The Ohio Art Company Business Information, Profile, and History

Company Perspectives:

The ability to satisfy the needs of our customers and the ultimate consumer is the base of our existence. Therefore, The Ohio Art Company is dedicated to:

All divisions meeting and exceeding minimum volume/profit objectives. Consistently increasing shareholder value. Providing an involved, continuously educated and trained employee group, all of whom will have the opportunity to share in consistently improving operating results. Recognizing that our existence is based upon our ability to satisfy the needs of our customers and the ultimate consumer better than our competition. To this end, we must provide the highest service and total quality that the organization can generate. Being a global marketer of toys that must build franchises for our product categories. Capitalizing on Ohio Art's recognized position as the quality/customer service leader in the lithographic metal decorating industry to grow our customer base. Focusing our capital and human resources in those areas of the business which will allow us the highest potential return on assets employed.

History of The Ohio Art Company

Headquartered in a small northwest Ohio town, The Ohio Art Company is best known for its classic drawing toy, the Etch A Sketch. In stark contrast to the faddish toys that crowded the toy market during the late 20th and early 21st centuries--as well as the increasing prevalence of toys featuring a licensed identity--the company's flagship product has endured more than 40 years, sold over 100 million units, and appealed to children in dozens of countries worldwide. About 25 percent of the firm's revenues are derived from the sale of writing and drawing toys. One of the oldest toymakers in the United States, Ohio Art produces about 50 toys in all, including the popular Betty Spaghetty line of dolls as well as water toys, children's drum sets, and sports sets. The company's slogan, "Making Creativity Fun," emphasizes its focus on art- and craft-oriented toys. Although toys generate the majority of Ohio Art's annual sales, the production and sale of custom metal lithography and molded plastic products, such as automobile trim, serving trays, and metal food containers, contribute more than one-third of revenues. After posting net losses in four out of five fiscal years from 1996 to 2000 thanks to a series of travails--and at times verging on bankruptcy--Ohio Art bounced back to profitability during fiscal 2002. The company remained vulnerable, however, because of its heavy reliance on two main toy lines, Etch A Sketch and Betty Spaghetty.

Early History: From Picture Frames to Lithographed Metal Toys

Ohio Art traces its history to the first decade of the 20th century, when Henry Simon Winzeler made a dramatic career change. Trained as a dentist, Winzeler opened a private practice in the tiny town of Archbold, Ohio, in 1900. Inspired by an oval mirror in his aunt's clothing store, Winzeler decided to start manufacturing oval picture frames. With $300 borrowed from friends, Winzeler made preparations to begin production in a rented hall. He sold the dental office in 1908 and opened a grocery, using the market's profits to buy equipment for the frame business. He continued to operate his "Hub Grocery" through early 1909.

Winzeler launched The Ohio Art Company in October 1908 with 15 employees. For the first two years, his oval metal frames were stamped in Toledo, then painted onsite in Archbold. In 1910 Winzeler bought his own stamping machine and consolidated production.

Sold primarily through the new breed of mass marketers such as Woolworth's, Kresge's, and Sears, Roebuck & Co., Ohio Art's framed pieces featured religious scenes, still lifes, and landscapes. Within just two years production had expanded to 20,000 units each day. The company's most popular view featured a pair of cupids, one asleep, one awake. The Cupid images were copyrighted by Taber-Prand Company, and Ohio Art paid a royalty on each set. Ohio Art's 75th anniversary publication noted that "Winzeler offered $100,000 for the rights to these pictures, but his offer was rejected. In 1938, Taber-Prand went into bankruptcy and Winzeler's son, Howie, bought the rights for $10." Company figures estimated that over 50 million of the cupid sets were sold, meaning that the decoration graced over one-half of all homes in the early 20th century.

Rising demand spurred moves to progressively larger plants, until Ohio Art moved to the town of Bryan and a specially built plant in 1915. The addition of lithography equipment that same year expanded the company's capabilities. Ohio Art diversified cautiously at first, lithographing wood-grain finishes on its traditional metal frames. This product line grew to include advertising signage and scale faces.

Ohio Art also expanded through acquisition during this period. The 1916 purchase of Chicago's Holabird Manufacturing Company broadened the product line to include glass-framed calendars featuring popular Ohio Art prints.

