The Plain Dealer
Tuesday, May 11, 1999

Maker of Etch-A-Sketch adjusting financial picture

By Troy Flint

With trading in the stock halted and its lenders refusing to extend loans, the company that makes the Etch-A-Sketch is twisting knobs to create a new financial plan.

Ohio Art Co., the Bryan, Ohio, firm that created the classic drawing toy, said Friday it is trying to work out a new borrowing agreement with its lenders. For the year ended Jan.31, the company lost $1.8 million, compared with a loss of $45.1 million the previous year. Sales grew 27 percent, to $45.9 million.

As of Oct. 31, the most recent data available, the company had $23.5 million in long-term debt and $2.3 million in short-term debt, but just $445,000 in cash.

The company failed to file its annual financial report with the Securities and Exchange Commission by last week's deadline.

That prompted the American Stock exchange to indefinitely halt trading in the company's shares May 3.

The company's performance has historically depended on it signature Etch-A-Sketch product, a winner since its inception in 1960.

Industry veterans said the number of toys has increased exponentially since Etch-A-Sketch's introduction four decades ago. As video games, action figures and interactive toys have taken hold, they said, Ohio Art has relied too heavily on its principal franchise.

"They have historically been a one-line company and been very conservative," said Jay Tapper, president of Tapper Candies, a maker of candy and toy products in Garfield Heights.

Ohio Art said that unlike previous holiday seasons, the one just ended was particularly bad.

"There were unforeseen and substantial order cancellations by a number of major toy retailers and they impacted not only us, but our industry," William C. Killgallon, Ohio Art's chairman and chief executive officer, said yesterday. "We ended up with the [excess] inventory, and we had also made marketing TV commitments in order to move merchandise through to the consumer - and we were not able to cancel those advertising commitments."

Despite the company's recent slump, one analyst remains positive about the company's prospects.

"If Ohio Art were for sale, there would be no shortage of potential buyers because of their excellent consumer franchise and their successful Etch-A-Sketch product," said David Leibowitz, an analyst with Burnham Securities in New York.

Ohio Art officials declined to comment on news reports speculating the company might be shopping for a buyer.

Ohio Art said AMEX suspended trading of the company's stock because of the delay in submitting the SEC report. AMEX spokesman Mike Shokouhi said trading was halted at the company's request. He added that such a decision is common when a company is preparing to make an announcement that will dramatically affect the stock price.

Ohio Art stock is thinly traded and has a small float - about three-quarters of the company's stock is owned by Killgallon and his relatives. Ohio art shares traded last Monday at $15.75, down from a 52-week high of $40 in November.

Tapper said Ohio Art was hurt by overly tentative attempts to develop new product lines.

"In this business, you live for one product that's constant and then gamble the cash flow from that to develop new items and try and grow the business base," he explained.

Ohio Art has experienced some success in the past few years with its Betty Spaghetty doll as well as two non-toy businesses: metal lithography and injection molding. The non-toy units account for about a third of the company's revenues.

Still, other industry figures say the toy business has shifted toward making products with a licensed identity, such as Teletubbies, the World Wrestling Federation or NASCAR.

"There is a real challenge we've seen building in the last couple years," said Bruce Good, vice president of Good Marketing, a Cleveland product-development and consulting firm specializing in the toy industry. "What's building is a shift toward licensed items rather than new products."