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, 2003

 

Commission file number 0-4479.

 

THE OHIO ART COMPANY

(Exact name of Registrant as specified in its charter)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

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    ý       No    o

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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.  ý.

 

The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of July 31, 2002 was approximately $5,860,000 (based upon the closing price of $15.25 on The American Stock Exchange).  The number of shares outstanding of the issuer’s Common Stock as of April 25, 2003 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).

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  o.  No  ý

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The following documents are incorporated into this Form 10-K by reference:

 

Portions of the Proxy Statement for Annual Meeting of Stockholders to be held on June 3, 2003 filed with the SEC pursuant to Schedule 14D Part III.

 

SAFE HARBOR STATEMENT

 

This document and supporting schedules contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995, and as such, only reflects the Company’s best assessment at this time.  Investors are cautioned the forward-looking statements involve risks and uncertainties, that actual results may differ materially from such statements, and that investors should not place undue reliance on such statements.  For a discussion of factors that may affect actual results, investors should refer to Item 1 of this Form 10-K.

 

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PART I

 

Item 1.  Business

 

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 6 of Notes to Consolidated Financial Statements included herein for the year ended January 31, 2003)

 

Products and Distribution

 

The Company manufactures and markets approximately 50 toy items including the nationally advertised Etch A Sketch®, Travel Etch A Sketch®, and Pocket Etch A Sketch® drawing devices, Betty Spaghetty® fashion doll, A.R.M. 4000XL™ water toy, and basketball sets.

 

The Company maintains showrooms in Bryan, Ohio and New York City and distributes its toy products through its own full-time sales force and through manufacturers’ representatives.  The toy products are sold domestically directly to general and specialty merchandise chains, discount stores, wholesalers, and mail order houses, and in foreign countries both direct to customers and through licensees.

 

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 customers 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 each of the last three fiscal years.

 

		Year Ended
CLASS		1/31/03		1/31/02		1/31/01
Writing and Drawing Toys		26	%	27	%	26	%
Activity Toys		2	%	5	%	9	%
Small Dolls		36	%	37	%	28	%
Diversified Products		36	%	31	%	37	%

 

Competition

 

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 2002 indicate the Company accounted for less than one percent (1%) of the total toy sales in the United States.  Competition in the

 

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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.

 

The 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.

 

Seasonality

 

The Company’s toy business is seasonal and historically approximately 55% 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 56% and 55% of annual sales respectively. 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. Results for the first six months of fiscal 2003 for all divisions, except Strydel Diversified Products, trailed the sales performance for the comparable period in fiscal 2002.  Sales of the Company’s Betty Spaghetty® fashion doll and Etch A Sketch drawing toy were down slightly from the previous year.  The Diversified Products segments reported a sales decline for the first six months of fiscal 2003 due to the loss of a major customer in the Ohio Art Diversified Products division.  The Strydel division demonstrated sales growth in excess of 30% over the comparable period of fiscal 2002. The Diversified Products segments do not have any established seasonal pattern.

 

For additional information regarding the Company’s various segments, see Footnote 6 to the Consolidated Financial Statements.

 

Backlog

 

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.  Because 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

 

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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:

 

2003 - approximately  $5,400,000

2002 - approximately  $6,200,000

 

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.

 

Raw Materials

 

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, 2003 and 2002, these imports accounted for approximately 30% of the total cost of goods sold for both periods.  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 ten years.

 

Intellectual Property

 

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 material extent.

 

The Company has an established program for licensing others to manufacture and/or distribute its products outside the United States.  International sales declined in fiscal 2003 as increased

 

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competition in the small doll category impacted sales in Europe of the Betty SpaghettyÒ fashion doll.

 

Employees

 

Because of the seasonal nature of the Company’s business, the number of full-time employees at January 31, 2003, 2002, and 2001 is not as indicative of activity as the average number of employees during the year.  The average number of full-time employees has been: 2003 – 191, 2002 – 204, 2001 - 304.

