Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 July 30, 1999
Commission file number 0-22717
ACORN PRODUCTS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 22-3265462
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
390 DUBLIN AVENUE, COLUMBUS, OHIO 43215
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (614) 222-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common stock, par value $.001 per share Nasdaq National Market
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 is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of October 22, 1999, the aggregate market value of our shares of
common stock (based on the last sale price of the common stock on the Nasdaq
National Market on that date) held by non-affiliates of the registrant was
approximately $2,621,605.
As of October 22, 1999, 6,021,705 shares of our common stock, par
value $.001 per share, were outstanding.
TABLE OF CONTENTS
DESCRIPTION PAGE
----------- ----
Table of Contents
Part I
Item 1. Business............................................................................. 3
Item 2. Properties........................................................................... 10
Item 3. Legal Proceedings.................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................................. 12
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 13
Item 6. Selected Financial Data ............................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................ 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................... 24
Item 8. Financial Statements and Supplementary Data ......................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................. 24
Part III
Item 10. Directors and Executive Officers of the Registrant .................................. 25
Item 11. Executive Compensation .............................................................. 27
Item 12. Security Ownership and Certain Beneficial Owners and Management ..................... 31
Item 13. Certain Relationships and Related Transactions ...................................... 32
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 33
Signatures ..................................................................................... 37
Financial Statements................................................................................. F-1
Schedules to Financial Statements.................................................................... S-1
2
PART I
ITEM 1. BUSINESS
AS USED IN THIS ANNUAL REPORT ON FORM 10-K AND EXCEPT AS THE CONTEXT
OTHERWISE MAY REQUIRE, "WE," "US," AND "OUR" MEANS ACORN PRODUCTS, INC. AND
OUR SUBSIDIARIES UNIONTOOLS, INC., H.B. SHERMAN MANUFACTURING COMPANY, INC.,
AND UNIONTOOLS IRRIGATION, INC. REFERENCES TO OUR FISCAL YEAR MEAN THE FISCAL
YEAR ENDED ON THE FRIDAY CLOSEST TO JULY 31 OF THE APPLICABLE YEAR (E.G.,
FISCAL 1999 MEANS THE FISCAL YEAR ENDED JULY 30, 1999). AS USED IN THIS
ANNUAL REPORT ON FORM 10-K, "ACE HARDWARE" REFERS TO ACE HARDWARE CORP.,
"TRUSERV" REFERS TO TRUSERV CORPORATION, "FRED MEYER" REFERS TO FRED MEYER,
INC., "FRANK'S NURSERY" REFERS TO FRANK'S NURSERY & CRAFTS INC., "HOMEBASE"
REFERS TO HOMEBASE, INC., "KMART" REFERS TO KMART CORPORATION, "PAYLESS
CASHWAYS" REFERS TO PAYLESS CASHWAYS, INC., "SEARS," REFERS TO SEARS, ROEBUCK
& COMPANY, "MID-STATES" REFERS TO MID-STATES DISTRIBUTING COMPANY, INC.,
"QUALITY STORES" REFERS TO QUALITY STORES, INC., "WAL-MART" REFERS TO
WAL-MART STORES, INC., "LOWE'S" REFERS TO LOWE'S COMPANIES, INC., "WHITE CAP"
REFERS TO WHITE CAP PRO-CONTRACTOR SUPPLIER, "HUGHES" REFERS TO HUGHES
SUPPLY, INC., "PRIME EQUIPMENT" REFERS TO PRIME SERVICES, INCORPORATED AND
"HOME DEPOT" REFERS TO THE HOME DEPOT, INC. WE OWN THE FOLLOWING REGISTERED
TRADEMARKS: Lady Gardener-Registered Trademark-(R), Perfect Cut-Registered
Trademark-(R), Pro Force-Registered Trademark-(R), Razor-Back-Registered
Trademark-(R), Union-Registered Trademark-(R), UnionPro-Registered
Trademark-(R) AND Yard 'n Garden-Registered Trademark-(R). Green
Thumb-Registered Trademark-(R) AND True Value-Registered Trademark-(R) ARE
REGISTERED TRADEMARKS OF TRUSERV. Frank's-Registered Trademark-(R) IS A
REGISTERED TRADEMARK OF FRANK'S NURSERY. Craftsman-Registered Trademark-(R)
AND Sears-Registered Trademark-(R) ARE REGISTERED TRADEMARKS OF SEARS.
Scotts-Registered Trademark-(R) IS A REGISTERED TRADEMARK OF THE SCOTTS
COMPANY.
FORWARD-LOOKING INFORMATION
Our actual results could differ materially from those projected in
our forward-looking statements. Additional information concerning factors
that could cause actual results to differ materially from those in our
forward-looking statements is contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as in our Current Report on Form 8-K filed with the Securities and
Exchange Commission on September 18, 1997, as amended on October 28, 1998
and on November 12, 1999, and as the same may be amended from time to time.
GENERAL
Founded in 1890, we are a leading manufacturer and marketer of
non-powered lawn and garden tools in the U.S. Our principal products include
long handle tools (such as forks, hoes, rakes and shovels), snow tools,
posthole diggers, wheelbarrows, striking tools, cutting tools, and watering
products (such as sprinklers, hose nozzles and hose couplings). We sell our
products under a variety of well-known brand names, including RAZOR-BACK,
UNION, YARD 'N GARDEN, SHERMAN THOMPSON, PERFECT CUT and, pursuant to a
license agreement, SCOTTS. In addition, we manufacture private label products
for a variety of retailers, including products sold under Sears' CRAFTSMAN
and TruServ's GREEN THUMB brand names. Our customers include mass merchants
such as Sears, Wal-Mart, Kmart and Fred Meyer, home centers such as Home
Depot, Lowe's, HomeBase and Payless Cashways, buying groups such as TruServ
and Ace Hardware, farm distributors such as Mid-States and Quality Stores,
and industrial distributors such as Prime Equipment and White Cap.
BUSINESS STRATEGY
Over the past eight years, we have implemented a business strategy
designed to transform ourselves from a manufacturing-oriented industrial
company into a marketing-oriented consumer products company. The central
elements of our approach have included a market segmentation strategy based
primarily on brand management and a merchandising strategy based on
attractive and informative product displays and labeling.
- MARKET SEGMENTATION STRATEGY. We have developed a family of
brands, each targeted to one or more specific consumer segments
and price-points. Our products and brands are differentiated by
price, features and warranty, as well as by the materials and
production processes used.
- MERCHANDISING STRATEGY. We were the first in the long handle tool
segment of the non-powered lawn and garden industry to
successfully implement sophisticated merchandising and marketing
programs. Our merchandising programs are designed to (i) create
brand identification among goods historically treated as
commodities and (ii) increase retail sales while reducing the
3
amount of sales support needed from the retailer's employees. We
use innovative product labeling and point-of-sale signage and
racking to highlight the comparative value and quality of
products within our trademarked "GOOD/BETTER/BEST" format. Where
adequate shelf-space is available, we also merchandise our brands
together, from our opening price-point YARD 'N GARDEN brand to
our best-quality RAZOR-BACK brand, using a similar value
positioning technique. We believe that this merchandising
strategy facilitates comparison shopping and encourages consumers
to purchase higher price-point products.
GROWTH STRATEGY
We believe that we can leverage the success of our business strategy
through the implementation of the following growth strategies:
- INCREASE PENETRATION IN HIGH GROWTH DISTRIBUTION CHANNELS. We
believe that certain distribution channels, such as home
centers and mass merchants, are growing more rapidly than the
overall industry. We believe that we can continue to increase
our sales in these high growth distribution channels through
our brand names, innovative merchandising techniques and high
quality products. For example, in August 1996, after we
demonstrated the effectiveness of our market segmentation and
merchandising strategies in a select number of Home Depot
stores, Home Depot selected us as the supplier of long handle
tools for all new Home Depot stores in new markets and for 50
existing Home Depot stores. As of the end of fiscal 1999, we
supplied long handle tools to 208 Home Depot stores. In
addition, we have been a continuous supplier to Sears for over
80 years and the primary supplier of long handle tools to
Sears for over 50 years. There can be no assurance that
retailers in such distribution channels will continue to open
a significant number of new stores or, if opened, that the
retailers will choose us to supply products to all or a
significant portion of such stores. In addition, there can be
no assurance that such stores will generate significant
additional sales for us or that such stores will not result in
a reduction of sales to our other customers, whether through
consolidation or otherwise.
- DEVELOP PRODUCT LINE EXTENSIONS. We believe that product line
extensions allow us to increase sales with minimal incremental
expenditures. We expanded our cutting tool and striking tool
product lines with the introduction in August 1995 of PERFECT
CUT pruning shears and loppers and RAZOR-BACK mattocks, picks,
axes, hammers and bars. Outside manufacturers produce the
striking and cutting tools. In August 1996, we introduced the
LADY GARDENER line of tools, which are ergonomically designed
for female gardeners. In August 1997, we introduced
wheelbarrows manufactured by a third party. In August 1998, we
introduced the RACK 'N ROLL-TM- Tool Caddy, a wheeled
garden tool organizer and storage product designed and
manufactured by us.
INDUSTRY
The non-powered lawn and garden tool industry is mature and, due in
part to the low-cost nature of non-powered equipment, generally is
non-cyclical. We believe that demand for non-powered lawn and garden tools
generally is driven by the desire of do-it-yourself, or "DIY", consumers to
maintain and landscape residential properties and the need of industrial and
farm professionals to acquire and utilize high-quality tools that will aid
them in efficiently completing their jobs. The following product categories
comprise the non-powered lawn and garden tool market: long handle tools,
garden hose, hose attachments, cutting tools, sprayers, wheelbarrows and
spreaders. We believe that long handle tools comprise the largest segment of
the non-powered lawn and garden tool market.
PRODUCTS AND BRANDS
PRODUCT LINES
We sell over 3,000 SKUs of non-powered lawn and garden tools. We
design, manufacture and market tools in the following product lines:
4
- Shovels and scoops
- Other steel products, such as hoes, forks, scrapers and rakes
- Garden hand tools and posthole diggers
- Snow tools, such as shovels and pushers
- Watering products such as sprinklers, hose nozzles and hose
couplings
- Other products such as garden tool organizers, repair handles,
weeders, edging tools and brooms.
In addition, we sell wheelbarrows, cutting tools and striking tools
purchased from outside equipment manufacturers. We also manufacture
proprietary custom molded products and component parts for other
manufacturers and distributors, as well as plastic components used in our
products.
BRAND POSITIONING
Under our market segmentation strategy, we have developed a family
of brands, each targeted to one or more specific consumer segments and
price-points. Our products and brands are differentiated by price, features
and warranty (up to a lifetime warranty). Product grades also differ with
respect to the materials and production processes used. For example, the
steel components of our RAZOR-BACK line are heavy-gauge and forged in order
to maximize the product's strength and durability, while our YARD 'N GARDEN
products are made with lighter gauge components. We carefully monitor our
products and search for growth opportunities that result from changes in
market segments. For example, we repositioned the RAZOR-BACK brand to cater
to the growing population of serious DIY consumers by updating the brand
image, introducing product line extensions and developing new promotional
campaigns. Our major brands are described below.
- RAZOR-BACK. We sell a full line of best-quality, industrial duty
tools for farm, industrial and professional users under the
RAZOR-BACK name. The brand enjoys a strong franchise with
agricultural and industrial professionals and is widely acknowledged
as the quality and performance standard for the long handle tool
industry. In 1995, we expanded the brand with a high-quality line of
cutting and striking tools and, in 1998, also added wheelbarrows
under the RAZOR-BACK name. The RAZOR-BACK line is sold primarily
through home center, hardware store, industrial distributor and farm
sector distribution channels.
- UNION PRO. We sell a limited line of high-quality, industrial duty
tools for farm, industrial and professional users under the UNION
PRO name. The UNION PRO line is sold primarily through industrial
distributor and farm sector distribution channels.
- UNION. The UNION line generates our largest sales volume. Under the
UNION name, we sell a full line of medium-quality, professional duty
tools with a wide range of features, quality points and performance
levels designed to match the needs of tradesmen and serious DIY
consumers. The UNION line is sold through all distribution channels
except warehouse clubs and is merchandised in a trademarked
GOOD/BETTER/BEST quality configuration.
- PERFECT CUT. We introduced the PERFECT CUT line in August 1995. We
sell a limited line of consumer and professional duty cutting tools
for tradesmen and serious DIY consumers under the PERFECT CUT name.
The PERFECT CUT line is sold primarily through home centers, mass
merchants and hardware store distribution channels and is
merchandised in a trademarked GOOD/BETTER/BEST quality
configuration.
- SCOTTS. In July 1992, we obtained from The Scotts Company the
exclusive right to manufacture, distribute and market in the U.S.
and Canada an extensive line of lawn and garden tools under the
SCOTTS name. We sought to benefit from The Scotts Company's national
prime time advertising campaigns, to develop joint promotional
programs with The Scotts Company and to leverage the SCOTTS brand
reputation and recognition among retailers that support The Scotts
Company bagged-goods program. Under the SCOTTS name, we sell a full
line of high-quality, consumer-oriented tools for home gardeners who
associate the SCOTTS name with value and quality. The SCOTTS line is
sold primarily through mass merchant and home center distribution
channels and is merchandised in a trademarked GOOD/BETTER/BEST
quality configuration.
5
- PROFORCE. We introduced the PROFORCE line in August 1993. The
ProForce line consists of a limited line of medium-quality,
consumer-oriented tools for DIY consumers. The PROFORCE line is sold
exclusively through the warehouse club distribution channel.
- YARD 'N GARDEN. Under the YARD 'N GARDEN name, we sell a limited
line of standard quality, promotional tools designed for occasional
DIY consumers who demand value in basic tools for home use. The YARD
'N GARDEN line is sold through all of our primary distribution
channels.
- LADY GARDENER. We introduced the LADY GARDENER line in August 1996.
Under the LADY GARDENER name, we sell a limited line of
high-quality, consumer-oriented tools ergonomically designed for
female gardeners. The LADY GARDENER line is sold primarily through
mass merchant, home center and hardware store distribution channels.
- SHERMAN THOMPSON. We developed the SHERMAN THOMPSON name in 1998 to
capitalize on the long history of the recent Sherman and Thompson
watering products acquisitions. We sell a high-quality line of
sprinklers, hose nozzles and hose couplings under the SHERMAN
THOMPSON name through all of the our primary distribution channels.
PRIVATE LABEL PRODUCTS
We also manufacture private label products for a variety of
customers who sell the products under, among others, the following labels:
- Sears under the CRAFTSMAN and SEARS label
- TruServ under the GREEN THUMB label
- Frank's Nursery under the FRANK'S label
We have been a continuous supplier to Sears for over 80 years and
the primary supplier of long handle tools to Sears for over 50 years. Private
label products generated approximately $25.8 million, or 15.5%, of our gross
sales in fiscal 1999.
NEW PRODUCT DEVELOPMENT
We believe that product line extensions allow us to increase sales
with minimal incremental expenditures. We expanded our cutting tool and
striking tool product lines with the introduction in August 1995 of PERFECT
CUT pruning shears and loppers and RAZOR-BACK mattocks, picks, axes, hammers
and bars. Outside manufacturers produce the striking and cutting tools. In
August 1996, we introduced the LADY GARDENER line of tools, which are
ergonomically designed for female gardeners. In August 1997, we introduced
wheelbarrows manufactured by a third party. In August 1998, we introduced the
RACK 'N ROLL-TM- Tool Caddy, a wheeled garden tool organizer and storage
product designed and manufactured by us.
CUSTOMERS
Our largest customer, Sears, which includes Sears' Orchard Supply
division, accounted for 10.9%, 13.6% and 13.4% of gross sales in fiscal 1997,
fiscal 1998, and fiscal 1999, respectively. Our ten largest customers
accounted for approximately 50.1%, 51.5% and 50.7% of gross sales during each
such period. We sell our products through a variety of distribution channels
including:
- Mass merchants such as Sears, Kmart and Fred Meyer
- Home centers such as Home Depot, Lowe's, HomeBase and Payless
Cashways
- Buying groups such as TruServ, Distribution America, and Ace
Hardware
- Farm distributors and stores such as Mid-States Distributing
Co., Wheatbelt, Inc. and Tractor Supply Company, Inc.
- Industrial distributors such as Prime Equipment, White Cap,
Oklahoma Rig & Supply Company, Texas Mill Supply &
Manufacturing, Inc. and Hughes Supply, Inc.
6
There can be no assurance that our sales to Sears or other major
customers will continue at existing levels. A substantial reduction or
cessation of sales to Sears or other major customers could have a material
adverse effect on our business, financial condition and results of
operations. Certain retail distribution channels in the lawn and garden
industry, such as mass merchants and home centers, are experiencing
consolidation. There can be no assurance that such consolidation will not
have an adverse impact on certain of our customers or result in a substantial
reduction or cessation of purchases of our products by certain customers. In
addition, we are facing increasing pressures from retailers with respect to
pricing, co-operative advertising and other rebates as the market power of
large retailers continues to grow. There can be no assurance that such
pressures will not have an adverse impact on our business, financial
condition and results of operations.
MERCHANDISING AND MARKETING
We were the first in the long handle tool segment of the non-powered
lawn and garden industry to successfully implement sophisticated
merchandising and marketing programs. Our merchandising programs are designed
to (i) create brand identification among goods historically treated as
commodities and (ii) increase retail sales while reducing the amount of sales
support needed from the retailer's employees. We use innovative product
labeling and point-of-sale signage and racking to highlight the comparative
value and quality of products within and among our brands. We merchandise
products within our UNION, SCOTTS and PERFECT CUT lines using our trademarked
"GOOD/BETTER/BEST" format. Where adequate shelf-space is available, we also
merchandise our brands together, from our opening price-point YARD 'N GARDEN
brand to our best-quality RAZOR-BACK brand, using a similar value positioning
technique. We believe that our merchandising strategy facilitates comparison
shopping and encourages consumers to purchase higher price-point products.
Where applicable, we provide our customers with merchandising
plan-o-grams. We also provide our customers with custom designed product
displays complete with informative signs and other "wall-talkers" to answer
consumer questions without the help of the retailer's sales staff. We
primarily use cooperative advertising to promote our products to consumers.
SALES
Our sales force is divided into regions, each led by a regional
manager. Some regional managers supervise a sales force consisting of direct
sales professionals who we employ. In addition, we utilize over 20
manufacturers' representative agencies who also report to the regional
managers. The manufacturers' representatives also sell lawn and garden
products for other manufacturers, but not products that compete with our
products. Our management and senior sales professionals regularly call on our
significant customers, while the manufacturing representatives provide store
level support. We generally compensate our sales professionals with a base
salary and bonuses based upon performance oriented objectives.
DISTRIBUTION AND LOGISTICS
Customer orders arrive at our headquarters in Columbus, Ohio and are
processed centrally. If we can fill the order from the current stock of
finished goods, the order is forwarded to one of our three distribution
centers for shipment based on proximity and availability. We currently
maintain distribution centers in Chino, California, Columbus, Ohio and
Frankfort, New York. As of July 30, 1999, we owned or leased a fleet of one
tractor, one straight truck and eight trailers for transporting products
between our manufacturing and distribution facilities. We use common carriers
for shipping finished products from warehouses to customer delivery points.
