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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 December 31, 2000
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 W. NATIONWIDE BLVD., 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 SmallCap 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 March 15, 2001, the aggregate market value of our shares of
common stock (based on the last sale price of the common stock on the Nasdaq
SmallCap Market on that date) held by non-affiliates of the registrant was
approximately $1,287,347.
As of March 15, 2001, 6,062,159 shares of our common stock, par value
$.001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of our Proxy Statement for the 2001 Annual Meeting of
Stockholders are incorporated by reference in Part III.
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TABLE OF CONTENTS
DESCRIPTION PAGE
Table of Contents.................................................................................... 2
Part I
Item 1. Business............................................................................. 3
Item 2. Properties........................................................................... 9
Item 3. Legal Proceedings.................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders.................................. 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 10
Item 6. Selected Financial Data ............................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 14
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............................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 25
Item 13. Certain Relationships and Related Transactions....................................... 25
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 26
Signatures ..................................................................................... 29
Financial Statements................................................................................. F-1
Schedules to Financial Statements.................................................................... S-1
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PART I
ITEM 1. BUSINESS
As used in this Annual Report on Form 10-K and except as the context
otherwise may require, "Company", "we", "us", and "our" refers to Acorn
Products, Inc. and its subsidiaries UnionTools, Inc. ("UnionTools"), Hawthorne
Tools, Inc. (formerly H.B. Sherman Manufacturing Company, Inc.), and Pinetree
Tools, Inc. (formerly UnionTools Watering Products, Inc.). References to fiscal
years 1996, 1997, 1998, and 1999 reflect the fiscal year ended on the Friday
closest to July 31 of the applicable year (e.g., "fiscal 1999" reflects the
fiscal year ended July 30, 1999). References to transition year 1999 reflect the
five-month period ended December 31, 1999 ("transition 1999"). References to
calendar year 1999 reflect the calendar year period ended December 31, 1999
("calendar 1999"). References to fiscal year 2000 reflect the calendar year
period ended December 31, 2000 ("fiscal 2000"). As used in this Annual Report on
Form 10-K, "Ace Hardware" refers to Ace Hardware Corporation, "Home Depot"
refers to The Home Depot, Inc., "Lowe's" refers to Lowes Companies, Inc.,
"Mid-States" refers to Mid-States Distributing Company, Inc., "Oklahoma Rig"
refers to Oklahoma Rig & Supply Company, Inc., "Orgill" refers to Orgill, Inc.,
"Sears" refers to Sears, Roebuck & Company, "Tractor Supply" refers to Tractor
Supply Company, Inc., "Wal-Mart" refers to Wal-Mart Stores, Inc., and "White
Cap" refers to White Cap Pro-Contractor Supplier. Our primary registered
trademarks include: Lady Gardener(R), Perfect Cut(R), Pro Force(R),
Razor-Back(R), Union(R), UnionPro(R), and Yard `n Garden(R). Craftsman(R)and
Sears(R)are registered trademarks of Sears. Scotts(R)is a registered trademark
of The Scotts Company.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify such forward-looking statements by the
words "expects", "intends", "plans", "projects", "believes", "estimates", and
similar expressions. In the normal course of business, we, in an effort to help
keep our stockholders and the public informed about our operations, may from
time to time issue such forward-looking statements, either orally or in writing.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or
projections involving anticipated revenues, earnings or other aspects of
operating results. We base the forward-looking statements on our current
expectations, estimates, and projections. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties, and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Therefore, the actual results of the future events described in
the forward-looking statements in this Annual Report on Form 10-K or elsewhere,
could differ materially from those stated in the 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
Our primary business is associated with our UnionTools, Inc.
subsidiary. UnionTools was founded in 1890, and is a leading designer,
manufacturer, and marketer of branded non-powered lawn and garden products. Our
primary business is the manufacturing, marketing, and distribution of garden
tools through mass market and other distribution channels in the United States.
We also sell our products to professional and commercial end-users through
distributors and industrial supply outlets. Our principal products include long
handle tools (such as shovels, forks, rakes, and hoes), snow tools, posthole
diggers, wheeled goods (such as wheelbarrows and hand carts), striking tools,
cutting tools, hand tools, and repair handles. In order to focus on our core
tool business, in fiscal 2000, we sold assets related to the manufacturing and
sale of watering products. Our products bear well known brand names, including
Razor-Back(R), Union(R), Yard `n Garden(R), Perfect Cut(R), and, pursuant to a
license agreement, Scotts(R). In addition, we manufacture and supply private
label products for a variety of customers, including products sold to Sears
under the Craftsman(R) brand name and Ace Hardware under the Ace(R) brand name.
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PRODUCTS
We sell non-powered lawn and garden tools, with our primary products
being long handle tools. We design, manufacture, source, and market tools in the
following product categories:
- Shovels, including round point and square point shovels;
garden/nursery shovels; roof rippers; irrigation and trenching
shovels; metal and plastic head snow shovels and pushers; garden,
nursery, and transplanting spades; drain and post spades;
- Posthole Diggers and Augers;
- Scoops, including aluminum, plastic, and steel scoops; general
and special purpose scoop shovels;
- Rakes, including steel and plastic/steel lawn, leaf and shrub
rakes; plastic lawn, leaf and shrub rakes; bow head and level
head rakes; specialty rakes and brooms;
- Garden Tools, including garden and special purpose hoes; weeders
and scrapers; rotary and half-moon edgers; fruit harvesters; bulb
planters; small hand tools like trowels, weeders, and
cultivators;
- Cultivators and Forks, including forged cultivators and hooks in
different sizes and spread; spading forks, manure forks, and
special purpose forks;
- Striking Tools, including sledges and heavy hammers; axes, mauls,
and wedges; picks and mattocks; tampers; heavy bars; bars,
pullers, and rippers;
- Cutting Tools, including bypass and anvil hand pruners; hedge and
grass shears; bypass and anvil loppers and mini loppers; tree
pruners and saws;
- Wheeled Goods, including wheelbarrows and hand trucks; and
- Miscellaneous Products, including garden tool organizers, repair
handles, and edging tools.
We continue to develop new products and enhance existing products in
order to maintain and improve our position in the market. Our marketing and
engineering departments develop new products with assistance from independent
consultants.
Shovels and other steel head implements are primarily manufactured at
our Frankfort, New York facility. Forks, cutting tools, and other implements are
sourced worldwide. We process North American ash wood logs at our seven wood
mills and purchase fiberglass handles. Our Hebron, Ohio injection molding
facility manufactures some of the plastic components used in our products, such
as plastic snow shovel heads. In addition, this facility manufactures
proprietary custom molded products and component parts for other manufacturers
and distributors.
SALES AND MARKETING
The non-powered lawn and garden industry is mature and, due in part to
the low-cost nature of non-powered equipment, generally is non-cyclical. 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 by the need of industrial and farm professionals to acquire and
utilize high-quality tools that will aid them in efficiently completing their
jobs. We promote our products primarily through co-operative advertising and
where applicable, provide customers with merchandising plan-o-grams and custom
designed product displays complete with informative signs to assist at the
retail level.
We market our products primarily within the United States. Sales within
the United States comprised 98% of total sales in fiscal 1999, transition 1999,
and fiscal 2000. Our products are sold primarily through mass merchants, home
centers, buying groups, and distributors. We market our products through our own
sales staff with significant support from manufacturers' representative
organizations.
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Our sales force is comprised of regional managers and direct sales
professionals who regularly call on customers and manage manufacturers'
representatives who provide store level support to customers. These
manufacturers' representatives also sell lawn and garden products for other
manufacturers, but not products that compete with ours.
We also have an Internet web site at www.uniontools.com which provides
consumers with product information, dealer locator, and customer service
contacts. In addition, customers can download Company information, catalogs, and
line art and photographs for use in advertisements. The reference to our web
site address does not constitute incorporation by reference of the information
contained on our web site, so you should not consider any information on our web
site to be a part of this Annual Report on Form 10-K.
LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS
Under a licensing agreement, we pay royalties to The Scotts Company
("Scotts") and therefore have the right to produce and market a line of garden
tools bearing the Scotts(R) trademark. We also have other licensing agreements
that are not material to our business.
We apply for patents and trademarks as applicable. Patents presently
owned by us are considered, in the aggregate, to be important to the conduct of
our business. Patent protection does not, however, deter competitors from
attempting to develop similar products. We are licensed under a number of
patents, none of which individually is considered material to our business. We
own a number of patents and trademarks registered in the United States Patent
and Trademark Office as well as the patent and trademark offices of certain
other countries. These include the trademarks:
- Lady Gardener(R);
- Perfect Cut(R);
- Razor-Back(R);
- Union(R);
- UnionTools(R);
- Union Pro(R); and
- Yard `n Garden(R).
Such registrations will continue as new patents and trademarks are developed or
acquired. We aggressively monitor and protect our brands against infringement
and other violations.
ACQUISITIONS AND DIVESTITURES
In fiscal 1998, we acquired the assets of H.B. Sherman Manufacturing
Company and Thompson Manufacturing. The intent of these acquisitions was to
leverage our expansive sales contacts in the lawn and garden industry and to
expand our product offerings by adding watering products.
During fiscal 2000, we discontinued the manufacture and sale of
watering products, and subsequently sold the related assets. These actions
represent the desire to dedicate our attention to core products: long handle
tools, cutting tools, striking tools, and wheeled goods.
Effective December 31, 1999, our wheelbarrow joint venture was
dissolved. We feel that the wheelbarrow business is significant and intend to
pursue this venture on our own by focusing on worldwide sourcing and
manufacturing in an effort to improve our position in the wheelbarrow category.
COMPETITION
The markets for non-powered lawn and garden tools are highly
competitive, especially with respect to product pricing, product quality,
innovation in the design of new products, availability, customer service and
support, although the degree and nature of such competition vary by location and
product line. We are generally perceived by our customers to be the highest
quality provider and to have the best service levels in our industry.
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We also enjoy strong brand name recognition. We believe that our commitment to
customer service, product innovation, and distribution systems position us well
to compete in the markets for non-powered lawn and garden tools.
We compete with various manufacturers and distributors. These
competitors also possess widely recognized brand names. With the merger of
Ames(R) and True Temper(R) in February 1999, the long handle tool market is now
primarily supplied by two domestic competitors - Ames(R) True Temper(R) and us.
Primary competitors in the cutting tools market are Fiskars(R) and Corona(R).
Our other product lines primarily compete with those of numerous small
manufacturers and distributors. In addition, we compete with various other
international manufacturers that export parts and finished goods to the United
States.
Our strategy requires that we continue to focus on customer service and
end-user needs, partly through the development and marketing of innovative new
products at competitive prices. We are also facing pricing pressures which, if
not mitigated by cost and expense reductions, may result in lower profitability
and could jeopardize our ability to grow or maintain market share. We believe
that our future success will depend upon our ability to produce and procure low
cost quality products and satisfy consumer tastes with respect to function and
design, and our ability to market such products in each applicable category at
competitive prices. No assurance can be given that we will be able to
successfully compete on the basis of these factors in the future.
