Back to GetFilings.com
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, 2002
Commission file number 0-4479.
THE OHIO ART COMPANY
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-4319140
- ----------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 111, Bryan, Ohio 43506
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 419-636-3141
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
Common Stock, $1 Par Value registered
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 (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ].
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of April 26, 2002 was approximately $8,567,000 (based upon the
closing price on The American Stock Exchange). The number of shares outstanding
of the issuer's Common Stock as of April 26, 2002 was 886,784. It is estimated
that 43% of that stock is held by non-affiliates. (Excludes shares beneficially
owned by officers and directors and their immediate families).
SAFE HARBOR STATEMENT
This document and supporting schedules contain "forward-looking" statements
as defined in the Private Securities Litigation Reform Act of 1995, and as such,
only reflects the Company's best assessment at this time. Investors are
cautioned the forward-looking statements involve risks and uncertainties, that
actual results may differ materially from such statements, and that investors
should not place undue reliance on such statements. For a discussion of factors
that may affect actual results, investors should refer to Item 1 of this Form
10-K.
2
PART I
Item 1. Business
The Ohio Art Company and its subsidiaries (the "Company") is principally
engaged in two lines of business: (a) the manufacture and distribution of toys
(both domestically and internationally) and (b) the manufacture and sale of
custom metal lithography (Ohio Art Diversified) and molded plastic products
(Strydel Diversified) to other manufacturers and consumer goods companies. (See
Note 7 of Notes to Consolidated Financial Statements included herein for the
year ended January 31, 2002.)
The Company manufactures and markets approximately 50 toy items including
the nationally advertised Etch A Sketch(R), Travel Etch A Sketch(R), and Pocket
Etch A Sketch(R) drawing devices, Betty Spaghetty(R) doll, Water T-Ball(TM),
basketball sets and drums.
The Company maintains showrooms in Bryan, Ohio and New York City and
distributes its products through its own full-time sales force and through
manufacturers' representatives. The toy products are sold directly to general
and specialty merchandise chains, discount stores, wholesalers, mail order
houses, and both direct to customers and through licensees in foreign countries.
The Company's Diversified Products segments manufacture specialty plastic
components and lithographic metal items such as parts for automobile trim,
lithographed metal serving trays, replica metal signs, photofilm canisters,
decorative tins, and metal food containers. These products are sold to others
directly or through manufacturers' representatives.
The following table reflects the approximate percentage of total sales
contributed by each class of similar products of the Company's total sales in
any of the last three fiscal years.
Year Ended
-------------------------------------
CLASS 1/31/02 1/31/01 1/31/00
----- ------- ------- -------
Writing and Drawing Toys 27% 26% 24%
Activity Toys 5% 9% 12%
Small Dolls 37% 28% 33%
Diversified Products 31% 37% 31%
The toy industry is highly competitive, and among the Company's competitors
are a number of substantially larger firms having greater financial resources
and doing a substantially greater volume of business. Published statistics for
the year 2001 indicate the Company accounted for less than one percent (1%) of
the total toy sales in the United States. Competition in the Company's business
is believed to be based on novelty of product, customer appeal, merchandising of
character licenses, ability to deliver products on a timely basis, price, and
reputation for quality.
3
Diversified Products segments are primarily products manufactured to
customers' specifications. The Company believes that the principal competitive
factors in this business are price and demonstrated ability to deliver quality
products on a timely basis.
The Company's toy business is seasonal and historically approximately 50%
to 60% of its sales have been made in the last six months of the fiscal year.
Second half shipments in the last two fiscal years amounted to 55% and 53% of
annual sales respectively. Results for the first six months of fiscal year 2002
were affected by general business contractions in key customer segments of the
Company's non-toy business that along with reduced spring water toy shipments,
more than offset a small volume increase in the Company's major toy categories.
International shipments of the Betty Spaghetty(R) fashion doll rose
significantly from the comparable six month period in fiscal year 2001.
Historically the second half is particularly strong as the primary selling
season is prior to the Christmas holiday. The Company's customers in recent
years have ordered later in the year in an effort to control inventories. The
Diversified Products segments do not have any established seasonal pattern.
For additional information regarding the Company's various segments, see
Footnote 7 to the Consolidated Financial Statements.
The Company's order backlog at the end of any fiscal year is not a
meaningful predictor of financial results of the preceding or succeeding year.
Historically, new toy products have been introduced at the annual industry trade
fair in February in New York and at foreign trade fairs, which generally occur
within a thirty-day period prior to the U.S. trade fair. In recent years there
has been a trend to earlier introduction of new items to major customers. Major
customers normally place tentative orders during the first and second calendar
quarters which indicate the items they will be buying for the coming season and
an indication of quantity. These orders are usually "booking" orders which have
no designated shipment date. Customers confirm specific shipment dates during
the year to meet their requirements. Industry practice is that these orders are
cancelable until shipped at no cost to the customer. As the Company's product
mix has a high percentage of promotional type products, the dollar amount of
orders in the order backlog which have been canceled in the third and fourth
quarters has been unpredictable. It is therefore difficult to state the level of
firm order backlog.
Order backlog at any point in time is impacted by the timing of the
February trade fair and placing of initial tentative orders by major accounts,
the product mix between spring and fall items, the mix between domestic versus
international orders, and the year-end inventory carry-over of the Company's
products at the retail level on the part of its customers. The order backlogs
believed to be firm, subject to comments above, as of mid-April were:
2002 - approximately $6,200,000
2001 - approximately $7,900,000
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.
4
Extended payment terms are in general use in the toy industry to encourage
earlier shipment of merchandise required for selling during the spring and
Christmas seasons.
The Company's basic raw materials are sheet metal, inks and coatings,
plastic resins, fiber board, and corrugated containers and are generally readily
available from a number of sources. Although the Company has at times not been
able to procure sufficient quantities of certain raw materials to meet its
needs, adequate supplies have been available in recent years.
The Company imports a variety of plastic and miscellaneous parts as well as
finished products from China and steel from Japan for its lithography business.
In the fiscal years ended January 31, 2002 and 2001, these imports accounted for
approximately 30% and 31%, respectively, of the total cost of goods sold.
Tariffs, internal affairs of foreign countries, and other restraints on
international trade have not materially affected the Company to date but, no
assurance can be given that these conditions will continue. The Company has
utilized forward exchange contracts to cover requirements for major purchase
commitments based on foreign currencies. However, the use of foreign exchange
contracts has not been necessary in the past nine years.
Preventing competitors from copying the Company's toy products is
important, and where possible, the Company attempts to protect its products by
the use of patents, trademarks, copyrights, and exclusive licensing agreements.
The Company believes its patents, trademarks, trade names, copyrights, and
exclusive licensing agreements are important to its business, but it is unable
to state what their value is, or that their validity will be maintained, or that
any particular pending application will be successful. It is believed that the
loss of proprietary rights for any important product might have a material
adverse effect on the Company's business.
The Company's Diversified Products segments sell products manufactured to
customers' specifications and does not rely on its own patents, trademarks, or
copyrights to any extent.
The Company has an established program for licensing others to manufacture
and/or distribute its products outside the United States. Matching its success
in fiscal 2001, international sales experienced double-digit increases in fiscal
2002 on sales in Europe based on the continued strength of the Betty
Spaghetty(R) fashion doll.
Because of the seasonal nature of the Company's business, the number of
full-time employees at January 31, 2002, 2001, and 2000 is not as indicative of
activity as the average number of employees during the year. The average number
of employees has been: 2002 - 204, 2001 - 304, 2000 - 309.