We use a computerized management information and control system that
allows us to determine the status of customer orders and enables us to
process orders quickly, respond to customer inquiries and adjust shipping
schedules to meet customer requirements. Within this system, we use an
electronic data interchange system that enables customers, through
computerized telephone communications, to place orders directly with us. We
believe that these systems enable efficient order processing, expedite
shipments and improve customer service.
We also provide our customers with the service of pre-ticketing and
bar-coding our products in accordance with customer specifications.
7
MANUFACTURING
The production of non-powered lawn and garden tools is an extensive
manufacturing and assembly process that involves several different
technologies, including sawmill operations, wood finishing, heavy gauge
forging, stamping, grinding, metal painting, machining, die-casting and
injection molding. Over the last 100 years, we have developed unique
processes that enable us to perform these complex tasks in an efficient
manner.
At our Frankfort, New York manufacturing facility, steel components
undergo hot and cold stamping and hot forging or welding, depending on the
type of tool head being produced. We clean the metal by grinding and
polishing the shaped steel heads. Next, we paint the steel components using
various techniques depending on product type and product material. We operate
our own water based paint manufacturing process that is used for all steel
tool components. Some steel components undergo additional finishing steps
such as anodization or immersion in special chemical baths.
At our seven active saw mills, we cut ash logs into flitches, then
into squares and finally into rounds. We then inspect the rounds, which have
diameters of one to two inches depending on the finished product
requirements, to remove defects. We ship the end product, a green ash dowel,
to either our Frankfort, New York or Delaware, Ohio sawmill to be kiln dried,
cut to length, shaped and turned into a handle. The kiln drying process takes
approximately six days and removes enough moisture from the wood to reduce
the weight of the original green dowel by approximately 35%. Wood handles
undergo chucking, boring, sanding and a finishing process at our Frankfort,
New York facility. The inventory of handles maintained at our Frankfort, New
York facility is a function of both price and seasonal considerations. The
assembly of the steel tool head to the handle and packaging take place in the
final manufacturing stage.
Manufacturing processes at our Chino, California watering products
facility include machining of metal bar stock and metal castings on automatic
screw machines, turret lathes, CNC turning centers and multiple spindle
chuckers and mills to produce high-quality hose nozzles and couplings, as
well as component parts for use in our sprinklers and other products. We also
perform zinc die-casting and metal punch press operations at the facility.
In March 1999, we announced that we were going to consolidate our
Columbus, Ohio manufacturing facility into our primary manufacturing facility
in Frankfort, New York. We operated the Columbus facility through August
1999. As of September 1999, we relocated all of the equipment from our
Columbus, Ohio manufacturing facility to our Frankfort, New York
manufacturing facility.
We have implemented a seasonally adjusted production schedule in
order to maximize our inventories of finished goods. We increase production
from December through March, our busiest season, and lower production during
the summer and fall seasons.
RAW MATERIALS
The primary raw materials used to produce our products are steel,
plastics and ash wood.
- STEEL. We purchase our steel requirements from several domestic
suppliers. The primary considerations in specialty steel sourcing
are metallurgy, price and width. We have strong and long-established
relationships with our steel suppliers and have never experienced
sourcing problems. We do not enter into long-term contracts
regarding our steel purchases. We purchased approximately 74% of our
steel requirements from Liberty Steel in fiscal 1999.
- PLASTICS. We use specially formulated plastics and resins in
our tools. Plastic tool heads historically have been produced by six
outside injection molders, utilizing molds developed and owned by
us. We use our own injection molding facility to manufacture
proprietary custom molded products and component parts for other
manufacturers and distributors, as well as to manufacture certain
plastic components used in our own products. We have not entered
into any long-term contracts regarding our plastics purchases.
- ASH WOOD. Ash is the ideal hardwood for handles because it is
lightweight, flexible and splinters less than most hardwoods. We
have wood specialists who maintain relationships with numerous log
8
suppliers and are responsible for sourcing our ash needs. We believe
that we will continue to be able to obtain sufficient quantities of
ash. We typically maintain a five to eight week inventory of ash at
each of our sawmills to cover occasional short-term fluctuations in
supply. We import ramin wood handles for some of our
promotionally-priced YARD 'N GARDEN brand products, such as rakes
and hoes. Ramin wood is less expensive than ash and is of sufficient
quality for tools (other than shovels) designed for
opening-price-point levels.
We also use brass, zinc and aluminum in the production of watering
products. We have not entered into any long-term contracts regarding our
brass, zinc and aluminum purchases.
We have several suppliers for most of our raw materials. There can
be no assurance, however, that we will not experience shortages of raw
materials or of components essential to our production processes or be forced
to seek alternative sources of supply. In addition, there can be no assurance
that prices for such materials will remain stable. Any shortages of raw
materials may result in production delays and increased costs which could
have a material adverse effect on our business, financial condition and
results of operations.
EMPLOYEES
As of July 30, 1999, we employed approximately 700 people (including
seasonal employees), approximately 500 of whom were paid on an hourly basis.
Our staffing requirements fluctuate during the year as a result of the
seasonality of the lawn and garden industry, adding approximately 100 to 200
additional seasonal employees in the third quarter. The average tenure of our
hourly employees is in excess of 10 years. Hourly employees at our Columbus,
Ohio distribution center and Delaware, Ohio sawmill are represented by the
International Association of Machinists, or the "IAM". The International
Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and
Helpers, or the "IBB", represents the hourly employees at our Frankfort, New
York. The International Brotherhood of Teamsters, or the "IBT", represents
hourly employees at our Portville, New York sawmill. The Glass, Molders,
Pottery, Plastics & Allied Workers International Union AFL-CIO, or the "AGM"
represents hourly employees at our Hebron, Ohio injection molding facility.
Our contracts with the IAM, the IBB, the IBT and the AGM expire in April
2002, June 2001, August 2002 and March 2002, respectively. We have no other
employees that are represented by unions.
We have not been subject to a strike or work stoppage in over 20
years and we believe that our relationships with our employees, the IAM, the
IBB, the IBT and the AGM are good. However, there can be no assurance that we
will be successful in negotiating new labor contracts on terms satisfactory
to us or without work stoppages or strikes. A prolonged work stoppage or
strike at any of our facilities could have a material adverse effect on our
business, financial condition and results of operations.
PATENTS AND TRADEMARKS
Our success and ability to compete are dependent to a significant
degree on our patents and trademarks. We register our patents and trademarks
in the United States Patent and Trademark Office and the patent and trademark
offices of certain other countries and intend to continue to do so as new
patents and trademarks are developed or acquired. Our trademarks include:
- LADY GARDENER
- PERFECT CUT
- PRO FORCE
- RAZOR-BACK
- UNION
- UNION PRO
- YARD 'N GARDEN
In addition, we hold trademarks on various configurations of our
GOOD/BETTER/BEST product labels and signage. In July 1992, we obtained the
exclusive right to manufacture, distribute and market in the U.S. and Canada
an extensive line of lawn and garden tools under the SCOTTS brand name. We
pay certain royalties to The Scotts Company, the owner of the SCOTTS
trademark, pursuant to a license agreement. The current term of the
9
license agreement expires in August 2001 and, subject to certain conditions, is
automatically renewed for successive three year periods.
COMPETITION
All aspects of the lawn and garden industry, including attracting
and retaining customers and pricing, are highly competitive. We compete for
customers with large consumer product manufacturers and numerous other
companies that produce specialty home and garden products, as well as with
foreign manufacturers that export their products to the U.S. Many of these
competitors are larger and have significantly greater financial resources
than us. There can be no assurance that increased competition in the lawn and
garden industry, whether from existing competitors, new domestic
manufacturers or additional foreign manufacturers entering the U.S. market,
will not have a material adverse effect on our business, financial condition
and results of operations.
ENVIRONMENTAL MATTERS
We are subject to various federal, state and local environmental
laws, ordinances and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes. We
have made, and will continue to make, expenditures to comply with these
environmental requirements and regularly review our procedures and policies
for compliance with environmental laws. We also have been involved in
remediation actions with respect to certain of our facilities. The amounts
that we have expended for such compliance and remediation activities have not
materially affected us. However, current conditions and future events, such
as changes in existing laws and regulations, may give rise to additional
compliance or remediation costs that could have a material adverse effect on
our business, financial condition or results of operations. Furthermore, as
is the case with manufacturers in general, if a release of hazardous
substances occurs on or from any of our properties or any associated offsite
disposal location, or if contamination from prior activities is discovered at
any of our properties, we may be held liable and the amount of such liability
could be material.
At July 30, 1999, we had a reserve for environmental remediation of
approximately $157,000. The actual cost of remediating environmental
conditions may be different than that accrued by us due to the difficulty in
estimating such costs and due to potential changes in the status of
legislation. We do not maintain an insurance policy for environmental matters.
ITEM 2. PROPERTIES
Our headquarters and executive offices, located in Columbus, Ohio,
occupy approximately 33,000 square feet in a facility that we lease. As of
July 30, 1999, we owned or leased the following other principal properties
for use in our business as set forth below:
DISTRIBUTION FACILITIES
OWNED SQUARE
LOCATION OR LEASED FEET
-------- --------- -----
Chino, California................................ Leased 64,200
Columbus, Ohio .................................. Leased 179,200
Columbus, Ohio .................................. Leased 105,000
Frankfort, New York(l) .......................... Owned 62,500
La Mirada, California(2)......................... Leased 19,100
MANUFACTURING FACILITIES
OWNED SQUARE
LOCATION OR LEASED FEET
-------- --------- -----
Columbus, Ohio(3) ............................... Owned 160,900
Frankfort, New York(l) .......................... Owned 201,210
Hebron, Ohio..................................... Owned 107,200
10
Chino, California................................ Leased 40,000
SAWMILLS
OWNED SQUARE
LOCATION OR LEASED FEET
-------- --------- -----
Beverly, West Virginia (Inactive)................ Owned 10,000
Cookeville, Tennessee............................ Owned 12,100
Delaware, Ohio .................................. Owned 51,100
Frankfort, New York(l) .......................... Owned 59,490
Huntington, Indiana ............................. Owned 7,600
Lebanon, Kentucky................................ Owned 13,500
Portville, New York ............................. Owned 9,000
Shippenburg, Pennsylvania ....................... Owned 15,000
(1) Our 351,000 square foot Frankfort, New York facility is comprised of a
distribution center, a manufacturing facility and a sawmill. We also
maintain approximately 27,800 square feet of office space in this
facility.
(2) The lease for our La Mirada, California distribution facility ended on
September 30, 1999. The La Mirada distribution facility was replaced by
our new Chino, California distribution facility.
(3) In September 1999, operations in our Columbus, Ohio manufacturing
facility were consolidated into our Frankfort, New York manufacturing
facility. We are currently in contract to sell the Columbus, Ohio
facility, which includes approximately 31,000 square feet of office
space, and expect to complete the sale by November 30, 1999.
We believe that our existing manufacturing facilities, distribution
centers and sawmills are adequate for the current level of operations. We
believe that our manufacturing facilities have sufficient excess capacity to
accommodate a 35% to 50% increase in the current level of output. We believe
that our current sawmill capacity is sufficient to accommodate up to a 30%
increase in the current level of output.
11
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in routine litigation incidental
to the conduct of business. Management believes that no currently pending
litigation to which we are a party will have a material adverse effect on our
financial position or results of operations.
In April 1999, our subsidiary, V.H.G. Tools, Inc. and predecessor
companies, were joined by Midwest Products, Inc., the defendant, in a product
liability lawsuit filed in New Jersey Superior Court, Burlington County, New
Jersey. The case is in its early stages, at least as to VHG. Plaintiff's and
Midwest's allegations do not appear to be supported by evidence, but if
plaintiff's and Midwest's allegations against VHG are proven, liability could
be substantial. We believe that any compensatory damages, if awarded, would be
covered by insurance.
Subsequent to our fiscal year end, we received written notification
that Huffy Corporation, True Temper Company and Huffco Company withdrew their
October 1998 complaint against us alleging, among other things, breach of
contract, unfair competition, misappropriation of trade secrets and fraud in
connection with discussions regarding a possible merger.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 1999 annual meeting of stockholders on June 22, 1999.
Holders of 5,946,772 shares of our common stock were present representing
98.7% of all shares entitled to vote at the meeting.
The following persons were elected as members of our Board of
Directors to serve until the 2000 annual meeting or until their successors
are duly elected and qualified: Conor D. Reilly, Gabe Mihaly, William W.
Abbott, Matthew S. Barrett, Stephen A. Kaplan, and John I. Leahy. Each
nominee received a vote of 5,922,589 shares FOR, with 24,183 shares
withholding approval.
The proposal to increase the number of shares of the Registrant's
common stock issuable upon exercise of stock options under the 1997
Non-Employee Director Stock Option Plan from 25,000 to 200,000 shares was
approved with 5,166,347 votes for, 774,921 votes against, and 5,504 votes
abstaining.
The ratification of the appointment of Ernst & Young LLP as our
independent auditors for fiscal year 2000, was approved with 5,922,589 votes
for, 11,100 votes against, and 354 votes abstaining.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock began trading on the Nasdaq National Market in June
1997 under the symbol "ACRN". The following table sets forth the high and low
sales prices of the common stock on the Nasdaq National Market during the
periods indicated:
MARKET PRICE
------------------
FISCAL PERIOD HIGH LOW
- ------------- ----------- ----------
1998:
First Quarter...................................... $17.25 $13.25
Second Quarter..................................... $15.25 $9.00
Third Quarter...................................... $10.625 $7.875
Fourth Quarter..................................... $9.75 $5.00
1999:
First Quarter...................................... $10.00 $5.13
Second Quarter..................................... $9.50 $6.25
Third Quarter...................................... $7.25 $5.00
Fourth Quarter..................................... $6.25 $4.31
2000:
First Quarter (through October 22, 1999)........... $4.81 $2.50
As of October 22, 1999, the approximate number of record holders of
the common stock was 20. The closing sales price of the common stock on
October 22, 1999 was $2.63 per share. During the latter part of fiscal 1999,
we repurchased 442,400 shares of Acorn common stock at a cost of
approximately $2.5 million.
We have never paid, and currently do not intend to pay, any cash
dividends on our common stock. We are a holding company with no business
operations of our own. Therefore, we are dependent upon payments, dividends
and distributions from UnionTools for funds to pay dividends to our
stockholders. UnionTools currently intends to retain any earnings for support
of its working capital, repayment of indebtedness, capital expenditures and
other general corporate purposes. UnionTools has no current intention of
paying dividends or making other distributions to us in excess of amounts
necessary to pay our operating expenses and taxes. Our senior credit facility
contains restrictions on UnionTools' ability to pay dividends or make
payments or other distributions to us.
On July 1, 1999, we issued 10,000 unregistered shares of our common
stock to A. Corydon Meyer. The shares are subject to forfeiture and vest one
year from the date of grant. Mr. Meyer's continued employment with us and his
performance of services for us is the consideration for the grant of
restricted stock. The grant of the restricted stock is exempt from
registration under the Securities Act of 1933 by virtue of the exemption
listed in Section 4(1) of that Act.
We also repurchased a total of 442,400 shares of our common stock in
open market transactions from March to May of 1999 in reliance on the
exemption from registration contained in Section 4(1) of the Securities Act
of 1933 as follows:
NUMBER OF PRICE PER
DATE TOTAL COST SHARES SHARE
March 11, 1999 $537,500 100,000 $5.38
March 19, 1999 $645,000 120,000 5.38
March 19, 1999 53,750 10,000 5.38
March 24, 1999 265,625 50,000 5.32
April 9, 1999 31,875 6,000 5.32
April 12, 1999 31,875 6,000 5.32
April 13, 1999 18,594 3,500 5.32
April 16, 1999 326,250 58,000 5.63
April 27, 1999 227,500 35,000 6.50
April 30, 1999 25,350 3,900 6.50
April 30, 1999 162,500 25,000 6.50
May 3, 1999 162,500 25,000 6.50
ITEM 6. SELECTED FINANCIAL DATA
13
We have derived the selected consolidated financial data for fiscal
1995, fiscal 1996, fiscal 1997, fiscal 1998, and fiscal 1999 from our audited
consolidated financial statements. Certain accounts from prior years have
been reclassified to conform to the fiscal 1999 presentation. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
the consolidated financial statements and notes thereto and the other
financial information included elsewhere in this Annual Report on Form 10-K.
FISCAL YEAR ENDED
----------------------------------------------------------------------------
July 28, August 2, August 1, July 31, July 30,
1995 1996 1997 1998 1999
----------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
----------------------------------------------------------------------------
Net sales........................ $ 86,543 $ 92,652 $ 101,011 $ 107,758 $ 111,414
Cost of goods sold............... 63,411 67,496 73,982 82,480 91,149
----------- ------------ ------------ ----------- -------------
Gross profit..................... 23,132 25,156 27,029 25,278 20,265
Selling, general and
administrative expenses...... 15,531 16,815 18,293 20,033 23,319
Interest expense ................ 6,485 6,732 7,176 2,560 3,401
Amortization of intangibles ..... 1,061 1,173 837 917 1,087
Other expenses, net(1)........... 694 1,522 1,548 259 2,653
----------- ------------ ------------ ----------- -------------
Income (loss) from continuing
operations before income
taxes and cumulative effect
adjustment .................. (639) (1,086) (825) 1,509 (10,195)
Income taxes..................... -- 582 134 230 145
----------- ------------ ------------ ----------- -------------
Income (loss) from continuing
operations before cumulative
effect adjustment ........... (639) (1,668) (959) 1,279 (10,340)
Income (loss) from
discontinued
operations(2) ............... (1,800) (6,480) (9,920) -- (936)
Cumulative effect of change
in accounting for
post-retirement benefits .... -- 869 -- -- --
----------- ------------ ------------ ----------- -------------
Net income (loss)................ $ (2,439) $ (7,279) $ (10,879) $ (1,279) $ (11,276)
=========== ============ ============ =========== =============
Net income (loss) applicable
to common stock........... $ (2,439) $ (7,279) $ (11,897) $ (1,279) $ (11,276)
=========== ============ ============ =========== =============
Loss from continuing operations
per share (basic and diluted) $ (1.10) $ (0.48) $ 0.20 $ (1.64)
Weighted average number of
shares outstanding........... 1,520,066 1,985,758 6,464,105 6,313,527
OTHER DATA:
Gross margin .................... 26.7% 27.2% 26.8% 23.5% 18.2%
EBITDA(3)(4) .................... $ 8,876 $ 9,238 $ 9,840 $ 7,938 $ (1,189)
14
July 28, August 2, August 1, July 31, July 30,
1995 1996 1997 1998 1999
------------ ------------ ----------- ----------- -------------
BALANCE SHEET DATA: (In thousands)
Working capital from continuing
operations.................. $ 5,989 $ 8,543 $ 26,909 $ 30,645 $ 15,118
Total assets..................... 112,280 98,895 98,890 112,633 108,867
Total debt....................... 72,104 61,891 18,935 32,317 38,363
Stockholders equity.............. 17,323 18,530 63,224 64,351 50,190
(1) In fiscal 1996, we recognized other expense of $563,000 in connection
with the resignation of our prior Chairman of the Board and other
expense of $750,000 in connection with self-insured life insurance
accruals related to the death of a former director.
In fiscal 1997, we recognized other expense of $950,000 from the
write-off of certain capitalized bank fees incurred in connection with
our previous bank credit facility.
In fiscal 1999, we recognized expenses related to strategic
transactions of $994,000, consolidation of manufacturing facilities
of $993,000 and consolidation of watering products operations of
$355,000.