CUSTOMERS
We sell our products through a variety of distribution channels
including:
- mass merchants such as Sears and Wal-Mart;
- home centers such as Home Depot and Lowe's;
- buying co-ops such as Ace Hardware;
- distributors and retailers such as Mid-States, Orgill, and
Tractor Supply; and
- industrial distributors such as Oklahoma Rig and White Cap.
Our largest customer is Sears, which includes Sears' Orchard Supply
division. We have been a continuous supplier to Sears for more than eighty years
and the primary supplier of long handle tools to Sears for more than fifty
years. Home Depot is another major customer and we have been a supplier to them
since 1997. Both Sears and Home Depot each account for over 10% of gross sales.
Our ten largest customers accounted for approximately 51.5% of gross sales
during fiscal 1998, 52.9% of gross sales during calendar 1999, and 52.6% of
gross sales during fiscal 2000. Most of our major customers are on electronic
data interchange (EDI) systems.
There can be no assurance that our sales to Sears, Home Depot, or other
major customers will continue at existing levels. A substantial reduction or
cessation of sales to Sears, Home Depot, or other major customers could have a
material adverse effect on our business, financial conditions, and results of
operations. In addition, we continue to face 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.
DISTRIBUTION AND LOGISTICS
Customer orders are placed and processed centrally at our headquarters
in Columbus, Ohio and then allocated from our current stock of finished goods in
our distribution center in Columbus, Ohio. We use common carriers to ship
finished products from our facilities to customer delivery points. We continue
to reassess the structure and processes of our logistics program for
opportunities to reduce costs and improve customer service.
In fiscal 2000, we exited our western distribution facility in
conjunction with the sale of assets related to the manufacture and sale of
watering products. We have consolidated our distribution operations at the
Columbus Distribution Center.
We utilize an information system that allows us to determine the status
of customer orders, process orders quickly, respond to customer inquiries, and
adjust shipping schedules to meet customer requirements. We
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believe that these systems enable efficient order processing, expedite
shipments, and improve customer service. Prioritizing our efforts in
distribution and logistics has resulted in an improvement in service levels, and
we consistently strive to achieve On Time, In Full, Error Free ("OTIFEF")
shipments.
MANUFACTURING AND SOURCING
We continue to strengthen our expertise and infrastructure. During
fiscal 2000, we hired Gary Zimmerman as the Senior Vice President of Operations
to provide leadership and oversight to manufacturing, logistics, purchasing,
customer service, and engineering.
Our ongoing efforts continued to improve both manufacturing and
sourcing capabilities in order to achieve the "world's low cost production" on
all products and components.
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, 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.
In addition, 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.
Since many products and components are more competitively manufactured
outside our facilities, we began strategic sourcing of some product components
in China in 1999. During fiscal 2000, we expanded our component sourcing to
include manufacturers in Europe, Asia, and Mexico, and dedicated resources to
manage these relationships.
INFORMATION TECHNOLOGY
In fiscal 2000, we announced our decision to outsource our information
technology function to Acxiom Corporation. Acxiom is a global leader in
real-time Customer Data Integration offering innovative database marketing
services, infrastructure management, premier data content, and integration
technologies. Founded in 1969, Acxiom is currently headquartered in Little Rock,
Arkansas, with operations in the United States, the United Kingdom, France,
Spain, and Australia.
This move will allow us to tap into the substantial resources and
expertise of Acxiom that would be unavailable to us on a standalone basis.
Acxiom will provide all information technology services support for us,
including server management, data network services, local area and wide area
networks, desktop support, help desk services, and all of our application
software support needs. We expect technology to provide significant efficiencies
and capabilities to us in servicing our customers in the 21st century.
RAW MATERIALS
The primary raw materials used to produce our products are steel,
fiberglass, 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 for steel purchases. We purchased more than
75% of our steel requirements from Liberty Steel Products, Inc.
in fiscal 2000.
- Fiberglass. We purchase our fiberglass requirements from two
suppliers. The primary considerations for sourcing fiberglass are
production capacities, quality, and cost. Fiberglass is used
primarily in the production of high-end tools. We purchased the
majority of our fiberglass requirements from Strongwell in fiscal
2000.
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- Ash Wood. Ash is the ideal hardwood for handles because it is
lightweight, flexible, and splinters less than most hardwoods. We
employ wood specialists who maintain relationships with numerous
log suppliers and are responsible for sourcing our ash needs. We
believe that sufficient quantities of ash will continue to be
available. Each of our sawmills typically maintains a five to
eight week inventory of ash to cover occasional short-term
fluctuations in supply. We import wood handles for some of our
promotionally priced products, such as rakes and hoes. Imported
wood is less expensive than ash and is of sufficient quality for
tools (other than shovels) designed for opening-price-point
levels. We expect our sawmills to be "Green" certified in the
first half of 2001. "Green Certification" is to ensure that the
forests are managed in an ecologically sound, socially
responsible, and economically viable manner.
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.
ASSOCIATES
As of December 31, 2000, we employed approximately 650 people
(including seasonal associates), approximately 500 of whom were paid on an
hourly basis. Our staffing requirements fluctuate during the year due to the
seasonal nature of sales in the lawn and garden industry, and approximately 100
to 150 additional seasonal associates are utilized during our busy season. The
average tenure of our hourly associates is about 10 years. Hourly associates at
the Columbus, Ohio distribution center and Delaware, Ohio sawmill are
represented by the International Association of Machinists ("IAM"). Our contract
with the IAM expires in April 2002. The International Brotherhood of
Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers ("IBB")
represents the hourly associates in Frankfort, New York. Our contract with the
IBB expires in June 2001. The International Brotherhood of Teamsters ("IBT")
represents hourly associates at the Portville, New York sawmill. Our contract
with the IBT expires in August 2002. The Glass, Molders, Pottery, Plastics &
Allied Workers International Union AFL-CIO ("AGM") represents hourly associates
at our Hebron, Ohio injection molding facility. Our contract with the AGM
expires in March 2002. No other associates are represented by unions.
We have not been subject to a strike or work stoppage in over 20 years,
and management believes that our relationships with associates, the IAM, the
IBB, the IBT, and the AGM are good. There can be no assurance, however, that
future labor contract negotiations will be successful or occur 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.
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 facilities. The amounts thus far expended for such compliance
and remediation activities have been minimal. Current conditions and future
events such as changes in existing laws and regulations may, however, 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 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 December 31, 2000, we had a reserve for environmental remediation of
approximately $157,000 to address claims not covered by insurance. The actual
cost of remediating environmental conditions may be different than that accrued
due to the difficulty in estimating such costs and due to potential changes in
the status of legislation.
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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
December 31, 2000, we owned or leased the following other principal properties
for use in our business as set forth below:
Location Owned or Leased Square Feet
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DISTRIBUTION FACILITIES:
Columbus, Ohio Leased 179,200
Columbus, Ohio Leased 105,000
MANUFACTURING FACILITIES:
Frankfort, New York(1) Owned 263,710
Hebron, Ohio Owned 107,200
SAWMILLS:
Frankfort, New York(1) Owned 59,490
Delaware, Ohio Owned 51,100
Shippensburg, Pennsylvania Owned 15,000
Lebanon, Kentucky Owned 13,500
Cookeville, Tennessee Owned 12,100
Portville, New York Owned 9,000
Huntington, Indiana Owned 7,600
(1) Our 351,000 square foot Frankfort, New York facility is
comprised of a manufacturing facility, a sawmill, and
approximately 27,800 square feet of office space.
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.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in routine litigation incidental to
the conduct of business. We believe 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. ("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'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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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". On December 17, 1999, our common stock began
trading under the same symbol on the Nasdaq SmallCap Market. The following table
sets forth the high and low sales prices of the common stock on the Nasdaq
SmallCap Market during the periods indicated:
Market Price
------------
Fiscal (Calendar) Period High Low
------------------------ ---- ---
1999: First Quarter $7.75 $5.00
Second Quarter 7.25 4.31
Third Quarter 5.88 2.38
Fourth Quarter 3.50 1.25
2000: First Quarter $2.75 $0.94
Second Quarter 1.69 1.00
Third Quarter 1.50 0.94
Fourth Quarter 1.13 0.25
2001: First Quarter $1.00 $0.38
As of February 28, 2001, the approximate number of record holders of
the common stock was 23. The closing sales price of our common stock on February
28, 2001 was $0.8125 per share.
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 revolving credit facility contains
restrictions on UnionTools' ability to pay dividends or make payments or other
distributions to us. The credit facility provides that, unless UnionTools meets
certain financial tests, it may not declare any dividends or make any other
payments or distributions to us except for amounts necessary to pay our
operating expenses up to $250,000 per month and to pay our federal and state
income taxes.
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 are the considerations 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.
From March 1999 to May 1999, we repurchased a total of 442,400 shares
of common stock in open market transactions for approximately $2.5 million.
On March 6, 2001, we received a Nasdaq Staff Determination indicating
that we failed to comply with the net tangible assets, minimum bid price, and
minimum float requirements for continued listing as set forth in Marketplace
Rule 4310, and that our common stock, therefore, is subject to delisting from
The Nasdaq SmallCap Market. We have requested a hearing before a Nasdaq Listing
Qualifications Panel to review the Nasdaq Staff Determination. There can be no
assurance the panel will grant our request for continued listing.
ITEM 6. SELECTED FINANCIAL DATA
We have derived the selected consolidated financial data for fiscal
1996, fiscal 1997, fiscal 1998, fiscal 1999, calendar 1999, and fiscal 2000 from
our audited consolidated financial statements. Certain amounts from prior years
have been reclassified to conform to the fiscal 2000 presentation. The selected
consolidated financial
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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 (except calendar year ended 12/31/1999)
(In thousands, except per share data)
---------------------------------------------------------------------------------
8/2/96 8/1/97 7/31/98 7/30/99 12/31/99 12/31/00
------------ ------------ ------------- ------------ ------------- -------------
(Unaudited)
STATEMENT OF OPERATIONS DATA:
Net sales $95,672 $105,303 $112,667 $117,431 $118,413 $116,591
Cost of goods sold 70,516 78,274 87,389 97,166 102,376 94,464
------------ ------------ ------------- ------------ ------------- -------------
Gross profit 25,156 27,029 25,278 20,265 16,037 22,127
Selling, general and 16,815 18,293 20,033 22,651 23,448 22,052
administrative expenses
Interest expense 6,732 7,176 2,560 3,401 4,097 6,947
Amortization of intangibles 1,173 837 917 1,087 1,091 974
Asset impairment 0 0 0 0 2,800 4,402
Other expenses, net(1) 1,522 1,548 259 3,321 5,080 1,640
------------ ------------ ------------- ------------ ------------- -------------
Income (loss) from continuing (1,086) (825) 1,509 (10,195) (20,479) (13,888)
operations before income taxes
and cumulative effect adjustment
Income taxes 582 134 230 145 755 80
------------ ------------ ------------- ------------ ------------- -------------
Income (loss) from continuing (1,668) (959) 1,279 (10,340) (21,234) (13,968)
operations before cumulative
effect adjustment
Loss from discontinued (6,480) (9,920) 0 (936) (921) 0
operations(2)
Cumulative effect of change in 869 0 0 0 0 0
accounting for post-retirement
benefits
------------ ------------ ------------- ------------ ------------- -------------
Net income (loss) ($7,279) ($10,879) $1,279 ($11,276) ($22,155) ($13,968)
============ ============ ============= ============ ============= =============
Income (loss) from continuing ($1.10) ($0.48) $0.20 ($1.64) ($3.45) ($2.31)
operations per share
(basic and diluted)
Weighted average number of 1,520,066 1,985,758 6,464,105 6,313,527 6,146,617 6,057,360
shares outstanding
OTHER DATA:
Gross margin 26.3% 25.7% 22.4% 17.3% 13.5% 19.0%
EBITDA(3)(4) $9,238 $9,840 $7,939 ($1,189) ($7,464) $2,720
BALANCE SHEET DATA:
Working capital from $8,543 $26,909 $30,645 $15,118 $10,702 $5,690
continuing operations(5)
Total assets 98,895 98,890 112,633 108,867 105,073 81,881
Total debt 61,891 18,935 32,317 38,363 49,387 41,942
Stockholders' equity 18,530 63,224 64,351 50,190 36,964 22,310
In July 2000, the FASB's Emerging Issues Task Force ("EITF") issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs. In accordance with the
provisions of this EITF, we have reclassified freight expenses from sales to
cost of goods sold for all reporting periods.