The Company maintains its own design and development staff and, in
addition, utilizes contractual arrangements with outside development groups.
Approximately $346,000, $328,000, and $514,000 for the years ended January 31,
2002, 2001, and 2000, respectively, was spent on such activities. Outside
development expenses for 2002, 2001, and 2000 were approximately $26,000,
$13,000, and $70,000 respectively.
5
Customers of the toy segment include a number of large retailers. A number
of major toy retailers have, in recent years, experienced financial difficulties
resulting in either bankruptcy, restructuring, or slow payment. The loss of any
of these customers could have a material adverse effect on this segment of the
Company's business. The Company's consolidated revenues for the fiscal year
ended January 31, 2002 to major toy retailers approximated $6,300,000
($6,700,000 and $7,700,000 for the years ended January 31, 2001 and January 31,
2000, respectively) to Wal-Mart and $3,000,000 to Target for the year ended
January 31, 2002 (and to Toys R Us of $4,500,000 and $6,400,000 for the years
ended January 31, 2001 and January 31, 2000, respectively).
Sales of the Company's Diversified Products segments are concentrated in a
limited number of accounts. Sales to the five largest customers account for
approximately 77% and 70% in fiscal 2002 and 2001, respectively, of the total
sales of these segments. The loss of any of these customers could have a
material adverse effect on the Diversified Products segments of the Company's
business.
Item 2. Properties
The Company owns plants located in Bryan, Ohio, which consist of
approximately 60,000 square feet of office, 374,000 square feet of production,
and 227,000 square feet of warehouse space. The Company also owns a plant in
Stryker, Ohio, which consists of approximately 134,000 square feet. The majority
of the Company's facilities are of masonry construction and are adequate for its
present operations. Production of metal lithography is normally scheduled on a
two- shift, eight hour, five day week with overtime for Saturday and Sunday at
the Bryan, Ohio facilities. The Stryker, Ohio plant is normally scheduled on the
basis of three-shift operations.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries is involved in pending
legal procedures which, in the aggregate, could materially affect the Company's
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
6
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
COMMON STOCK - MARKET, EARNINGS, AND DIVIDEND INFORMATION
The principal market for the Common Stock of The Ohio Art Company is the
American Stock Exchange under Ticker Symbol OAR. The approximate number of
record holders of the Company's Common Stock at January 31, 2002 was 781. 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 2002
and 2001 by quarter, were as follows:
Fiscal Year Ended January 31, 2002
----------------------------------
Sales Prices Income Dividend
High Low (Loss) Declared
---- --- ------ --------
Feb - Apr $ 5.00 $ 2.80 $ .05 $.00
May - Jul 17.00 4.90 .79 .00
Aug - Oct 14.45 8.70 1.61 .04
Nov - Jan 30.50 11.90 1.15 .04
Fiscal Year Ended January 31, 2001
----------------------------------
Sales Prices Income Dividend
High Low (Loss) Declared
---- --- ------ --------
Feb - Apr $18.00 $11.25 $(1.61) $.00
May - Jul 16.38 5.88 (.35) .00
Aug - Oct 10.25 5.13 .71 .00
Nov - Jan 6.50 2.00 (.34) .00
Given the financial condition of the Company, the Board of Directors suspended
dividend payments effective April 16, 1999. Dividend payments were reinstated on
December 4, 2001.
7
Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA YEARS ENDED
JANUARY 31, 2002, 2001, 2000 AND 1999, AND DECEMBER 31, 1997
Amounts in thousands, except per share data
JANUARY 31 DECEMBER
31
-------------------------------------------------------------------
2002 2001 2000 1999 1997
---- ---- ---- ---- ----
Net Sales and Other Income $46,872 $46,674 $54,777 $47,149 $37,081
Net Income (Loss) 3,136 (1,380) 356 (1,722) (5,144)
Net Income (Loss) per Share
of Common Stock (a) 3.60 (1.59) .41 (1.98) (5.68)
Dividends Declared per
Share of Common Stock .08 .00 .00 .16 .20
Dividends Paid per Share of
Common Stock(b) (e) .04 .00 .04 .16 .20
Book Value per Share of
Common Stock (c) 10.18 6.99 8.53 8.70 9.71
Average Number of Shares
Outstanding 870,787 865,516 865,046 869,307 904,903
Stockholders of Record (d) 781 908 803 691 621
Working Capital (Deficit) $ 4,870 $(3,349) $ 9,694 $(6,204) $ 8,207
Property, Plant and
Equipment (net) 7,804 8,985 10,258 11,478 12,241
Total Assets 22,301 22,944 28,361 33,220 31,731
Long-Term Obligations 5,108 971 13,798 777 15,073
Stockholders Equity 9,030 6,203 7,563 7,716 8,668
Average Number of
Employees 204 304 309 323 303
Note: Amounts for the periods ended January 31, 2000 and 1999 have been restated
to reflect the change from the last-in-first-out (LIFO) method of valuing
inventories to the first-in-first-out (FIFO) method in fiscal year 2001.
(a) Based upon weighted average shares outstanding during the year.
(b) Stock or cash dividend paid every year since 1908 except fiscal year 2001.
(c) Based upon shares outstanding at year-end.
(d) Includes Employee Stock Ownership Plan participants who were 100% vested at
year-end.
8
(e) The Company is subject to dividend restrictions under its line of credit
agreement. The most significant restrictions are: an aggregate amount
declared in each quarter not to
exceed $36,000, aggregate net borrowing availability in excess of
$1,000,000, no event of default existing at the time a dividend is
declared, and various restrictions on transactions with related parties.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operations
The following table sets forth for the periods indicated selected earnings and
expense items, the percentage relationship to net sales, and the percentage
increase or decrease of such items as compared to the corresponding period:
JAN 31 JAN 31 JAN 31 JAN 31 JAN 31
2002 2001 2000 2002 2001
---- ---- ---- ---- ----
(Dollars in thousands) % Increase (Decrease)
Net Sales $45,544 $45,947 $52,539 (.9)% (12.6)%
Gross Margin 13,625 11,436 13,035 19.1% (12.3)%
Percent of Net Sales 29.9% 24.9% 24.8%
Selling, Administrative and General $11,744 $11,804 $12,344 (.5)% ( 4.4)%
Percent of Net Sales 25.8% 25.7% 23.5%
Income from Operations before
Interest Expense $3,209 $ 358 $2,929 796.4% (87.8)%
Percent of Net Sales 7.0% .8% 5.6%
Interest Expense $ 766 $1,739 $2,240 (56.0)% (22.4)%
Percent of Net Sales 1.7% 3.8% 4.3%
Income Tax Expense (Benefit) $(693) $0 $333 N/A (100.0)%
Percent of Net Sales (1.5)% 0% .6%
Net Income (Loss) $3,136 $(1,380) $356 327.2% (487.6)%
Percent of Net Sales 6.9% (3.0)% .7%
The Company's net sales for the year ended January 31, 2002 decreased less than
1% from the prior year. This decrease was more than offset by increases in
royalty and other income resulting in a slight increase in total revenue for the
fiscal year. Sales of the Etch A Sketch(R) drawing toys were up 10% as domestic
shipments continued to grow. Betty Spaghetty(R) fashion doll shipments rose 25%,
primarily due to strong performances by our overseas partners. Those
9
efforts more than offset the continued soft demand for the Betty Spaghetty(R)
fashion doll in the domestic market, which was affected by limited in-store
promotional and national advertising campaigns. Overall, international toy sales
increased 56% on the strength of the retail movement of Betty Spaghetty(R)
fashion dolls in European and Australian markets. Ohio Art Diversified sales
were down 23% from the previous year due to weak demand from our key customer
base, as well as from discontinuing sales to customers whose business did not
meet profit objectives. Strydel Diversified sales were up 9% from the prior year
as the segment reversed the previous year's sales declines.