(2) Represents the loss from the discontinued VSI and McGuire-Nicholas
operations, as well as (i) a loss in fiscal 1996 of $665,000 incurred
upon the sale of substantially all of the assets of VSI and (ii) a loss
of $8.4 million in fiscal 1997 incurred in connection with the sale of
substantially all of the assets of McGuire-Nicholas.
In fiscal 1999, the Company incurred a loss from discontinued
operations primarily due to a worker's compensation adjustment of
$758,000 related to divested operations and sales tax obligation of
$128,000 related to the sale of McGuire-Nicholas.
(3) EBITDA represents earnings from continuing operations before interest
expense, income taxes, depreciation and amortization. EBITDA is
presented because it is a widely accepted financial indicator used by
certain investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent
cash flows for the period, nor has it been presented as an alternative
to income from continuing operations as an indicator of operating
performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(4) Fiscal 1999 EBITDA would have been approximately $6.5 million
excluding the effect of the following unusual charges: manufacturing
consolidation ($1.3 million), strategic transaction costs ($1.0
million), senior management restructuring charges ($0.7 million),
bad debt expense ($0.7 million), inventory obsolescence ($2.2
million), worker's compensation ($0.4 million) and expenses related
to the temporary loss of logistical control ($1.2 million).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
selected consolidated financial data, our consolidated financial statements
and the notes thereto and the other financial information included elsewhere
in this Annual Report on Form 10-K, as well as the factors set forth under
the caption "Forward-Looking Information" below.
OVERVIEW
We are a leading manufacturer and distributor of non-powered lawn
and garden tools. We are a holding company with no business operations of its
own. Our only material asset is all of the outstanding capital stock of
UnionTools.
15
Founded in 1890, we completed an initial public offering in 1997. We
used a portion of the proceeds of such offering to repay debt associated with
a 1988 leveraged buyout. Since 1991, we have implemented a business strategy
designed to transform us from a manufacturing-oriented industrial company
into a marketing-oriented consumer products company. The central elements of
our approach include a market segmentation strategy based primarily on brand
management and a merchandising strategy based on attractive and informative
product displays and labeling.
The price of raw materials used in our products remained relatively
stable during each of the periods discussed below.
Implementation of our market segmentation and merchandising
strategies has resulted in increased selling, general and administrative
expenses as we have increased our marketing focus through the development of
merchandising displays, point-of-sale signage and product labeling, as well
as additional cooperative advertising. We also incurred an increase in
selling, general and administrative expenses due to increased staffing and
upgrades of management information systems. An increase in competitive
pressures could result in additional increases in selling, general and
administrative expenses, as well as increases in volume rebates and other
discounts and allowances that reduce net sales and adversely effect
profitability.
During the latter part of fiscal 1999, we experienced difficulties
in manufacturing and logistical control that resulted in a significant
deterioration in customer service. Product shortages resulting from the
consolidation of our Columbus, Ohio manufacturing facility into our primary
manufacturing facility located in Frankfort, New York contributed to the
problems encountered. Additional problems arose in connection with a computer
upgrade required for our computer systems to meet Year 2000 compliance,
followed by the loss of the Distribution Center Manager in charge of our
primary distribution center located in Columbus, Ohio in the third quarter of
fiscal 1999. Difficulties were further compounded by the absence of formal
processes and procedures at the distribution center; and by the complexity
added to our operations by our decision to distribute watering products from
Columbus without an adequate increment in resources. We were not fully aware
of the ramifications and financial consequences of these issues, particularly
the customer deductions, freight costs and inventory loss discovered upon
taking a physical inventory count, until the fourth quarter of fiscal 1999.
At year end, we made significant adjustments to properly reflect
appropriate value in accounts receivable, inventories, product tooling and
accrued liabilities. Control issues contributed to an inventory loss
discovered upon taking physical inventory. Worker's compensation reserves
were reviewed for all plan years as a result of an estimated settlement of
certain open years with our insurance carrier and adjusted to proper levels.
We wrote off product tooling and obsolete inventory related to a discontinued
product offering. Excess and obsolete inventory was evaluated and reserves
were provided to reflect anticipated value recovery below cost. Accounts
receivable in bankruptcy and other aged accounts were reserved. The effect of
these adjustments, combined with the deterioration in financial performance
due to problems in manufacturing and logistical control, resulted in our
reporting a net loss of $11.4 million in the fourth quarter of fiscal 1999,
$11.3 million for the full year of fiscal 1999.
We have taken several actions aimed at preventing a recurrence of
these matters. The distribution center has been staffed with a professional
facility manager, and we have implemented upgrades in or new positions of
warehouse manager, traffic manager and inventory control manager. We have
also increased our capacity by leasing a larger facility in Chino, California
and have leased a warehouse in Frankfort, New York, enabling us to ship
directly from the primary manufacturing facility, when preferable. Outgoing
shipment audits have also been initiated. We expect customer service level
performance and related customer deductions to return to historical levels by
the end of December 1999.
There have been several key changes in senior management to
strengthen and focus the Company. A new president and chief executive was
promoted internally in September 1999 to lead the Company, following the
resignation of his predecessor. Similarly, the senior vice president of
operations resigned in September 1999 and was replaced by an executive of the
Company. The chief financial officer resigned in June 1999 and the director
of marketing resigned in September 1999. A new chief financial officer was
hired in June 1999 and vice presidents of marketing and sales were hired in
September and November 1999, respectively. A director of human resources was
hired in November 1999. We believe that these changes will provide the
leadership and experience necessary to restore and enhance profitability.
16
The magnitude of the losses, combined with the costs to execute a
manufacturing consolidation and a share repurchase program, required us to
address our liquidity needs after year end. As a result, we have entered into
a sixth amendment to the Company's credit facility, including a $6 million
capital infusion by our majority stockholder, discussed further in Liquidity
and Capital Resources.
RESULTS OF OPERATIONS
The following table sets forth certain components of our
consolidated statement of operations data expressed as a percentage of net
sales:
YEAR ENDED
---------------------------------------------------
AUGUST 1, JULY 31, JULY 30,
1997 1998 1999
------------- ------------ ------------
Net sales...................................... 100.0% 100.0% 100.0%
Cost of goods sold............................. 73.2 76.5 81.8
------------- ------------ ------------
Gross profit................................... 26.8 23.5 18.2
Selling, general and administrative expenses... 18.1 18.6 20.9
Interest expense............................... 7.1 2.4 3.0
Amortization of intangibles.................... 0.8 0.9 1.0
Other expenses, net............................ 1.6 0.2 2.5
------------- ------------ ------------
Income (loss) from continuing operations
before income taxes......................... (0.8) 1.4 (9.2)
Income taxes................................... 0.1 0.2 0.1
------------- ------------ ------------
Income (loss) from continuing operations.... (0.9) 1.2 (9.3)
Gain (loss) from discontinued operations....... (9.9) -- (0.8)
------------- ------------ ------------
Net income (loss).............................. (10.8%) 1.2% (10.1)%
============= ============ ============
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES. Our net sales increased $3.6 million or 3.4% to $111.4
million in fiscal 1999 compared to $107.8 million in fiscal 1998. The
increase in net sales for fiscal 1999 reflected an aggregate $4.8 million of
net sales arising from a full year of offering watering products, partially
offset by operational inefficiencies in our core business.
GROSS PROFIT. Fiscal 1999 gross profit declined $5.0 million to
$20.3 million compared to $25.3 million in fiscal 1998. Gross profit as a
percentage of sales decreased to 18.2% in fiscal 1999 compared to 23.5% in
fiscal 1998. The decline in gross profit was driven primarily by several
factors. Logistical and manufacturing control issues during 1999 negatively
affected customer service levels and drove higher customer deductions,
distribution and freight costs associated with the revenue for that period.
Control issues also contributed to an inventory loss that was discovered by
taking a physical inventory count. At year end, worker's compensation
reserves were reviewed for all plan years as a result of an estimated
settlement of certain open years with our insurance carrier and adjusted to
proper levels. We wrote off product tooling and obsolete inventory related to
a discontinued product offering. Excess and obsolete inventory was evaluated
and reserves were provided to reflect anticipated value recovery below cost.
Accounts receivable in bankruptcy and other aged accounts were reserved. The
decrease in gross profit was partially offset by benefits from our cost
reduction program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 16.4% or $3.3 million, to $23.3 million in
fiscal 1999 compared to fiscal 1998. As a percentage of sales, selling,
general and administrative expenses increased to 20.9% in fiscal 1999 from
18.6% in fiscal 1998. The increase in selling, general and administrative
expenses is primarily due to having a full year of costs related to the
watering products business. Senior management restructuring charges,
including severance, recruiting and relocation costs, and the write off of
uncollectible accounts contributed to the increase in selling, general and
administrative costs.
17
OTHER EXPENSES, NET. Other expenses increased $2.4 million to
approximately $2.7 million in fiscal 1999 from $.3 million in fiscal 1998.
Approximately $1.4 million of the increase related to plant consolidation
costs incurred in connection with (1) the consolidation of our Columbus, Ohio
manufacturing facility into our primary facility located in Frankfort, New
York, and (2) consolidation of the manufacturing operations of our watering
products. We also incurred approximately $1.0 million in fiscal 1999 related
to accounting, legal, consulting and other expenses related to the
exploration of strategic transactions.
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Loss from
continuing operations before income taxes was $10.2 million in fiscal 1999,
an $11.7 million decline from a profit of $1.5 million in fiscal 1998.
Interest expense increased $.8 million, to $3.4 million in fiscal 1999 from
$2.6 million in fiscal 1998.
NET LOSS. We incurred a net loss of $11.3 million in fiscal 1999, a
$12.6 million deterioration compared to a profit of $1.3 million in fiscal
1998. The loss from discontinued operations of $.9 million primarily reflects
a worker's compensation accrual adjustment of $.8 million for businesses
previously sold.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES. Our net sales increased 6.7%, or $6.7 million, to $107.8
million in fiscal 1998 compared to $101.0 million in fiscal 1997. The
increase in net sales reflected an aggregate of $10.1 million of additional
net sales arising from a full year of operation of our injection molding
division, from sales by our watering products division and from sales of new
products, partially offset by a decline in net sales of long handle tools and
snow tools of approximately $3.3 million. Net sales of long handle tools in
the second and third quarters were negatively impacted by unfavorable winter
and spring weather conditions.
GROSS PROFIT. Gross profit decreased 6.5%, or $1.8 million, to $25.3
million in fiscal 1998 compared to $27.0 million in fiscal 1997. Gross margin
decreased to 23.5% in fiscal 1998 compared to 26.8% in fiscal 1997. The
decrease in gross margin was primarily due to lower net sales of long handle
tools and lower overhead absorption rates realized as we decreased production
in response to sluggish demand, as well as competitive pricing pressures.
Gross margin also was adversely affected by increased manufacturing costs
related to new product development and lower gross margins realized by our
injection molding division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 9.5%, or $1.7 million, to $20.0 million in
fiscal 1998 compared to $18.3 million in fiscal 1997. As a percentage of net
sales, selling, general and administrative expenses increased to 18.6% in
fiscal 1998 from 18.1% in fiscal 1997. Selling, general and administrative
expenses were negatively impacted by increased administrative expenses
resulting from public company requirements and pursuit of our acquisition
strategy.
OTHER EXPENSES, NET. Other expenses decreased $1.3 million to
approximately $300,000 in fiscal 1998 from $1.6 million in fiscal 1997. Other
expenses in fiscal 1997 included the write-off of $950,000 of capitalized
bank fees incurred in connection with our previous bank credit facility.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from
continuing operations before income taxes increased to $1.5 million in fiscal
1998 from a loss of approximately $825,000 in fiscal 1997. Interest expense
decreased $4.6 million to $2.6 million in fiscal 1998 from $7.2 million in
fiscal 1997. Interest expense was partially reduced by the retirement in July
1997 of approximately $51.4 million aggregate principal amount of
indebtedness in connection with our initial public offering.
NET INCOME. Net income increased to $1.3 million in fiscal 1998 from
a loss of $10.9 million in fiscal 1997, primarily as a result of a loss of
$9.9 million in fiscal 1997 from discontinued operations.
SEASONAL AND QUARTERLY FLUCTUATIONS; IMPACT OF WEATHER
The lawn and garden industry is seasonal in nature, with a high
proportion of sales and operating income generated in January through May.
Accordingly, our sales tend to be greater during the third and fourth fiscal
quarters. As a result, our operating results depend significantly on the
spring selling season. To support this sales peak, we must anticipate demand
and build inventories of finished goods throughout the fall and winter.
Accordingly, our levels of raw materials and finished goods inventories tend
to be at their highest, relative to
18
sales, during our first and second fiscal quarters. These factors increase
variations in our quarterly results of operations and potentially expose us
to greater adverse effects of changes in economic and industry trends.
Moreover, actual demand for our products may vary substantially from the
anticipated demand, leaving us with excess inventory or insufficient
inventory to satisfy customer orders.
The following table sets forth certain unaudited data of the Company
for each of the quarters in fiscal 1998 and fiscal 1999. The financial data
for each of these quarters is unaudited but includes all adjustments which
the Company believes to be necessary for a fair presentation. All quarters
include normal recurring adjustments except for the fourth quarter of 1999
which includes certain adjustments of $7.4 million related to the write-off
of obsolete inventory, write-off of tooling associated with a discontinued
product, increases in the reserve for uncollectible accounts receivable, and
increases in the reserve for worker's compensation and other miscellaneous
adjustments. These operating results, however are not necessarily indicative
of results for any future period.
FISCAL 1998 FISCAL 1999
-------------------------------------------------- --------------------------------------------------
QUARTER ENDED
------------------------------------------------------------------------------------------------------
OCTOBER JANUARY MAY 1, JULY 31, OCTOBER JANUARY APRIL 30, JULY 30,
31, 1997 30, 1998 1998 1998 30, 1998 29, 1999 1999 1999
----------- --------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands-unaudited)
Net sales........... $ 20,416 $21,143 $ 37,911 $ 28,288 $ 22,172 $ 22,449 $ 40,434 $ 26,359
Cost of goods sold... 15,277 16,340 29,440 21,423 16,814 16,965 29,964 27,406
----------- --------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit......... 5,139 4,803 8,471 6,865 5,358 5,484 10,470 (1,047)
Selling, general and
administrative
expenses (SG&A)... 4,819 4,411 5,526 5,277 4,948 4,981 5,962 7,428
----------- --------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit less
SG&A(1)(2)........ $ 320 $ 392 $ 2,945 $ 1,588 $ 410 $ 503 $ 4,508 $ (8,475)
=========== ========= =========== =========== =========== =========== =========== ===========
Net sales as a
percentage of
full year net
sales............. 18.9% 19.6% 35.2% 26.3% 19.9% 20.1% 36.3% 23.7%
Gross profit as a
percentage of
full year gross
profit............ 20.3 19.0 33.5 27.2 26.4 27.1 51.7 (5.2)
Gross profit less
SG&A(1) as a
percentage of
full year
operating
profit(loss)...... 6.1 7.5 56.1 30.3 13.4 16.5 147.6 (277.5)
(1) Does not include amortization of intangibles and other expenses, each
of which generally are non-seasonal in nature.
(2) Fourth Quarter 1999 Gross Margin less SG&A would have been a $1.1
million loss if you exclude the $7.4 million effect of the unusual
year end charges described above.
Weather is the single most important factor in determining market
demand for our products and also is the least predictable. For example, while
floods in the Midwest adversely affected the sale of most types of lawn and
garden equipment in 1992, the severe winter of 1994 resulted in a surge in
demand for snow shovels. In addition, bad weather during the spring gardening
season, such as that experienced throughout most of the U.S. in the spring of
1995 and 1998, can adversely affect overall annual sales.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for working capital, capital expenditures
and debt service. We have financed our working capital, capital expenditures
and debt service through internally generated cash flow and funds borrowed
under the Company's senior credit facility (the "Credit Facility").
Net cash provided by continuing operations was $1.4 million in
fiscal 1999 compared to net cash used in operations of $0.2 million in fiscal
1998. The improvement in use of cash was due to a decrease in accounts
receivable and an increase in liabilities. Accounts receivable declined as a
result of lower fourth quarter net sales levels and improved collection
efforts at year end. Accounts payable and accrued liabilities increased due
to adjustments in worker's compensation and employee medical accruals at year
end, as well as accrued severance
19
and other expenses related to the manufacturing consolidation. Costs were
also accrued related to the restructuring of senior management as discussed
in the Overview. The payables outstanding were higher than prior year due to
greater manufacturing activity near year end and more effective cash
management. Depreciation and amortization increased $1.7 million in fiscal
1999, to $5.6 million compared to $3.9 million in fiscal 1998. This is
primarily due to a $1.2 million charge to fully depreciate tooling related to
a discontinued product line. These items were partially offset by the
deterioration in net income, to a net loss of $11.3 million.
Net cash used in continuing operations was $0.2 million in fiscal
1998 compared to net cash used in continuing operations of $7.6 million in
fiscal 1997. The decrease in use of cash was principally the result of net
income of $1.3 million compared to a net loss of $10.9 million in fiscal
1997, partially offset by an increase in accounts receivable of $4.4 million
due to increased sales volume.
We made capital expenditures of approximately $2.4 million, $2.9
million and $4.9 million during fiscal 1997, fiscal 1998 and fiscal 1999,
respectively. The capital expenditures relate primarily to ongoing
improvements of property, plant and equipment, manufacturing process
improvements and increased manufacturing capacity. In fiscal 1999, capital
was also spent on the consolidation of the Columbus, Ohio manufacturing
facility into the primary facility in Frankfort, New York. We intend to make
capital expenditures of approximately $3.5 million in the next twelve months
primarily related to the purchase of new equipment and equipment and facility
maintenance.
In July 1997, we used approximately $9.6 million of the net proceeds
from our initial public offering to redeem preferred stock and approximately
$11.0 million of the net proceeds from our initial public offering to repay a
portion of our subordinated debt. The remaining $24.0 million aggregate
principal amount of the subordinated debt associated with a 1988 leveraged
buyout was exchanged for 1,716,049 shares of Common Stock.
We entered into the Credit Facility to finance capital expenditures,
including future acquisitions, and to fund working capital and other general
business purposes. In July 1997, we used approximately $20.6 million of the
net proceeds from our initial public offering to repay a portion of the debt
outstanding under the Credit Facility and accrued interest thereon. As of
July 30, 1999, approximately $6.5 million was available under the revolving
portion of the Credit Facility and approximately $19.0 million was available
under the acquisition line of the Credit Facility. Indebtedness outstanding
under the Credit Facility bears interest at variable rates (8.3% per annum at
July 30, 1999).
We recognized that the net losses and share repurchase that occurred
in fiscal 1999, as well as the costs required to improve the profitability of
the business (including the senior management restructuring) and complete the
manufacturing consolidation in the near term, would require more liquidity
than was available to us at year end. As a result of the fourth quarter of
fiscal 1999 operating performance, we were not in compliance with our Credit
Facility covenants. Therefore, on October 28, 1999 we entered into an
amendment of the Credit Facility to support operational, capital expenditure
and working capital needs through April 30, 2001, the revised term of the
facility. First, all covenant defaults were waived and new covenants were set
to reflect the current profitability of the business. The interest rate with
respect to the credit facility was reset to LIBOR plus 3.5%, up from LIBOR
plus 1.5%. The revolving portion of the facility increased to $35 million,
then $40 million during peak working capital months, reducing back down to
$30 million in conjunction with anticipated working capital levels. A success
fee in favor of the lenders was added, the amount of which fluctuates
according to the date of satisfaction of our obligations under the Credit
Facility, with a maximum 3% fee on the outstanding facility commitment toward
the end of the eighteen month term. The acquisition line was fixed at its
current balance of approximately $16 million. Stock repurchases are now
prohibited, though we did repurchase approximately $2.5 million of common
stock during fiscal 1999. Our majority stockholder infused $6 million of
capital, in the form of junior, participating debt in the Credit Facility.