The onset of World War I in 1914 interrupted toy imports from Germany and afforded domestic toymakers the opportunity to fill the void. In 1917 Ohio Art acquired both the C.E. Carter Company's Erie toy plant and the Battle Creek Toy Manufacturing Company. During this period, Ohio Art began making the lithographed metal windmills, sand pails, toy cars, wagons, circus trains, spinning tops, and drum sets that would be mainstays throughout the 20th century. The company honed its lithography skills with the production of metal tea sets that featured detailed depictions of nursery rhymes, alphabets, animals, and children's stories.

In 1927 H.S. Winzeler retired from Ohio Art to concentrate on his West Coast businesses. Although Winzeler continued to own the company, Lachlan M. ("Mac") MacDonald succeeded Winzeler as president and directed Ohio Art's 1930 incorporation. About 20 percent of the company's equity was sold to the public at that time, but the Winzelers retained a controlling stake. Fifteen-year-old son Howard W. ("Howie") Winzeler started working part-time at Ohio Art in 1930 and joined the firm full-time three years later.

Ohio Art maintained its fiscal strength throughout the Great Depression and was even able to acquire several other companies hobbled by the crisis. In 1930 alone the company bought out four firms: Mutual Novelty Manufacturing Company in Chicago, a producer of artificial icicles for decorating Christmas trees; Veelo Manufacturing Company, maker of dolls and stuffed animals; Delta Products, a manufacturer of electric appliances and car parts; and Household Appliance Manufacturing Company, a maker of clothes dryers. Craftsman Studios, a manufacturer of brass and copper tableware, was acquired in 1931. Two printing companies, Kenyon Company, Inc., and Detroit Publishing Company, were purchased the following year. When H.S. Winzeler died in 1939 Howie was appointed to fill the vacant seat on the board of directors. By the end of the year, he had also advanced to vice-president.

During World War II, when virtually all domestic production was harnessed for the war effort, even toymakers such as Ohio Art were called upon to manufacture strategic products. The tiny northwest Ohio firm made parts for rockets, bombs, and aircraft throughout the war, and its contributions earned an "Excellence" award at war's end.

When Ohio Art resumed toymaking in the postwar era, it began using new plastics to make its traditional toys. Metal dollhouses featured plastic furniture, and tea sets, sand pails, and farm sets reappeared in plastic.

Enter the Etch A Sketch, 1960

H.W. Winzeler, who advanced to Ohio Art's presidency in 1953, encountered what would become the company's flagship product at a European toy fair in 1959. That was when France's Arthur Granjean pitched his "L'Ecran Magique" ("magic writer") to the chief executive officer. Winzeler was reluctant to pay the apparently steep price Granjean demanded to license the product but bought the rights after a second presentation later that year.

Renamed the Etch A Sketch, the toy featured a glass "window" enclosed in a red plastic frame. A combination of aluminum powder and plastic pellets inside the window made it look like a flat gray screen. Young sketchers could create line images by turning the white knobs on the left and right of the screen, which, by a series of internal strings and pulleys, controlled the horizontal and vertical movement of a stylus that scraped the aluminum powder from the back of the glass, leaving a thin black line. To erase a drawing and start over, the sketcher simply turned the toy on its face and shook, coating the glass with a new film of aluminum powder.

Ohio Art launched the toy in time for the 1960 holiday season and supported Etch A Sketch (which itself resembled a television) with its first televised advertising campaign. With seals of approval from Good Housekeeping and Parents magazines, the Etch A Sketch soon became a toy store mainstay. Sears, Roebuck & Co. alone sold ten million of the toys from 1960 to 1970.

Not content to rest, Ohio Art balanced the toy market's seasonally cyclical sales with the incorporation of Strydel, Inc., in 1962. Strydel applied Ohio Art's injection molding, lithography, and metal stamping capabilities to the production of metal and plastic industrial components such as auto trim, film canisters, and reproductions of classic metal signs and trays, mostly premiums for Coca-Cola. Ohio Art was eventually producing 500 lithographed designs. In 1968 Ohio Art acquired Trinc Company, a truck leasing firm formerly owned by Ohio Art executives, and a controlling interest in Emenee Corporation, a manufacturer of toy musical instruments.