Net sales for the year ended January 31, 2001 decreased 13% from the prior year
due to significant decreases in Domestic Toy and in Diversified Products
segments. Sales of the Etch A Sketch(R) drawing toys were up over 20%, but this
gain was more than offset by reduced shipments of the Betty Spaghetty(R) fashion
doll. International Toy sales rose over 26% on the strength of the retail
movement of Betty Spaghetty(R) fashion dolls in key market areas. Ohio Art
Diversified sales were down 9% from the previous year because of reduced demand
for lithographed metal sheets to the photographic industry and due to a
reduction in shipments to a major customer experiencing financial difficulties.
Strydel Diversified sales fell 10% from the prior year due to decreasing sales
to the automotive industry.
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 $11,458,000,
$7,170,000, and $5,850,000 in fiscal years 2002, 2001, and 2000, respectively,
of which approximately $9,611,000, $4,700,000, and $4,200,000 in fiscal years
2002, 2001, and 2000, respectively, were to customers in the European community.
The Company's gross margin percentage in 2002 (29.9%) improved considerably from
the previous year (24.9%). All segments reported higher gross margins except
Strydel Diversified. Toy segment margins rose 5.4% due to reduced sales
deduction expenses related to domestic shipments and to overhead savings
resulting from the Company's cost reduction program. Ohio Art Diversified
reported a smaller margin improvement (2.5%), as sales declines partially offset
the savings from lower sales deduction expenses and reduced overhead costs.
Strydel Diversified margins fell 10.6%, largely due to the loss of intercompany
production, which had absorbed some of the fixed overhead costs in previous
years.
The gross margin percentage in 2001 (24.9%) was up slightly from the level of
the prior year (24.8%). Unabsorbed labor and overhead expenses decreased
approximately $800,000, but this gain was offset by a lower gross margin for
Ohio Art Diversified (20.0%) in comparison to the previous year (22.2%). Gross
margins increased for all other segments.
Selling, administrative, and general expenses in 2002 were reduced by
approximately $60,000 from the preceding year. Advertising expense declined
approximately $500,000, as expenditures were limited to a percentage of sales.
Royalty expense increased approximately $100,000 due to higher sales of the
Betty Spaghetty(R) fashion doll, but this was largely offset by lower domestic
10
commission expense. The Company accrued approximately $800,000 for bonuses to be
paid to office employees in fiscal year 2003.
Selling, administrative, and general expenses decreased by approximately
$500,000 in 2001 from 2000 levels. Reduced advertising expenditures and salary
expense accounted for nearly all of the decrease. In addition, royalty,
commission and travel expenses fell in direct proportion to the decline in sales
volume. The latter expenses were largely offset by increases in health insurance
costs absorbed by the Company.
Interest expense decreased significantly in 2002 from 2001. The Company's loans,
which are based on the prime bank lending rate, were favorably affected by
declines in this rate during the year. In addition, the Company repaid
approximately $4,200,000 of the long-term debt in 2002.
Interest expense decreased approximately $500,000 in 2001 from 2000 as the
Company entered into new term loan and revolving credit agreements at more
favorable interest rates. The Company repaid approximately $4,100,000 of the
long-term debt in 2001, nearly all of it in the fourth quarter.
The 2002 income before income taxes of $2,443,000 resulted from a combination of
factors, including significantly lower sales deduction, production-related
overhead, advertising, and interest expenses, along with an increase in royalty
income.
The 2001 pre-tax loss of $1,380,000 resulted from significantly lower sales
volume primarily due to soft demand for the Betty Spaghetty(R) fashion doll and
reduced demand for metal lithography and plastic injection molded parts as
previously explained.
During fiscal year 2000, the Company realized a gain of $978,000 on the sale of
marketable equity securities. The gain, after taxes of $333,000, amounted to
$645,000. The Company sold all of its marketable equity securities in this
transaction and considers the gain to be a one-time event.
Note 1 of Notes to Consolidated Financial Statements presents a summary of
significant accounting policies. A discussion of the change from last in-first
out (LIFO) method inventory valuation to the first in-first out (FIFO) method is
described under the heading "Change in Accounting Principle".
Note 3 of Notes to Consolidated Financial Statements presents the components of
the income tax provision (benefits) for 2002, 2001, and 2000, and the
reconciliation of taxes at the statutory rate to the Company's income tax
expense. Also included in Note 3 is a discussion of the Company's valuation
allowance.
Liquidity And Sources Of Capital
Because of the seasonal nature of the toy business, the Company normally
requires a substantial build-up in working capital from the beginning of the
year to a seasonal peak during the third quarter. Extended payment terms are in
general use in the toy industry to encourage earlier
11
shipments of merchandise required for selling during the Christmas season. As a
result, the Company's working capital requirements typically increase with
seasonal shipments as collection of a substantial portion of accounts receivable
is deferred until the fourth quarter. This increased working capital requirement
has been financed in recent years by borrowings under a revolving line of
credit.
The Company has made a concerted effort to improve cash flows from operating
activities in recent years. Net cash generated from operating activities
amounted to approximately $6,400,000, $2,200,000, and $5,600,000 in fiscal years
2002, 2001 and 2000 respectively. Most of the improvement in these years has
been derived from reductions in inventory and accounts receivable.
Cash used in investing activities for fiscal year 2002 was approximately
$526,000 compared to $495,000 in fiscal year 2001. Purchases of property, plant
and equipment in each of these years amounted to approximately $509,000,
$623,000, and $798,000 in fiscal years 2002, 2001 and 2000 respectively. These
amounts are approximately $1,200,000 less than the provision for depreciation
and amortization in each year. In fiscal year 2000, cash proceeds from the sale
of marketable equity securities provided approximately $1,332,000.
Cash used in financing activities for fiscal years 2002, 2001, and 2000 amounted
to approximately $4,200,000, $3,500,000, and $4,200,000 respectively. Funds
provided by other activities were primarily used to reduce the Company's
long-term and short-term debt.
Effective April 7, 2000, the Company entered into a three-year revolving credit
agreement that provides for borrowings of up to $12,000,000 based on various
percentages of eligible inventory and accounts receivable and six-year term
loans aggregating $3,279,000. In addition, at that time the Company also
executed a $5,200,000 term loan to refinance its existing term loan. Amounts
available under the revolving credit agreement as of January 31, 2002 were
$6,073,000. The revolving credit facility and term loans are collateralized by
the assets of the Company. The outstanding loan balances at January 31, 2002
were $0 on the revolving credit agreement, approximately $5,084,000 on the term
loans, and $303,000 in borrowings on the Company's ESOP.
The outstanding loan balances at January 31, 2001 were approximately $1,926,000
on the Revolving Credit Agreement, approximately $7,285,000 on the term loans,
and $343,000 in borrowings on the Company's ESOP.
The Company was not in compliance with the minimum tangible net worth covenant
included in its Loan and Security Agreement at January 31, 2001. This event of
default was subsequently waived by the lender unconditionally. However, it
appeared probable that the Company would not be able to meet this covenant
requirement at the end of the first quarter of fiscal year 2002 and, as a
result, the debt was classified as a current liability in the January 31, 2001
Balance Sheet.
