE>
divisions and a significant increase of approximately 15% in the
Diversified Products division. Domestic sales decreased approximately
$1.7 million in the first quarter of 1996 from the similar 1995 period
as key retailers carried over into 1996 significantly higher inventory
levels of the Company's product, especially activity toys. This was
reflected in the Company's rate of order receipt and order backlog
calling for shipment in early 1996 which was down significantly from the
prior year. Also contributing to the decrease in domestic sales
throughout the year was the termination of the Michael Jordan license
which significantly reduced the sale of basketball games in 1996. In
addition, two major retailers who had carried our "pocket" line of
products in 1995 did not carry them in 1996.
Toy segment export sales, foreign royalty income, and direct
shipments from foreign manufacturers to foreign customers included in
consolidated revenues amounted to approximately $3,360,000, $4,222,000,
and $6,696,000, in 1997, 1996, and 1995 respectively.
The loss of 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 decrease in 1996 shipments from 1995 was the result of excess
inventories carried over from the prior year at our overseas partners'
facilities as well as at their customers, and poor product acceptance at
the retail level.
The 1997 increase in sales for the Diversified Products segment of
approximately $1,400,000 consists of an increase of approximately
$1,600,000 for our Diversified business located at our Bryan, Ohio
facility, and a decrease of approximately $200,000 at Strydel, Inc., our
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 our Diversified business located
in Bryan, Ohio.
The increase in 1996 sales for the Diversified Products segment of
approximately 15% was made up of an increase of approximately 7% for our
Diversified business located at our Bryan, Ohio facility (primarily
lithography, metal stamping, and premium business) and an increase of
approximately 67% at Strydel, Inc., our injection molding facility which
increased its sales to automotive companies in 1996 to approximately
$2,400,000 from approximately $1,400,000 in 1995.
The 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
- 18 -
<PAGE>
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.
The Company's gross profit margin percentage in 1996 (24.3%)
decreased significantly from the level of the prior year (35.1%). The
Diversified Products segment gross profit margin increased slightly from
the prior year. Approximately 6.4% of the decrease is the result of the
change in product mix, primarily the decrease in sales of the Making
Creativity Funr category, which is at higher than average gross profit
margins. The majority of the remaining decrease in gross margins is due
to the increase in unabsorbed overhead because of the lower level of
domestic toy production at the Company's domestic facilities.
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.
Selling, administrative, and general expenses decreased in dollars
in 1996 but increased as a percentage of net sales from the 1995 levels.
Of the total decrease of $2,795,000, advertising expense decreased
approximately $1,400,000, employee compensation expense decreased
approximately $500,000, and travel and entertainment expense decreased
approximately $300,000. The decrease in advertising expense was the
result of attempts to control expenditures to a percentage of sales,
rather than committing funds with the expectation of higher sales. The
decrease in employee compensation expense is directly related to the
Company's incentive compensation program, under which bonus payments are
dependant on the Company's profitability. The decrease in travel and
entertainment expense was due to close scrutiny by management.
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.
Interest expense increased marginally in 1996 ($237,000) from 1995
($201,000). The higher levels of borrowing were somewhat offset by the
lower borrowing rate.
The 1997 loss from operations 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.
- 19 -
<PAGE>
The 1996 loss from operations resulted from lower sales volume and
reduced gross margins related to factors previously explained.
Note 3 of Notes to Consolidated Financial Statements presents the
components of the income taxes (credits) for 1997, 1996, and 1995, and
the reconciliation of taxes at the statutory rate to the Company's
income tax expense.
LIQUIDITY AND SOURCES OF CAPITAL
Because of the seasonal nature of the toy business, the Company
normally requires a substantial build-up in working capital from the
beginning of the year to a seasonal peak during the third and early part
of the fourth calendar quarters. Extended payment terms are in general
use in the toy industry to encourage earlier shipments of merchandise
required for selling during the Christmas season. As a result, the
Company's working capital requirements typically increase with seasonal
shipments as collection of a substantial portion of accounts receivable
is deferred until the fourth calendar quarter. This increased working
capital requirement has been financed in recent years by bank borrowings
under both a revolving line-of-credit and by short-term lines-of-credit.
The Company's current ratio at December 31, 1997 decreased to 2.2
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.