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(1) In fiscal 1996, we recognized other expenses 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.
In calendar 1999, we recognized expenses related to management
restructuring charges, including severance and relocation expenses, of
$668,000.
In fiscal 2000, we recognized a $1.2 million loss in connection with
the sale of certain assets related to the manufacturing and sale of the
watering products and other expenses of $407,821 in connection with
management restructuring charges, including severance and relocation
expenses.
(2) Represents the loss from the discontinued VSI and McGuire-Nicholas
operations, as well as (i) a loss in fiscal 1996 of $6.5 million
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 and calendar 1999, we incurred a loss from discontinued
operations primarily due to a workers' 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) In 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), management restructuring charges ($0.7 million), bad debts
($0.7 million), inventory obsolescence ($2.2 million), workers'
compensation ($0.4 million), and expenses related to the temporary loss
of logistical control ($1.2 million).
In fiscal 2000, EBITDA would have been approximately $7.3 million
excluding the effect of the following unusual charges: operating
inefficiencies resulting from delays in the manufacturing consolidation
($3.0 million), loss on the sale of assets related to the manufacturing
and sale of watering products ($1.2 million), and management
restructuring charges ($0.4 million).
(5) Represents current assets less current liabilities (excluding the
Acquisition Facility and the Junior Participation Term Loan Note).
We have derived the selected consolidated financial data for transition
year 1999 and for the comparable period of 1998 from our audited consolidated
financial statements. We included these references because we changed from a
fiscal year end (the Friday closest to July 31 of the applicable year) to a
calendar year end after we filed our Annual Report on Form 10-K for fiscal 1999.
The 1999 transition year is the five-month period from July 31, 1999 to December
31, 1999. 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.
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Five-Month Period Ended
(In thousands,
except per share data)
------------------------------------
1/3/99 12/31/99
----------------- -----------------
(Unaudited)
STATEMENT OF OPERATIONS DATA:
Net sales $36,729 $37,711
Cost of goods sold 28,517 33,727
----------------- -----------------
Gross profit 8,212 3,984
Selling, general and 8,173 8,970
administrative expenses
Interest expense 1,209 1,905
Amortization of intangibles 444 448
Asset impairment 0 2,800
Other expenses, net 1,010 2,769
----------------- -----------------
Loss from continuing operations (2,624) (12,908)
before income taxes and cumulative
effect adjustment
Income taxes (benefit) (527) 83
----------------- -----------------
Loss from continuing operations (2,097) (12,991)
before cumulative effect adjustment
Loss from discontinued operations (165) (150)
----------------- -----------------
Net loss ($2,262) ($13,141)
================= =================
Loss from continuing operations ($0.32) ($2.16)
per share (basic and diluted)
Weighted average number of 6,464,105 6,023,174
shares outstanding
OTHER DATA:
Gross margin 22.4% 10.6%
EBITDA $311 ($5,969)
BALANCE SHEET DATA:
Working capital from $28,067 $10,702
continuing operations
Total assets 114,893 105,073
Total debt 37,046 49,387
Stockholders' equity 62,090 36,964
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 Statements" 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 our own.
Our only material asset is all of the outstanding capital stock of
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UnionTools, Inc.
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.
In fiscal 2000, we focused on strategically rationalizing our business
model to restore profitability. This included discontinuing the manufacture and
sale of watering products and an emphasis on profitable products and
relationships with customers. During fiscal 2000, improvements in our
forecasting and planning processes, we believe, have allowed us to consistently
provide the highest service levels in the industry.
We experienced manufacturing inefficiencies during the first half of
fiscal 2000, primarily due to the effects of consolidating manufacturing
facilities in the second half of calendar 1999. Those issues have now been
addressed and resolved and we have turned our focus to cost savings
opportunities, driven by a new Senior Vice President of Operations and a new
Vice President and General Manager of our Frankfort, New York manufacturing
facility. We have also decreased the cost of our logistical processes, reducing
the number of distribution locations, from three to one location in Columbus,
Ohio. These reductions were accomplished during fiscal 2000 with minimal effect
on service level performance. The net result as it relates to manufacturing and
distribution is that we believe that we have been able to correct the problems
that arose in calendar 1999 and contributed to the operating losses during that
time period.
The discontinuation of watering products and cost management on sales
support and other overhead expenses has allowed us to lower our selling, general
and administrative costs. We continue to challenge and re-evaluate our overhead
costs of doing business.
Interest costs have become a greater burden to us in fiscal 2000 due to
higher market rates plus the incremental costs associated with executing the
sixth amendment to our Credit Facility in October 1999. This has been tempered
by our ongoing efforts to reduce working capital, including an $8.7 million
reduction in inventory requirements.
We are currently in negotiations to extend our existing Credit Facility
through April 30, 2002. We believe an extension will provide sufficient
liquidity for us as we move through our operating cycle. We continue to evaluate
opportunities to reduce borrowing costs, including the potential to refinance,
as our financial performance improves.
To strengthen our technology platform and resources, all information
system functions and support were outsourced to Acxiom Corporation in November
2000. The transition has been essentially completed, with no disruption to our
business.
RESULTS OF OPERATIONS
The following table sets forth certain components of our consolidated
statement of operations data expressed as a percentage of net sales:
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15
Fiscal (Calendar) Year Ended (12 months)
------------------------------------------------------------
7/31/98 7/30/99 12/31/99 12/31/00
-------------- ------------- ------------- -------------
(Unaudited)
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 77.6% 82.7% 86.5% 81.0%
-------------- ------------- ------------- -------------
Gross profit 22.4% 17.3% 13.5% 19.0%
Selling, general and 17.8% 19.3% 19.8% 18.9%
administrative expenses
Interest expense 2.3% 2.9% 3.4% 6.0%
Amortization of intangibles 0.8% 0.9% 0.9% 0.8%
Asset impairment 0.0% 0.0% 2.4% 3.8%
Other expenses, net 0.2% 2.8% 4.3% 1.4%
-------------- ------------- ------------- -------------
Income (loss) from continuing 1.3% -8.7% -17.3% -11.9%
operations before income taxes
Income taxes 0.2% 0.1% 0.6% 0.1%
-------------- ------------- ------------- -------------
Income (loss) from continuing 1.1% -8.8% -17.9% -12.0%
operations
Loss from discontinued operations 0.0% -0.8% -0.8% 0.0%
-------------- ------------- ------------- -------------
Net income (loss) 1.1% -9.6% -18.7% -12.0%
============== ============= ============= =============
Five-Month Period Ended
-------------------------------------
1/3/99 12/31/99
---------------- ----------------
(Unaudited)
Net sales 100.0% 100.0%
Cost of goods sold 77.6% 89.4%
---------------- ----------------
Gross profit 22.4% 10.6%
Selling, general and 22.3% 23.8%
administrative expenses
Interest expense 3.3% 5.1%
Amortization of intangibles 1.2% 1.2%
Asset impairment 0.0% 7.4%
Other expenses, net 2.7% 7.3%
---------------- ----------------
Loss from continuing operations -7.1% -34.2%
before income taxes
Income taxes (benefit) -1.4% 0.2%
---------------- ----------------
Loss from continuing operations -5.7% -34.4%
Loss from discontinued operations -0.5% -0.4%
---------------- ----------------
Net loss -6.2% -34.8%
================ ================
FISCAL 2000 COMPARED TO CALENDAR 1999
Net Sales. Net sales decreased 1.5%, or $1.8 million, to $116.6 million
for fiscal 2000 compared to $118.4 million in calendar 1999. The decline in net
sales was caused primarily by lower watering product sales. In the third quarter
of fiscal 2000, we sold assets related to the manufacturing and sale of watering
products. The sales of long handled tools were slightly lower than a year ago
due to the rationalization of unprofitable customers
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and products.
Gross Profit. Gross profit increased 38.0%, or $6.1 million, to $22.1
million for fiscal 2000 compared to $16.0 million in calendar 1999. Gross margin
increased to 19.0% for fiscal 2000 compared to 13.5% for calendar 1999. The
increase in gross profit and margin were driven by several factors: improved
customer service levels; shipment fulfillment processes; and consolidation of
distribution centers. In addition, we have continued to focus on cost reductions
and improvements in logistical and manufacturing process controls to drive year
to year gains in fiscal 2000. An emphasis on profitable products and
relationships with customers has also favorably influenced margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1.3 million, or 6.0%, to $22.1 million for
fiscal 2000 versus $23.4 million in calendar 1999. As a percentage of net sales,
selling, general and administrative expenses decreased to 18.9% for fiscal 2000
as compared to 19.8% in calendar 1999. The improvement reflects the elimination
of sales and administrative support for the sale of watering products, as well
as, productivity gains and cost reductions, including lower sales expenses and a
reduction in personnel.
Operating Income (Loss). Operating income (gross profit less selling,
general and administrative expenses) improved $7.5 million, to a profit of $0.1
million for fiscal 2000 compared to a loss of $7.4 million in calendar 1999. The
improvement in operating income was primarily due to the items discussed above.
Interest Expense. Interest expense increased $2.8 million, or 69.6%, to
$6.9 million for fiscal 2000 compared to $4.1 million in calendar 1999. The
increase in interest expense was primarily due to higher market rates (LIBOR)
and borrowing costs, as a result of the most current amendment to our loan
agreement, and higher borrowing levels during the year.
Amortization of Goodwill. Amortization of goodwill decreased 10.7% to
$1.0 million for fiscal 2000 compared to $1.1 million in calendar 1999. The
reduction in amortization is due to the lower amount of goodwill to be
amortized, resulting from the asset impairment charges recognized during these
time periods.