This debt is evidenced by a subordinated note which carries a 12.0% paid in
kind interest option and is exchangeable for shares of our common stock at a
price of $3.50 per share.
We are in the process of evaluating all non-strategic assets for
purposes of sale, including the anticipated sale of the Columbus
manufacturing facility in November 1999. We are working to reduce the days
sales outstanding in accounts receivable, including the offer of discount
terms where appropriate. The action steps we have taken to resolve the
logistical and manufacturing control issues that negatively impacted the
fourth quarter of fiscal 1999 should serve to reduce customer deductions,
distribution and freight costs. Capital and other
20
expenditures are being scrutinized and potentially deferred if not considered
critical. It is our belief that these actions, together with the revised
facility commitment and the capital infusion by our majority stockholder,
will provide sufficient liquidity for the business to operate over the term
of the facility.
EFFECTS OF INFLATION
We are adversely affected by inflation primarily through the
purchase of raw materials, increased operating costs and expenses and higher
interest rates. We believe that the effects of inflation on our operations
have not been material in recent years.
IMPACT OF THE YEAR 2000 ON COMPUTER SYSTEMS
STATE OF READINESS. We have reviewed our Year 2000 issues in regards
to both our information-technology and its non-information-technology. Our
operating system software as well as some of our older software applications
were written using two digits rather than four to define the applicable year.
As a result, those software applications have time-sensitive software that
recognize a date using "00" as the year 1900 rather than the Year 2000. This
could cause a system failure or miscalculations causing disruptions of
operations, including a temporary inability to process transactions, send
invoices or engage in similar normal business activities. We have modified or
replaced portions of our software applications and hardware so that our
computer systems will function properly with respect to dates in the Year
2000 and thereafter. We believe that our information-technology is Year
2000-ready. We do not believe that there are any material Year 2000 issues
with regard to non-information-technology (e.g. machinery used in
manufacturing, forklifts, general office equipment, and other equipment that
may contain embedded chips or date sensitive processors).
In addition, we have initiated communications with our significant
customers and suppliers to determine the extent to which our interface
systems are vulnerable to the failure of such customers and suppliers to
remediate their own Year 2000 issues. Based on such communications, we are
not currently aware of any third-party issue applicable to the Year 2000 that
is likely to have a material impact on our conduct of the business, our
results of operations or our financial condition.
COSTS TO ADDRESS OUR YEAR 2000 ISSUES. Although we are currently
updating our computer systems, such updating was not accelerated due to Year
2000 issues. We do not anticipate any further material expenditures related
specifically to Year 2000 compliance. The following chart reflects our
estimated Year 2000-specific costs, including the estimated cost to update
our current computer systems.
ESTIMATED CONVERSION COST
Expense Capital
------- ------
Hardware -- $ 200,000
Project Management $ 125,000 75,000
Software and Custom Coding 165,000 --
---------- ---------
$ 290,000 $ 275,000
========== =========
RISKS OF OUR YEAR 2000 ISSUES. We do not believe that any Year 2000
issues will impact our manufacturing. However, it is possible that Year 2000
issues may have an impact on our administration. We believe that our greatest
Year 2000 risk is the risk that our customers and suppliers are not Year
2000-ready. Failure by us, or our customers or suppliers to adequately
address the Year 2000 issues in a timely manner could have a material impact
on our conduct of the business, our results of operations and our financial
condition. Accordingly, we plan to address all Year 2000 issues before
problems materialize. We believe that the associated costs are adequately
budgeted for in our business plans. However, should efforts on our part, our
customers and suppliers fail to adequately address their relevant Year 2000
issues, the most likely worst case scenario would be a total loss of revenue
to us.
OUR CONTINGENCY PLANS. We will produce contingency plans on a case
by case basis.
21
RISKS. There can be no assurance that we will not experience cost
overruns or delays in the completion of our year 2000 project. Factors that
could cause such cost overruns or delays include, among other things, an
unavailability of properly trained personnel, unforeseen difficulty locating
and correcting relevant computer codes and similar uncertainties.
FORWARD-LOOKING STATEMENTS
Statements in the foregoing discussion that indicate our company's
intentions, hopes, beliefs, expectations or predictions of the future are
forward-looking statements. It is important to note that our actual results
could differ materially from those projected in such forward-looking
statements due to, among other risks and uncertainties inherent in our
business, the following important factors:
- Weather is the most significant factor in determining market demand
for our products and is inherently unpredictable. Inclement weather
during the spring gardening season and lack of snow during the winter
may have a material adverse effect on our business, financial
condition and results of operations.
- The lawn and garden industry is seasonal in nature, with a high
proportion of sales and operating income generated in January through
May. Accordingly, our sales tend to be greater during its third and
fourth fiscal quarters. As a result, our operating results depend
significantly on the spring selling season. To support this sales
peak, we must anticipate demand and build inventories of finished
goods throughout the fall and winter. Accordingly, our levels of raw
materials and finished goods inventories tend to be at their highest,
relative to sales, during our first and second fiscal quarters. These
factors increase variations in our quarterly results of operations and
potentially expose us to greater adverse effects of changes in
economic and industry trends. Moreover, actual demand for our products
may vary substantially from the anticipated demand, leaving us with
either excess inventory or insufficient inventory to satisfy customer
orders.
- Our ten largest customers in the aggregate accounted for approximately
50.7% of gross sales in fiscal 1999. A substantial reduction or
cessation of sales to these or other major customers could have a
material adverse effect on our business, financial condition and
results of operations.
- Certain retail distribution channels in the lawn and garden industry,
such as mass merchants and home centers, are experiencing
consolidation. There can be no assurance that such consolidation will
not have an adverse impact on certain customers or result in a
substantial reduction or cessation of purchases of our products by
certain customers. In addition, we are facing increasing pressure from
retailers with respect to pricing, co-operative advertising and other
rebates as the market power of large retailers continues to grow.
There can be no assurance that such pressures will not have an adverse
impact on our business, financial condition and results of operations.
- A key element of our growth strategy is to increase sales in certain
distribution channels that we believe are growing more rapidly than
the overall industry, such as home centers and mass merchants through
retailers such as Home Depot, Lowe's and Sears. There can be no
assurance that retailers in such distribution channels will continue
to open a significant number of new stores or, if opened, that we will
be chosen to supply our products to all or a significant portion of
such stores. In addition, there can be no assurance that such stores
will generate significant additional sales for us or that such stores
will not result in a reduction of sales to our other customers,
whether through consolidation or otherwise.
- Our future growth and development is largely dependent upon the
services of A. Corydon Meyer, our President and Chief Executive
Officer, as well as our other executive officers. The loss of Mr.
Meyer's services, or the services of one or more of our other
executive officers, could have a material adverse effect on us.
22
- Our products require the supply of raw materials consisting primarily
of steel, plastics and ash wood. Although we have several suppliers
for most of our raw materials, there can be no assurance that we will
not experience shortages of raw materials or components essential to
our production processes or be forced to seek alternative sources of
supply. In addition, there can be no assurance that prices for such
materials will remain stable. Any shortages of raw materials may
result in production delays and increased costs which could have a
material adverse effect on our business, financial condition and
results of operations.
- All aspects of the lawn and garden industry, including attracting and
retaining customers and pricing, are highly competitive. We compete
for customers with large consumer product manufacturers and numerous
other companies that produce specialty home and garden products, as
well as with foreign manufacturers that export their products to the
U.S. Many of these competitors are larger and have significantly
greater financial resources than us. There can be no assurance that
increased competition in the lawn and garden industry, whether from
existing competitors, new domestic manufacturers or additional foreign
manufacturers entering the U.S. market, will not have a material
adverse effect on our business, financial condition and results of
operations.
- Most of our hourly employees are covered by collective bargaining or
similar labor agreements. We currently are a party to four such
agreements, one of which expires in 2001 and three of which expire in
2002. There can be no assurance that we will be successful in
negotiating new labor contracts on terms satisfactory to us or without
work stoppages or strikes. A prolonged work stoppage or strike at any
of our facilities could have a material adverse effect on our
business, financial condition and results of operations.
- We are subject to various federal, state, and local environmental
laws, ordinances and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling,
storage, transportation, treatment and disposal of hazardous
substances and wastes. We have made, and will continue to make,
expenditures to comply with these environmental requirements and
regularly review our procedures and policies for compliance with
environmental laws. We also have been involved in remediation actions
with respect to certain facilities. Amounts expended by us in such
compliance and remediation activities have not been material to us.
However, current conditions and future events, such as changes in
existing laws and regulations, may give rise to additional compliance
or remediation costs that could have a material adverse effect on our
business, financial condition or results of operations. Furthermore,
as is the case with manufacturers in general, if a release of
hazardous substances occurs on or from our properties or any
associated offsite disposal location, or if contamination from prior
activities is discovered at any of our properties, we may be held
liable and the amount of such liability could be material.
- New housing starts often represent an addition to the overall number
of consumers in the lawn and garden tool market and, accordingly, an
increase in demand. Similarly, government spending on highways,
bridges and other construction projects often represents an increase
in demand for long handled tools. A decline in housing starts or
government spending on construction projects could result in a
decrease in demand for our products and, accordingly, could have a
material adverse effect on our business, financial condition and
results of operations.
- Adverse changes in general economic conditions in the United States,
including the level and availability of consumer debt, the level of
interest rates and consumer sentiment regarding the economy in
general, could result in a decrease in demand for our products and,
accordingly, could have a material adverse effect on our business,
financial condition and results of operations.
The factors set forth above are not exhaustive. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and we
will not undertake, and specifically decline, any obligation to publicly
23
release the results of any revisions which may be made to any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of anticipated or
unanticipated events. New factors emerge from time to time and it is not
possible for our management to predict all of such factors, nor can they
assess the impact of each such factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Therefore,
forward-looking statements should not be relied upon as a prediction of
actual future results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inflation and Interest Rates.
We have not been significantly affected by inflation in recent years
and anticipate that we will not be significantly affected by inflation in the
near term. A material change in interest rates could have an impact on our
financial results as we are presently paying a variable interest rate on our
outstanding debt. In October, 1999 we entered into an amendment of our
existing credit facility (the Amended Facility). The Amended Facility
provides for a $40 million revolving credit facility from January 1 through
June 30 of each year; $35 million from July 31 through October 31; and $35
million from November 1 through December 31. In connection with the Amended
Facility, the interest rate charges on outstanding borrowings was increased
from LIBOR plus 1.5% to LIBOR plus 3.5%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements, together with the report
thereon of Ernst & Young LLP, are set forth on pages F-1 through F-20 hereof
(see Item 14 of this Annual Report on Form 10-K for the Index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth for each of our directors, such
person's name, age, and his position with us:
Name Age Position
---- --- --------
A. Corydon Meyer 45 President and Chief Executive Officer
William W. Abbott 68 Chairman
Matthew S. Barrett 40 Director
Stephen A. Kaplan 41 Director
John I. Leahy 69 Director
A. CORYDON MEYER became the President and Chief Executive Officer of
the Registrant and UnionTools on September 2, 1999. Mr. Meyer joined the
Registrant and UnionTools in June 1999 as Senior Vice President of Sales and
Marketing. From 1998 to 1999, Mr. Meyer served as Vice President and Chief
Operating Officer of Reiker Enterprises, Inc. Prior to that, Mr. Meyer served
as Corporate Vice President (1995-1998) and Vice President (1990-1995) of
Lamson & Sessions Co.
WILLIAM W. ABBOTT became a director in January 1997 and our Chairman
in October 1999. Mr. Abbott currently is self-employed as a business
consultant. From August 1989 to January 1995, Mr. Abbott served as Senior
Advisor to the United Nations Development Programme. In 1989, Mr. Abbott
retired from 35 years of service at Procter & Gamble as a Senior Vice
President in charge of worldwide sales and other operations. He currently
serves as a member of the Boards of Directors of Horace Mann Educators
Corporation and Fifth Third Bank of Naples, Florida, a member of the Advisory
Board of Deloitte & Touche LLP, a member of the Advisory Board of Manco, a
member of the Board of Overseers of the Duke Cancer Center and an Executive
in Residence of Appalachian State University.
MATTHEW S. BARRETT became a director in December 1993. Mr. Barrett
is a managing director of Oaktree Capital Management, LLC. Prior to joining
Oaktree, from 1991 to April 1995, Mr. Barrett was Senior Vice President of
TCW Asset Management Company.
STEPHEN A. KAPLAN became a director in December 1993. Mr. Kaplan is
a principal of Oaktree, where he runs the Principal Activities Group. Prior
to joining Oaktree, from November 1993 to April 1995, Mr. Kaplan was a
managing director of TCW Asset Management Company. Mr. Kaplan currently
serves as a member of the Board of Directors of KinderCare Learning Centers,
Inc., CollaGenex Pharmaceuticals, Inc., Biopure, Inc., and GeoLogistics
Corporation.
JOHN I. LEAHY became a director in August 1994. Mr. Leahy has been
the President of Management and Marketing Associates, a management consulting
firm owned by Mr. Leahy, since 1987. In 1987, Mr. Leahy retired after 34
years of service at the Black & Decker Corporation, where he was President
and Group Executive, Western Hemisphere. Mr. Leahy currently serves as a
director of Allied Capital Corporation and several privately held companies.
Mr. Leahy is a Trustee of The Sellinger School of Business and Management and
St. Mary's University.
MEETINGS, COMMITTEES, AND COMPENSATION OF THE BOARD OF DIRECTORS
Our board of directors had a total of 5 meetings during fiscal 1999.
During fiscal 1999, each of the directors attended 75% or more of the total
number of meetings of (i) the board and (ii) the committees of the board on
which such director served. Directors who are our employees receive no
compensation for serving as directors. Non-employee directors receive the
following annual compensation: (i) $20,000 paid, at the director's election,
either in shares of common stock pursuant to our Deferred Equity Compensation
Plan for Directors (the "Director Stock Plan") or one-half in cash and
one-half in shares of common stock pursuant to the Director Stock Plan; (ii)
stock options with an exercise price equal to the fair market value of our
common stock on the date of
25
grant, a Black-Scholes valuation of $25,000 and a ten year term; and (iii)
reimbursement of reasonable out-of-pocket expenses.
In March 1997, we created a Management Development and Compensation
Committee and an Audit Committee. The Compensation Committee has the
authority to (i) administer our 1997 Stock Incentive Plan, including the
selection of optionees and the timing of option grants, and (ii) review and
monitor key employee compensation policies and administer our management
compensation plans. The Audit Committee recommends the annual appointment of
our independent public accountants with whom the Audit Committee reviews the
scope of audit and non-audit assignments and related fees, the accounting
principles used by us in financial reporting, internal financial auditing
procedures and the adequacy of our internal control procedures. Messrs.
Abbott (Chairman) and Kaplan are the current members of the Compensation
Committee and Messrs. Leahy (Chairman) and Barrett are the current members of
the Audit Committee.
On October 28, 1999, we entered into two agreements with Mr. Abbott in
recognition of his appointment as Chairman of Acorn and UnionTools.
The agreements provide, in addition to any compensation owing to Mr. Abbott as a
result of his being a director of Acorn and UnionTools, annual compensation of
$40,000 during his term as Chairman plus a one-time grant of 100,000 stock
options, with a two year vesting period and an exercise price of $3.00.
EXECUTIVE OFFICERS
In addition to Mr. Meyer and Mr. Abbott, the following persons are
our executive officers:
J. MITCHELL DOLLOFF, age 33, was named our Senior Vice President,
Operations, in September 1999. Mr. Dolloff served as our Senior Vice
President, Finance and Administration from May 1999 until September, 1999.
Mr. Dolloff joined the Registrant and UnionTools in June 1997 as Vice President,
General Counsel and Director of Investor Relations and in February 1998 was
named Vice President of Corporate Development. From October 1991 to June 1997,
Mr. Dolloff was an associate attorney at Gibson, Dunn & Crutcher LLP.
JOHN G. JACOB, age 39, was named our Vice President and Chief
Financial Officer in June 1999. From 1998 to June 1999, Mr. Jacob served as
Vice President of Finance for Sun Apparel Company/Polo Jeans Company. Prior
to that, Mr. Jacob served as Vice President of Finance and Treasurer of
Maidenform Worldwide, Inc. from 1996 to 1998. From 1991 to 1996, Mr. Jacob
served in various positions at Kayser-Roth Corporation, most recently as Vice
President and Treasurer.
W. DOUGLAS COPLEY, age 38, was named Vice President of Sales of
UnionTools in October 1999. From January 1995 to October 1999, Mr. Copley
served as Vice President of Sales and Marketing-North America for Fort Wayne
Plastics, Inc. From January 1993 to January 1995, Mr. Copley served in
various positions with VSI Fasteners, Inc., including Director of Marketing
and Director of Sales.
JOHN MACKIN, age 42, was named Vice President of Marketing of
UnionTools in October 1999. Mr. Mackin was Vice President, Sales and
Marketing -Watering Products for UnionTools from March 1999 to October 1999.
From January 1997 until March 1999, Mr. Mackin served as Director of Sales,
Marketing and China Operations of Flexrake Corporation. Mr. Mackin served
as General Manager, Lawn and Garden Division, of Olympia Industrial, Inc.
from July 1993 to January 1997.
L.B. DOVE, II, age 53, was named Corporate Controller of UnionTools
in August 1995 and Acorn's Chief Accounting Officer in September 1999. From
September 1994 to July 1995, Mr. Dove served as Corporate Controller of
Scriptel Holding, Inc. From August 1990 to June 1994, Mr. Dove served as
Senior Manager, Business Planning and Fiscal (Controller) for the McDonnell
Douglas Corporation's Columbus, Ohio manufacturing facility.
Officers are elected annually by the board of directors and serve at
its discretion. There are no family relationships among our directors and
executive officers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors and greater than 10% stockholders to file reports of
ownership and changes in ownership of our securities with the Securities and
26
Exchange Commission. Copies of the reports are required by SEC regulation to
be furnished to us. Based on our review of such reports, we believe that all
reporting persons complied with all filing requirements during the year ended
July 30, 1999, except for a late filing of Form 4 for the month of February
1999 for Mr. Abbott, and a late filing of Form 5 for fiscal 1999 for Mr.