The Company's current ratio at December 31, 1996 increased to 2.7
to 1 from 2.4 to 1 at December 31, 1995. The primary reason for the
increase was the change in income taxes from a current liability in 1995
due to the profitable year to a current asset in 1996 because of the
loss year. In addition, accounts receivable and inventories, as well as
accounts payable decreased because of the lower level of sales in 1996.
Accrued employee compensation also decreased significantly because of
the Company's incentive compensation program.
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
- 20 -
<PAGE>
existing facilities. Major expenditures for 1996, in addition to the
lithography project mentioned above, were for the purchase of tooling
for new product in the 1996 and 1997 product lines and other
improvements to the Company's Lithography department. Funding for these
expenditures in 1996 was primarily through borrowings.
On 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 increase in carryover of cash was not as great as the increase
in current liabilities at December 31, 1997 and therefore did have a
negative impact on liquidity during the first quarter of 1998. Based on
current financial projections, the bank financing provided under the
June 27, 1997 agreements may need to be increased. Alternative methods
of increasing working capital are available.
ENVIRONMENTAL MATTERS
The Company is subject to various laws and governmental
regulations concerning environmental matters and employee safety and
health in the United States. The Company is subject to the Occupational
Safety and Health Administration (OSHA) concerning employee safety and
health matters, and the United States Environmental Protection Agency.
These groups and other federal agencies have the authority to promulgate
regulations that could have an impact on the Company's operations.
The Company is committed to a long-term environmental protection
program that reduces emissions of hazardous materials into the
environment, as well as to the remediation of identified existing
environmental or OSHA concerns.
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 1997, 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 1997, 1996, and 1995 resulted
in only a small portion of these purchases being committed in foreign
currencies and therefore only minor exposure to exchange risk.
- 21 -
<PAGE>
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 approximately 10% in 1996 over 1995 levels and increased again
in early 1997, but decreased by the end of 1997, ending at a lower
price than the end of 1996. It is anticipated that there will be a
minor (less than 10%) increase in plastic prices in 1998. 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
Based on a recent assessment, the Company has determined that it
will be necessary to upgrade its current versions of software used on
its mainframe computer system with respect to dates in the Year 2000
and thereafter. Since only minor modifications were made internally to
the packaged software, implementation of the newer version should be
relatively straightforward. However, if the upgrade of software and
minor modifications are not made, or are not completed timely, the Year
2000 Issue could have a material impact on the operations of the
Company.
The Company has initiated formal communications with all of its
significant suppliers and large customers 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.
The Company expects all modifications to be completed and tested by
December 31, 1998. The financial impact of making the required change
will be comprised of internal costs, excluding the costs required to
upgrade and replace systems and equipment in the normal course of
business, and is not expected to be material to the Company's results of
operation.
OTHER INFORMATION
This document and supporting schedules may 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.
- 22 -
<PAGE>
<TABLE>
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations
for the years ended December 31, 1997, and 1996 (in thousands of
dollars, except per share amounts):
<CAPTION>
Net Income
Cost of Net (Loss) Per
Net Products Income Share of
1997 Sales Sold (Loss) Common Stock
- ---- ------- ------- -------- ------------
<S> <C> <C> <C> <C>
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)
======= ======= ======== =======
1996
- ----
March 31 ................... $ 5,321 $ 4,933 $(1,434) $(1.55)
June 30 .................... 6,785 5,793 (1,094) (1.18)
September 30 ............... 12,530 8,857 (33) (.04)
December 31 ................ 11,784 7,982 860 .91
------- ------- ------- -------
TOTALS $36,420 $27,565 $(1,701) $(1.86)
======= ======= ======= =======
</TABLE>
<TABLE>
COMMON STOCK - MARKET, EARNINGS, AND DIVIDEND INFORMATION
The principal market for the Common Stock of The Ohio Art Company
is the American Stock Exchange under Ticker Symbol OAR. The approximate
number of record holders of the Company's Common Stock at December 31,
1997 was 621. 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 1997 and 1996 by quarter, were as
follows:
<CAPTION>
1997 1996
------------------------------ ------------------------------
Sales Prices Earnings Dividend Sales Prices Earnings Dividend
High Low (Loss) Declared High Low (Loss) Declared
------ ----- -------- -------- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jan-Mar $19.75 $15.50 $(1.34) $.08 $28.50 $22 $(1.55) $.13
Apr-Jun 20 15.88 (2.60) .04 26.25 16 (1.18) .04
Jul-Sep 17.25 14.75 (.31) .04 19 15.50 (.04) .04
Oct-Dec 15.25 14.63 (1.43) .04 17.75 14.50 .91 .04
The Company expects to continue its policy of paying regular cash
dividends, although there is no assurance as to future dividends because
they are dependent on future earnings, capital requirements, and
financial condition. Foregoing prices are retroactively adjusted to
reflect the 1996 two for one stock split.