Asset Impairment. An asset impairment charge of $4.4 million was
recognized in fiscal 2000 and a similar charge of $2.8 million was recorded in
calendar 1999. We recognized these charges based on our review of the net
realizable value on certain long-lived assets related to the manufacture and
sale of watering products.
Other Expenses, Net. Other expenses decreased $3.5 million, or 67.7%,
to $1.6 million for fiscal 2000 compared to $5.1 million in calendar 1999. The
improvement is primarily due to the absence of costs associated with the
manufacturing consolidation program that we executed in calendar 1999 and lower
management restructuring costs. In fiscal 2000, the improvements were partially
offset by a loss incurred on the sale of certain assets related to the
manufacturing and sale of watering products. For purposes of comparison, all
costs associated with management restructuring have been classified in other
expenses.
Loss from Continuing Operations Before Income Taxes. Loss from
continuing operations before income taxes decreased $6.6 million to a loss of
$13.9 million in fiscal 2000 compared to a loss of $20.5 million in calendar
1999. The decreased loss was primarily due to the items discussed above.
Net Loss. Net loss decreased $8.2 million, or 37.0%, to $14.0 million
for fiscal 2000 compared to $22.2 million in calendar 1999. Net loss per share
(basic and diluted) was $2.31 for fiscal 2000, based on a weighted average
number of shares outstanding of approximately 6.1 million, compared to net loss
per share of $3.60 (basic and diluted) for calendar 1999, based on a weighted
average number of shares outstanding of approximately 6.1 million.
TRANSITION 1999 COMPARED TO THE COMPARABLE PERIOD IN 1998
Net Sales. Net sales increased $1.0 million, or 2.7%, to $37.7 million
in transition 1999 compared to $36.7 million in the comparable period of 1998.
The increase in net sales was caused by higher gross sales of long handled
tools, partially offset by lower gross sales of molded products and an increase
in allowances and deductions. Strong customer demand, including gains from
reduction of order backlog, drove the increase in sales
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of long handled tools. The decrease in gross sales of molded products was
primarily due to the loss of one significant customer. The increase in
allowances and deductions was primarily a result of continued difficulties in
manufacturing and logistical control.
Gross Profit. Gross profit decreased 51.5%, or $4.2 million, to $4.0
million in transition 1999 compared to $8.2 million in the comparable period of
1998. Gross margin decreased to 10.6% in transition 1999 from 22.4% in the
comparable period of 1998. The declines in gross profit and margin were driven
primarily by several factors. Logistical and manufacturing control issues
identified in fiscal 1999 continued to negatively affect customer service levels
and related costs and higher distribution and freight expenses. Unfavorable
absorption variances were incurred due to lower production levels resulting from
difficulties related to the manufacturing consolidation and due to the timing of
expense recognition resulting from changing our fiscal year to a calendar year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.8 million to $9.0 million for transition
1999 compared to $8.2 million in the comparable period of 1998. As a percentage
of net sales, selling, general and administrative expenses increased to 23.8% in
transition 1999 from 22.3% in the comparable period of 1998. The increase was
due to investments in marketing related activities and information system
infrastructure and associate related expenses, including workers' compensation
and group benefit costs.
Operating Income (Loss). Operating income (gross profit less selling,
general and administrative expenses) decreased $5.0 million, to a loss of $5.0
million for transition 1999 from breakeven for the comparable period of 1998.
The decrease in operating income was primarily due to the items discussed above.
Interest Expense. Interest expense increased 57.6%, or $0.7 million, to
$1.9 million for transition 1999 compared to $1.2 million in the comparable
period of 1998. The increase in interest expense was due to higher debt levels
and interest rates, consistent with the change in terms resulting from the
amendment of our credit agreement, effective October 28, 1999.
Amortization of Goodwill. Amortization of goodwill remained flat at
$0.4 million in transition 1999 and in the comparable period of 1998.
Asset Impairment. An asset impairment charge of $2.8 million was
recognized in transition 1999 based on our review of the net realizable value on
certain long-lived assets. There was no asset impairment charge taken in the
comparable period of 1998.
Other Expenses, Net. Other net expenses including special charges
increased to $2.8 million in transition 1999 from $1.0 million in the comparable
period of 1998. The increase was due primarily to costs associated with our
manufacturing consolidation program and management restructuring costs offset by
the absence of acquisition related costs incurred in the comparable period of
1998. The cost of our manufacturing consolidation was higher than anticipated
due to inefficiencies in initial production, including training, scrap, and
machine repair costs.
Loss from Continuing Operations Before Income Taxes. Loss from
continuing operations before income taxes declined $10.3 million to a loss of
$12.9 million in transition 1999 compared to a loss of $2.6 million in the
comparable period of 1998. The increased loss was primarily due to the items
discussed above.
Net Loss. Net loss was $13.1 million in transition 1999 compared to a
loss of $2.3 million in the comparable period of 1998. Net loss per share (basic
and diluted) was $2.18 in transition 1999, based on a weighted average number of
shares outstanding of approximately 6.0 million, compared to net loss per share
of $0.35 (basic and diluted) in the comparable period of 1998, based on a
weighted average number of shares outstanding of approximately 6.5 million.
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales. Net sales increased $4.7 million, or 4.2% to $117.4 million
in fiscal 1999 compared to $112.7 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.
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Gross Profit. Gross profit declined $5.0 million to $20.3 million in
fiscal 1999 compared to $25.3 million in fiscal 1998. Gross profit as a
percentage of net sales decreased to 17.3% in fiscal 1999 compared to 22.4% 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, workers' 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 13.1%, or $2.6 million, to $22.6 million in
fiscal 1999 compared to $20.0 million in fiscal 1998. As a percentage of net
sales, selling, general and administrative expenses increased to 19.3% in fiscal
1999 from 17.8% in fiscal 1998. The increase in selling, general and
administrative expenses is primarily due to having a full year of costs related
to watering products and the write off of uncollectible accounts.
Operating Income (Loss). Operating income (gross profit less selling,
general and administrative expenses) decreased $7.6 million, or 145.5%, to a
loss of $2.4 million in fiscal 1999 compared to a profit of $5.2 million in
fiscal 1998. The decrease in operating income was primarily due to the items
discussed above.
Interest Expense. Interest expense increased $0.8 million, or 32.9%, to
$3.4 million in fiscal 1999 compared to $2.6 million in fiscal 1998. The
increase in interest expense was due to higher market rates (LIBOR) and
borrowing costs.
Amortization of Goodwill. Amortization of goodwill increased $0.2
million, or 18.5%, to $1.1 million in fiscal 1999 compared to $0.9 million in
fiscal 1998. The increase in amortization is due to the higher amount of
goodwill to be amortized during fiscal 1999.
Other Expenses, Net. Other expenses increased $3.0 million to $3.3
million in fiscal 1999 from $0.3 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
incurred approximately $0.6 million in fiscal 1999 related to management
restructuring costs. 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.
Income (Loss) from Continuing Operations Before Income Taxes. Income
from continuing operations before income taxes decreased $11.7 million to a loss
of $10.2 million in fiscal 1999 compared to a profit of $1.5 million in fiscal
1998. The decrease was primarily due to the items discussed above.
Net Income (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 $0.9 million in fiscal
1999 primarily reflects a workers' compensation accrual adjustment of $0.8
million for businesses previously sold. Net loss per share (basic and diluted)
was $1.79 for fiscal 1999, based on a weighted average number of shares
outstanding of approximately 6.3 million, compared to net income per share of
$0.20 (basic and diluted) for fiscal 1998, based on a weighted average number of
shares outstanding of approximately 6.5 million.
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 those months. 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 the last six
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19
months of the calendar year. 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.
Weather is the single most important factor in determining market
demand for our products and also is the least predictable. For example,
springtime flooding unfavorably affects the sale of most types of lawn and
garden equipment, while moderate to heavy snowfall during winters usually
results in a surge in demand for snow shovels. Bad weather during the spring
gardening season can adversely affect overall annual sales, but if the weather
is favorable during construction projects, such as new housing starts and
government spending on highways, this usually represents an increase in demand
for long handled tools.
The following table sets forth certain unaudited data for each of the
quarters in calendar 1999 and fiscal 2000. The financial data for each of these
quarters is unaudited but includes all adjustments which we believe to be
necessary for a fair presentation. All quarters include normal recurring
adjustments except for the second 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, 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.
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Calendar 1999
Quarter Ended (unaudited - in thousands)
------------------------------------------------------------------
4/4/99 7/4/99 10/3/99 12/31/99
--------------- --------------- --------------- ---------------
Net sales $38,489 $37,100 $21,088 $21,736
Cost of goods sold 28,776 34,383 19,895 19,322
--------------- --------------- --------------- ---------------
Gross profit 9,713 2,717 1,193 2,414
Selling, general and administrative 5,675 6,251 6,236 5,286
--------------- --------------- --------------- ---------------
expenses (SG&A)
Gross profit less SG&A(1)(2) $4,038 ($3,534) ($5,043) ($2,872)
=============== =============== =============== ===============
Net sales as a percentage of 32.5% 31.3% 17.8% 18.4%
full year net sales
Gross profit as a percentage of 60.6% 16.9% 7.4% 15.1%
full year gross profit
Fiscal 2000
Quarter Ended (unaudited - in thousands)
------------------------------------------------------------------
4/2/00 7/2/00 10/1/00 12/31/00
--------------- --------------- --------------- ---------------
Net sales $40,737 $35,170 $22,098 $18,586
Cost of goods sold 31,876 27,621 18,803 16,164
--------------- --------------- --------------- ---------------
Gross profit 8,861 7,549 3,295 2,422
Selling, general and administrative 5,986 5,784 5,688 4,594
--------------- --------------- --------------- ---------------
expenses (SG&A)
Gross profit less SG&A(1) $2,875 $1,765 ($2,393) ($2,172)
=============== =============== =============== ===============
Net sales as a percentage of 34.9% 30.2% 19.0% 15.9%
full year net sales
Gross profit as a percentage of 40.0% 34.1% 14.9% 11.0%
full year gross profit
(1) Does not include amortization of intangibles and other
expenses, each of which generally are non-seasonal in nature.
(2) Second quarter 1999 gross profit less SG&A would have been a
$1.2 million loss if you exclude the $7.4 million effect of
the unusual year-end charges described above.
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
our revolving credit facility (the "Credit Facility").
Net cash provided by continuing operations was $4.1 million in fiscal
2000 compared to net cash used in continuing operations of $4.0 million in
calendar 1999. The $8.1 million improvement in net cash provided by continuing
operations was due to a $7.3 million gain in net income, improved further by
higher non-cash charges taken in fiscal 2000. Improvements in accounts
receivable and inventory offset net unfavorable changes in pay-
20
21
ables and other liabilities. Lower accounts receivable and inventory levels were
the result of the discontinuation of the manufacture and sale of watering
products, as well as, the liquidation of excess and obsolete inventory. The
results were also favorably influenced by stronger collection efforts in
accounts receivable and by more effective forecasting and planning processes in
determining inventory needs.