12
During the second quarter of fiscal 2002, the Company came into compliance with
the financial covenant, and as a result the noncurrent portion of the Company's
debt has been classified in the January 31, 2002 balance sheet as such.
Environmental Matters
The Company is subject to various laws and governmental regulations concerning
environmental matters and employee safety and health in the United States. The
Company is subject to the Occupational Safety and Health Administration (OSHA)
concerning employee safety and health matters, and the United States
Environmental Protection Agency. These groups and other federal agencies have
the authority to promulgate regulations that could have an impact on the
Company's operations.
The Company received an EPA violation letter in May 1999. The Company is engaged
in ongoing negotiations to reach a settlement with the EPA and does not know the
outcome of these negotiations as yet. The Company believes that the settlement
will not have a material adverse effect on its operations.
The Company is committed to a long-term environmental protection program that
reduces emissions of hazardous materials into the environment, as well as to the
remediation of identified existing environmental or OSHA concerns.
Impact Of Inflation And Changing Prices
The Company's current labor contracts and management compensation policies have
lessened the impact that wage inflation has on operations because compensation
above base wages has been based on overall Company performance. Although the
Company continued to be affected by increased costs of materials and services
during fiscal 2002, the magnitude of these increases, other than costs of
natural gas and employee health care, over the past several years has not been
significant in most areas of the business.
While gas rates have stabilized in fiscal 2002, average gas rates during fiscal
2001 were approximately 50% higher than the preceding year. This increase most
directly affected the lithography business, which utilizes gas-powered ovens;
however, the impact to overall lithography product cost was less than 5%. The
Company converted from a self-funded health insurance program to a premium based
insurance plan in fiscal 2002 to reduce its risk exposure related to
catastrophic claims. While successful in reducing risk, the Company's overall
claims experience has continued to rise along with the general increase in the
cost of health-related services. Insurance premiums for fiscal 2003 are expected
to be 30% higher than in fiscal 2002.
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 2002, 2001, and 2000 resulted in only a small portion of these
purchases being committed in foreign currencies and therefore only minor
exposure to exchange risk.
13
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 rose substantially in fiscal 2001, but
were relatively constant throughout fiscal 2002. During a period of rapidly
rising costs the Company is not able to fully recover cost increases through
price increases due to competitive conditions and trade practices.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
The Company's earnings and cash flow are not directly affected by foreign
currency exchange since nearly all purchases and sales are made in U.S.
currency. However, the Company could be affected indirectly, either positively
or negatively, since the majority of its toy products are manufactured by
unrelated vendors overseas and the price of the products is influenced by the
foreign exchange rate.
The Company's interest expense is sensitive to the level of the U.S. prime rate
as described in Note 2 to the Consolidated Financial Statements. The Company is
not a party to any material derivative financial instruments.
14
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Ohio Art Company
Bryan, Ohio
We have audited the 2002 and 2001 consolidated financial statements and
financial statement schedule of The Ohio Art Company and Subsidiaries, listed in
Item 14(a) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. The consolidated financial statements of The Ohio
Art Company and Subsidiaries for the year ended January 31, 2000, prior to the
restatement described in Note 1 were audited by other auditors whose report
dated March 10, 2000, except for note 2 as to which the date was April 7, 2000,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 2002 and 2001 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of The
Ohio Art Company and Subsidiaries as of January 31, 2002 and 2001 and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also audited the adjustments described in Note 1 that were applied to restate
the financial statements as of January 31, 2000 and for the year ended January
31, 2000. In our opinion, such adjustments are appropriate and have been
properly applied.
Crowe, Chizek & Company LLP
Fort Wayne, Indiana
March 7, 2002
15
Report of Independent Auditors
Board of Directors and Shareholders
The Ohio Art Company
We have audited, before the restatement for the accounting change described in
Note 1, the accompanying consolidated statements of operations, shareholders'
equity and cash flows for the year ended January 31, 2000. Our audit also
included the financial statement schedule for the year ended January 31, 2000
listed in the index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion. We have not audited the consolidated financial statements of The Ohio
Art Company and subsidiaries for any period subsequent to January 31, 2000.
In our opinion, the consolidated financial statements referred to above, before
the restatement for the accounting change described in Note 1, present fairly,
in all material respects, the consolidated results of operations and cash flows
of The Ohio Art Company and subsidiaries for the year ended January 31, 2000, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule for the year
ended January 31, 2000, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ERNST & YOUNG LLP
Toledo, Ohio
March 10, 2000, except for
Note 2, as to which the date
is April 7, 2000
16
CONSOLIDATED FINANCIAL STATEMENTS
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets
January 31
2002 2001
----------------------------------------
Assets
Current assets:
Cash $ 2,199,133 $ 535,552
Accounts receivable, less allowances of $435,500
in 2002 and $475,289 in 2001 4,988,226 5,966,155
Inventories:
Finished products 3,246,303 3,804,732
In process 125,970 102,609
Materials and purchased parts 1,570,342 1,715,670
----------------------------------------
Inventories at first in, first out (FIFO) method 4,942,615 5,623,011
Deferred income taxes 823,144 -
Prepaid expenses 380,051 295,991
----------------------------------------
Total current assets 13,333,169 12,420,709
Other assets:
Cash value of life insurance, less policy loans of $185,271 in
2002 and 2001 66,432 36,607
Restricted cash 100,000 100,000
Deposits and advances 611,690 602,839
Prepaid pension asset 635,405 798,773
----------------------------------------
1,413,527 1,538,219
Property, plant and equipment:
Land 164,626 164,626
Land improvements 153,494 153,494
Leasehold improvements 132,920 132,920
Buildings and building equipment 7,853,847 7,774,879
Machinery and equipment 30,419,317 30,075,562
----------------------------------------
38,724,204 38,301,481
Less allowances for depreciation and amortization 30,920,143 29,316,342
----------------------------------------
7,804,061 8,985,139
----------------------------------------
Total assets $ 22,550,757 $ 22,944,067
========================================
See accompanying notes to financial statements.
17
The Ohio Art Company and Subsidiaries
Consolidated Balance Sheets (Continued)
January 31
2002 2001
----------------------------------------
Liabilities
Current liabilities:
Accounts payable $ 3,220,905 $ 3,959,370
Employees' compensation and amounts withheld therefrom 1,584,113 348,493
Taxes, other than income taxes 511,209 239,503
Other liabilities 1,166,464 1,668,348
Dividend payable 35,471
Long-term debt due or callable within one year 1,550,000 9,554,420
----------------------------------------
Total current liabilities 8,068,162 15,770,134
Long-term debt, less amounts due or callable within one year 3,836,727 -
Deferred income taxes 250,112 -
Accrued pension 1,035,040 749,578
Other 236,146 221,520
----------------------------------------
Total liabilities 13,426,187 16,741,232
Stockholders' equity:
Common Stock, par value $1.00 per share:
Authorized - 1,935,552 shares
Outstanding - 886,784 shares (excluding 72,976
treasury shares) 886,784 886,784
Additional paid-in capital 196,898 196,898
Accumulated other comprehensive loss, net of tax (182,930) -
Retained earnings 8,526,818 5,462,153
Reduction for ESOP loan guarantee (303,000) (343,000)
----------------------------------------
Total stockholders' equity 9,124,570 6,202,835
----------------------------------------
Total liabilities and stockholders' equity $ 22,550,757 $ 22,944,067
========================================
See accompanying notes to financial statements.