Mihaly.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information
concerning the annual and long-term compensation earned by our chief executive
officer and each of our other most highly compensated executive officers whose
annual salary and bonus during fiscal 1999 exceeded $100,000 (the "Named
Executive Officers"). Mr. Mihaly's, Mr. Kasprisin's, and Mr. Dolloff's cash
compensation was paid by Acorn. Mr. Hyrb's cash compensation was paid by
UnionTools. Non-cash compensation, other than options to purchase common stock,
was paid by UnionTools.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------- -----------------
AWARDS
-----------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)(2)(3)(4)
- ---------------------------------- ----------- ------------- ----------- ----------------- ------------------
GABE MIHALY(5) 1999 $309,145 $260,000 20,325 $ 8,103
President and Chief Executive 1998 $309,145 -- 20,325 $ 11,284
Officer 1997 $299,269 $198,890 20,325 $ 93,628
J. MITCHELL DOLLOFF 1999 $194,072 $ -- 8,125 $ 5,846
Senior Vice President Operations 1998 $155,000 -- 8,125 $ 15,845
and President of Watering 1997 $14,307 $ 20,000 8,125 --
Products Division
THOMAS A. HYRB(6) 1999 $173,736 $ -- 10,150 $ 5,550
Senior Vice President of 1998 $173,677 -- 10,150 $ 9,943
Operations of UnionTools 1997 $169,830 $ 25,475 10,150 $ 9,850
STEPHEN M. KASPRISIN(7) 1999 $162,490 $ -- 10,150 $ 217,824
Chief Financial Officer and Vice 1998 $173,085 -- 10,150 $ 9,924
President of the Company and 1997 $169,252 $ 25,388 10,150 $ 10,623
UnionTools
- ----------------------
(1) Amounts shown include matching benefits paid under our defined contribution
401(k) plan and other miscellaneous cash benefits, but do not include
retirement benefits under our Salaried Employee Pension Plan or
Supplemental Pension Plan. See "Pension Plans."
(2) Amounts shown for fiscal 1997 include the following: (a) $5,683, $5,642 and
$5,639 of matching benefits paid under our defined contribution 401(k) plan
for Messrs. Mihaly, Hyrb and Kasprisin, respectively; (b) $80,976 for Mr.
Mihaly with respect to accelerated vesting of in-the-money stock options;
and (c) $2,553 paid by us with respect to supplementary life insurance for
the benefit of Mr. Mihaly.
(3) Amounts shown for fiscal 1998 include the following: (a) $5,724, $3,130,
$5,736 and $5,736 of matching benefits paid under our defined contribution
401(k) plan for Messrs. Mihaly, Dolloff, Hyrb and Kasprisin, respectively;
(b) $2,553 paid by us with respect to supplementary life insurance for the
benefit of Mr. Mihaly; and (c) $11,119 paid by us with respect to
relocation expenses of Mr. Dolloff.
27
(4) Amounts shown for fiscal 1999 include the following: (a) $5,550, $5,846,
$5,550 and $4,873 of matching benefits paid under our defined contribution
401(k) plan for Messrs. Mihaly, Dolloff, Hyrb and Kasprisin, respectively;
and (b) $2,553 paid by us with respect to supplementary life insurance for
the benefit of Mr. Mihaly.
(5) Mr. Mihaly's employment with the Registrant and UnionTools ended upon his
resignation on September 2, 1999.
(6) Mr. Hyrb's employment with UnionTools ended upon his resignation on
September 2, 1999.
(7) Mr. Kasprisin's employment with the Registrant and UnionTools ended upon
his resignation in June 1999. Severance payments totaling $212,951 were
paid by us to Mr. Kasprisin.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END
OPTION VALUE TABLE
The following table provides certain information regarding the number
and value of stock options held by our Named Executive Officers at July 30,
1999.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT
(#) FISCAL YEAR-END ($)(2)
----------------------------- ------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ---------- ----------- ------------ -------------- ------------- ---------------
Gabe Mihaly 0 0 92,252 44,748 80,340 0
J. Mitchell Dolloff 0 0 28,273 19,819 0 0
Thomas A. Hyrb 0 0 34,110 21,131 0 0
Stephen M. Kasprisin 0 0 30,450 10,150 0 0
- --------------------
(1) Value realized represents the difference between the exercise price of the
option shares and the market price of the option shares on the date the
option was exercised. The value realized was determined without
consideration for any taxes or brokerage expenses which may have been owed.
(2) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at year end
($4.63 based on the average of the high and low sale prices on July 30,
1999). An option is in-the-money if the fair market value of the underlying
shares exceeds the exercise price of the option.
PENSION PLANS
UnionTools maintains seven noncontributory defined benefit pension
plans covering substantially all of our hourly employees. UnionTools also
maintains a noncontributory defined benefit pension plan covering our
salaried, administrative and supervisory employees (the "Salaried Employee
Pension Plan") and a supplemental noncontributory defined benefit pension
plan covering certain of our senior executive officers (the "Supplemental
Pension Plan").
28
The following table sets forth the estimated annual benefits payable
upon retirement under the Salaried Employee Pension Plan based on retirement
at age 65 and fiscal 1999 covered compensation.
YEARS OF SERVICE
----------------
REMUNERATION(1) 15 20 25 30 35
- ------------ -- -- -- -- --
$125,000 $42,187 $56,250 $70,313 $70,313 $70,313
160,000 and above $54,000 $72,000 $90,000 $90,000 $90,000
- ---------------------------
(1) Based on final earnings.
For each of our Named Executive Officers, the Salaried Employee
Pension Plan covers total compensation as listed in the summary compensation
table, but limited to $160,000 as required by the Employee Retirement Income
Security Act of 1974. Messrs. Mihaly, Dolloff, Hyrb, and Kasprisin have
credited service of approximately 8, 2, 7 and 10 years, respectively, under
the Salaried Employee Pension Plan. Benefits under the Salaried Employee
Pension Plan are based on years of credited service and final earnings (the
highest average monthly earnings over any 60 consecutive calendar month
period in the 120 calendar months preceding retirement or termination of
employment). Monthly benefits are paid under the Salaried Employee Pension
Plan in an amount equal to 2.25% of the employees' final earnings multiplied
by the lesser of 25 years or the total number of years of credited service.
Benefits under the Salaried Employee Pension Plan for credited years of
service prior to 1993 were determined pursuant to a formula that yielded
slightly lower benefits. Accordingly, actual benefits for each of the Named
Executive Officers are slightly lower than the amounts indicated in the
foregoing table. Benefits under the Salaried Employee Pension Plan are not
subject to any offset.
The following table sets forth the estimated annual benefits payable
upon retirement under the Supplemental Pension Plan based on retirement at age
65 and fiscal 1999 covered compensation.
YEARS OF SERVICE
----------------
REMUNERATION(1) 15 20 25 30 35
- ------------ -- -- -- -- --
$175,000 $ 5,062 $ 6,750 $ 8,437 $ 8,437 $ 8,437
200,000 13,500 18,000 22,500 22,500 22,500
225,000 21,938 29,250 36,563 36,563 36,563
250,000 30,375 40,500 50,625 50,625 50,625
300,000 47,250 63,000 78,7570 78,750 78,750
400,000 81,000 108,000 135,000 135,000 135,000
- ---------------------------
(1) Based on final earnings.
For Mr. Mihaly, the Supplemental Pension Plan covers compensation as listed
in the summary compensation table above $160,000. Mr. Mihaly has credited
service of approximately 8 years under the Supplemental Pension Plan.
Benefits under the Supplemental Pension Plan are based on years of credited
service and final earnings (the highest average monthly earnings over any 60
consecutive calendar month period in the 120 calendar months preceding
retirement or termination of employment). Monthly benefits are paid under the
Supplemental Pension Plan in an amount equal to 2.25% of the employees' final
earnings (as described above) multiplied by the lesser of 25 years or the
total number of years of credited service. Benefits under the Supplemental
Pension Plan are not subject to any offset.
AGREEMENTS WITH KEY EMPLOYEES
In May 1997, we entered into an employment agreement with Mr. Mihaly
which provides for his employment as our President and the President and
Chief Executive Officer of UnionTools. This employment agreement terminated
upon Mr. Mihaly's resignation on September 2, 1999.
In May 1999, we entered into a separation agreement with Mr.
Kasprisin. The agreement included severance payments equal to the highest
aggregate annual compensation (including salary, bonuses and incentive
payments) includible in gross income paid during any one of the last three
years preceding his termination. This resulted in a lump sum payment of
$212,951. The agreement also included the continuation of employee benefits
for one year from the date of termination.
29
In June 1999, we entered into agreements with Messrs. Meyer, Dolloff
and Jacob which provide that following termination of such officers'
employment with us, we will pay to such employee an amount equal to the
highest aggregate annual compensation (including salary, bonuses and
incentive payments) includable in gross income paid to such employee during
any one of the three taxable years preceding the date of his termination. If
such termination occurs within two years following a change in control (as
defined in such agreement), we also are required to pay to such employee an
amount equal to two times the amount described in the preceding sentence.
In September, 1999, we entered into Separation Agreements with Mr.
Mihaly and Mr. Hyrb. Mr. Mihaly's agreement included severance payments
totaling $500,000 and the continuation of employment benefits for one year
from the effective date of the agreement. Mr. Hyrb's agreement included
severance payments totaling approximately $215,000 (equal to the highest one
year salary and bonus for the last three years) and the continuation of
employment benefits for one year from the effective date of the agreement.
On September 2, 1999, upon Mr. Meyer's promotion to President and
Chief Executive Officer and in accordance with the 1997 Stock Incentive Plan,
we entered into a stock option agreement with Mr. Meyer pursuant to which Mr.
Meyer was granted an option to acquire a total of 400,000 shares of our
common stock which vest as follows: (i) 100,000 option shares as of September
1, 1999 (the "Initial Vesting Date") and (ii) 100,000 option shares per year
for three years thereafter provided that Mr. Meyer continues to serve as
President and Chief Executive Officer. The exercise prices of the options are
determined as of the applicable vesting dates and are equal to the Fair
Market Value of the Common Stock on such dates. Each will expire on the tenth
anniversary of its date of grant.
On October 12, 1999, in consideration for the cancellation of 32,500
options granted to him in 1997 at an exercise price of $14.00 per share, we
granted Mr. Dolloff, our Senior Vice President of Operations, options to
purchase 16,250 shares of our common stock, all of which were vested
immediately, at an exercise price of $3.00 per share. Additionally, on
October 12, 1999, we granted Mr. Jacob, our Vice President and Chief
Financial Officer, options to purchase 16,250 shares of our common stock, all
of which were vested immediately, at a exercise price of $3.00 per share.
30
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership of our common stock by each person known by us to beneficially own
more than 5% of the outstanding shares of our common stock, each of our
directors, each of our Named Executive Officers, and all of our directors and
executive officers as a group as of October 22, 1999:
SHARES BENEFICIALLY OWNED (1)(2)
STOCKHOLDER NUMBER PERCENT
The TCW Group, Inc.(3) 3,162,049 52.5%
Oaktree Capital Management, LLC(4) 1,149,500 19.1%
OCM Principal Opportunities Fund, L.P. 1,149,500 19.1%
J. & W. Seligman & Co. Incorporated(5) 721,715 12.0%
A. Corydon Meyer(6) 110,000 1.8%
Gabe Mihaly(7) 110,177 1.8%
J. Mitchell Dolloff(8) 20,148 *
Thomas A. Hyrb(9) 34,110 *
Stephen M. Kasprisin(10) 33,950 *
William W. Abbott(11) 28,086 *
Matthew S. Barrett(12) 1,149,500 19.1%
Stephen A. Kaplan(13) 1,149,500 19.1%
John I. Leahy(14) 23,946 *
All directors and executive officers as a group (10 persons) (15) 1,315,080 22.0%
* Represents beneficial ownership of less than 1% of our outstanding common
stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting
power and/or investment power with respect to those shares.
(2) The address of the TCW Group, Inc. is 865 South Figueroa Street, Los
Angeles, California 90017. The address of Oaktree, the OCM Principal
Opportunities Fund, L.P. (the "Oaktree Fund"), Mr. Barrett and Mr.
Kaplan is 333 South Grand Avenue, 28th Floor, Los Angeles, California
90071. The address of J. & W. Seligman & Co. Incorporated ("JWS") is
100 Park Avenue, New York, New York 10017. The address for Messrs.
Meyer, Mihaly, Dolloff, Hyrb and Kasprisin is c/o Acorn Products, Inc.,
390 Dublin Avenue, Columbus, Ohio 43215. The address of Mr. Abbott is
6923 Greentree Drive, Naples, Florida 33963. The address of Mr. Leahy
is c/o Management & Marketing Associates, 30 East Padonia Road,
Timonium, Maryland 21093.
(3) The TCW Group, Inc. is the parent corporation of TCW Asset Management
Company ("TAMCO"). TAMCO is the managing general partner of TCW Special
Credits, a general partnership among TAMCO and certain individual
general partners (the "Individual Partners"). TCW Special Credits is
(i) the general partner of four limited partnerships that hold shares
of common stock (the "TCW Limited Partnerships") and (ii) the
investment advisor for three third party accounts that hold shares of
common stock (the "TCW Accounts"). The TCW Limited Partnerships and the
TCW Accounts in the aggregate hold 2,148,576 shares of common stock.
The TCW Group, Inc. also is the parent corporation of Trust Company of
the West, which is the trustee of four trusts that hold shares of
common stock (the "TCW Trusts"). The TCW Trusts in the aggregate hold
1,013,473 shares of common stock. The following TCW Limited
Partnerships and TCW Trusts individually beneficially own more than 5%
of the outstanding shares of common stock: TCW Special Credits Fund III
(660,036 shares or 11.0%); TCW Special Credits Fund IIIb (625,988
shares or 10.4%); and TCW Special Credits Trust IIIb (447,124 shares or
7.4%). Certain of the Individual Partners also are principals of
Oaktree. The Individual Partners, in their capacity as general partners
of TCW Special Credits, have been designated to manage the TCW Limited
Partnerships, the TCW Accounts and the TCW Trusts. Although Oaktree
provides consulting, research and other investment management support
to the Individual Partners, Oaktree does
31
not have voting or dispositive power with respect to the TCW Limited
Partnerships, the TCW Accounts or the TCW Trusts.
(4) All of such shares of common stock are owned by the Oaktree Fund.
(5) JWS directly owns 277,720 shares, or 4.6%, of the common stock. JWS, as
an investment adviser for Seligman Value Fund Series, Inc. - Seligman
Small Cap Value Fund (the "Fund"), may be deemed to beneficially own
the shares of the Fund. The Fund owns 430,000 shares, or 7.1%, of the
common stock. William C. Morris, as the owner of a majority of the
outstanding voting securities of JWS, may be deemed to beneficially own
the shares reported by JWS. The information in this note is taken from
a Schedule 13G filed with the Securities and Exchange Commission on
February 9, 1999 by the persons named herein.
(6) Includes vested option of 100,000 shares of common stock issued in
accordance with the 1997 Stock Incentive Plan and 10,000 shares of
common stock which are subject to a restricted stock agreement between
Mr. Meyer and us. Excludes 300,000 shares of common stock issuable
pursuant to options not exercisable within 60 days.
(7) Includes 17,925 shares of common stock which are owned jointly by Mr.
Mihaly and his spouse.
(8) Reflects 20,148 shares of common stock issuable pursuant to options
exercisable within 60 days. Excludes 11,692 shares of common stock
issuable pursuant to options not exercisable within 60 days.
(9) Reflects 34,110 shares of common stock issuable pursuant to options
exercisable within 60 days. Excludes 21,131 shares of common stock
issuable pursuant to options not exercisable within 60 days.
(10) Includes 3,500 shares of common stock which are owned jointly by Mr.
Kasprisin and his spouse.
(11) Includes 9,486 shares of common stock issuable pursuant to stock
options exercisable within 60 days. Does not include 6,085 shares of
common stock issuable pursuant to the Director Stock Plan. Excludes
100,000 shares of common stock issuable pursuant to options not
exercisable within 60 days.
(12) Reflects shares of common stock owned by the Oaktree Fund and also
shown as beneficially owned by Oaktree. To the extent that Mr. Barrett,
as a managing director of Oaktree, participates in the process to vote
or dispose of any such shares, he may be deemed under such
circumstances for the purpose of Section 13 of the Exchange Act to be
the beneficial owner of such shares of common stock. Mr. Barrett
disclaims beneficial ownership of such shares of common stock. Does not
include 9,486 shares of common stock issuable pursuant to options
exercisable within 60 days and 6,085 shares of common stock issuable
pursuant to the Director Stock Plan. Pursuant to TCW's policy, all
compensation paid to Mr. Barrett is donated to charity.
(13) Reflects shares of common stock owned by the Oaktree Fund and also
shown as beneficially owned by Oaktree. To the extent that Mr. Kaplan,
as a principal of Oaktree, participates in the process to vote or
dispose of any such shares, he may be deemed under such circumstances
for the purpose of Section 13 of the Exchange Act to be the beneficial
owner of such shares of common stock. Mr. Kaplan disclaims beneficial
ownership of such shares of common stock. Does not include 9,486 shares
of common stock issuable pursuant to options exercisable within 60 days
and 6,085 shares of common stock issuable pursuant to the Director
Stock Plan. Pursuant to Oaktree's policy, all compensation paid to Mr.
Kaplan is contributed to the Oaktree Fund.
(14) Includes 9,486 shares of common stock issuable pursuant to options
exercisable within 60 days. Does not include 3,042 shares of common
stock issuable pursuant to the Director Stock Plan.
(15) See notes (6) through (14) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
32
None of our executive officers served on the Board of Directors or
on the Compensation Committee of any other entity, any of whose officers
served either on our Board of Directors or on our Compensation Committee.
TRANSACTIONS BETWEEN DIRECTORS, EXECUTIVE OFFICERS AND THE REGISTRANT
In December 1993 and May 1994, we issued subordinated notes in the
aggregate principal amount of approximately $31.4 million to the TCW Funds.
In August 1996, we issued 100 shares of Series A Preferred Stock to the TCW
Funds as payment in full of accrued interest on the subordinated notes for
fiscal 1995 and fiscal 1996. In July 1997, we used $9.6 million of the
proceeds from its initial public offering to redeem the Series A Preferred
Stock and pay accumulated dividends thereon and $11.0 million of the proceeds
from our initial public offering to repay a portion of the subordinated notes
and accrued interest thereon. The remaining $24.0 million aggregated
principal amount of the subordinated notes was exchanged for 1,716,049 shares
of common stock.
In December 1996, we issued a subordinated promissory note to the
TCW Funds in the aggregate principal amount of $6.0 million and bearing
interest at a rate of 13% per year as bridge financing. In December 1996, we
paid $6.3 million to the TCW Funds in prepayment of the subordinated
promissory note, accrued interest thereon and a $180,000 facility fee.
Conor D. Reilly, the Chairman of the Board of the Registrant and of
UnionTools until October 12, 1999, is a partner in the law firm of Gibson,
Dunn & Crutcher LLP. We paid fees of approximately $762,000 to Gibson, Dunn &
Crutcher LLP in fiscal 1999.
In January 1994, Mr. Mihaly, the President, Chief Executive Officer
and a director of the Registrant and UnionTools, received a loan from
UnionTools in the aggregate principal amount of $245,000. The loan was
originally intended to mature in January 1998, but the loan was subsequently
extended to and paid in October 1998 to coincide with the payment of Mr.
Mihaly's one-time cash bonus to be paid in connection with his employment
agreement. The loan bore interest at an annual rate of 5.34% and was secured
by a pledge of common stock.