Net cash used in continuing operations was $7.6 million in transition
1999 compared to net cash used in continuing operations of $2.1 million in the
comparable period of 1998. The $5.5 million increase in net cash used in
continuing operations was driven by a $10.9 million deterioration in net income,
partially offset by a $2.8 million non-cash asset impairment charge. The results
were also favorably impacted by relative improvements in working capital,
primarily due to a lower inventory build in transition 1999 compared to the
comparable period of 1998. We fell behind on production and customer
requirements due to the time and cost inefficiencies experienced as a result of
the manufacturing consolidation occurring during the transition 1999 time
period.
We made capital expenditures of approximately $1.5 million in fiscal
2000, $3.4 million in transition 1999, $4.9 million during fiscal 1999, and $2.9
million in fiscal 1998. The capital expenditures relate primarily to ongoing
improvements of property, plant and equipment, manufacturing process
improvements, and increased manufacturing capacity. Capital requirements were
lower during fiscal 2000 due to the activity level and expenditures made during
transition 1999 related to the manufacturing consolidation. In addition, the
discontinuation of the manufacture of watering products lowered investment
levels in fiscal 2000. In fiscal 2000, expenditures were made primarily at our
Frankfort, New York manufacturing facility and in strengthening our technology
platform. In transition 1999, the capital expenditures were focused on the
consolidation of our Columbus, Ohio manufacturing facility into the primary
facility in Frankfort. The $4.0 million in proceeds from the sale of assets is
the result of the sale of inventory, trademarks, and property and equipment
related to the manufacture and sale of watering products.
We utilize our Credit Facility to finance capital expenditures, fund
working capital, and other general business purposes. As of December 31, 2000,
approximately $3.4 million was available under the revolving portion of the
Credit Facility. Indebtedness outstanding bears interest at variable rates based
on LIBOR plus 3.5%.
We recognized that the restructuring of our operations and the
restoration to profitability, while significant, was not sufficient to support a
refinancing of the Credit Facility. To provide the time and resources necessary
to drive us forward, we are currently in negotiations to extend our existing
Credit Facility through April 30, 2002.
We continue to evaluate all non-strategic assets for purposes of sales,
particularly excess or obsolete inventory. Payment terms with both customers and
vendors have been impacted favorably, reducing our overall working capital
needs.
It is our belief that these actions, combined with the profit
improvements already made to the business and the expected extension of the
Credit Facility, will provide us with sufficient liquidity to allow us to move
through our operating cycle and to continue strengthening the profitability of
the business. However, if future financial results do not meet our expectations,
we will activate contingency plans, further reducing expenditures, and take
other actions to operate within the resources available.
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.
FORWARD-LOOKING STATEMENTS
Statements in the foregoing discussion that indicate our intentions,
hopes, beliefs, expectations, or predictions of the future are forward-looking
statements. It is important to note that our actual results could differ
21
22
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 those months. 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 the
last six months of the year. 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 52.6% of gross sales in fiscal 2000. 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 Sears and Home Depot.
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.
- 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.
22
23
- 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 United
States. 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 United States market, will not have a material
adverse effect on our business, financial condition, and
results of operations.
- Most of our hourly associates 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.
Current conditions and future events, such as changes in
existing laws and regulations, may, however, 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.
- We have been notified by Nasdaq that we do not currently meet
the Nasdaq SmallCap Market's continued listing requirements
and that our common stock will be delisted. We have appealed
this decision. There can be no assurance, however, that we
will be successful with such appeal.
- Our inability to successfully extend our Credit Facility
ongoing, or to extend the Credit Facility on terms and
conditions favorable to us, 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 release the results of any revisions which may be made to any
forward-looking statement to reflect events
23
24
or circumstances after the date on which such statement is made or to reflect
the occurrence of anticipated or un-anticipated events. New factors emerge from
time to time and it is not possible for us to predict all such factors, nor can
we 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 July 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-21 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
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the captions
"ELECTION OF DIRECTORS", "INFORMATION CONCERNING THE BOARD OF DIRECTORS,
EXECUTIVE OFFICERS, AND PRINCIPAL STOCKHOLDERS" and "SECTION 16(A) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" in our Proxy Statement relating to our 2001
Annual Meeting of Stockholders to be held on May 30, 2001 (the "2001 Annual
Meeting"), and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the
"INFORMATION CONCERNING THE BOARD OF DIRECTORS, EXECUTIVE OFFICERS, AND
PRINCIPAL STOCKHOLDERS" and "EXECUTIVE COMPENSATION" in our Proxy Statement
relating to our 2001 Annual Meeting and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the captions
"OWNERSHIP OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE
OFFICERS" in our Proxy Statement relating to our 2001 Annual Meeting and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the captions
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION" in our Proxy Statement relating to our
2001 Annual Meeting and is incorporated herein by reference.
25
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are filed with
this Annual Report on Form 10-K pursuant to Item 8:
- Report of Independent Auditors
- Consolidated Balance Sheets as of December 31, 1999 and December
31, 2000
- Consolidated Statements of Operations for fiscal 1998, fiscal
1999, five-month period ended January 3, 1999 (unaudited),
transition 1999, calendar 1999 (unaudited), and fiscal 2000
- Consolidated Statements of Stockholders' Equity for fiscal 1998,
fiscal 1999, transition 1999, and fiscal 2000
- Consolidated Statements of Cash Flows for fiscal 1998, fiscal
1999, five-month period ended January 3, 1999 (unaudited),
transition 1999, calendar 1999 (unaudited), and fiscal 2000
- Notes to Consolidated Financial Statements
(a)(2) The following financial statement schedules 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:
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***
10.1.1* Employment Severance Agreement, dated as of August 31, 1999,
among the Company, UnionTools, Inc., and J. Mitchell Dolloff
(reference is made to Exhibit 10.1.1 to Form 10-K for the year
ended July 30, 1999, filed with the Securities and Exchange
Commission on November 12, 1999)
10.1.2* Employment Severance Agreement, dated as of August 31, 1999,
among the Company, UnionTools, Inc., and A. Corydon Meyer
(reference is made to Exhibit 10.1.2 to Form 10-K for the year
ended July 30, 1999, filed with the Securities and Exchange
Commission on November 12, 1999)
10.1.3* Employment Severance Agreement, dated as of August 31, 1999
among the Company, UnionTools, Inc., and John G. Jacob
(reference is made to Exhibit 10.2.3 to Form 10-K
26
27
for the year ended July 30, 1999, filed with the Securities
and Exchange Commission on November 12, 1999)
10.2* Compensation Agreement, dated as of October 28, 1999, between
the Company and William W. Abbott (reference is made to
Exhibit 10.2 to Form 10-K for the year ended July 30, 1999,
filed with the Securities and Exchange Commission on November
12, 1999)
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***
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 December 14, 2000, between
UnionTools, Inc. and The Scotts 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, Inc. (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, Inc.
(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,
27
28
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)
21.1 Subsidiaries of the Company**
23.1 Consent of Ernst & Young LLP**
24.1 Power of Attorney**
- --------------
* Management contracts and compensatory plans.
** 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., P.O. Box 1930, Columbus, Ohio 43216-1930. 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
September 30, 2000:
Current Report on Form 8-K, dated March 13, 2001, filed with
the Securities Exchange Commission on March 14, 2001 (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)
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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 date indicated.
Principal Executive Officer:
By: * A. Corydon Meyer
----------------------------------------------
Name: A. Corydon Meyer
Title: President, Chief Executive Officer, and
Director
Principal Financial Officer:
By: /s/ John G. Jacob
----------------------------------------------
Name: John G. Jacob
Title: Vice President and Chief Financial
Officer
Principal Accounting Officer:
By: * Ted O'Flaherty
----------------------------------------------
Name: Ted O'Flaherty
Title: Chief Accounting Officer
Directors:
By: * William W. Abbott
----------------------------------------------
William W. Abbott, Chairman
By: * Matthew S. Barrett
----------------------------------------------
Matthew S. Barrett, Director
By: * John J. Kahl, Jr.
----------------------------------------------
John J. Kahl, Jr., Director
By: * Stephen A. Kaplan
----------------------------------------------
Stephen A. Kaplan, Director
By: * John L. Mariotti
----------------------------------------------
John L. Mariotti, Director
* By: /s/ John G. Jacob
----------------------------------------------
John G. Jacob, Attorney-in-fact
Dated: April 17, 2001
29
30
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 December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the fiscal years ended July 31, 1998, July 30, 1999, December
31, 2000, and for the five-month period ended December 31, 1999. Our audits also
included 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 December 31, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
fiscal years ended July 31, 1998, July 30, 1999, December 31, 2000, and for the
five-month period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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.
The accompanying financial statements have been prepared assuming that
Acorn Products, Inc. and Subsidiaries will continue as a going concern. As more
fully described in Note 12, the Company has incurred recurring operating losses,
its revolving credit facility expires on April 30, 2001, its acquisition term
loan matures on April 30, 2001, and its junior participation term loan note
matures on August 1, 2001. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 12. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
February 23, 2001
F-1
31
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
1999 2000
----------- ------------
ASSETS (In thousands)
Current assets:
Cash $ 1,326 $ 596
Accounts receivable, less reserves for doubtful accounts, sales 18,021 14,541
discounts, and other allowances ($2,140 and $2,125, respectively)
Inventories, less reserves for excess and obsolete inventory 33,168 24,488
($2,305 and $1,523, respectively)
Prepaids and other current assets 1,012 616
--------- ---------
Total current assets 53,527 40,241
Property, plant and equipment, net of accumulated depreciation 17,571 14,096
Goodwill, net of accumulated amortization 32,544 26,813
Other intangible assets 1,431 731
--------- ---------
Total assets $ 105,073 $ 81,881
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (average interest rate of 9.08% and 10.31%, $ 27,228 $ 19,787
respectively) (see Note 4)
Acquisition facility (average interest rate of 8.91% and 10.31%, 16,009 15,342
respectively) (see Note 4)
Junior participation term loan note (average interest rate of 12%) 6,000 6,707
(see Note 4)
Accounts payable 9,004 7,196
Accrued expenses 5,544 7,307
Income taxes payable 206 50
Other current liabilities 843 211
--------- ---------
Total current liabilities 64,834 56,600
Other long-term liabilities 3,275 2,971
--------- ---------
Total liabilities 68,109 59,571
Contingency (see Note 8)
STOCKHOLDERS' EQUITY
Common stock, par value of $.001 per share, 20,000,000 shares 78,262 78,262
authorized; 6,464,105 shares issued; and 6,046,680 and 6,062,159 shares
outstanding at December 31, 1999 and December 31, 2000, respectively
Contributed capital stock options 460 460
Accumulated other comprehensive loss (778) (1,551)
Retained earnings (deficit) (38,632) (52,600)
--------- ---------
39,312 24,571
Common stock in treasury, 417,425 and 401,946 shares at (2,348) (2,261)
--------- ---------
December 31, 1999 and December 31, 2000, respectively
Total stockholders' equity 36,964 22,310
--------- ---------
Total liabilities and stockholders' equity $ 105,073 $ 81,881
========= =========
See accompanying notes.