18
The Ohio Art Company and Subsidiaries
Consolidated Statements of Operations
Year Ended January 31,
2002 2001 2000
------------------------------------------------------------
Net sales $ 45,544,270 $ 45,946,832 $ 52,538,669
Royalty income 1,229,335 612,925 908,341
Other income 98,673 114,034 1,330,118
------------------------------------------------------------
46,872,278 46,673,791 54,777,128
Costs and expenses:
Cost of products sold 31,919,510 34,511,292 39,503,555
Selling, general and administrative 11,743,882 11,804,345 12,344,158
Interest 766,116 1,738,642 2,240,276
------------------------------------------------------------
44,429,508 48,054,279 54,087,989
------------------------------------------------------------
Income (loss) before income taxes 2,442,770 (1,380,488) 689,139
Provision for (benefit from) income taxes (692,838) - 333,000
------------------------------------------------------------
Net income (loss) $ 3,135,608 $ (1,380,488) $ 356,139
============================================================
Net income (loss) per share $ 3.60 $ (1.59) $ .41
============================================================
Average number of shares outstanding 870,787 865,516 865,046
============================================================
See accompanying notes to financial statements.
19
The Ohio Art Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Accumulated Other Guaranteed
Common Paid-In Retained Comprehensive ESOP
Stock Capital Earnings Income (Loss) Obligation Totals
-------------------------------------------------------------------------------
Balances at January 31, 1999 $886,784 $196,898 $6,486,502 $508,499 $(363,000) $7,715,683
Net income 356,139 356,139
Other comprehensive income (loss), net of tax:
Reclassification of realized gain on marketable
equity security included in net income, net
of $333,000 income tax effect (645,937) (645,937)
Additional minimum pension liability 137,438 137,438
-------------------------------------------------------------------------------
Balances at January 31, 2000 886,784 196,898 6,842,641 - (363,000) 7,563,323
Net loss (1,380,488) (1,380,488)
Adjustment to guaranteed ESOP obligation 20,000 20,000
-------------------------------------------------------------------------------
Balances at January 31, 2001 886,784 196,898 5,462,153 - (343,000) 6,202,835
Net income 3,135,608 3,135,608
Adjustment to guaranteed ESOP obligation 40,000 40,000
Additional minimum pension liability, net of tax (182,930) (182,930)
Dividends (70,943) (70,943)
-------------------------------------------------------------------------------
Balances at January 31, 2002 $886,784 $196,898 $8,526,818 $(182,930) $ (303,000) $9,124,570
===============================================================================
See accompanying notes to financial statements.
20
The Ohio Art Company and Subsidiaries
Consolidated Statements of Cash Flows
Year ended January 31,
2002 2001 2000
-----------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 3,135,608 $ (1,380,488) $ 356,139
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for depreciation and amortization 1,689,656 1,839,775 1,986,693
Gain on sale of marketable equity security - (988,326)
Deferred federal income taxes (573,032) - 333,000
Provision for losses on accounts receivable (39,789) 112,773 166,020
Scholarship obligation expense (13,500) 97,465 26,915
Gain on sale of property, plant and
equipment (12,500) (6,000) (1,160)
Changes in operating assets and liabilities:
Accounts receivable 1,017,719 1,262,476 (926,967)
Inventories 680,397 1,016,293 3,529,027
Accounts payable (738,465) ( 56,856) (854,074)
Prepaid expenses, other assets, accrued
expenses and other liabilities 1,246,554 (722,486) 1,938,320
-----------------------------------------------------
Net cash provided by operating activities 6,392,648 2,162,952 5,565,587
-----------------------------------------------------
Cash flows from investing activities
Proceeds on sale of marketable equity security - 1,332,370
Purchases of property, plant and equipment (508,578) (622,907) (797,918)
Changes in net cash value of life insurance (29,825) 122,104 287,203
Proceeds from sale of property, plant and
equipment 12,500 6,000 32,744
-----------------------------------------------------
Net cash provided by (used in) investing
activities (525,903) (494,803) 854,399
-----------------------------------------------------
Cash flows used in financing activities
Borrowings 44,414,045 39,186,959 -
Repayments (48,581,738) (42,728,985) (4,157,434)
Cash dividends paid (35,471) - ( 35,452)
-----------------------------------------------------
Net cash used in financing activities (4,203,164) (3,542,026) (4,192,886)
-----------------------------------------------------
Cash
Increase (decrease) during year 1,663,581 (1,873,877) 2,227,100
At beginning of year 535,552 2,409,429 182,329
-----------------------------------------------------
Cash end of year $ 2,199,133 $ 535,552 $ 2,409,429
=====================================================
See accompanying notes to financial statements.
21
The Ohio Art Company and Subsidiaries
Notes To Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of The Ohio Art
Company and its subsidiaries (the Company) after elimination of significant
intercompany accounts, transactions and profits.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and
amortization are computed by the straight-line method over the estimated useful
lives of the respective assets.
Revenue Recognition
Revenue for all segments is recognized when products are shipped to customers.
Royalty income is recognized as earned. The Company's Diversified Products
segments manufacture to customer specifications. Shipments are based on customer
orders. Revenue is recognized at the time of shipment and is not dependent on
customer acceptance.
Product Development Costs
Costs related to the development of new products and changes to existing
products are charged to operations as incurred.
Advertising and Sales Promotion
Advertising and sales promotion expenditures are charged to operations in the
year incurred. Advertising expense was approximately $2,481,000, $2,981,000, and
$3,243,000 for the years ended January 31, 2002, 2001 and 2000 respectively.
Prepaid advertising and sales promotion expenditures amounted to approximately
$65,000 and $61,000 at January 31, 2002 and 2001, respectively.
22
Income Taxes
The Company accounts for income taxes under the asset and liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for operating loss and tax credit carryforwards and for the estimated
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets to an amount that is more likely than not to be
realized, when deemed appropriate.
Net Income (Loss) Per Share
Net income (loss) per share is computed based upon the average number of shares
outstanding during the year after giving effect to released shares held by the
Company's Employee Stock Ownership Plan. The Company has no potentially dilutive
securities.
Marketable Equity Security
Unrealized gains and losses, net of deferred income taxes, were included as a
component of stockholders' equity until realized. The average cost of the
security sold was used to determine the realized gain.
Financial Instruments
The carrying amounts for cash, accounts receivable, and short and long term debt
approximate fair market value. The carrying value of debt approximates market
based on current borrowing rates.
Inventory Valuation
Inventories are valued at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method.
Treasury Stock
Treasury Stock is recorded as a reduction of the Company's equity at the cost of
the acquired shares. The common shares are reduced by the par value of the
treasury shares acquired with the remaining cost recorded as a reduction of
additional paid in capital.
Change in Accounting Principle
During fiscal 2001, the company changed its method of valuing inventories from
the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
The change was made because the Company had begun to realize and expects to
continue to experience cost
23
reductions as a result of technological improvements in its manufacturing
process. The Company believes the FIFO method is preferable to the LIFO method,
as inventories are reflected in the Company's balance sheet at their most recent
value and the FIFO method will result in a better measurement of operating
results. Also, the FIFO method is the predominant method used in the industry in
which the Company operates. This change in the method of valuing inventories has
been applied retroactively, and comparative amounts for the prior periods
presented has been restated.