 

The Company maintains its own design and development staff and, in addition, utilizes contractual arrangements with outside development groups.  Approximately $357,000, $346,000, and $328,000 for the years ended January 31, 2003, 2002 and 2001, respectively, was spent on such activities.  Outside development expenses for 2003, 2002, and 2001 were approximately $145,000, $26,000, and $13,000 respectively.

 

Customers

 

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.  In 2003 and 2002, the Company’s top two major retailers were Wal-Mart and Target, based on the Company’s consolidated revenues.  In 2003 and 2002, Wal-Mart accounted for 10% or more of the Company’s sales.  In 2001, Wal-Mart, Eastman Kodak, and Toys R Us each accounted for 10% or more of the Company’s sales.  For additional information, see Note 6 of Notes to Consolidated Financial Statements included herein for the year ended January 31, 2003.

 

Sales of the Company’s Diversified Products segments are concentrated in a limited number of accounts.  Sales to the five largest customers accounted for approximately 77% in both fiscal 2003 and 2002 and 70% in fiscal 2001 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.

 

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Executive Officers of the Company

 

Officers are elected annually to serve until the first meeting of directors following the annual meeting of shareholders in each year.

 

Name		Age		Present Position With Company		First Year Elected To Present Position
William C. Killgallon		64		Chairman		1989
Martin L. Killgallon II		55		President		1989
J. D. Kneipp		58		Chief Financial Officer		1999
E. A. Clark, Jr.		62		Vice President Manufacturing		2000
J. D. Wood		49		Vice President Product Development		2000
W. E. Shaffer		80		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.

 

E. A. Clark, Jr. was elected Vice President of Manufacturing in July 2000.  He had previously served as General Manager of Manufacturing Operations since April of 1999 and as Labor Relations Coordinator since his date of employment in May 1995.

 

J. D. Wood was elected Vice President of Research and Development in July 2000.  She had previously served as Director of the Design Group since her date of employment in November 1995.

 

 

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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 proceedings which, in the aggregate, could reasonably be expected to materially affect the Company’s financial position or results of operations.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None.

 

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PART II

 

Item 5.  Market for the Company’s Common Stock and Related Stockholder Matters

 

The principal market for the Common Stock of The Ohio Art Company is the American Stock Exchange (the “Exchange”) under Ticker Symbol “OAR”.  The approximate number of record holders of the Company’s Common Stock at January 31, 2003 was 836.  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 2003 and 2002 by quarter, were as follows:

 

		Fiscal Year Ended January 31, 2003
		Sales Prices						Income			Dividend Declared
		High			Low
Feb – Apr		$	32.25		$	18.25		$	(.74	)	$	.16
May – Jul		25.00			10.50			.58			.04
Aug – Oct		14.75			10.25			1.18			.04
Nov – Jan		21.00			10.25			.39			.04

 

		Fiscal Year Ended January 31, 2002
		Sales Prices						Income			Dividend Declared
		High			Low
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

 

The Board of Directors suspended dividend payments effective April 16, 1999.  Dividend payments were reinstated on December 4, 2001.

 

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Item 6.  Selected Financial Data

 

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA YEARS ENDED

JANUARY 31, 2003, 2002, 2001, 2000, AND 1999

(Amounts in thousands, except per share data)

 

		JANUARY 31
		2003			2002			2001			2000			1999
Net Sales and Other Income		$	38,987		$	46,872		$	46,674		$	54,777		$	47,149
Net Income (Loss)		1,229			3,136			(1,380		)	356			(1,722		)
Net Income (Loss) per Share of Common Stock (a)		1.41			3.60			(1.59		)	.41			(1.98		)
Dividends Declared per Share of Common Stock		.28			.08			.00			.00			.16
Dividends Paid per Share of Common Stock(b) (e)		.28			.04			.00			.04			.16
Book Value per Share of Common Stock (c)		9.90			10.29			6.99			8.53			8.70
Average Number of Shares Outstanding