F-2
32
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended Five Months Ended Calendar (Fiscal) Year Ended
--------------------------- ---------------------------- -----------------------------
7/31/98 7/30/99 1/3/99 12/31/99 12/31/99 12/31/00
------------- ------------- ------------- ------------- ------------- --------------
(Unaudited) (Unaudited)
(In thousands, except share data)
Net sales $ 112,667 $ 117,431 $ 36,729 $ 37,711 $ 118,413 $ 116,591
Cost of goods sold 87,389 97,166 28,517 33,727 102,376 94,464
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 25,278 20,265 8,212 3,984 16,037 22,127
Selling, general and administrative 20,033 22,651 8,173 8,970 23,448 22,052
expenses
Interest expense 2,560 3,401 1,209 1,905 4,097 6,947
Amortization of intangibles 917 1,087 444 448 1,091 974
Asset impairment 0 0 0 2,800 2,800 4,402
Other expenses, net:
Watering products consolidation 0 355 0 0 355 0
Plant consolidation and 0 1,661 0 2,025 3,686 408
management restructuring
Strategic transactions 0 994 768 0 226 0
Loss on sale of assets 0 0 0 0 0 1,238
Miscellaneous 259 311 242 744 813 (6)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing 1,509 (10,195) (2,624) (12,908) (20,479) (13,888)
operations before income taxes
Income taxes (benefit) 230 145 (527) 83 755 80
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing 1,279 (10,340) (2,097) (12,991) (21,234) (13,968)
operations
Discontinued operations:
Loss from disposal 0 (936) (165) (150) (921) 0
----------- ----------- ----------- ----------- ----------- -----------
Loss from discontinued operations 0 (936) (165) (150) (921) 0
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 1,279 ($11,276) ($2,262) ($13,141) ($22,155) ($13,968)
=========== =========== =========== =========== =========== ===========
Basic and Diluted Earnings
per Share Data:
Income (loss) from continuing $ 0.20 ($1.64) ($0.32) ($2.16) ($3.45) ($2.31)
operations
Loss from discontinued operations 0.00 (0.15) (0.03) (0.02) (0.15) 0.00
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per share $ 0.20 ($1.79) ($0.35) ($2.18) ($3.60) ($2.31)
=========== =========== =========== =========== =========== ===========
Weighted average number of shares 6,464,105 6,313,527 6,464,105 6,023,174 6,146,617 6,057,360
outstanding (basic and diluted)
See accompanying notes.
F-3
33
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Contributed Accumulated
------------------------ Capital Other Retained
Number of Stock Comprehensive Earnings Treasury
Shares Amount Options Loss (Deficit) Stock Total
------------- ---------- -------------- ---------------- ------------ --------- ----------
(in thousands)
Balances at August 1, 1997 6,464,105 $ 78,391 $ 460 ($133) ($15,494) $ 0 $ 63,224
Net loss for the period August 2, 0 0 0 0 1,279 0 1,279
1997 through July 31, 1998
Adjustment to minimum 0 0 0 (152) 0 0 (152)
pension liability
Comprehensive income 0 0 0 0 0 0 1,127
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at July 31, 1998 6,464,105 78,391 460 (285) (14,215) 0 64,351
Net loss for the period August 1, 0 0 0 0 (11,276) 0 (11,276)
1998 through July 30, 1999
Adjustment to minimum 0 0 0 (397) 0 0 (397)
pension liability
Comprehensive loss 0 0 0 0 0 0 (11,673)
Purchase of treasury stock (442,400) 0 0 0 0 (2,488) (2,488)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at July 30, 1999 6,021,705 78,391 460 (682) (25,491) (2,488) 50,190
Net loss for the period July 31, 0 0 0 0 (13,141) 0 (13,141)
1999 through December 31, 1999
Adjustment to minimum 0 0 0 (96) 0 0 (96)
pension liability
Comprehensive loss 0 0 0 0 0 0 (13,237)
Issuance of treasury stock 24,975 (129) 0 0 0 140 11
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1999 6,046,680 78,262 460 (778) (38,632) (2,348) 36,964
Net loss for the period January 1, 0 0 0 0 (13,968) 0 (13,968)
2000 through December 31, 2000
Adjustment to minimum 0 0 0 (773) 0 0 (773)
pension liability
Comprehensive loss 0 0 0 0 0 0 (14,741)
Issuance of treasury stock 15,479 0 0 0 0 87 87
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 2000 6,062,159 $ 78,262 $ 460 ($1,551) ($52,600) ($2,261) $ 22,310
========== ========== ========== ========== ========== ========== ==========
See accompanying notes.
F-4
34
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended Five Months Ended Calendar (Fiscal) Year Ended
----------------------- ------------------------ -----------------------------
7/31/98 7/30/99 1/3/99 12/31/99 12/31/99 12/31/00
----------- ---------- ------------ ---------- -------------- --------------
(Unaudited) (Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,279 ($11,276) ($ 2,262) ($13,141) ($22,155) ($13,968)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) continuing operations:
Loss from discontinued operations 0 936 165 150 920 0
Loss on sale of assets 0 0 0 0 0 1,238
Depreciation and amortization 3,870 5,605 1,714 4,906 8,798 9,655
Reserves for doubtful accounts, sales
discounts, and other allowances 181 1,350 (97) (104) 1,343 (15)
Changes in operating assets and
liabilities:
Accounts receivable (4,572) 2,991 5,987 2,295 (701) 3,327
Inventories 151 (768) (7,849) (2,277) 4,804 5,441
Other assets 682 (495) 449 1,684 740 1,096
Accounts payable and accrued expenses (445) 4,449 224 (1,683) 2,708 (853)
Income taxes payable (307) 80 (43) 83 206 (156)
Other liabilities (1,072) (1,471) (388) 447 (636) (1,709)
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) continuing
operations (233) 1,401 (2,100) (7,640) (3,973) 4,056
Net cash used in discontinued operations 0 (42) (166) (728) (770) 0
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities (233) 1,359 (2,266) (8,368) (4,743) 4,056
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of net assets from acquisition, (9,911) 0 0 0 0 0
net of cash acquired
Purchases of property, plant and
equipment, net (2,882) (4,935) (2,155) (3,391) (6,171) (1,504)
Proceeds from sale of assets 0 0 0 828 828 4,032
Proceeds from disposal of discontinued
operations (625) 0 0 0 0 0
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities (13,418) (4,935) (2,155) (2,563) (5,343) 2,528
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on acquisition line 9,911 0 0 6,150 6,150 (667)
Borrowings on term loan 0 0 0 0 0 707
Net activity on revolving loan 3,471 6,046 4,729 4,874 6,191 (7,441)
Proceeds from issuance of treasury stock 0 0 0 11 11 87
Purchase of treasury stock 0 (2,488) 0 0 (2,488) 0
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities 13,382 3,558 4,729 11,035 9,864 (7,314)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash (269) (18) 308 104 (222) (730)
Cash at beginning of period 1,509 1,240 1,240 1,222 1,548 1,326
-------- -------- -------- -------- -------- --------
Cash at end of period $ 1,240 $ 1,222 $ 1,548 $ 1,326 $ 1,326 $ 596
======== ======== ======== ======== ======== ========
Interest paid $ 2,338 $ 3,292 $ 1,207 $ 1,554 $ 3,180 $ 4,904
======== ======== ======== ======== ======== ========
See accompanying notes.
F-5
35
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
collectively "we", "us", "our", "Company") is a leading designer, manufacturer,
and marketer of branded non-powered lawn and garden tools in the United States.
Our principal products include long handle tools (such as shovels, forks, rakes
and hoes), snow tools, posthole diggers, wheeled goods (such as wheelbarrows and
hand carts), striking tools, cutting tools, hand tools, and repair handles. We
sell our products under a variety of well-known brand names and through a
variety of distribution channels. In addition, we manufacture private label
products for a variety of retailers. Acorn is a holding company with no business
operations of its own.
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, our operating results depend significantly on the spring selling season.
To support this sales peak, we must 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 the fall and winter.
Weather is the most significant factor in determining market demand for
our products and is inherently unpredictable. Fluctuations in weather can be
favorable or unfavorable for the sale of lawn and garden equipment.
Our top two customers are Sears and Home Depot. Each of these customers
accounted for over 10% of gross sales during fiscal 1998, fiscal 1999,
transition 1999, and fiscal 2000. Our ten largest customers accounted for
approximately 52.9% of gross sales during calendar 1999 and 52.6% of gross sales
during fiscal 2000.
Our products require the supply of raw materials consisting primarily
of steel, plastics, and ash wood. We have several suppliers for most of our raw
materials.
2. SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
On October 29, 1999, the Board of Directors of Acorn approved a change
in the fiscal year end to December 31 and a change in the interim quarterly
reporting periods to the period ending on the Sunday closest to the last day of
each calendar quarter. Prior to the change, our fiscal year was comprised of the
52 or 53 weeks ending on the Friday closest to July 31 of each year and interim
quarterly reporting periods ended on the Friday closest to the last day of each
fiscal quarter. Unless otherwise stated, references to fiscal 1998 relates to
the fiscal year ended July 31, 1998, fiscal 1999 relates to the fiscal year
ended July 30, 1999, and fiscal 2000 relates to the fiscal year ended December
31, 2000.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Acorn and its subsidiaries, McGuire-Nicholas Company, Inc.
("McGuire-Nicholas") and UnionTools, Inc. (and its subsidiaries Hawthorne Tools,
Inc. and Pinetree Tools, Inc.). All inter-company accounts and transactions have
been eliminated. See Note 3 - Discontinued Operations regarding the disposal of
McGuire-Nicholas and Note 11 - Other Expenses regarding the disposal of certain
assets related to Hawthorne Tools, Inc. and Pinetree Tools, Inc.
REVENUES
We recognize revenue from product sales when title passes to the
customer.
SHIPPING AND HANDLING COSTS
F-6
36
Late in 2000, the Emerging Issues Task Force ("EITF") issued EITF
00-10, "Accounting for Shipping and Handling Fees and Costs". The EITF requires
that amounts for shipping and handling billed to customers be reported as a
component of sales while the related costs be reported as an expense. Prior to
the issuance of the EITF, we offset freight charged to customers against freight
paid to third-party shippers in computing net sales. We complied with the
classification guidelines of the EITF in 2000. The Consolidated Statements of
Operations for all periods presented have been adjusted to reclassify freight
paid to third-party shippers from net sales to cost of goods sold.
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:
12/31/99 12/31/00
------------- -------------
(In thousands)
Finished goods $15,967 $11,349
Work in process 8,250 6,652
Raw materials and supplies 8,951 6,487
------------ ------------
Total inventories $33,168 $24,488
============ ============
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:
12/31/99 12/31/00
------------- -------------
(In thousands)
Land $1,306 $1,280
Buildings and improvements 4,693 6,498
Machinery and equipment 24,291 21,244
Furniture and fixtures 3,095 3,509
------------ ------------
33,385 32,531
Accumulated depreciation and amortization (16,533) (19,652)
------------ ------------
Property, plant and equipment, net 16,852 12,879
Construction in process 719 1,217
------------ ------------
$17,571 $14,096
============ ============
Depreciation expense was approximately $4.3 million in fiscal 2000,
$1.7 million in transition 1999, $4.5 million in fiscal 1999, and $2.9 million
in fiscal 1998. In fiscal 1999, we recorded approximately $1.2 million in
additional depreciation related to the write-down of equipment and tooling
associated with a discontinued product.