The effect of the accounting change on net income for the year ended January 31,
2000 is as follows:
Net income, as previously reported $ 430,695
Adjustment for effect of a change in accounting
principle that is applied retroactively (74,556)
--------
Net income, as adjusted $ 356,139
=======
Effect on earnings per share:
Net income, as previously reported $ .50
Adjustment for effect of a change in accounting
principle that is applied retroactively $ (0.09)
------
Net income, as adjusted $ .41
===
2. Long-term Obligations
January 31
2002 2001
----------------------------------
Revolving credit agreement $ - $ 1,926,341
Term loan 5,083,727 7,285,079
Note payable by ESOP, guaranteed
by the Company 303,000 343,000
----------------------------------
5,386,727 9,554,420
Less amounts due or callable within one year (1,550,000) (9,554,420)
----------------------------------
3,836,727 -
==================================
The Company executed a loan and security agreement on April 7, 2000 that
provides for borrowings up to $12,000,000 for three years on a revolving credit
basis based on various percentages of eligible inventory and accounts receivable
and term loans aggregating $3,279,000 with interest payable monthly at prime
plus 1.25% and an unused line fee of 0.5%. The term loans require monthly
principal payments of $45,542 plus interest in seventy-two consecutive payments
commencing May 1, 2000. The loan and security agreement is collateralized by all
real and personal property of the Company.
24
On April 7, 2000, the Company executed a $5,200,000 term loan to refinance its
existing term loan. The new term loan is payable in monthly installments of
$91,500 including interest at prime plus 2%, increasing by 0.5% on each
anniversary date through April 1, 2007. The loan is collateralized by all real
and personal property of the Company.
The various financing agreements contain certain financial covenants common to
such agreements that require, among other things, maintenance of minimum amounts
of tangible net worth and limit dividend payments and purchases of property,
plant and equipment.
At January 31, 2001, the Company was not in compliance with one of its covenants
for which it has received a waiver from the lender. However, it appeared
probable that the Company would not be able to meet this covenant requirement at
the end of the first quarter of fiscal year 2002 and as a result the debt was
classified as a current liability in the January 31, 2001 balance sheet.
During the second quarter of 2002 the Company came into compliance with the
financial covenant, and as a result the noncurrent portion of the Company's debt
has been classified in the balance sheet as such.
3. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
deferred tax assets and liabilities as of January 31, 2002 and 2001 are as
follows:
January 31
2002 2001
-------------------------------
Gross deferred tax assets:
Net operating loss carryforwards $1,010,000 $2,379,000
Supplemental retirement plan 187,000 186,000
Inventory 193,000 179,000
Charitable contribution carryover 129,000 210,000
Accounts receivable 148,000 162,000
Accrued expenses 373,000 224,000
Valuation allowance - (1,447,000)
-------------------------------
Total deferred tax asset 2,040,000 1,893,000
Gross deferred tax liabilities:
Property, plant and equipment 995,000 1,061,000
Pension assets and liabilities 51,000 200,000
LIFO recapture 421,000 632,000
-------------------------------
Total deferred tax liability 1,467,000 1,893,000
-------------------------------
Net deferred taxes $ 573,000 $ -
===============================
25
At January 31, 2002 and 2001, pursuant to SFAS No. 109, "Accounting for Income
Taxes," the Company has considered whether, based on the weight of evidence, the
net deferred income tax assets would more likely than not be realized. In this
connection, the Company considers the scheduled reversal of existing taxable
temporary differences, projected future taxable income, and tax planning
strategies to determine the valuation allowance, if any, to be recognized for
net deferred tax assets.
At January 31, 2001, the Company's net deferred income tax assets were offset in
full by a valuation allowance, due largely to uncertainty associated with the
Company's then ability to realize these tax benefits.
At January 31, 2002, the Company believes that the future tax benefits of
recorded net deferred income tax assets, including the net operating loss
("NOL") carryforwards, will be realized. Accordingly, the Company believes that
no valuation allowance is required for the recorded net deferred income tax
assets at January 31, 2002. However, the amount of the net deferred income tax
assets considered realizable could be adjusted in the future if estimates of
future taxable income or reversing taxable temporary differences are revised.
For U.S. federal income tax purposes, the NOL carryforwards amount to
approximately $3,000,000, which expire from 2012 to 2021.
The provision for (benefit from) federal income taxes for the year ended January
31, 2002, 2001 and 2000 consisted of the following:
2002 2001 2000
Current income tax provision (benefit):
Federal $ (120,000) $ - $ -
------------------- ------------------- --------------------
Deferred income tax provision (benefit):
Federal (495,000) 653,000 333,000
Net operating loss carryforwards 1,369,000 - -
Change in valuation allowance (1,447,000) (653,000) -
------------------- ------------------- --------------------
(573,000) - 333,000
------------------- ------------------- --------------------
Provision for (benefit from) income taxes $ (693,000) $ - $ 333,000
=================== =================== ====================
Reconciliation of reported income tax expense (benefit) and the amount computed
by applying the statutory U.S. federal income tax rate of 34% to income (loss)
before income taxes is stated below:
Year ended January 31
2002 2001 2000
-----------------------------------------
Tax provision (benefit) at federal
statutory rate $ 831,000 $ (469,000) $ 260,000
26
Change in valuation allowance (1,447,000) 653,000 (13,000)
Change in comprehensive
income portion of
additional minimum
pension liability - 71,000
Other, net (77,000) (184,000) 15,000
-----------------------------------------
$ (693,000) $ - $ 333,000
=========================================
4. Pension Plans and Employees' Stock Ownrship (ESOP) Plan
The Company has various defined benefit pension plans covering substantially all
of its employees. Benefits provided by the plans are based on compensation,
years of service and a negotiated rate per year of service for
collectively-bargained plans. The Company generally funds pension costs based
upon amortization of prior service costs over 25 years, but not in excess of the
amount deductible for income tax purposes. One plan, which has a limited number
of participants, is unfunded.
The following tables set forth aggregated information related to the various
pension plans:
January 31
2002 2001
-----------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 8,516,411 $ 11,543,687
Service cost 254,231 302,222
Interest cost 619,275 707,518
Actuarial gains 61,213 (118,000)
Benefits paid (605,829) (3,919,016)
-----------------------------------------
Benefit obligation at end of year $ 8,845,301 $ 8,516,411
=========================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 8,510,409 $ 12,387,578
Actual return on plan assets 761,728 (6,695)
Company contributions 48,048 48,542
Benefits paid (605,829) (3,919,016)
-----------------------------------------
Fair value of plan assets at end of year $ 8,714,356 $ 8,510,409
=========================================
Components of (accrued) prepaid benefit cost:
Funded status of the plans $ (130,945) $ 6,002
Unrecognized net actuarial gain (162,401) (181,555)
Unrecognized transition obligation 137,831 183,777
Unrecognized prior service cost 33,810 40,971
Additional minimum pension liability (277,930) -
-----------------------------------------
(Accrued) prepaid benefit cost $ (399,635) $ 49,195
=========================================
27
The Company recorded an additional minimum pension liability in the current year
due to the liability that was recognized, as unfunded accrued pension cost was
less than the unfunded accumulated benefit obligation.