</TABLE>
- 23 -
<PAGE>
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 December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of The Ohio Art Company and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Toledo, Ohio
February 6, 1998
- 24 -
<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,846,404 $ 1,077,835
Accounts receivable, less allowances of
$415,000 in 1997 and $365,000 in 1996 8,295,072 6,221,932
Income taxes recoverable 1,066,346 711,348
Inventories:
Finished products 3,581,942 3,996,972
In process 312,434 393,464
Materials and purchased parts 2,356,891 2,328,956
----------- -----------
Inventories at FIFO 6,251,267 6,719,392
Less adjustment to reduce inventories to
last-in, first-out (LIFO) method 2,447,285 2,429,182
----------- -----------
Inventories at LIFO 3,803,982 4,290,210
Prepaid expenses 651,336 257,485
Deferred federal income taxes 533,000 692,000
----------- -----------
Total current assets 16,196,140 13,250,810
Other assets:
Cash value of life insurance, less
policy loans of $437,094 in 1997
and $425,280 in 1996 649,649 589,208
Marketable equity security 1,590,563 931,750
Deposits and advances 181,242 240,450
Goodwill -- 820,323
Pension 871,731 785,223
----------- -----------
3,293,185 3,366,954
Property, plant and equipment:
Land 164,626 164,626
Land improvements 135,261 121,930
Leasehold improvements 132,920 132,920
Buildings and building equipment 7,103,551 5,942,491
Machinery and equipment 28,441,894 27,279,286
----------- -----------
35,978,252 33,641,253
Allowances for depreciation and
amortization 23,736,776 22,176,164
----------- -----------
12,241,476 11,465,089
----------- -----------
$31,730,801 $28,082,853
=========== ===========
<FN>
See accompanying notes
</FN>
</TABLE>
- 25 -
<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets (continued)
<CAPTION>
December 31
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,436,958 $ 3,168,953
Employees' compensation and amounts
withheld therefrom 660,115 503,675
Taxes, other than federal income taxes 426,026 334,046
Other liabilities 1,338,633 389,399
Dividend payable 35,691 36,904
Current portion of long-term debt 1,559,000 500,000
----------- -----------
Total current liabilities 7,456,423 4,932,977
Long-term obligations, less current portion 15,073,338 8,361,540
Deferred federal income taxes 533,000 732,851
Stockholders' equity:
Common Stock, par value $1.00 per share:
Authorized - 1,935,552 shares
Outstanding - 892,271 shares in 1997 and
922,277 shares in 1996 (excluding 67,489
and 37,483 treasury shares, respectively) 892,271 922,277
Additional paid-in capital 204,671 225,308
Retained earnings 7,145,602 12,888,810
Unrealized investment gains, net of
income taxes of $428,500 in 1997 and
$216,500 in 1996 830,828 420,232
Reduction for:
Minimum pension liability (42,332) (38,142)
ESOP loan guarantee (363,000) (363,000)
----------- -----------
Total stockholders' equity 8,668,040 14,055,485
----------- -----------
$31,730,801 $28,082,853
=========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
- 26 -
<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Consolidated Statements of Operations
<CAPTION>
Year ended December 31
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $36,290,922 $36,419,719 $47,354,141
Royalty income 521,126 705,966 1,617,032
Other income 268,478 401,507 258,948
----------- ----------- -----------
37,080,526 37,527,192 49,230,121
Costs and expenses:
Cost of products sold 28,777,624 27,565,050 30,756,599
Selling, general and
administrative 12,259,562 12,355,881 15,150,917
Interest 1,124,149 237,193 201,024
Charge for impairment of
goodwill 799,320 -- --
----------- ----------- -----------
42,960,655 40,158,124 46,108,540
----------- ----------- -----------
Income(loss) before income taxes (5,880,129) (2,630,932) 3,121,581
Income taxes (credit) (736,000) (929,847) 1,160,900
----------- ----------- -----------
Net income (loss) $(5,144,129) $(1,701,085) $ 1,960,681
=========== =========== ===========
Net income (loss) per share $(5.68) $(1.86) $2.04
=========== =========== ===========
Average number of shares
outstanding 904,903 915,630 963,048
=========== =========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