In October 1999, UnionTools entered into a Sixth Amendment to the
existing Credit Agreement with Heller Financial, Inc. Pursuant to the amendment,
the Oaktree Fund and certain of the TCW Funds, which collectively own a majority
of our outstanding common stock, made a capital infusion of $6.0 million into
UnionTools. The loan bears interest at an annual rate of 12% and is payable
quarterly in additional promissory notes or, following repayment of all
borrowings under the Credit Agreement other than the $6.0 million note, in
cash. The principal balance of the $6.0 million loan, together with all
accrued but unpaid interest thereon, is due and payable in full in August
2001 and can be exchanged for common stock of the Registrant prior to
repayment at the election of the TCW Funds and Oaktree Funds.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Acorn are
filed with this Annual Report on Form 10-K pursuant to Item 8:
- Report of Independent Auditors
- Consolidated Balance Sheets as of July 31, 1998 and July 30,
1999
- Consolidated Statements of Operations for fiscal 1997,
fiscal 1998 and fiscal 1999
- Consolidated Statements of Stockholders' Equity for fiscal
1997, fiscal 1998, and fiscal 1999
- Consolidated Statements of Cash Flows for fiscal 1997,
fiscal 1998 and fiscal 1999
- Notes to Consolidated Financial Statements
33
(a)(2) The following financial statement schedules of Acorn are filed
with this Annual Report on Form 10-K pursuant to Item 14(d) and appear
immediately preceding the exhibit index:
I. Condensed Financial Information of Registrant
II. Valuation and Qualifying Accounts
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or the notes thereto.
(a)(3)The following items are filed as exhibits to this Annual Report
on Form 10-K (management contracts and compensatory plans are indicated
by an asterisk (*)):
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of Acorn
Products, Inc.***
3.2 Amended and Restated Bylaws of Acorn Products, Inc.***
4.1 Specimen Stock Certificate for common stock.***
10.1* Employment Agreement, dated as of May 29, 1997, among the
Company, UnionTools, Inc. and Gabe Mihaly.***
10.2.1* Employment Severance Agreement, dated as of May 29, 1997,
among the Company, UnionTools and Thomas A. Hyrb.***
10.2.2* Employment Severance Agreement, dated as of May 29, 1997,
among the Company, UnionTools and Stephen M. Kasprisin.***
10.2.3* Employment Severance Agreement, dated as of August 31, 1999,
among the Company, UnionTools and J. Mitchell Dolloff.**
10.2.4* Employment Severance Agreement, dated as of August 31, 1999,
among the Company, UnionTools and A. Corydon Meyer.**
10.2.5* Employment Severance Agreement, dated as of August 31, 1999
among the Company, UnionTools and John Jacob.**
10.3* Acorn Products, Inc. Deferred Equity Compensation Plan for
Directors.***
10.4* Acorn Products, Inc. 1997 Stock Incentive Plan.***
10.5* Standard Form of Acorn Products, Inc. Stock Option
Agreement.***
10.6* UnionTools, Inc. Retirement Plan for Salaried Employees.***
34
10.7* Amendment No. 1 to UnionTools, Inc., Retirement Plan for
Salaried Employees.***
10.8* Acorn Products, Inc. Supplemental Pension Plan for Executive
Employees.***
10.9 Amended and Restated Credit Agreement, dated as of May 20,
1997, between UnionTools, Inc., and Heller Financial, Inc.***
10.10 License Agreement, dated as of August 1, 1992, between
UnionTools, Inc. and The Scott Company.***
10.11 Registration Rights Agreement, dated as of June 18, 1997,
between Acorn Products, Inc. and various funds and accounts
managed by TCW Special Credits.***
10.12 Registration Rights Agreement, dated as of June 18, 1997,
between Acorn Products, Inc. and OCM Principal Opportunities
Fund, L.P.***
10.13 Master Lease Agreement, dated as of June 4, 1998, between
BancBoston Leasing, Inc., and UnionTools. (Reference is made
to Exhibit 10.13 to Form 10-K for the year ended July 31,
1998, filed with the Securities and Exchange Commission on
October 29, 1998).
10.14 Rider No. 1 to Master Lease Agreement, dated as of June 4,
1998, between BancBoston Leasing, Inc., and UnionTools.
(Reference is made to Exhibit 10.14 to Form 10-K for the year
ended July 31, 1998, filed with the Securities and Exchange
Commission on October 29, 1998).
10.15 Amendment No.1 to Credit Agreement, dated as of November 24,
1997, between UnionTools, Inc., and Heller Financial, Inc.
(Reference is made to Exhibit 10 to Form 10-Q for the quarter
ended October 31, 1997, filed with the Securities and Exchange
Commission on December 15, 1997).
10.16 Amendment No. 2 to Credit Agreement, dated as of May 22, 1998,
between UnionTools, Inc., and Heller Financial, Inc.
(Reference is made to Exhibit 10.16 to Form 10-K for the year
ended July 31, 1998, filed with the Securities and Exchange
Commission on October 29, 1998).
10.17 Amendment No. 3 to Credit Agreement, dated as of October 29,
1998, between UnionTools, Inc., and Heller Financial, Inc.
(Reference is made to Exhibit 10.1 to Form 10-Q for the
quarter ended October 30, 1998, filed with the Securities and
Exchange Commission on December 8, 1998).
10.18 Amendment No. 4 to Credit Agreement, dated as of February 26,
1999, between UnionTools, Inc., and Heller Financial, Inc.
(Reference is made to Exhibit 10.1 to Form 10-Q for the
quarter ended January 29, 1999, filed with the Securities and
Exchange Commission on March 15, 1999).
10.19 Amendment No. 5 to Credit Agreement, dated as of June 10,
1999, between UnionTools, Inc., and Heller Financial, Inc.
(Reference is made to Exhibit 10.1 to Form 10-Q for the
quarter ended April 30, 1999, filed with the Securities and
Exchange Commission on June 14, 1999).
10.20 Amendment No. 6 to Credit Agreement, dated as of October 28,
1999, between UnionTools, Inc., and Heller Financial, Inc.
(Reference is made to Exhibit 99.2 to the Current Report on
Form 8-K dated October 27, 1999, and filed with the Securities
and Exchange Commission on October 29, 1999).
10.21* Acorn Products, Inc. 1997 Nonemployee Director Stock Incentive
Plan. (Reference is made to Exhibit 4(a) on a Registration
Statement on Form S-8 (Registration Number 333- 58807) filed
with the Securities and Exchange Commission on July 9, 1998.)
35
10.22* Compensation Agreement, dated as of October 28, 1999, between
the company and W. Wallace Abbott.**
21.1 Subsidiaries of the Company.**
23.1 Consent of Ernst & Young LLP.**
24.1 Power of Attorney.**
27.1 Financial Data Schedule.**
- ------------------
** Filed herewith.
***Previously filed with the same exhibit number on a Registration Statement
on Form S-1 (Registration Number 333-25325) filed with the Securities and
Exchange Commission on April 17, 1997, as amended.
Copies of exhibits may be obtained by writing to Investor Relations, Acorn
Products, Inc., 390 Dublin Avenue, P.O. Box 1930, Columbus, Ohio 43216.
Persons requesting copies will be charged a reasonable fee to cover
reproduction and mailing expenses.
(b) Reports on Form 8-k.
We filed the following Current Reports on Form 8-K since April 30,
1999:
(i) Current Report on Form 8-K, dated October 27, 1999, filed with
the Securities Exchange Commission on October 29, 1999 (Items
5 and 7).
(c) Exhibits.
The exhibits to this report follow the signature page.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 14(a)(2) above.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ACORN PRODUCTS, INC.
By: /s/ John G. Jacob
----------------------------------------
Name: John G. Jacob
Title: Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Principal Executive Officer:
By: * A. Corydon Meyer
----------------------------------------
Name: A. Corydon Meyer
Title: President and Chief Executive Officer
Principal Financial Officer:
By: /s/ John G. Jacob
----------------------------------------
Name: John G. Jacob
Title: Vice President and Chief Financial
Officer
Principle Accounting Officer:
By: * L.B. Dove, II
----------------------------------------
Name: L.B. Dove, II
Title: Chief Accounting Officer
Directors:
*William W. Abbott
--------------------------------------------
William W. Abbott, Chairman
*Matthew S. Barrett
--------------------------------------------
Matthew S. Barrett, Director
*Stephen A. Kaplan
--------------------------------------------
Stephen A. Kaplan, Director
*John I. Leahy
--------------------------------------------
John I. Leahy, Director
*By: /s/ John G. Jacob
-------------------------------
John G. Jacob, attorney-in-fact
Dated: November 11, 1999
37
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Acorn Products, Inc.
We have audited the accompanying consolidated balance sheets of Acorn
Products, Inc. and Subsidiaries as of July 31, 1998 and July 30, 1999, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the fiscal years ended August 1, 1997, July 31, 1998
and July 30, 1999. Our audits also include the financial statement schedules
listed in the index at Item 14(a). These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Acorn Products, Inc. and Subsidiaries at July 31, 1998 and July 30, 1999
and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended July 30, 1999, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
Columbus, Ohio
September 15, 1999 except for
Notes 4 and 13, as to which
the date is October 28, 1999
F-1
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JULY 31, JULY 30,
1998 1999
---- ----
ASSETS
Current assets:
Cash $ 1,240 $ 1,222
Accounts receivable, less reserves for
doubtful accounts, sales discounts, and other
allowances (1998-$894; 1999-$2,244) 24,553 20,212
Inventories 30,123 30,891
Prepaids and other current assets 2,948 2,193
----------- -----------
Total current assets 58,864 54,518
Property, plant and equipment, net of accumulated
depreciation 16,205 16,622
Goodwill, net of accumulated amortization 35,271 35,793
Other intangible assets 2,293 1,934
----------- -----------
Total assets $ 112,633 $ 108,867
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (average interest
rate of 8.32% - 1998 and 8.01% - 1999) $ 16,308 $ 22,354
Accounts payable 7,010 10,294
Accrued expenses 4,413 6,472
Income taxes payable 43 123
Other current liabilities 445 157
----------- -----------
Total current liabilities 28,219 39,400
Acquisition term loan (average interest rate of
8.19% - 1998 and 8.60% - 1999) 16,009 16,009
Other long-term liabilities 4,054 3,268
----------- -----------
Total liabilities 48,282 58,677
Contingency - Note 8
Stockholders' equity:
Common stock, par value of $.001 per share,
20,000,000 shares authorized, 6,464,105 shares
issued, 6,464,105 and 6,021,705 shares outstanding
at July 31, 1998 and July 30, 1999, respectively 78,391 78,391
Contributed capital-stock options 460 460
Accumulated other comprehensive loss (285) (682)
Retained earnings (deficit) (14,215) (25,491)
----------- -----------
64,351 52,678
Common stock in treasury, 442,400 shares - (2,488)
----------- -----------
Total stockholders' equity 64,351 50,190
----------- -----------
Total liabilities and stockholders' equity $ 112,633 $ 108,867
=========== ===========
See accompanying notes.
F-2
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FISCAL YEAR ENDED
AUGUST 1, JULY 31, JULY 30,
1997 1998 1999
------------ ----------- ------------
Net sales $ 101,011 $ 107,758 $ 111,414
Cost of goods sold 73,982 82,480 91,149
--------- --------- ---------
Gross profit 27,029 25,278 20,265
Selling, general and administrative expenses 18,293 20,033 23,319
Interest expense 7,176 2,560 3,401
Amortization of intangibles 837 917 1,087
Other expenses, net:
Watering products consolidation - - 355
Plant consolidation - - 993
Strategic transactions - - 994
Miscellaneous 1,548 259 311
--------- --------- ---------
Income (loss) from continuing operations
before income taxes (825) 1,509 (10,195)
Income taxes 134 230 145
--------- --------- ---------
Income (loss) from continuing operations (959) 1,279 (10,340)
Discontinued operations:
Loss from operations (1,499) - -
Loss on disposal (8,421) - (936)
--------- --------- ---------
Loss from discontinued operations (9,920) - (936)
--------- --------- ---------
Net income (loss) (10,879) 1,279 $ (11,276)
Preferred stock dividend (1,018) - -
--------- --------- ---------
Net income (loss) applicable to common
stock $ (11,897) $ 1,279 $ (11,276)
========= ========= =========
BASIC AND DILUTED EARNINGS PER SHARE DATA:
Loss from continuing operations $ (.48) $ 0.20 $ (1.64)
Loss from discontinued operations (5.00) - (0.15)
Preferred stock dividend (.51) - -
--------- --------- ---------
Net income (loss) per share $ (5.99) $ 0.20 $ (1.79)
========= ========= =========
See accompanying notes.
F-3
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK PREFERRED STOCK
------------ ---------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Balances at
August 2, 1996 1,490,826 $ 14,406 100 $ 8,596
Net loss for the period
August 3, 1996 through
August 1, 1997 - - - -
Adjustment to minimum
pension liability - - - -
Comprehensive loss - - - -
Redemption of preferred
stock - - (100) (8,596)
Preferred stock dividend - (1,018) - -
Conversion of debt to
equity 1,716,049 24,025 - -
Stock issued in public
offering 3,250,000 40,890 - -
Stock options issued - - - -
Stock issued 7,230 88 - -
---------- ----------- -------- -----------
Balances at August 1, 1997 6,464,105 78,391 - -
Net loss for the period
August 2, 1997 through
July 31, 1998 - - - -
Adjustment to minimum
pension liability - - - -
Comprehensive income - - - -
---------- ----------- -------- -----------
Balances at July 31, 1998 6,464,105 78,391 - -
Net loss for the period
August 1, 1998 through
July 30, 1999 - - - -
Adjustment to minimum
pension liability - - - -
Comprehensive loss - - - -
Purchase of treasury stock (442,400) - - -
---------- ----------- -------- -----------
Balances at July 30, 1999 6,021,705 $ 78,391 $ - $ -
========== =========== ======== ===========
CONTRIBUTED ACCUMULATED
CAPITAL OTHER RETAINED
STOCK COMPREHENSIVE EARNINGS TREASURY
OPTIONS LOSS (DEFICIT) STOCK TOTAL
----------- -------------- ------------- ---------- -----------
Balances at
August 2, 1996 $ 340 $ (197) $ (4,615) $ - $ 18,530
Net loss for the period
August 3, 1996 through
August 1, 1997 - - (10,879) - (10,879)
Adjustment to minimum
pension liability - 64 - - 64
-----------
Comprehensive loss - - - - (10,815)
Redemption of preferred
stock - - - - (8,596)
Preferred stock dividend - - - - (1,018)
Conversion of debt to
equity - - - - 24,025
Stock issued in public
offering - - - - 40,890
Stock options issued 120 - - - 120
Stock issued - - - - 88
----------- -------------- ------------- ---------- -----------
Balances at August 1, 1997 460 (133) (15,494) - 63,224
Net loss for the period
August 2, 1997 through
July 31, 1998 - - 1,279 - 1,279
Adjustment to minimum
pension liability - (152) - - (152)
-----------
Comprehensive income - - - - 1,127
----------- -------------- ------------- ---------- -----------
Balances at July 31, 1998 460 (285) (14,215) - 64,351
Net loss for the period
August 1, 1998 through
July 30, 1999 - - (11,276) - (11,276)
Adjustment to minimum
pension liability - (397) - - (397)
-----------
Comprehensive loss - - - - (11,673)
Purchase of treasury stock - - - (2,488) (2,488)
----------- -------------- ------------- ---------- -----------
Balances at July 30, 1999 $ 460 $ (682) $ (25,491) $ (2,488) $ 50,190
=========== ============== ============= ========== ===========
See accompanying notes.
F-4
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL YEAR ENDED
AUGUST 1, JULY 31, JULY 30,
1997 1998 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (10,879) $ 1,279 $(11,276)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) continuing operations:
Loss from discontinued operations 9,920 - 936
Depreciation and amortization 3,489 3,870 5,605
Reserves for doubtful accounts, sales discounts and
other allowances 156 181 1,350
Conversion of accrued interest to common stock 3,714 - -
Financing fees, net (1,218) - -
Issuance of stock options 120 - -
Changes in operating assets and liabilities:
Accounts receivable (6,551) (4,572) 2,991
Inventories (3,141) 151 (768)
Other assets (886) 682 (495)
Accounts payable and accrued expenses (773) (445) 4,449
Income taxes payable (750) (307) 80
Other liabilities (751) (1,072) (1,471)
------------ ------------ ------------
Net cash provided by (used in) continuing operations (7,550) (233) 1,401
Net cash provided by (used in) discontinued operations 2,430 - (42)
------------ ------------ ------------
Net cash provided by (used in) operating activities (5,120) (233) 1,359
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of net assets from acquisition, net of cash acquired (6,499) (9,911) -
Investment in joint venture (520) - -
Purchases of property, plant and equipment, net (2,436) (2,882) (4,935)
Proceeds from disposal of discontinued operations 6,863 (625) -
------------ ------------ ------------
Net cash used in investing activities (2,592) (13,418) (4,935)
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated debt retired (7,329) - -
Acquisition line borrowings 6,098 9,911 -
Net activity on term loan (18,000) - -
Net activity on revolving loan 300 3,471 6,046
Redemption of preferred stock and accrued dividends (9,614) - -
Net proceeds from Initial Public Offering 37,176 - -
Issuance of stock 88 - -
Purchase of treasury stock - - (2,488)
------------ ------------ ------------
Net cash provided by financing activities 8,719 13,382 3,558
------------ ------------ ------------
Net increase (decrease) in cash 1,007 (269) (18)
Cash at beginning of period 502 1,509 1,240
------------ ------------ ------------
Cash at end of period $ 1,509 $ 1,240 $ 1,222
============ ============ ============
Interest paid $ 7,175 $ 2,338 $ 3,292
============ ============ ============
See accompanying notes.
F-5
ACORN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
Founded in 1890, Acorn Products, Inc. (Acorn), through its
wholly-owned subsidiary UnionTools, Inc. ("UnionTools" and together with
Acorn the "Company") is a leading manufacturer and marketer of non-powered
lawn and garden tools in the U.S. The Company's principal products include
long handle tools (such as forks, hoes, rakes and shovels), snow tools,
posthole diggers, wheelbarrows, striking tools, cutting tools and
watering products (such as sprinklers, hose nozzles and hose couplings). The
Company sells its products under a variety of well-known brand names. In
addition, the Company manufactures private label products for a variety of
retailers. The Company sells its products through a variety of distribution
channels. Acorn is a holding company with no business operations of its own.
(See Note 3 for a discussion of the Company's disposition of its non-lawn and
garden operations.)
The lawn and garden industry is seasonal in nature, with a high
proportion of sales and operating income generated in January through May. As
a result, the Company's operating results depend significantly on the spring
selling season. To support this sales peak, the Company must build
inventories of finished goods throughout the fall and winter. Accordingly,
the Company's levels of raw materials and finished goods inventories tend to
be at their highest, relative to sales, during the Company's first and second
fiscal quarters. (See Note 12).
Weather is the most significant factor in determining market demand
for the Company's products and is inherently unpredictable. Fluctuations in
weather can be favorable or unfavorable for the sale of lawn and garden
equipment.
The Company's largest customer, Sears, accounted for 10.9%, 13.6%
and 13.4% of gross sales in fiscal 1997, fiscal 1998 and fiscal 1999,
respectively. Home Depot accounted for 11.0% of gross sales in fiscal 1999.
No other customers accounted for 10% or more of the Company's gross sales in
fiscal 1997, fiscal 1998 or fiscal 1999.
The Company's products require the supply of raw materials
consisting primarily of steel, plastics and ash wood. The Company has several
suppliers for most of its raw materials.