January 31
2002 2001 2000
--------------------------------------------------------------
Weighted-average assumptions
Discount rate 7.5% 7.5% 7.5%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 3.0% 3.0% 3.0%
Year ended January 31
2002 2001 2000
--------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 254,331 $ 302,222 $ 333,571
Interest cost 619,275 707,518 862,915
Expected return on plan assets (733,717) (854,806) (973,441)
Amortization of prior service cost 7,161 38,470 16,516
Amortization of transition amount 45,946 ( 5,847) (10,969)
Recognized net actuarial loss (46,633) (24,121) 21,261
--------------------------------------------------------------
Benefit cost $ 146,363 $ 163,436 $ 249,853
==============================================================
The pension plan(s) with an accumulated benefit obligation in excess of plan
assets recorded the following:
2002 2001
-----------------------------------
Projected benefit obligation $ 4,558,283 $ 346,352
===================================
Accumulated benefit obligation $ 4,006,447 $ 419,822
===================================
28
Fair value of plan assets $ 3,988,492 $
-
===================================
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
13,931 and 16,189 unallocated shares is $375,440 and $45,324 at January 31, 2002
and 2001, respectively. No unallocated shares are committed to be released
within one year. The ESOP has outstanding borrowings which the Company has
guaranteed. Accordingly, the Company has recorded the loans as long-term
obligations and as reductions of stockholders' equity.
Dividends paid on unallocated shares in the trust are recorded as compensation
rather than as dividends.
5. Other Comprehensive Income
FASB Statement No. 130, "Reporting Comprehensive Income" requires that
comprehensive income or loss, which is the total of net income or loss and other
comprehensive income or loss, be reported in the financial statements. Other
comprehensive income or loss for the Company consists of minimum pension
liability adjustments and unrealized gains and losses on certain security
investments. Amounts that had previously been recognized in other comprehensive
income or loss are reclassified to net income or loss in the period realized.
Disclosure of comprehensive income or loss is incorporated into the Statement of
Stockholders' Equity and the table below.
Years ended January 31
2002 2001 2000
Net income (loss) $ 3,135,608 $ (1,380,488) $ 356,139
Net adjustments to arrive at
Comprehensive income (loss) (182,930) - (508,499)
---------------------------------------------
Comprehensive income (loss) $ 2,952,678 $ (1,380,488) $ (152,360)
=============================================
6. Operating Leases
The Company leases office space and equipment pursuant to various noncancelable
operating lease agreements. Total rent expense approximated $663,000, $671,000,
and $615,000 for fiscal 2002, 2001, and 2000 respectively. The lease term for
the office space extends through April, 2006 with monthly lease payments of
$11,966. In addition, rent for the office lease is subject to escalation based
upon the Consumer Price Index. Future commitments under the leases as of January
31, 2002 are as follows:
29
Office Manufacturing
Office Space Equipment Equipment Total
------------------------------------------------------------------
2003 $ 161,160 $ 59,423 $ 362,000 $ 582,583
2004 165,995 10,338 76,958 253,291
2005 170,975 - - 170,975
2006 45,348 - - 45,348
------------------------------------------------------------------
$ 543,478 $ 69,761 $ 438,958 $1,052,197
==================================================================
7. Industry Segments
The Company has four reportable segments: domestic toy, international toy, Ohio
Art diversified products, and Strydel diversified products. The domestic toy
segment manufactures and distributes toys through major retailers in the United
States while the international toy segment manufactures and utilizes foreign toy
companies to distribute their products throughout the world. The Ohio Art
diversified products segment manufactures and sells custom lithographed products
to consumer goods companies. The Strydel diversified products segment
manufactures and sells molded plastic parts to other manufacturers, including
Ohio Art.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, not including gains and losses on the
Company's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Intersegment sales are recorded at cost, and as such, there is no intercompany
profit or loss on intersegment sales or transfers.
The Company's reportable segments offer either different products in the case of
the diversified products segments, or utilize different distribution channels in
the case of the two toy segments.
30
Financial information relating to reportable segments is as follows:
Domestic International Ohio Art Strydel
Toy Toy Diversified Diversified Total
-----------------------------------------------------------------------------------
Year ended January 31, 2002:
Net sales to external customers $ 20,494,498 $ 10,653,571 $ 10,650,084 $ 3,746,117 $ 45,544,270
Intersegment revenues 109,664 - - 220,576 330,240
Interest expense (401,956) (68,742) (206,228) ( 89,190) (766,116)
Provision for depreciation and
amortization (576,650) - (965,815) (147,191) (1,689,656)
Segment profit (loss) 1,713,591 1,307,316 (81,361) (496,736) 2,442,770
Segment assets 12,975,955 3,649,019 8,360,328 4,137,960 29,123,262
Expenditures for long-lived 259,360 - 132,461 116,757 508,578
assets
Year ended January 31, 2001:
Net sales to external customers $ 21,803,380 $ 6,824,242 $ 13,894,558 $ 3,424,652 $ 45,946,832
Intersegment revenues 113,038 - - 972,175 1,085,213
Interest expense (975,120) (165,617) (372,638) (225,267) (1,738,642)
Provision for depreciation and
amortization (715,226) - (965,226) (159,323) (1,839,775)
Segment profit (loss) (689,981) (228,718) (282,197) (179,592) (1,380,488)
Segment assets 13,591,137 2,166,906 10,123,476 3,896,600 29,778,119
Expenditures for long-lived 427,267 - 53,726 141,914 622,907
assets
Year ended January 31, 2000:
Net sales to external customers $ 28,079,884 $ 5,396,780 $ 15,274,323 $ 3,787,682 $ 52,538,669
Intersegment revenues 108,902 - - 1,292,783 1,401,685
Interest expense (1,344,166) (224,027) (504,062) (168,021) (2,240,276)
Provision for depreciation and
amortization (934,244) - (949,455) (102,994) (1,986,693)
Segment profit (loss) 498,275 (959,646) 75,240 79,476 (306,655)
Segment assets 17,848,194 1,376,461 11,805,632 2,904,503 33,934,790
Expenditures for long-lived 284,495 - 482,340 31,083 797,918
assets
31
The following are reconciliations between total segment and consolidated totals
for revenues, income (loss) before income taxes, and assets:
Year Ended January 31
2002 2001 2000
--------------------------------------------------------
Revenues:
Total external net sales
for reportable segments $ 45,544,270 $ 45,946,832 $ 52,538,669
Other revenues 1,328,008 726,959 2,238,459
--------------------------------------------------------
Total consolidated revenues $ 46,872,278 $ 46,673,791 $ 54,777,128
========================================================
Profit and loss:
Total profit (loss) for reportable $ 2,442,770 $ (1,380,488) $ (306,655)
segments
Other profit (loss) - elimination of
intersegment profit (loss)
7,468
Unallocated amounts:
Gain on sale of marketable equity
security 988,326
--------------------------------------------------------
Income (loss) before income taxes $ 2,442,770 $ (1,380,488) $ 689,139
========================================================
Assets:
Total assets for reportable segments $ 29,123,262 $ 29,778,121 $ 33,934,790
Elimination of:
Intercompany receivables (4,580,197) (4,591,634) (3,331,635)
Intercompany profit in inventory (19,767) (19,767) (19,767)
Investment in subsidiaries (2,222,653) (2,222,653) (2,222,653)
--------------------------------------------------------
Total consolidated assets $ 22,300,645 $ 22,944,067 $ 28,360,735
========================================================
32
A substantial portion of the Company's accounts receivable are from toy
retailers, wholesalers and other toy manufacturers. The Company has credit
insurance to cover a portion of its losses on accounts receivable. The Company
had net credit losses of $360,000, $110,000, and $198,000 during fiscal 2002,
2001, and 2000, respectively. Net domestic toy segment sales includes
approximately $9,365,000, $11,234,000, and $14,132,000 for 2002, 2001, and 2000,
respectively, to two major retailers. Amounts included in accounts receivable
for these two customers were $1,354,000 and $1,719,000 at January 31, 2002 and
2001 respectively.