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<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
<CAPTION>
Additional Reduction for Reduction for
Common Paid-In Retained Unrealized Minimum Pension ESOP Loan
Stock Capital Earnings Gains Liability Guaranty
-------- -------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 $497,470 $759,632 $14,389,158 $376,775 $ (40,211) $ (96,749)
Net income 1,960,681
Cash dividends declared($.24 per share) (236,534)
Change in ESOP loan guarantee (266,251)
Purchase of 16,837 treasury shares (16,837) (26,637) (539,577)
Pension liability adjustment 12,634
Change in unrealized gain on marketable
equity security 58,389
-------- -------- ----------- ---------- -------------- -------------
Balances at December 31, 1995 480,633 732,995 15,573,728 435,164 (27,577) (363,000)
Net loss (1,701,085)
Cash dividends declared ($.25 per share) (234,281)
Stock split 470,751 (470,751)
Purchase of 29,107 treasury shares (29,107) (36,936) (749,552)
Pension liability adjustment (10,565)
Change in unrealized gain on marketable
equity security (14,932)
-------- -------- ----------- ---------- -------------- -------------
Balances at December 31, 1996 922,277 225,308 12,888,810 420,232 (38,142) (363,000)
Net loss (5,144,129)
Cash dividends declared ($.20 per share) (180,673)
Purchase of 30,006 treasury shares (30,006) (20,637) (418,406)
Pension liability adjustment (4,190)
Change in unrealized gain on marketable
equity security 410,596
-------- ------- ------------ ---------- -------------- -------------
Balances at December 31, 1997 $892,271 $204,671 $ 7,145,602 $830,828 $(42,332) $(363,000)
======== ======== =========== ========== ============== =============
<FN>
See accompanying notes.
</FN>
</TABLE>
- 28 -
<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Year ended December 31
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(5,144,129) $(1,701,085) $1,960,681
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 1,643,777 1,584,729 1,588,818
Provision for losses on accounts receivable 108,808 29,659 34,048
Gain on sale of property, plant and equipment (14,709) (55,782) (13,762)
Gain on sale of marketable equity security -- (120,384) --
Charge for impairment of goodwill 799,320 -- --
Deferred federal income taxes (272,000) (204,900) 127,800
Increase (decrease) in scholarship obligation 43,132 3,638 (1,579)
Changes in operating assets and liabilities:
Accounts receivable (2,181,948) 871,673 387,798
Inventories 486,228 1,792,323 (2,503,471)
Accounts payable 268,005 (417,508) (1,242,334)
Prepaid and accrued expenses and other assets and liabilities 241,633 (2,880,682) 410,002
----------- ----------- -----------
Net cash provided by (used in) operating activities (4,021,883) (1,098,319) 748,001
INVESTING ACTIVITIES
Purchases of plant and equipment (2,434,663) (7,584,653) (1,506,274)
Proceeds from sale of property, plant, and equipment 50,211 75,250 32,550
Changes in net cash value of life insurance (60,441) (45,509) (53,716)
Proceeds on sale of marketable equity security -- 172,800 --
----------- ----------- -----------
Net cash used in investing activities (2,444,893) (7,382,112) (1,527,440)
FINANCING ACTIVITIES
Borrowings 27,500,000 38,100,000 7,400,000
Repayments (19,613,720) (30,300,000) (7,400,000)
Cash dividends paid (181,886) (226,215) (237,544)
Purchase of treasury shares (469,049) (815,595) (583,051)
----------- ----------- -----------
Net cash provided by (used in) financing activities 7,235,345 6,758,190 (820,595)
</TABLE>
- 29 -
<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Year ended December 31
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents:
Increase (decrease) during year 768,569 (1,722,241) (1,600,034)
At beginning of year 1,077,835 2,800,076 4,400,110
----------- ----------- -----------
Cash and cash equivalents at end of year $1,846,404 $1,077,835 $2,800,076
=========== =========== ===========
Supplemental disclosure of noncash transaction:
During 1995, the Company was eligible to receive the death benefits of four life insurance policies
with net cash values totalling $51,534, which have been included in accounts receivable at December
31, 1995.