In July 1997, Acorn completed an initial public offering of
3,250,000 shares of Common Stock at a price to the public of $14.00 per
share. The net proceeds from the offering were approximately $41.3 million.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Acorn and its subsidiaries, McGuire-Nicholas Company, Inc.
("McGuire-Nicholas"), VSI Fasteners, Inc. ("VSI") and UnionTools, Inc. (and
its subsidiaries H.B. Sherman Company, Inc. and Union Tools Watering
Products, Inc.). All intercompany accounts and transactions have been
eliminated. (See Note 3 -- Discontinued Operations regarding the disposal of
VSI and McGuire-Nicholas).
REVENUES
The Company recognizes revenue from product sales upon shipment.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Inventories consist
of the following:
JULY 31, JULY 30,
1998 1999
---- ----
(IN THOUSANDS)
Finished goods $ 15,202 $ 17,099
Work in process 5,709 5,895
Raw materials and supplies 9,212 7,897
---------- ---------
Total inventories $ 30,123 $ 30,891
========== =========
F-6
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and is depreciated
using the straight-line method over the following estimated useful lives:
Machinery and equipment 3 to 7 years
Buildings and improvements 7 to 40 years
Furniture and fixtures 3 to 7 years
Property, plant and equipment consists of the following:
JULY 31, JULY 30,
1998 1999
---- ----
(IN THOUSANDS)
Land $ 1,626 $ 1,626
Buildings and improvements 5,033 5,193
Machinery and equipment 18,032 21,820
Furniture and fixtures 2,177 3,164
-------- --------
26,868 31,803
Accumulated depreciation and amortization (10,663) (15,181)
-------- --------
Property, plant and equipment, net $16,205 $16,622
======== ========
Depreciation expense was approximately $2.9 million and $4.5 million
for fiscal 1998 and fiscal 1999, respectively. In fiscal 1999, the Company
recorded approximately $1.2 million in additional depreciation related to the
equipment and tooling of the discontinued product. The net book value of this
equipment and tooling at July 30, 1999 approximates its net realizable value.
GOODWILL
Goodwill, resulting from the cost of assets acquired exceeding the
underlying net asset value, is amortized on the straight-line method over a
forty-year period. Accumulated amortization was $4.0 million at July 31, 1998
and $5.0 million at July 30, 1999. Amortization expense was approximately $1
million in fiscal 1998 and fiscal 1999. The Company periodically assesses the
recoverability of its goodwill.
INCOME TAXES
The Company files a consolidated federal income tax return. Federal
income taxes are apportioned among Acorn and its subsidiaries based on each
corporation's taxes as determined on a separate return basis. State tax
returns are filed on a separate-company basis.
The liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average
number of shares of Common Stock outstanding during each period. Diluted
earnings per share is computed using the weighted-average number of shares of
Common Stock outstanding during each period plus dilutive Common Stock
equivalents using the treasury stock method. See Note 10 for the computation
of basic and diluted earnings per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-7
FISCAL YEAR
The Company's fiscal year is comprised of the 52 or 53 weeks ending
on the Friday closest to July 31 of each year. Unless otherwise stated,
references to fiscal 1997, fiscal 1998 and fiscal 1999 relate to the fiscal
years ended August 1, 1997, July 31, 1998 and July 30, 1999, respectively,
and were comprised of 52 weeks. The Company's interim reporting periods for
quarterly periods end on the Friday closest to the last day of each fiscal
quarter.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
fiscal 1999 presentation.
SEGMENT REPORTING
In 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131). SFAS No. 131 establishes standards for
the way that companies report information about operating segments,
geographic areas and major customers. The company has evaluated the statement
and determined that it has one reportable segment.
3. DISCONTINUED OPERATIONS
VSI
In March 1996, the Company adopted a formal plan to sell VSI.
Accordingly, VSI was accounted for as a discontinued operation in the
financial statements for fiscal 1996. During fiscal 1996, the Company
provided for estimated losses of $665,000 on the disposal of VSI, which
represented the write-down of inventory and other assets to estimated net
realizable value and the estimated loss through the disposal date. The
Company completed the sale of substantially all of the assets of VSI on
December 4, 1996 for approximately $6.9 million, plus the assumption of
approximately $2.3 million of related liabilities.
MCGUIRE-NICHOLAS
In January 1997, the Company adopted a formal plan to sell
McGuire-Nicholas. Accordingly, McGuire-Nicholas is accounted for as a
discontinued operation and classified as such in the accompanying
consolidated financial statements. During fiscal 1997, the Company provided
for an estimated loss on the disposal of McGuire-Nicholas of $9.9 million,
consisting of an estimated loss on disposal of $8.4 million and a provision
of $1.5 million of operating losses for fiscal 1997 and anticipated operating
losses through the date of closing. The loss on disposal represented the
write-off of $7.3 million of goodwill relating to McGuire-Nicholas and the
write-down of inventory and other assets to estimated net realizable value.
On August 8, 1997, the Company sold substantially all of the assets of
McGuire-Nicholas for approximately $4.7 million, plus the assumption of
approximately $4.0 million of related liabilities. During fiscal 1999, the
Company recognized an additional charge of approximately $0.9 million relating
to the settlement of certain tax and worker's compensation claims.
RESULTS OF OPERATIONS AND NET ASSETS OF DISCONTINUED OPERATIONS
The following represents the combined results of operations of the
Company's discontinued operations (in thousands):
FISCAL
1997
------
Revenues $29,643
Costs and expenses 30,731
Interest expense (411)
Loss from operations (1,499)
Interest expense has been allocated to discontinued operations for
all applicable periods based on the ratio of net assets of discontinued
operations to consolidated net assets plus debt.
F-8
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
UnionTools entered into a credit facility (the "Credit Facility") in
December 1996 which, as amended and restated in May 1997, November 1997,
October 1998, February 1999, and June 1999 provides for a $40 million
revolving credit facility (the "Revolving Facility") from January 1 through
June 30 ($30 million from July 1 through December 31) and a $35 million
acquisition facility (the "Acquisition Line"). Available borrowings under the
Revolving Facility are based on specified percentages of accounts receivable
and inventory. The Credit Facility originally also provided for a $20 million
term loan, which was repaid in June 1997 with a portion of the proceeds from
Acorn's initial public offering.
The Credit Facility contains certain covenants, which, among other
things, require UnionTools to maintain specified financial ratios and satisfy
certain tests, including minimum interest coverage ratios, and places limits
on future capital expenditures by UnionTools. The Credit Facility also
includes negative covenants including limitations on indebtedness, liens,
guarantees, obligations, mergers, consolidations, liquidations and
dissolutions, sales of assets, leases, dividends and other payments in
respect of capital stock, capital expenditures, investments, loans and
advances, optional payments and modifications and other debt instruments,
transactions with affiliates, changes in fiscal year, negative pledge clauses
and changes in line of business. At July 31, 1999, UnionTools was not in
compliance with certain of these debt covenants.
On October 28, 1999 UnionTools entered into a sixth amendment to the
amended and restated Credit Facility (the "Amended Facility") to support
operational, capital expenditure, and working capital needs through April 30,
2001, the revised term of the facility. In connection with the Amended
Facility, the lenders waived the July 30, 1999 covenant defaults and
established revised covenant requirements. The Amended Facility provides for
a $40 million revolving credit facility from January 1 through June 30 of
each year, $30 million from July 31 through October 31, and $35 million from
November 1 through December 31.
In addition, the Amended Facility limits the Acquisition Line to the existing
outstanding balance of approximately $16 million and extends the repayment
terms as follows:
DATE PAYMENT
---- -------
September 30, 2000 2.083% of outstanding balance
December 31, 2000 2.083% of outstanding balance
March 31, 2001 2.083% of outstanding balance
April 30, 2001 93.751% of outstanding balance
Borrowings under the Amended Facility bear interest at either the
bank prime rate plus a margin of 1.5% (prime rate at October 28, 1999 was
8.25%) or, at UnionTools' option, the LIBOR rate plus a margin of 3.5% (LIBOR
rate at October 28, 1999 was 5.82%). In addition, UnionTools is required to
pay a fee of 0.5% per year on the unused portion of the Revolving Facility.
The Amended Facility also includes a "success fee" that is established based
upon the date of repayment of the facility. The "success fee" increases from
a minimum of 0.5% of the outstanding facility commitment (if repayment occurs
on or before April 30, 2000) to a maximum of 3.0% (if repayment occurs after
January 31, 2001).
Borrowings under the Amended Facility are secured by substantially
all of the assets of UnionTools and are guaranteed by Acorn. The Acorn
guarantee is secured by a pledge of all the capital stock of UnionTools. In
addition, UnionTools is required to make certain mandatory prepayments under
the Amended Facility based upon cash flow and certain other events described
in the Amended Facility. UnionTools may elect to prepay all or a portion of
the Amended Facility at any time. At October 28, 1999 UnionTools had $6.8
million in available borrowings under the Amended Facility.
On October 28, 1999, in connection with the amendment to the Amended
Facility, UnionTools also issued a $6.0 million junior participation term
loan note (the "Note") bearing interest at 12.0% per annum. Interest is
payable quarterly in arrears on each February 1, May 1, August 1 and November
1 through the issuance of additional term notes or, following repayment of
all borrowings under the Amended Facility other than the Notes through the
payment of cash. Under the provisions of the Note the lender has the right,
at any time during which any unpaid principal amount remains, to exchange the
Note for shares of common stock of the Company. The number of shares received
will be equal to the sum of the unpaid principal and unpaid interest through
date of exchange divided by $3.50. If not previously exchanged for common
stock, the Note matures on the latter of August 1, 2001 or ninety-one days
after the Expiry Date, as defined in the Amended Facility. The proceeds of
the Note were funded through a subordinated participation agreement between
the lender and the majority stockholder of the Company. The Note is by its
terms incorporated into the Amended Facility and is secured by the collateral
in accordance with the terms of the Amended Facility.
The fair value of the Company's long-term debt approximates the
carrying amount at July 30, 1999.
F-9
5. STOCKHOLDERS' EQUITY AND DERIVATIVE SECURITIES
INCREASE IN AUTHORIZED CAPITAL STOCK AND STOCK SPLIT
In May 1997, Acorn increased the number of authorized shares of
Common Stock to 20 million and effected a 1,446-for-1 split of the Common
Stock in the form of a common stock dividend (the "Stock Split"). All share
and per share information has been restated to reflect the Stock Split.
TREASURY STOCK
During fiscal 1999, Acorn repurchased 442,400 shares of common stock
at a cost of $2,488,000.
PREFERRED STOCK
At August 2, 1996, Acorn had 100 shares of non-voting,
non-convertible, Series A Preferred Stock issued and outstanding. Holders of
the Series A Preferred Stock were entitled to a cumulative 13% dividend,
payable quarterly in additional Series A Preferred Stock at a value of
$85,962 per share. The Series A Preferred Stock was redeemable at the option
of Acorn at any time, in whole or in part, at a price of $85,962 per share,
plus accrued dividends. In July 1997, Acorn used $9.6 million of the proceeds
from its initial public offering to redeem the Series A Preferred Stock and
pay accumulated dividends thereon.
STOCK OPTIONS
During fiscal 1997, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). In accordance with the provisions of SFAS 123, the Company has
elected to continue to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee and nonemployee director stock options and,
accordingly, does not recognize compensation costs when the exercise price of
such employee stock options is equal to the fair market value of the stock at
the grant date.
Pursuant to employment agreements, certain executive officers of the
Company were granted options to purchase shares of Common Stock. Vesting of
the options and the related exercise price were contingent upon the
attainment of certain profitability targets, and portions of the options that
failed to vest expired. The Company recognized compensation expense of
$120,000 in fiscal 1997 related to the vesting of these options. Vested
options to purchase 39,042 shares of Common Stock . (with an exercise price
of $0 and $12.10 per share relating to 33,258 and 5,784 shares, respectively)
were outstanding at July 30, 1999 and July 30, 1998. These vested options
expire in December 2003.
In April 1997, Acorn adopted the 1997 Stock Incentive Plan (the
"Incentive Plan") for members of senior management and certain other officers
and employees of the Company. The purpose of the Incentive Plan is to provide
incentives to employees of the Company by granting awards tied to the
performance of the Common Stock. Awards to employees may take the form of
options, stock appreciation rights or sales or grants of restricted stock.
The Company has reserved an aggregate of 730,000 shares of Common Stock for
issuance under the Incentive Plan. At July 30, 1999, Acorn has granted
options to purchase an aggregate of 371,595 options under the Incentive Plan,
at a weighted-average exercise price of $12.61 per share. 242,224 shares were
vested (with an exercise price of $14.00 and $5.75 per share relating to
226,525 and 15,699 shares, respectively) at July 30, 1999. 164,550 shares
were vested (with an exercise price of $14.00 per share) at July 31, 1998.
These vested options expire in June 2004.
In January 1998, Acorn adopted the 1997 Nonemployee Director Stock
Incentive Plan (the "Nonemployee Director Incentive Plan") for non-employee
directors of the Company. The purpose of the Nonemployee Director Incentive
Plan is to enable the Company to attract and retain nonemployee directors by
granting awards tied to the performance of the Common Stock. Awards to
nonemployee directors may take the form of options, stock appreciation rights
or sales or grants of restricted stock. The Company has reserved an aggregate
of 200,000 shares of Common Stock for issuance under the Nonemployee Director
Incentive Plan. Acorn has granted options to purchase an aggregate of 47,430
shares of stock under the Nonemployee Director Incentive Plan, at a weighted
average exercise of $8.09 per share. 47,430 shares were vested (with an
exercise price of $10.25 and $6.70 per share relating to 18,630 and 28,800
shares, respectively) at July 30, 1999. 18,630 shares were vested (with an
exercise price of $10.25 per share relating) at July 30, 1998. The 18,630 and
28,800 vested options expire in December 2008 and 2009, respectively.
F-10
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its incentive stock options
granted subsequent to December 31, 1994 under the fair value method of SFAS
No. 123. The fair value of the options at the date of grant for the Incentive
Plan was $7.80 and $3.56 per share at July 31, 1998 and July 30, 1999,
respectively. The fair value of these options at the date of grant for the
Nonemployee Director Incentive Plan was $6.71 and $4.34 per share at July 31,
1998 and July 30, 1999, respectively.
The valuation of the options were estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal 1999: (i) a risk-free interest rate
of 6.35%; (ii) no dividend yield; (iii) a volatility factor of the expected
market price of the Company's Common Stock of .397; and (iv) a
weighted-average expected life of each option of 10 years.
If the Company had elected to recognize compensation expense based upon the
fair value of options at the grant date as prescribed by SFAS No. 123,
reported net income (loss) applicable to common stock and per share amounts
would have been as follows:
FISCAL FISCAL FISCAL
1997 1998 1999
---- ---- ----
Net income (loss) applicable to common stock (in thousands) $(12,660) $ 43 $(11,974)
Net income (loss) applicable to common stock per share (6.37) .01 (1.90)
The pro forma financial effects of applying SFAS No. 123 may not be
representative of the pro forma effects on reported results of operations for
future years.
F-11
The following table summarizes the stock option activity:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
-------- ----------
1997 STOCK INCENTIVE PLAN:
Outstanding at August 3, 1996 - $ -
Granted 329,100 14.00
Exercised - -
Expired/terminated - -
-------------
Outstanding at August 1, 1997 329,100 14.00
Granted - -
Exercised - -
Expired/terminated - -
-------------
Outstanding at July 31, 1998 329,100 14.00
Granted 62,795 5.75
Exercised - -
Expired/terminated (20,300) 14.00
-------------
Outstanding at July 30, 1999 371,595 12.61
=============
1997 NONEMPOYEE DIRECTOR STOCK INCENTIVE PLAN:
Outstanding at August 1, 1997 - $ -
Granted 18,630 10.25
Exercised - -
Expired/terminated - -
-------------
Outstanding at July 31, 1998 18,630 10.25
Granted 28,800 6.70
Exercised - -
Expired/terminated - -
-------------
Outstanding at July 30, 1999 47,430 8.09
=============
OTHER STOCK OPTIONS:
Outstanding at August 2, 1996 70,854 $ 6.42
Granted - -
Exercised (7,230) 12.10
Expired/terminated (24,582) 12.10
-------------
Outstanding at August 1, 1997 39,042 1.79
Granted - -
Exercised - -
Expired/terminated - -
-------------
Outstanding at July 31, 1998 39,042 1.79
Granted - -
Exercised - -
Expired/terminated - -
-------------
Outstanding at July 30, 1999 39,042 1.79
=============
F-12
DIRECTOR STOCK PLAN
In April 1997, Acorn adopted the Deferred Equity Compensation Plan
for Directors (the "Director Stock Plan"). The purpose of the Director Stock
Plan is to increase the proprietary interest in the Company of non-employee
members of the Board of Directors thereby increasing their incentive to
contribute to the success of the Company. Only non-employee directors are
eligible to participate in the Director Stock Plan. The number of shares of
Common Stock reserved for issuance pursuant to the Director Stock Plan is
73,000. In lieu of cash, non-employee directors can elect to receive all or
one-half of their fees in the form of common stock units. The number of
common stock units issued is determined by dividing (i) an amount equal to
the dollar amount of the fees to be received in the form of common stock
units by (ii) the average of the high and low sale prices of the Common Stock
on the Nasdaq National Market on the last business day preceding the date of
payment. Any cash or stock dividends payable on shares of Common Stock accrue
for the benefit of the directors in the form of additional common stock
units. Common stock units are distributed to non-employee directors in the
form of Common Stock following the director's resignation from the Board of
Directors. In addition, common stock units are distributed to directors in
the form of Common Stock following the death of the director or a change in
control of Acorn as defined in the Director Stock Plan. As of July 31, 1999,
22,856 common stock units had been awarded under the Director Stock Plan
representing an equal number of shares of Common Stock to be issued in the
future.
F-13
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as
follows:
JULY 31, JULY 30,
1998 1999
---- ----
(IN THOUSANDS)
Deferred tax assets:
Inventory $ 785 $ 1,420
Accrued expenses and other 2,425 2,783
Net operating loss carryforwards 13,094 18,886
Capital loss carryforward 2,585 2,585
----------- ------------
Total deferred tax assets 18,889 25,674
Valuation allowance for deferred tax assets (17,323) (21,542)
----------- ------------
Deferred tax assets 1,566 4,132
Deferred tax liabilities:
Goodwill 1,376 3,029
Depreciation and other 190 1,103
----------- ------------
Total deferred tax liabilities 1,566 4,132
----------- ------------
Net deferred tax assets $ - $ -
=========== ============
Based upon the Company's history of operating losses and in
accordance with SFAS No. 109, management recorded a 100% valuation allowance
resulting in no deferred tax assets being recognized.
At July 31, 1999, the Company has net operating loss carryforwards
of $45.3 million for income tax purposes that expire in the years 2009
through 2019 and capital loss carryforwards of $6.2 million for income tax
purposes that expire in 2002 through 2003.
The provision for income taxes is comprised of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 1, JULY 31, JULY 30,
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
Current--Federal $ - $ 40 $ -
Current--State 134 190 145
---------- --------- ---------
$ 134 $ 230 $ 145
========== ========= =========
For financial reporting purposes, the federal tax provision for
fiscal 1998 represents tax due under the Alternative Minimum Tax (AMT) System
as fully reserved operating loss carryforwards eliminate book taxable income.