The following customers account for 10% or more of the company's sales for
fiscal years 2002, 2001, and 2000:
2002 2001 2000
---- ---- ----
Wal Mart $6,300,000 $6,700,000 $7,700,000
Eastman Kodak * 6,500,000 7,300,000
Toys R Us * 4,500,000 6,400,000
*Total sales for the year amounted to less than 10%.
33
8. Statement of Cash Flows
Noncash transactions excluded from the statement of cash flows:
2002 2001 2000
Refinancing of long term debt due
or callable within one year - $13,157,116 -
Cash payments for interest during 2002, 2001, and 2000 approximated $788,000,
$1,909,000, and $2,186,000.
9. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations
for the years ended January 31, 2002 and 2001 (in thousands of dollars, except
per share amounts):
Net
Income
(Loss) Per
2002 Cost of Net Share of
Products Income Common
Net Sales Sold (Loss) Stock
--------- ---- ------ -----
April 30 $ 10,065 $ 7,465 $ 46 $ .05
July 31 10,354 7,188 686 .79
October 31 15,060 10,049 1,399 1.61
January 31 10,065 7,217 1,005 1.15
-------- ------- ------- ------
TOTALS $45,544 $31,919 $ 3,136 $ 3.60
======= ======= ======= ======
2001
April 30 $ 9,091 $ 7,644 $(1,390) $(1.61)
July 31 12,338 9,341 (305) ( .35)
October 31 14,639 10,357 612 .71
January 31 9,879 7,169 (297) (.34)
-------- ------- ------- ------
TOTALS $45,947 $34,511 $(1,380) $(1.59)
======= ======= ======= ======
During the fourth quarter of fiscal 2002, the Company reversed the valuation
allowance related to its net deferred tax assets of $1,447,000.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
34
PART III
Item 10. Directors and Executive Officers of the Company
(a) Identification of Directors
The identification of directors and all persons nominated to become directors is
included in the Company's Proxy Statement for the 2002 Annual Meeting of
Shareholders as filed with the Securities and Exchange Commission and is
incorporated herein by reference.
(b) Executive Officers of the Company
First Year
Present Position Elected To
Name Age With Company Present Position
---- --- ------------ ----------------
William C. Killgallon 63 Chairman 1989
Martin L. Killgallon II 54 President 1989
J. D. Kneipp 57 Chief Financial Officer 1999
E. A. Clark, Jr. 61 Vice President 2000
Manufacturing
J. D. Wood 48 Vice President 2000
Product Development
W. E. Shaffer 79 Secretary 1995
J. D. Kneipp was elected Chief Financial Officer in December 1999. He had
previously served as Controller since his election in July 1998 and as
Accounting Manager since his date of employment in April 1997 to July 1998. He
had previously been employed by White Consolidated Industries as Controller of
the Washex Division from 1992 to 1996. E. A. Clark, Jr. was elected Vice
President of Manufacturing in July 2000. He had previously served as General
Manager of Manufacturing Operations since April of 1999 and as Labor Relations
Coordinator since his date of employment in May 1995. J. D. Wood was elected
Vice President of Research and Development in July 2000. She had previously
served as Director of the Design Group since her date of employment in November
35
1995. Officers are elected annually to serve until the first meeting of
directors following the annual meeting of shareholders in each year.
Item 11. Executive Compensation
The information required under this item is included in the Company's Proxy
Statement for the 2002 Annual Meeting of Shareholders as filed with the
Securities and Exchange Commission and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is included in the Company's Proxy
Statement for the 2002 Annual Meeting of Shareholders as filed with the
Securities and Exchange Commission and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report.
(1) Reports of Independent Auditors
The consolidated financial statements of The Ohio Art Company and
subsidiaries:
Consolidated Balance Sheets - January 31, 2002 and January 31,
2001
Consolidated Statements of Operations - Years ended January 31,
2002, January 31, 2001 and January 31, 2000
Consolidated Statements of Stockholders' Equity - Years ended
January 31, 2002, January 31, 2001 and January 31, 2000
Consolidated Statements of Cash Flow - Years ended January 31,
2002, January 31, 2001 and January 31, 2000
Notes to Consolidated Financial Statements - January 31, 2002
(2) The following consolidated financial statement schedule of The Ohio Art
Company and subsidiaries is filed under Item 14(d):
36
SCHEDULE PAGE
-------- ----
Schedule II - Valuation and Qualifying Accounts 38
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
Not applicable.
(c) See Exhibit Index for list of exhibits.
(d) The Financial statement schedule which is listed under Item 14(a)(2) is
filed hereunder.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE OHIO ART COMPANY
Date: April 30, 2002 By /s/ William C. Killgallon
-------------------------------
William C. Killgallon, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/William C. Killgallon Chairman of the Board Principal April 30, 2002
Executive Officer and Director
/s/Martin L. Killgallon II President and Director April 30, 2002
Martin L. Killgallon
/s/Jerry D. Kneipp Chief Financial Officer April 30, 2002
Jerry D. Kneipp
/s/ Joseph A. Bockerstette Director April 30, 2002
Joseph A. Bockerstette
/s/Neil H. Borden, Jr. Director April 30, 2002
Neil H . Borden, Jr.
/s/Frank L. Gallucci Director April 30, 2002
Frank L. Gallucci
/s/Wayne E. Shaffer Secretary and Director April 30, 2002
Wayne E. Shaffer
38
The Ohio Art Company and Subsidiaries Schedule II - Valuation and Qualifying Accounts
Additions
---------
Balance at Charged to Charged to Balance
Beginning Costs and Other Deductions- at End
Description Of Period Expenses Accounts-Describe Describe (1) of Period
- ----------- --------- -------- ----------------- ------------ ---------
Year ended January 31, 2002
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $475,289 $320,411 $360,200 $435,500
=================================================================================
Year ended January 31, 2001
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $449,000 $136,197 $109,908 $475,289
=================================================================================
Year ended January 31, 2000
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts $515,000 $166,020 $232,020 $449,000
=================================================================================
(1) Uncollectible accounts charged off and collection costs, less recoveries.
39
THE OHIO ART COMPANY AND SUBSIDIARIES EXHIBIT INDEX
Exhibit # Page
- --------- ----
3(i)(a) Articles of Incorporation as amended, filed as --
Exhibit 3(a) to Company's Form 10-K for the
year ended December 31, 1986, and incorporated
herein by reference.
3(i)(b) Code of Regulations filed as Exhibit 3(b) to --
Company's Form 10-K for the year ended December
31, 1990, and incorporated herein by reference.
3(ii) The Ohio Art Company ByLaws approved by the Board --
of Directors on June 20, 1997, and incorporated
herein by reference.
10(a) Employee Stock Ownership Plan, filed as Exhibit --
10(c) to Company's Form 10-K for the year
ended December 31, 1987, and incorporated herein
by reference.
10(b) The Ohio Art Company Supplemental Retirement Plan, --
as amended and restated effective January 1, 1992
filed as Exhibit 10(d) to Company's Form 10-K
for the year ended December 31, 1992, and
incorporated herein by reference.
10(c) Loan and Security Agreement dated April 7, 2000 --
filed as Exhibit 10.1 to Company's Form 8-K dated
April 17, 2000, and incorporated herein by reference.
10(d) Loan agreement dated April 7, 2000 filed as Exhibit 10.2 --
to Company's Form 8-K dated April 17, 2000 and
incorporated herein by reference.
21 Subsidiaries of the Company. 41
40