GOODWILL
F-7
37
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 approximately $14.0 million at
December 31, 2000 and $8.3 million at December 31, 1999. Periodically, we assess
the recoverability of our goodwill and other long-lived assets based upon an
evaluation of factors such as a significant adverse event or a change in the
environment in which the business operates. For goodwill identified with
impaired assets, we evaluate whether the expected undiscounted future cash flows
are less than the carrying value of the asset. We use a market value approach
for assessing the recoverability of enterprise level goodwill. An impairment
loss is recorded in the period such determination is made. We recorded
approximately $4.4 million in fiscal 2000 and $2.8 million in transition 1999 in
additional expense related to the impairment write-down of goodwill associated
with our watering products.
INCOME TAXES
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 9 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 us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
fiscal 2000 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. In accordance with SFAS No. 131, we operate in one
reportable segment.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), as amended, which is required to be adopted in years beginning after
June 15, 2000. Because we did not have any derivatives at December 31, 2000, we
do not anticipate that the adoption of the new Statement will have any effect on
our earnings or our financial position.
3. DISCONTINUED OPERATIONS
In January 1997, we 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, we provided for an estimated loss on the disposal of
McGuire-Nicholas of $9.9 million. We recognized additional charges of
approximately $0.2 in transition 1999 and $0.9 million in fiscal 1999 relating
to tax and workers' compensation claims which have been classified as loss from
discontinued operations.
F-8
38
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 provided 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 Facility"). Available borrowings under the Revolving Facility are
based on specified percentages of accounts receivable and inventory.
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. The Amended Facility provides for a $40
million revolving credit facility from January 1 through July 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 Facility 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 December 31, 2000 was 9.5%) or,
at UnionTools' option, the LIBOR rate plus a margin of 3.5% (LIBOR rate at
December 31, 2000 was 6.81%). 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 occurred on or before April
30, 2000) to a maximum of 3.0% (if repayment occurs after January 31, 2001). At
December 31, 2000, the facility had not been repaid.
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 December 31, 2000, UnionTools had $3.4 million in
available borrowings under the Amended Facility.
On October 28, 1999, in connection with the Amended Facility,
UnionTools also issued a $6.0 million junior participation term loan note (the
"Note") bearing interest at 12% 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 Note 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. The number of shares received will be equal to the sum of the unpaid
principal and unpaid interest through the 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 our majority stockholder. 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 Credit Facility contains certain covenants, which, among other
things, requires UnionTools to maintain specified financial ratios and places
limits on future capital expenditures by UnionTools. The Credit Facility also
F-9
39
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 December 31, 2000, we were in compliance with these covenants.
The fair value of our long-term debt approximates the carrying amount
at December 31, 2000.
5. STOCKHOLDERS' EQUITY
TREASURY STOCK
During fiscal 1999, we repurchased 442,400 shares of common stock at a
cost of $2,488,000.
STOCK OPTIONS
During fiscal 1997, we adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the provisions of SFAS 123, we have elected to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for our employee and
nonemployee director stock options and, accordingly, do not recognize
compensation costs when the exercise price of such stock options is equal to or
greater than the fair market value of the stock at the grant date.
Pursuant to employment agreements, certain executive officers 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.
Vested options to purchase 21,690 shares of common stock (with an exercise price
of $0.01 per share relating to 15,906 and $12.10 per share relating to 5,784
shares) were outstanding at December 31, 1999 and 2000. These vested options
expire in December 2003.
In April 1997, we adopted the 1997 Stock Incentive Plan (the "Incentive
Plan") for executives and certain other associates of the Company. The purpose
of the Incentive Plan is to provide incentives to associates by granting awards
tied to the performance of the common stock. Awards to associates may take the
form of options, stock appreciation rights, or sales or grants of restricted
stock. We have reserved an aggregate of 1,000,000 shares of common stock for
issuance under the Incentive Plan. At December 31, 2000, we granted options to
purchase an aggregate of 729,450 shares under the Incentive Plan, at a weighted
average exercise price of $2.63 per share.
In January 1998, we adopted the 1997 Nonemployee Director Stock
Incentive Plan (the "Nonemployee Director Incentive Plan") for nonemployee
directors of Acorn. The purpose of the Nonemployee Director Incentive Plan is to
enable us to attract and retain nonemployee directors by granting awards tied to
the performance of the common stock. Awards to directors may take the form of
options, stock appreciation rights, or sales or grants of restricted stock. We
have reserved an aggregate of 500,000 shares of common stock for issuance under
the Nonemployee Director Incentive Plan. At December 31, 2000, we granted
options to purchase an aggregate of 147,432 shares of stock under the
Nonemployee Director Incentive Plan, at a weighted average exercise price of
$3.62 per share.
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 we have accounted for our incentive stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS No. 123. The weighted
average fair value of options granted during 2000 is $1.00.
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 2000: (i) a risk-free interest rate of 6.2%; (ii) no
dividend yield; (iii) a volatility factor of the expected market price of our
common stock of 0.803; and (iv) a weighted average expected life of each option
of 10 years.
If we had elected to recognize compensation expense based upon the fair
value of options at the grant date as
F-10
40
prescribed by SFAS No. 123, reported net income (loss) applicable to common
stock and per share amounts would have been as follows:
Fiscal Year
---------------------------------------- Five Months Ended
1998 1999 2000 December 31, 1999
------------ ------------ ------------ -----------------
Net income (loss) applicable to common stock $43 ($11,974) ($14,442) ($12,109)
(in thousands)
Net income (loss) applicable to common stock
per share $0.01 ($1.90) ($2.38) ($2.01)
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
41
The following table summarizes the stock option activity:
Number Weighted Average
of Shares Exercise Price
--------- ----------------
1997 STOCK INCENTIVE PLAN
Outstanding at August 1, 1997 329,100 $ 14.00
Granted 0
Exercised 0
Expired/terminated 0
--------
Outstanding at July 31, 1998 329,100 14.00
Granted 62,795 5.75
Exercised 0
Expired/terminated (20,300) 14.00
--------
Outstanding at July 30, 1999 371,595 12.61
Granted 264,612 3.61
Exercised 0
Expired/terminated (286,905) 12.64
--------
Outstanding at December 31, 1999 349,302 5.76
Granted 642,189 1.57
Exercised 0
Expired/terminated (262,041) 4.19
--------
Outstanding at December 31, 2000 729,450 $ 2.63
========
1997 NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
Outstanding at August 1, 1997 0
Granted 18,630 $ 10.25
Exercised 0
Expired/terminated 0
--------
Outstanding at July 31, 1998 18,630 10.25
Granted 28,800 6.70
Exercised 0
Expired/terminated 0
--------
Outstanding at July 30, 1999 47,430 8.09
Granted 0
Exercised 0
Expired/terminated 0
--------
Outstanding at December 31, 1999 47,430 8.09
Granted 100,002 1.50
Exercised 0
Expired/terminated 0
--------
Outstanding at December 31, 2000 147,432 $ 3.62
========
F-12
42
Number Weighted Average
of Shares Exercise Price
--------- ----------------
OTHER STOCK OPTIONS
Outstanding at August 1, 1997 39,042 $ 1.79
Granted 0
Exercised 0
Expired/terminated 0
-------
Outstanding at July 31, 1998 39,042 1.79
Granted 0
Exercised 0
Expired/terminated 0
-------
Outstanding at July 30, 1999 39,042 1.79
Granted 0
Exercised (17,352) 0.01
Expired/terminated 0
-------
Outstanding at December 31, 1999 21,690 3.23
Granted 0
Exercised 0
Expired/terminated 0
-------
Outstanding at December 31, 2000 21,690 $ 3.23
=======
The following table summarizes information regarding stock options
outstanding at December 31, 2000.
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
- -------------------- ------------- ----------------- -------------- ------------- --------------
$0.01 to $3.00 773,247 9.47 $1.55 679,309 $1.53
$3.01 to $6.00 15,211 8.67 $4.81 15,211 $4.81
$6.01 to $9.00 28,800 8.08 $6.70 28,800 $6.70
$9.01 to $12.00 18,630 7.08 $10.25 18,630 $10.25
$12.01 to $14.00 62,684 6.18 $13.82 62,684 $13.82
In fiscal 2000, we changed the exercise price of certain options issued
under the 1997 Stock Incentive Plan as follows: 16,901 options repriced from
$4.81 to $2.25 per share; 83,099 options repriced from $3.88 to $2.25 per share;
and 100,000 options repriced from $3.00 to $1.25 per share.
DIRECTOR STOCK PLAN
In April 1997, we 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 of nonemployee members of the Board of
Directors of Acorn, thereby increasing their incentive to contribute to our
success. Only nonemployee 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. The Board of Directors approved an
amendment to the Director Stock Plan on March 26, 2001, to increase the number
of shares available for issuance under the Director Stock Plan to 200,000. The
amendment will be voted upon by the stockholders at the Annual Meeting of
Stockholders to be held on
F-13
43
May 30, 2001. In lieu of cash, directors can elect to receive all or one-half of
their fees in the form of shares of common stock. The number of shares of common
stock issued is determined by dividing (i) an amount equal to the dollar amount
of the fees to be received in the form of shares of common stock by (ii) the
average of the high and low sale prices of the common stock on the Nasdaq
SmallCap 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 shares of common stock. Shares of common
stock are distributed in the form of common stock following the director's
resignation from the Board of Directors. In addition, shares of common stock 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.
26,684 shares of common stock had been awarded as of December 31, 1999 and
73,688 shares of common stock had been awarded as of December 31, 2000, under
the Director Stock Plan representing an equal number of shares of common stock
to be issued in the future.
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 deferred tax assets and liabilities are as follows:
12/31/99 12/31/00
-------- ---------
(in thousands)
Deferred tax assets:
Inventory $ 893 $ 610
Accrued expenses and other 3,117 3,324
Net operating loss carryforwards 23,202 29,344
Capital loss carryforward 2,584 2,584
-------- --------
Total deferred tax assets 29,796 35,862
Valuation allowance for deferred tax assets (25,533) (31,342)
-------- --------
Deferred tax assets 4,263 4,520
Deferred tax liabilities:
Goodwill 3,223 3,271
Depreciation and other 1,040 1,249
-------- --------
Total deferred tax liabilities 4,263 4,520
-------- --------
Net deferred tax assets $ 0 $ 0
======== ========
Based on our history of operating losses and in accordance with SFAS No. 109, we
recorded a 100% valuation allowance resulting in no deferred tax assets being
recognized.
At December 31, 2000, we had a net operating loss carryforward of $70.4
million for income tax purposes that expire in the years 2009 through 2020 and
capital loss carryforward of $6.2 million for income tax purposes that expire in
2002 through 2003.