However, in fiscal 1998 the Company generated a loss for federal income tax
purposes. Therefore, the federal income tax provision for fiscal 1998 was
recorded based on the AMT system. AMT is calculated separately from the
regular U.S. federal income tax and is based on a flat rate applied to a
broader tax base. The higher of the two taxes is paid. The excess of the AMT
paid over regular tax can be carried forward indefinitely to reduce regular
tax liabilities in future years.
F-14
7. PENSION AND POST RETIRMENT BENEFIT PLANS
Union Tools maintains multiple defined benefit pension plans which
cover substantially all employees. Benefits paid under the defined benefit
plans are generally based either on years of service and the employee's
compensation in recent years of employment or years of service multiplied by
contractual amounts. The Company's funding policy for all plans is to fund at
least the minimum amount required by ERISA.
Also, the Company sponsors an unfunded defined benefit health care
plan that provides post-retirement medical and life insurance benefits to
employees who had attained age 50 and 10 years of service by August 1, 1996
and to current participants receiving benefits. Lifetime benefits under the
plan are capped at $25,000 per participant.
PENSION BENEFITS POST RETIREMENT BENEFITS
---------------- ------------------------
1998 1999 1998 1999
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning of year $ 14,045 $ 15,798 $ 3,783 $ 2,902
Service cost 662 689 17 19
Interest cost 1,149 1,200 197 185
Participant contributions - - - 85
Actuarial losses / (gains) 1,156 3 (406) -
Plan amendments - 63 - -
Benefits paid (1,214) (1,065) (689) (787)
---------------- ---------------- ----------------- ----------------
Benefit obligations at end of year 15,798 16,688 2,902 2,404
================ ================ ================= ================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 13,471 14,624 - -
Actual return on plan assets 1,254 1,345 - -
Company contributions 1,113 2,198 689 702
Participant contributions - - - 85
Benefits paid (1,214) (1,065) (689) (787)
---------------- ---------------- ----------------- ----------------
Fair value of plan assets at end of year 14,624 17,102 - -
================ ================ ================= ================
Funded status of the plans (under-funded) (1,174) 414 (2,902) (2,404)
Unrecognized net actuarial losses / (gains) 1,884 1,817 (940) (864)
Minimum pension liability (1,202) (1,614) - -
Unamortized prior service cost 577 618 - -
---------------- ---------------- ----------------- ----------------
Prepaid (accrued) benefit cost $ 85 $ 1,235 $ (3,842) $ (3,268)
================ ================ ================= ================
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 8.00% 8.00% 7.5% 6.75%
Expected return on plan assets 8.75% 8.75% - -
Rate of compensation increase 4.00% 4.00% - -
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 662 $ 689 $ 17 $ 19
Interest cost 1,149 1,200 197 185
Actual return on plan assets (1,254) (1,345) - -
Amortization of prior service cost 16 21 - -
Recognized net actuarial (gains) / losses 77 71 (178) (76)
---------------- ---------------- ----------------- ----------------
Net periodic benefit cost $ 650 $ 636 $ 36 $ 128
================ ================ ================= ================
F-15
7. PENSION AND POST RETIRMENT BENEFIT PLANS (CONTINUED)
The following is a summary of aggregate prepaid benefit costs and aggregate
accrued benefit costs:
JULY 31, JULY 30,
1998 1999
----------------- -----------------
(IN THOUSANDS)
Aggregate prepaid benefit cost $ 1,771 $ 2,572
Aggregate accrued benefit cost (1,686) (1,337)
----------------- -----------------
Net prepaid (accrued) benefit cost $ 85 $ 1,235
================= =================
The company has individual defined benefit pension plans which have
accumulated benefit obligations that are in excess of plan assets. These same
plans have projected benefit obligations that are in excess of plan assets.
The aggregate accumulated benefit obligations , projected benefit obligations
and fair value of plan assets of these plans are as follows:
JULY 31, JULY 30,
1998 1999
----------------- -----------------
(IN THOUSANDS)
Aggregate accumulated benefit obligations $ 6,147 $6,907
Aggregate projected benefit obligations $ 6,147 $6,911
Aggregate fair value of plan assets 4,460 5,570
HEALTH CARE COST TREND RATE
The weighted average health care cost trend rate for fiscal 2000 is
5.5% and is assumed to decline to 5% in fiscal 2001 and remain at that level
thereafter. The weighted average health care cost trend rate for fiscal 1999
was 6%.
The assumed health care cost trend rate has a significant effect on
the amount reported. A one-percentage point change in the assumed health care
cost trend rate would have the following effects on post-retirement benefit
obligations:
1 PERCENTAGE POINT INCREASE 1 PERCENTAGE POINT DECREASE
--------------------------- ---------------------------
(IN THOUSANDS)
Effect on total of service and interest cost components
in fiscal 1999 $ 16 $ (14)
Effect on total of post-retirement benefit obligation
in fiscal 1999 $199 $(175)
DEFINED CONTRIBUTION 401(K) PLAN
The company also sponsors defined contribution 401(k) plans covering
all employees. The Company's matching contribution varies by plan and
amounted to $242,555, $293,273 and $310,740 in fiscal 1997, fiscal 1998 and
fiscal 1999, respectively.
8. COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENT AND OPERATING LEASES
UnionTools entered into a royalty agreement with The Scotts Company,
pursuant to which UnionTools obtained the exclusive right to manufacture,
distribute and market in the U.S. and Canada an extensive line of lawn and
garden tools under the Scotts-Registered Trademark- brand name. Under the
agreement, UnionTools must pay certain minimum royalty amounts annually.
Rent expense under operating leases was $1.2 million in fiscal 1997,
$1.2 million in fiscal 1998 and $1.6 million in fiscal 1999.
F-16
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The minimum annual payments for leases under non-cancelable
operating leases and the Scotts license agreement at July 30, 1999 are as
follows (in thousands):
2000 $1,963
2001 1,900
2002 1,360
2003 843
2004 757
Thereafter 726
LITIGATION
From time to time, the Company is a party to personal injury
litigation arising out of incidents involving the use of Company products
purchased by consumers from retailers to whom the Company distributes. The
Company generally is covered by insurance for these product liability claims.
In April 1999, a subsidiary, V.H.G. Tools, Inc. (VHG) and
predecessor companies, were joined by Midwest Products, Inc., the defendant,
in a product liability lawsuit filed in New Jersey Superior Court, Burlington
County, New Jersey. The case is in its early stages, at least as to VHG.
Plaintiff's and Midwest allegations do not appear to be supported by
evidence, but if plaintiff's and Midwest allegations against VHG are proven,
liability could be substantial. The Company believes that any compensatory
damages, if awarded, would be covered by insurance.
COLLECTIVE BARGAINING AGREEMENTS
The majority of the Company's hourly employees are covered by
collective bargaining agreements, including those at the primary
manufacturing facility in Frankfurt, New York as well as those at the
Frankfurt and Columbus, Ohio distributions centers. The collective bargaining
agreements covering the Frankfurt and Columbus hourly employees expire in
2001 and 2002, respectively. The Company has not been subject to a strike or
work stoppage in over 20 years and believes that its relationships with its
employees and applicable unions are good. However, there can be no assurance
that the Company will be successful in negotiating new labor contracts on
terms satisfactory to the Company or without work stoppages or strikes. A
prolonged work stoppage or strike at any of the Company's facilities could
have a material adverse effect on the Company's business, financial condition
and results of operations.
AGREEMENTS WITH KEY EMPLOYEES
The Company entered into agreements with certain of its executive
officers providing for, under certain circumstances, payments from the
Company following the termination of such officers' employment with the
Company or following a change in control of the Company (as defined therein).
F-17
9. ACQUISITION OF BUSINESSES
On February 19, 1997, the Company acquired for approximately $6.3
million in cash certain assets of an injection molding company. The Company
accounted for the acquisition as a purchase and the results of the injection
molding company's operations are included in the accompanying financial
statements beginning with the date of acquisition. The Company is amortizing
the non-compete agreement over a seven year period.
In February 1998, the Company acquired for approximately $3.5
million in cash, the stock of H.B. Sherman Manufacturing Company, Inc.
("Sherman") The Company accounted for the acquisition as a purchase and the
results of Sherman's operations are included in the accompanying financial
statements beginning with the date of acquisition. The Company is amortizing
the goodwill over a forty-year period.
In June 1998, the Company acquired for approximately $6.5 million in
cash certain assets of the Thompson Manufacturing Company, Inc. ("Thompson").
The Company accounted for the acquisition as a purchase and the results of
Thompson's operations are included in the accompanying financial statements
beginning with the date of acquisition. The Company is amortizing the
goodwill over a forty-year period.
Pro forma results including the acquired companies since the
beginning of the earliest period presented would not be materially different
from actual results.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and dilutive earnings
per share:
1997 1998 1999
---- ---- ----
Numerator:
Net income (loss) $ (10,879,000) $ 1,279,000 $ (11,276,000)
Preferred stock dividend (1,018,000) -- --
---------------- ------------- ---------------
Numerator for basic and dilutive earnings per share -
Net income (loss) applicable to common stock $ (11,897,000) $ 1,279,000 $ (11,276,000)
Denominator:
Denominator for basic earnings per share -
weighted-average shares 1,985,758 6,464,105 6,313,527
Effect of dilutive securities:
1997 Stock Incentive Plan -- -- --
1997 Nonemployee Director Stock Incentive Plan -- 1,132 --
Deferred Equity Compensation Plan for Directors -- 12,263 --
Other stock options -- 33,258 --
---------------- ------------- ---------------
Dilutive potential common shares -- 46,653 --
Denominator for diluted earnings per share -
weighted-average shares and
assumed conversions 1,985,758 6,510,758 6,313,527
Basic earnings per share $ (5.99) $ 0.20 $ (1.79)
================ ============= ===============
Diluted earnings per share $ (5.99) $ 0.20 $ (1.79)
================ ============= ===============
For additional disclosure regarding outstanding stock options and
the Deferred Equity Compensation Plan for Directors, see Note 5 -
Stockholders' Equity and Derivative Securities. At July 31, 1998, options to
purchase 329,100 shares of Common Stock at $14.00 per share and options to
purchase 5,784 shares of Common Stock at $12.10 per share were not included
in the computation of diluted earnings per share because the exercise price
of the options was greater than the average market price of the Common Stock
and, therefore, the effect would be anti-dilutive.
F-18
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain financial data of the Company
for each quarter of fiscal 1998 and 1999. The financial data for each of these
quarters is unaudited but includes all adjustments which the Company believes to
be necessary for a fair presentation. All quarters include normal recurring
adjustments except for the fourth quarter of 1999 which includes certain
adjustments of $8.2 million related to the write-off of obsolete inventory, the
write-off of tooling and inventory associated with a discontinued product,
increases in the reserve for uncollectible accounts receivable, and increases in
the reserve for workers compensation and other miscellaneous adjustments. These
operating results, however, are not necessarily indicative of results for any
future period.
INCOME (LOSS)
INCOME FROM
(LOSS) CONTINUING
FROM OPERATIONS LOSS FROM
CONTINUING PER SHARE DISCONTINUED NET INCOME
NET SALES GROSS PROFIT OPERATIONS (DILUTED) OPERATIONS (LOSS)
----------- ------------- ------------ ------------- ------------- ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1998
First quarter $ 20,416 $ 5,139 $ (324) $ (.05) $ - $ (324)
Second quarter 21,143 4,803 (275) (.04) - (275)
Third quarter 37,911 8,471 1,343 .21 - 1,343
Fourth quarter 28,288 6,865 535 .08 - 535
----------- --------- ------------ ------------- ------------
$ 107,758 $25,278 $ (1,279) $ .20 $ - $ (1,279)
=========== ========= ============ ============= ============
1999
First quarter $ 22,172 $ 5,358 $ (508) $ (.08) $ (166) $ (674)
Second quarter 22,449 5,484 (1,490) (.23) - (1,490)
Third quarter 40,434 10,470 2,324 .37 - 2,324
Fourth quarter 26,359 (1,047) (10,666) (1.77) (770) (11,436)
----------- --------- ------------ ------------- ------------
$ 111,414 $20,265 $(10,340) $ (1.79) $ (936) $(11,276)
=========== ========= ============ ============= ============
12. OTHER EXPENSES
In January 1999, the Company incurred expenses of $355,000 in
consolidating its watering products division into a single facility.
The company incurred expenses for legal, accounting, consulting and
other expenses of $994,000 in fiscal 1999 related to certain strategic
transactions.
In March 1999, the Company announced that it would consolidate its
Columbus, Ohio manufacturing facility into its primary manufacturing facility
in Frankfort, New York. The Columbus manufacturing facility continued to
operate through August 1999, at which time operations ceased. The company
expects the total net cost of the consolidation to be under $3 million, of
which less than $1 million is related to net capital expenditures. Cost
incurred in fiscal 1999 related to the consolidation totaled $993,000.
F-19
13. COMPANY OPERATIONS
The Company's consolidated financial statements have been presented
on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The Company
incurred a net loss of $11,276,000 in fiscal 1999 and was in violation of the
covenants under its Credit Facility (see note 4). The Company has been
substantially dependent upon borrowings under the Credit Facility to finance
its working capital needs during the peak sales period, to finance
acquisitions, and to finance the repurchase of $2,488,000 of common stock
during fiscal 1999.
Through the third quarter of fiscal 1999, the Company had reported
net income of $160,000. The fourth quarter, however, resulted in the
recognition of a loss totaling $11,436,000. Management believes this fourth
quarter loss was largely due to operational control issues and several large
year end adjustments.
The Company's primary cash needs are for working capital, capital
expenditures and debt service. The Company has historically financed these
needs through internally generated cash flow and funds borrowed under the
Credit Facility. The Company recognized that the net losses and share
repurchase that occurred in fiscal 1999, as well as the costs required to
improve the profitability of the business (including the senior management
restructuring) and complete the manufacturing consolidation in the near term
would require more liquidity than was available under the existing Credit
Facility. In addition, as a result of the poor fourth quarter performance,
the Company was not in compliance with the Credit Facility covenants. The
Company has addressed its liquidity needs and the covenant violations by
entering into an amendment to the Credit Facility and obtaining a cash
infusion from the majority shareholder. Note 4 discloses the revisions to the
Credit Facility and the $6 million cash infusion from the Company's majority
shareholder (in the form of junior, participating debt) that occurred in late
October 1999.
The Company will take actions to generate cash from sources other
than operations and the amended Credit Facility. The Company is in the
process of evaluating all non-strategic assets for purposes of sale,
including the sale of the Columbus manufacturing facility, which is expected
to occur in November 1999. The Company is working to reduce the days sales
outstanding in accounts receivable, and will, where appropriate offer
discount terms. Capital and other expenditures are being scrutinized and
potentially deferred if not considered critical. It is the belief of
management that these actions, together with the revised facility commitment
and the capital infusion by its majority stockholder, will provide the
Company with sufficient liquidity for the business to return to profitable
operations. However, if future financial results do not meet management's
expectations, management will reduce discretionary expenditures.
14. RELATED PARTY TRANSACTIONS
The Company received certain professional services from the firm in
which the Company's former Chairman is a Partner. In fiscal 1999, the Company
paid approximately $762,000 for these services and at July 30, 1999 the
Company had a payable of approximately $73,000 related to these services.
F-20
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
UNIONTOOLS, INC.
JULY 30, 1999
ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ----------- ----------- ---------- ----------- ----------
Fiscal Year Ended July 30, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 259,378 $ 701,103 $ 0 $ 19,717 $ 940,764
Reserve for sales discounts and
other allowances 634,401 668,844 0 0 1,303,245
----------- ----------- ---------- ----------- ----------
Total $ 893,779 $1,369,947 $ 0 $ 19,717 $2,244,009
Fiscal Year Ended July 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 175,391 $ 198,649 $ 0 $ 114,662 $ 259,378
Reserve for sales, discounts and
allowances 537,949 96,452 0 0 634,401
----------- ----------- ---------- ----------- ----------
Total $ 713,340 $ 295,101 $ 0 $ 114,662 $ 893,779
Fiscal Year Ended August 1, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 140,000 $ 100,782 $ 4,000 $ 69,391 $ 175,391
Reserve for sales, discounts and
allowances 416,673 121,276 0 0 537,949
----------- ----------- ---------- ----------- ----------
Total $ 556,673 $ 222,058 $ 4,000 $ 69,391 $ 713,340
S-1
ACORN PRODUCTS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
JULY 31, JULY 30,
1998 1999
---- ----
(IN THOUSANDS)
ASSETS
Cash $ 76 $ 76
Accounts receivable 265 --
Prepaid and other assets 1,021 772
---------- ---------
Total current assets 1,362 848
Property, plant and equipment, net -- --
Goodwill 6,446 6,263
Other assets (principally investment in and amounts due
from wholly-owned subsidiaries) 58,196 44,563
---------- ---------
Total assets $ 66,004 $ 51,674
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,292 $ 1,407
Income taxes payable 101 27
Other current liabilities 260 50
---------- ---------
Total current liabilities 1,653 1,484
---------- ---------
Total liabilities 1,653 1,484
---------- ---------
Stockholders' equity
Common stock 78,391 78,391
Contributed capital - stock options 460 460
Minimum pension liability (285) (683)
Retained earnings (deficit) (14,215) (25,490)
---------- ---------
64,351 52,678
Less: Common stock in treasury - (2,488)
---------- ---------
Total stockholders' equity 64,351 50,190
---------- ---------
Total liabilities and stockholders' equity $ 66,004 $ 51,674
========== =========
S-2
ACORN PRODUCTS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(PARENT COMPANY)
CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED
-------------------------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
Selling and administrative expenses $ 1,785 $ 2,625 $ 3,973
Interest expense 4,539 83 16
Amortization of goodwill 183 183 183
Other expenses 739 (54) 1,075
---------- ----------- ---------
Loss before equity in earnings and losses of subsidiaries (7,246) (2,837) (5,247)
Equity in earnings (loss) of wholly-owned subsidiaries (3,633) 4,346 (6,029)
Income taxes -- (230) --
---------- ----------- ---------
Net income (loss) $(10,879) $ 1,279 $(11,276)
========== =========== =========
S-3
ACORN PRODUCTS, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
(PARENT COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED
-------------------------------------------
AUGUST 1, JULY 31, JULY 30,
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
Net cash from operating activities $ (11,405) $ 390 $ 2,488
INVESTING ACTIVITIES:
Property and equipment -- -- --
FINANCING ACTIVITIES:
Net activity on revolving loan (12,537) -- --
Redemption of subordinated debt (31,354) -- --
Issuance of common stock 64,105 -- --
Purchase of treasury stock -- -- (2,488)
Retirement of preferred stock (8,596) -- --
---------- ----------- ---------
11,618 -- (2,488)
---------- ----------- ---------
Increase in cash $ 213 $ 390 $ --
========== =========== =========
S-4
ACORN PRODUCTS, INC
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED)
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the parent company-only financial statements, the Company's
investment in subsidiaries is stated at cost plus equity in undistributed
earnings of subsidiaries. The Company's share of net income (loss) of its
unconsolidated subsidiaries is included in consolidated income using the
equity method. Parent company-only financial statements should be read in
conjunction with the Company's consolidated financial statements.
2. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
The Company is a guarantor of the Credit Facility of UnionTools, a
wholly-owned subsidiary. Cash utilized by the Company is provided through
inter-company borrowings and is subject to certain restrictions. See Note 4
to the Company's Consolidated Financial Statements.
S-5