<FN>
See accompanying notes.
</FN>
</TABLE>
- 30 -
<PAGE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of The Ohio
Art Company and its subsidiaries (the Company) after elimination of
significant intercompany accounts, transactions and profits.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents
Cash equivalents consist of investments with an original maturity of
three months or less when purchased.
Property, Plant and Equipment
Property, plant and equipment are stated on the basis of cost.
Depreciation and amortization are computed by the straight-line method
over the estimated useful lives of the respective assets.
Goodwill
Goodwill represents the excess of cost over equity in net assets of
businesses acquired. 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
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.
- 31 -
<PAGE>
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 $3,283,000,
$2,838,000, and $4,189,000 in 1997, 1996 and 1995, respectively.
Net Income (Loss) Per Share
Net income (loss) per share is computed based upon the average number of
shares outstanding during the year after giving effect to released
shares held by the Company's Employee Stock Ownership Plan. The
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", in 1997.
The Company adopted this accounting standard on December 31, 1997.
There was no effect on earnings per share as a result of adoption for
any periods presented, as 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.
Accounting Pronouncements
The FASB issued Statement of Financial Accounting Standards Nos. 130,
"Reporting Comprehensive Income", and 131, "Disclosures about Segments
of an Enterprise and Related Information", in 1997. The Company will
adopt the provisions of Statement Nos. 130 and 131 in 1998. Statement
130 requires that comprehensive income, which includes net income and
other comprehensive income consisting of minimum pension liability
adjustments and unrealized gains and losses on certain security
investments, be reported as a total in the financial statements.
Statement No. 131 requires that operating segment financial information
be reported on a basis consistent with the Company's internal reporting
that is used for evaluating segment performance and allocating
resources. Adoption of Statement Nos. 130 and 131 will have no effect
on the Company's consolidated results of operations, financial position
or cash flows. The Company is evaluating the effects of Statement No.
131 on the disclosure of industry segment information.
- 32 -
<PAGE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. LONG-TERM OBLIGATIONS
December 31
1997 1996
----------- -----------
Revolving credit agreements $10,000,000 $7,800,000
Term loan 5,686,208 --
Long-term obligation--scholarships 158,066 207,448
Long-term obligation--pension 425,064 491,092
Note payable by ESOP, guaranteed by
the Company 363,000 363,000
----------- -----------
16,632,338 8,861,540
Less current portion 1,559,000 500,000
----------- -----------
$15,073,338 $ 8,361,540
=========== ===========
The Company has a credit agreement that provides for borrowings up to
$13,000,000 on a revolving credit basis to June 2000 at the Bank's prime
rate or a fixed rate based on the federal funds rate plus 175 to 225
basis points. A quarterly facility fee is payable equal to .125% of the
unused portion of the facility. The Company's intention is to pay down
revolving credit borrowings in the amount of $900,000 during 1998.
The term loan is payable to a bank in monthly installments of $96,535
including interest at 9.0% through June 2002. The loan is
collateralized by certain lithography equipment.
The credit agreement contains certain financial covenants that require,
among other things, maintenance of minimum amounts and ratios of working
capital, minimum amounts of tangible net worth, maximum ratio of
indebtedness to tangible net worth and limits purchases of property,
plant and equipment. Certain financial covenants have not been met, and
the bank has waived such noncompliance.
The Company has recorded the present value of the long-term obligations
related to ETCH A SKETCHr scholarship contests conducted in 1985 and
1990. Future payments to the contest winners are payable by the
Company through 2012.
Maturities of the term loan for the five years subsequent to December
31, 1997 are as follows: 1998 - $659,000; 1999 - $721,000;
2000 - $788,000; 2001 - $862,000 and 2002 - $2,656,000.