Shifting of Control to Killgallon Family in Late 1970s

The founding Winzeler family sold its controlling stake in Ohio Art to William Casley Killgallon in 1977. The Winzelers had drawn Killgallon from a rival toy company to become sales manager in 1955. He advanced to a seat on the board within two years and was elected president in 1966 and board chairman in 1978. William Killgallon was joined by his son Bill (William Carpenter) in 1968; Bill succeeded his father as president and chief executive officer in 1978 and was joined at the company by his brother, Martin ("Larry") Killgallon. They consolidated Ohio Art's peripheral businesses as the diversified Products Division in 1978.

Although Ohio Art had used licensed characters to make its products more attractive and recognizable to children and parents since the late 1920s, licensing efforts intensified dramatically during the 1980s. Ohio Art continued to license perennially popular Disney characters--even offering an Etch A Sketch in the shape of Mickey Mouse--as well as trendy animated figures such as Smurfs and Pac-Man. The company also introduced the Lil' Sport line of scaled-down basketball, baseball, and soccer toys during the late 1970s and early 1980s.

Ohio Art launched Etch A Sketch spinoffs during the 1980s, including plastic overlays with drawing games and puzzles, as well as travel and pocket Etch A Sketch models. The company's efforts to parlay its long-running (yet only moderately profitable) Etch A Sketch franchise culminated in the 1986 launch of the Etch A Sketch Animator. This electronic version of the classic toy could store several drawings at a time and play them back, effecting animation. At a retail price of about $50, the Animator was one of Ohio Art's most expensive offerings. The company's sales jumped 50 percent from about $31.3 million in 1985 to $47 million in 1986, and its profits quintupled to $2.5 million. Those high-flying results came back to earth in the ensuing years, however, when competition from video games battered Animator sales. Ohio Art lost $3 million in 1989 and 1990 and finally ceased production of the Animator.

In a more low-tech vein, Ohio Art launched a color Etch A Sketch in 1993 that used the traditional two-knob drawing method but featured six colors and produced a color copy of each drawing. In honor of the toy's 35th birthday in 1995, Ohio Art introduced pocket models in jewel tones.

Struggling for a Turnaround, 1990s and Early 2000s

Ironically, the recession of the early 1990s helped Ohio Art to a certain degree, as many of its toys retailed for less than $20 and thus appealed to budget-conscious parents. Art, craft, and educational toys offered to "Make Creativity Fun." Sales and profits peaked at $55.6 million and $3.4 million in 1992. However, as the United States slowly emerged from recession, Ohio Art's results headed downward again. Sales declined by over 25 percent to $41.1 million in 1994, and profits dropped by more than three-quarters to $824,000 during the same period. The Killgallons, who continued to own a controlling interest in the company, worked to regain Ohio Art's luster, reducing the workforce by about 15 percent, cutting inventory levels, and achieving efficiencies in administrative areas.

A turnaround would not come easily, however. Ohio Art saw its revenue increase to $47.4 million in 1995 thanks in large part to a jump in Etch A Sketch sales following the toy's inclusion in the hit animated film, Toy Story. Yet in 1996 revenues fell by 23 percent and the company slipped into the red, posting a $1.7 million loss, as a result of several factors, most notably the ending of a licensing deal with superstar Michael Jordan on its basketball games and the decision by two major retailers to discontinue carrying the pocket line. The loss widened to $5.1 million in 1997. A major factor was the first product recall in the company's history. That summer, Ohio Art had introduced its first water toy, Splash Off Water Rockets, but had to quickly initiate a voluntary recall when problems with the toy's material were discovered, problems that led to the cracking and breaking of seams.

Sales increased 27 percent in 1998, to $45.9 million, as the company scored a hit with its newly introduced Betty Spaghetty doll. Aimed at girls ages four and up, the small doll featured interchangeable limbs, spaghetti-like hair, and a variety of accessories, such as a cell phone, a laptop computer, and in-line skates, According to company President Martin Killgallon II, quoted in the Cleveland Plain Dealer, "She's funky. She's different. She's certainly not Barbie." Despite Betty's popularity, Ohio Art failed to post a profit in 1998, losing another $1.8 million, mainly because an unnamed "major retailer" abruptly canceled a $15.2 million toy order just before the holiday season. The company was left with a large amount of excess inventory and also was unable to cancel television advertising commitments that had been made in support of the holiday line.