Interest paid during the years December 31, 1997, 1996 and 1995 was
$1,037,668, $455,594 and $190,714, respectively. The Company
capitalized $216,989 of construction period interest into plant and
equipment in 1996.
- 33 -
<PAGE>
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:
December 31
1997 1996
------ ------
Deferred tax assets: (In Thousands)
Net operating loss carryforward (expires 2012) $1,046 $ --
Inventories 184 242
Nondeductible accruals 174 159
Charitable contribution carryover 145 84
Allowance for uncollectible accounts receivable 141 124
Supplemental benefit accrual 131 139
Deferred royalties 101 1
Other 89 169
------ ------
2,011 918
Deferred tax liabilities:
Depreciation $ 670 $ 489
Unrealized gains on marketable equity security 428 217
Pension accrual 280 253
------ ------
1,378 959
------ ------
633 (41)
Valuation allowance (633) --
------ ------
Net deferred tax liabilities $ -- $ (41)
====== ======
The above are reflected in the consolidated balance sheets as follows:
December 31
1997 1996
------ ------
Current deferred tax asset $ 533 $ 692
Noncurrent deferred tax liability (533) (733)
------ ------
$ -- $ (41)
====== ======
- 34 -
<PAGE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INCOME TAXES (continued)
Significant components of the provision (credit) for income taxes
attributable to operations are as follows:
Year ended December 31
1997 1996 1995
------ ------ ------
Federal: (In Thousands)
Current $ (464) $ (725) $ 898
Deferred (272) (205) 128
------ ------ ------
(736) (930) 1,026
State and local -- -- 135
------ ------ ------
$ (736) $ (930) $1,161
====== ====== ======
The reasons for the difference between total income tax expense (credit)
and the amount computed by applying the statutory federal income tax
rate to income (loss) before income taxes follows:
Year ended December 31
1997 1996 1995
------ ------ ------
(In Thousands)
Income taxes (credit) at statutory rate $(1,999) $ (895) $1,061
Charge for goodwill impairment 272 -- --
Valuation allowance 633 -- --
Effect of tax rate difference on net
operating loss carryback 200 -- --
State and local income taxes -- -- 89
Other items (credit) 158 (35) 11
------ ------ ------
Total income tax expense $(736) $ (930) $1,161
Total income tax payments (refunds) during 1997, 1996 and 1995 were
$(128,178), $887,500, and $729,349, respectively.
4. PENSION PLANS
The Company has pension plans covering substantially all of its
employees. Benefits provided by the plans are based on compensation,
years of service, and a negotiated rate per year of service for
collectively-bargained plans. The Company generally funds pension costs
based upon amortization of prior service costs over 25 years, but not in
excess of the amount deductible for income tax purposes. One plan,
which has a limited number of participants, is unfunded.
- 35 -
<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PENSION PLANS (continued)
The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated
balance sheets at December 31:
<CAPTION>
1997 1996
-------------------------- --------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested benefits $ 8,903,617 $ 1,354,297 $ 8,489,193 $ 1,304,352
Nonvested benefits 89,809 1,219 79,917 805
----------- ----------- ----------- -----------
8,993,426 1,355,516 8,569,110 1,305,157
Effect of future salary increases 1,177,205 365,568 1,309,818 155,344
----------- ----------- ----------- -----------
Projected benefit obligation for service rendered
to date 10,170,631 1,721,084 9,878,928 1,460,501
Plan assets (principally invested in immediate
participation guaranteed fixed income insurance
contracts and common stocks) at fair value 11,011,557 922,720 10,265,209 814,065
----------- ----------- ----------- ----------
Plan assets in excess of (less than) projected
benefit obligation 840,926 (798,364) 386,281 (646,436)
Unrecognized net (asset) liability at the
transition date (77,275) 229,723 (137,368) 259,618
Prior service cost not yet recognized in net
periodic pension cost 66,877 7,868 80,990 9,289
Unrecognized net (gain) loss 41,203 235,555 455,320 (39,561)
Adjustment required to recognize minimum liability -- (99,846) -- (74,002)
----------- ----------- ----------- -----------
Net pension asset (liability) $ 871,731 $ (425,064) $ 785,223 $ (491,092)
=========== =========== =========== ===========
</TABLE>
- 36 -
<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PENSION PLANS (continued)
<CAPTION>
1997 1996
-------------------------- --------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Pension assets (liabilities) included in:
Other assets $ 871,731 $ -- $ 785,223 $ --
Long-term obligations -- (425,064) -- (491,092)
----------- ----------- ----------- -----------
Net pension asset (liability) $ 871,731 $ (425,064) $ 785,223 $ (491,092)
=========== =========== =========== ===========
</TABLE>
- 37 -
<PAGE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PENSION PLANS (continued)
Amounts relating to the minimum pension liability have been recorded as
follows at December 31:
1997 1996
-------- --------
Minimum pension liability $(99,846) $(74,002)
Intangible pension asset $ 35,706 $ 16,211
Equity reduction, net of deferred federal income
taxes of $21,808 in 1997 and $19,649 in 1996 $ 42,332 $ 38,142
Net periodic pension cost includes the following components:
Year ended December 31
1997 1996 1995
---------- ---------- ----------
Service cost--benefits earned
during the period $ 316,479 $ 261,233 $ 309,378
Interest cost on projected
benefit obligation 831,153 767,158 742,749
Return on plan assets (1,254,585) (648,627) (1,474,904)
Net amortization and deferral 311,313 (277,809) 617,028
---------- ---------- ----------
Net periodic pension cost $ 204,360 $ 101,955 $ 194,251
========== ========== ==========
Actuarial assumptions:
Discount rate 7.5% 7.5% 7.5%
Long-term rate of return 8.5% 8.5% 8.5%
Rate of increase of future
compensation 5.5% 5.5% 5.5%
The Company has an Employee Stock Ownership Plan (ESOP) for eligible
employees which is accounted for in accordance with Statement of
Position (SOP) 93-6 of the Accounting Standards Division of the
American Institute of Certified Public Accountants. The ESOP acquired
16,500 shares during 1995. The fair market value of the 21,738
unallocated shares is $323,353 and $374,981 at December 31, 1997 and
1996, 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.
- 38 -
<PAGE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PENSION PLANS (continued)
Compensation expense in 1995, measured using the fair market value when
the shares are committed to be released, amounted to $1,098. Dividends
paid on unallocated shares in the trust are recorded as compensation
rather than as dividends. ESOP funding, as determined by the Board of
Directors, amounted to $1,098 in 1995 (none in 1997 and 1996).
5. INDUSTRY SEGMENTS
The Company is principally engaged in two lines of business which are
the manufacture and distribution of toys and the manufacture and sale of
custom lithographed products and molded plastic products to other
manufacturers and consumer goods companies. The toy segment principally
includes drawing activity toys, sports activity toys, pre-school
activity toys, and other inexpensive toys. The Company's principal
market includes retailers throughout the United States. In addition,
revenue is derived from international markets.
- 39 -
<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INDUSTRY SEGMENTS (continued)
Financial information relating to industry segments is as follows:
<CAPTION>
Depreciation
and
Operating Identifiable Amortization Capital
Business Segment Net Sales Earnings(Loss) Assets Expense Expenditures
- ---------------------------- ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1997
- ----
Toy Segment $22,260,553 $(5,780,550) $12,813,882 $1,065,564 $ 813,090
Diversified Products Segment 14,030,369 1,296,112 11,472,504 578,213 1,621,573
----------- ----------- ----------- ---------- ----------
$36,290,922 (4,484,438) 24,286,386 $1,643,777 $2,434,663
=========== ========== ==========
General corporate amounts (271,542) 7,444,415
Interest expense (1,124,149)
----------- -----------
Totals $(5,880,129) $31,730,801
=========== ===========
1996
- ----
Toy Segment $23,767,569 $(2,996,522) $11,393,449 $1,151,578 $ 792,404
Diversified Products Segment 12,652,150 1,324,557 10,322,133 433,151 6,792,249
----------- ----------- ----------- ---------- ----------
$36,419,719 (1,671,965) 21,715,582 $1,584,729 $7,584,653
=========== ========== ==========
General corporate amounts (721,774) 6,367,271
Interest expense (237,193)
----------- -----------
Totals $(2,630,932) $28,082,853
=========== ===========
</TABLE>
- 40 -
<PAGE>
<TABLE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INDUSTRY SEGMENTS (continued)
<CAPTION>
Depreciation
and
Operating Identifiable Amortization Capital
Business Segment Net Sales Earnings(Loss) Assets Expense Expenditures
- ---------------------------- ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1995
- ----
Toy Segment $36,356,222 $ 2,219,434 $14,064,941 $1,163,628 $ 952,512
Diversified Products Segment 10,997,919 1,661.052 4,604,486 425,190 553,762
----------- ----------- ----------- ---------- ----------
$47,354,141 3,881,386 18,669,427 $1,588,818 $1,506,274
=========== ========== ==========
General corporate amounts (558,781) 6,902,636
Interest expense (201,024)
----------- -----------
Totals $ 3,121,581 $25,572,063
=========== ===========
</TABLE>
- 41 -
<PAGE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INDUSTRY SEGMENTS (continued)
Operating earnings are net sales less operating expenses directly
attributable to the segments and general corporate expenses which are
allocated to the segments. Identifiable assets by business segment
include all assets directly identified with those operations (accounts
receivable, inventories and property, plant and equipment and
intangibles). General corporate expenses consist of the costs of
operating the corporate headquarters and other corporate expenses not
directly attributable to the operations of the two segments.
Toy segment export sales from the United States, foreign royalty income,
and direct shipments from foreign manufacturers to foreign customers
included in consolidated revenues amounted to approximately $3,360,000,
$4,222,000, and $6,696,000 in 1997, 1996, and 1995, respectively, of
which approximately $1,565,000, $2,412,000, and $2,595,000 were to
customers in the European community. Identifiable assets located
outside the United States are less than 10% of consolidated assets at
December 31, 1997 and 1996.
Substantially all of the Company's accounts receivable are from toy
retailers, wholesalers, and other toy manufacturers. The Company has
credit insurance to cover a portion of its losses on accounts
receivable. The Company had net credit losses (recoveries) of $65,000,
$50,000, and $84,000 during 1997, 1996 and 1995, respectively. Net
toy segment sales includes approximately $9,203,000, $7,000,000, and
$14,200,000 in 1997, 1996 and 1995, respectively, to two major
retailers.
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 December 31, 1997 are as shown below:
- 42 -
<PAGE>
The Ohio Art Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. OPERATING LEASES (continued)
Office Equipment Total
---------- ---------- ----------
1998 $ 136,861 $ 67,802 $ 204,663
1999 140,998 39,753 180,751
2000 145,260 9,734 154,994
2001 149,650 149,650
2002 154,173 154,173
Thereafter 548,833 548,833
---------- ---------- ----------
$1,275,775 $ 117,289 $1,393,064
========== ========== ==========
- 43 -
<PAGE>
Exhibit 21
THE OHIO ART COMPANY AND SUBSIDIARIES
Percentage
of Voting
Name of Subsidiaries and Jurisdiction Control Owned
of Incorporation by Registrant
------------------------------------- -------------
Strydel, Inc. (Ohio) 100%
Trinc Company (Ohio) 100%
- 44 -
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of The Ohio Art Company for the year ended December 31,
1997, of our report dated February 6, 1998, included in Exhibit 13 to
Form 10-K.
Our audits also included the financial statement schedule of The Ohio
Art Company and Subsidiaries listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Toledo, Ohio
February 6, 1998
- 45 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,846,404
<SECURITIES> 0
<RECEIVABLES> 8,710,072
<ALLOWANCES> 415,000
<INVENTORY> 3,803,982
<CURRENT-ASSETS> 16,196,140
<PP&E> 35,978,252
<DEPRECIATION> 23,736,776
<TOTAL-ASSETS> 31,730,801
<CURRENT-LIABILITIES> 7,456,423
<BONDS> 0
0
0
<COMMON> 892,271
<OTHER-SE> 7,775,769
<TOTAL-LIABILITY-AND-EQUITY> 31,730,801
<SALES> 36,290,922
<TOTAL-REVENUES> 37,080,526
<CGS> 28,777,624
<TOTAL-COSTS> 28,777,624
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,124,149
<INCOME-PRETAX> (5,880,129)
<INCOME-TAX> (736,000)
<INCOME-CONTINUING> (5,144,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,144,129)
<EPS-PRIMARY> (5.68)
<EPS-DILUTED> (5.68)
</TABLE>