In 1999 Ohio Art seemed on the verge of declaring bankruptcy. Its main lender, Fifth Third Bancorp, declared the company in default on a $17.7 million revolving loan because of the failure to meet the bank's standards of profitability and the necessary ratio of assets to liabilities. From May through September the company's stock was suspended from trading on the American Stock Exchange because Ohio Art had not filed its annual report for 1998. When the report was finally released in September, the auditors said that Ohio Art's finances raised "substantial doubt" about its ability to stay in business. As it searched for new financing, the company was able to fund its operations from its internal cash flow; aiding the company's survival was the release in 1999 of the smash-hit movie sequel Toy Story 2, which once again featured the Etch A Sketch. Despite its appearing onscreen for only about 30 seconds, the attendant free advertising helped boost sales of the drawing toy by 20 percent during the 1999 holiday season. Revenues for 1999 increased 16 percent, and Ohio Art even achieved a small profit of $356,000.

In April 2000 Ohio Art secured a new line of bank financing, bringing some stability to its financial picture. That year a major restructuring was launched in order to enhance the company's longer term viability. The goal was to reduce annual operating costs by $2.5 million by the fall of 2001. The most dramatic--and historic--change was the decision to shift production of the Etch A Sketch from Ohio to China, following a long line of other U.S. manufacturers who had made similar moves. The shift resulted in the elimination of 50 production jobs. For the year, Ohio Art posted its fourth loss in five years as revenues fell because of disappointing sales of the Betty Spaghetty line in the United States.

In 2001 Ohio Art recorded its highest profits ($3.1 million) in nearly a decade. Sales of Etch A Sketch were strong, and while the domestic performance of Betty Spaghetty continued to disappoint, the doll was scoring big in the European market. Ohio Art also managed to overcome the weak economic climate in the United States in late 2001 as well as the financial troubles at retailer Kmart Corporation, which abruptly canceled orders that holiday season.

Ohio Art's improving financial picture enabled the firm to begin investing in new products again. In early 2003 the company introduced a water gun called the A.R.M. 4000 XL, which it described as "the only water gun ergonomically designed to fit on the user's arm" (A.R.M. stood for "Aquatic Revenge Machine"). Hasbro, Inc. soon sued Ohio Art for patent infringement, claiming that the A.R.M. was too similar to Hasbro's Super Soaker water guns. In July 2003 a U.S. district judge dismissed the case, but Hasbro vowed to appeal. Meantime, it was reported in mid-2002 that Ohio Art was trying to sell its Strydel injection-molding subsidiary, hoping to use the proceeds to fund further toy development. Such a move might prove vital to Ohio Art's future as analysts consistently criticized the company's toy line as being too narrowly focused on just a few key products.

Principal Subsidiaries: Strydel, Inc.; Trinc Company.

Principal Competitors: Mattel, Inc.; Hasbro, Inc.; JAKKS Pacific, Inc.; Marvel Enterprises, Inc.

Chronology

• Key Dates:
• 1908: In Archbold, Ohio, Henry Simon Winzeler founds The Ohio Art Company as a maker and seller of oval metal picture frames.
• 1915: Company is relocated to Bryan, Ohio, where it builds a new plant and also adds lithography equipment.
• 1917: Ohio Art ventures into toymaking through two acquisitions; company begins making lithographed metal toys and tea sets.
• 1930: Company incorporates and goes public, though the Winzelers retain a controlling stake.
• 1960: Ohio Art launches the Etch A Sketch during the holiday season.
• 1962: Strydel, Inc. is formed as a subsidiary focusing on custom metal lithography and molded plastic products.
• 1977: Winzeler family sells its controlling stake to William Casley Killgallon.
• 1978: The non-toy operations are consolidated within the Diversified Products Division.
• 1998: The Betty Spaghetty doll debuts.
• 2000: Ohio Art announces it will shift production of the Etch A Sketch from Ohio to China.