The provision for income taxes is comprised of the following:
Fiscal Year
-------------------------------------------------- Five Months Ended
1998 1999 2000 December 31, 1999
-------------- -------------- -------------- -----------------
Current - Federal $ 40 $ 0 $ 0 $ 0
Current - State 190 145 80 83
---- ---- ---- ----
$230 $145 $ 80 $ 83
==== ==== ==== ====
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 carryforward eliminate book taxable
F-14
44
income. However, in fiscal 1998 we 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
United States 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.
7. PENSION AND POST-RETIREMENT BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS
UnionTools maintains multiple defined benefit pension plans that cover
substantially all associates. Benefits paid under the defined benefit plans are
generally based either on years of service and the associate's compensation in
recent years of employment or years of service multiplied by contractual
amounts. Our funding policy for all plans is to fund at least the minimum amount
required by ERISA. Activity related to the pension plans is as follows:
F-15
45
Five Months
Fiscal Year Ended
------------------------------------- December
1998 1999 2000 31, 1999
----------- ---------- ----------- ------------
(In thousands)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning of year $ 14,045 $ 15,798 $ 16,873 $ 16,688
Service cost 662 689 311 265
Interest cost 1,149 1,200 1,323 523
Actuarial losses/(gains) 1,156 3 1,330 (67)
Plan amendments 0 63 (192) 29
Benefits paid (1,214) (1,065) (1,261) (565)
-------- -------- -------- --------
Benefit obligations at end of period $ 15,798 $ 16,688 $ 18,384 $ 16,873
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period $ 13,471 $ 14,624 $ 17,482 $ 17,102
Actual return on plan assets 1,254 1,345 1,859 218
Company contributions 1,113 2,198 1,860 727
Benefits paid (1,214) (1,065) (1,261) (565)
-------- -------- -------- --------
Fair value of plan assets at end of period $ 14,624 $ 17,102 $ 19,940 $ 17,482
======== ======== ======== ========
Funded status of the plans (under-funded) ($ 1,174) $ 414 $ 1,549 $ 609
Unrecognized net actuarial losses/(gains) 1,884 1,817 2,867 2,136
Minimum pension liability (1,202) (1,614) (2,386) (1,665)
Unamortized prior service cost 577 618 523 568
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 85 $ 1,235 $ 2,553 $ 1,648
======== ======== ======== ========
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate 8.00% 8.00% 7.50% 8.00%
Expected return on plan assets 8.75% 8.75% 8.75% 8.75%
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 662 $ 689 $ 311 $ 265
Interest cost 1,149 1,200 1,323 523
Actual return on plan assets (1,254) (1,345) (1,859) (218)
Amortization of prior service cost 16 21 44 21
Recognized net actuarial losses/(gains) 77 71 367 (387)
Effects of changes in assumption 0 0 0 58
-------- -------- -------- --------
Net periodic benefit cost $ 650 $ 636 $ 186 $ 262
======== ======== ======== ========
The following is a summary of aggregate prepaid benefit costs and
aggregate accrued benefit costs:
12/31/1999 12/31/2000
---------- ----------
(In thousands)
Aggregate prepaid benefit cost $ 2,787 $ 3,442
Aggregate accrued benefit cost (1,139) (889)
------- -------
Net prepaid benefit cost $ 1,648 $ 2,553
======= =======
F-16
46
We have individual defined benefit pension plans that 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:
12/31/1999 12/31/2000
---------- ----------
(In thousands)
Aggregate accumulated benefit obligations $7,021 $8,214
Aggregate projected benefit obligations 7,021 8,214
Aggregate fair value of plan assets 5,872 7,323
POST-RETIREMENT BENEFIT PLANS
We also sponsor an unfunded defined benefit health care plan that
provides post-retirement medical and life insurance benefits to associates 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. Activity related to the plan is as follows:
F-17
47
Five Months
Fiscal Year Ended
---------------------------------- December
1998 1999 2000 31, 1999
---------- -------- ---------- ---------------
(In thousands)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning of year $ 3,783 $ 2,902 $ 2,292 $ 2,404
Service cost 17 19 2 8
Interest cost 197 185 188 85
Participant contributions 0 85 230 35
Actuarial losses/(gains) (406) 0 815 0
Benefits paid (689) (787) (815) (240)
------- ------- ------- -------
Benefit obligations at end of period $ 2,902 $ 2,404 $ 2,712 $ 2,292
======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period $ 0 $ 0 $ 0 $ 0
Company contributions 689 702 585 205
Participant contributions 0 85 230 35
Benefits paid (689) (787) (815) (240)
------- ------- ------- -------
Fair value of plan assets at end of period $ 0 $ 0 $ 0 $ 0
======= ======= ======= =======
Funded status of the plans (under-funded) ($2,902) ($2,404) ($2,712) ($2,292)
Unrecognized net actuarial losses/(gains) (940) (864) 4 (833)
------- ------- ------- -------
Prepaid (accrued) benefit cost ($3,842) ($3,268) ($2,708) ($3,125)
======= ======= ======= =======
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate 7.50% 6.75% 7.50% 6.75%
Expected return on plan assets N/A N/A N/A N/A
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 17 $ 19 $ 2 $ 19
Interest cost 197 185 188 185
Actual return on plan assets 0 0 0 0
Amortization of prior service cost 0 0 0 0
Recognized net actuarial losses/(gains) (178) (76) (22) (76)
Effects of changes in assumption 0 0 0 0
------- ------- ------- -------
Net periodic benefit cost $ 36 $ 128 $ 168 $ 128
======= ======= ======= =======
The weighted average health care cost trend rate for fiscal 2001 is
6.0% and is assumed to remain at that level thereafter. The weighted average
health care cost trend rate for fiscal 2000 was 5.5%. A one percentage point
change in the assumed health care cost trend rate would have the following
effects on post retirement benefit obligations:
One Percentage One Percentage
Point Increase Point Decrease
------------------ -----------------
(In thousands)
Effect on total of service and interest cost components in fiscal 2000 $ 2 ($2)
Effect on total of post-retirement benefit obligation in fiscal 2000 $27 ($33)
F-18
48
In February 2001, UnionTools, acting in its capacity as the plan
sponsor and policy holder, notified certain of its associates, retirees, and
collective bargaining units (IBB, IBT, and IAM) of its intention or desire to
eliminate retiree medical and life benefits. The amended change in the
post-retirement benefit plans is anticipated to be effective in the second
quarter of 2001. We have not assessed the impact of this amendment on our
financial position. While this action may be disputed, UnionTools has reserved
the right to modify or terminate these benefits within the context of each plan
document.
DEFINED CONTRIBUTION 401(K) PLAN
We sponsor defined contribution 401(k) plans covering all associates.
Our matching contribution varies by plan and amounted to approximately $362,000
in fiscal 2000, $154,000 in transition 1999, $310,000 in fiscal 1999, and
$293,000 in fiscal 1998.
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 United States and Canada an extensive line of lawn
and garden tools under the Scotts(R) brand name. Under the agreement, UnionTools
must pay certain minimum royalty amounts annually.
Rent expense under operating leases was $2.3 million in fiscal 2000,
$1.2 million in transition 1999, $2.0 million in fiscal 1999, and $1.6 million
in fiscal 1998.
The minimum annual payments under non-cancelable operating leases and
the Scotts license agreement at December 31, 2000 are as follows:
Year Amount
------------ -----------------
2001 $2,071,000
2002 609,000
2003 349,000
2004 226,000
2005 55,000
Thereafter 22,000
LITIGATION
From time to time, we are a party to personal injury litigation arising
out of incidents involving the use of our products purchased by consumers from
retailers to whom we distribute. We are generally covered by insurance for these
product liability claims.
In April 1999, an inactive 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. Plaintiffs' initial settlement demand to Midwest is $26
million. We have contacted our insurance carriers with respect to this matter
and have obtained acknowledgment of coverage under a primary policy which
provides limits of $1 million per occurrence subject to an aggregate limit of $2
million. We have also obtained acknowledgement of coverage with respect to an
umbrella policy with a limit of liability of $25 million excess of the primary
policy. We have not yet received acknowledgment of coverage with respect to a
secondary policy with limit of liability of $5 million excess of the umbrella
policy. We believe that any compensatory damages, if awarded, will be covered by
insurance.
F-19
49
COLLECTIVE BARGAINING AGREEMENTS
The majority of our hourly associates are covered by collective
bargaining agreements, including those at the primary manufacturing facility in
Frankfort, New York, as well as those at the Columbus, Ohio distribution center.
The collective bargaining agreement covering the Frankfort hourly associates
expires in 2001, while the collective bargaining agreement covering the Columbus
hourly associates expires in 2002. We have not been subject to a strike or work
stoppage in over 20 years and believe that our relationships with our associates
and applicable unions 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.
AGREEMENTS WITH KEY EXECUTIVES
We entered into agreements with certain of our executive officers
providing for, under certain circumstances, payments from us following the
termination of such executives' employment with us or following a change in
control of the Company (as defined therein).
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and dilutive
earnings per share:
Five Months
Fiscal Year Ended
-------------------------------------------- December
1998 1999 2000 31, 1999
------------- ------------- ------------- -------------
NUMERATOR
Net income (loss) $ 1,279,000 ($11,276,000) ($13,968,000) ($13,141,000)
============ ============ ============ ============
DENOMINATOR
Denominator for basic earnings per share 6,464,105 6,313,527 6,057,360 6,023,174
- weighted average shares
Effect of dilutive securities:
1997 Stock Incentive Plan 0 0 0 0
1997 Nonemployee Director Stock 1,132 0 0 0
Incentive Plan
Deferred Equity Compensation 12,263 0 0 0
Plan for Directors
Other stock options 33,258 0 0 0
------------ ------------ ------------ ------------
Dilutive potential common shares 46,653 0 0 0
------------ ------------ ------------ ------------
Denominator for diluted earnings per share 6,510,758 6,313,527 6,057,360 6,023,174
============ ============ ============ ============
- weighted average shares and assumed
conversions
Basic earnings (loss) per share $ 0.20 ($1.79) ($2.31) ($2.18)
============ ============ ============ ============
Diluted earnings (loss) per share $ 0.20 ($1.79) ($2.31) ($2.18)
============ ============ ============ ============
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
F-20
50
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.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain financial data for each quarter
of calendar 1999 and fiscal 2000. The financial data for each of these quarters
is unaudited but includes all adjustments which we believe to be necessary for a
fair presentation. All quarters include normal recurring adjustments except for
the third quarter of fiscal 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 Income
(Loss) Continuing (Loss)
from Operations from Net
Net Gross Continuing Per Share Discontinued Income
Sales Profit Operations (Diluted) Operations (Loss)
----------- ---------- ------------- ---------------- -------------- -----------
(In thousands, except for per share data)
1999
First quarter $ 38,489 $ 9,713 $ 1,846 $ 0.29 $ 0 $ 1,846
Second quarter 37,100 2,717 (5,591) (0.92) (758) (6,349)
Third quarter 21,088 1,193 (8,585) (1.42) (12) (8,597)
Fourth quarter 21,736 2,414 (8,904) (1.40) (151) (9,055)
---------- --------- ------------ ------------ ----------- ---------
$ 118,413 $ 16,037 $ (21,234) $ (3.45) $ (921) $ (22,155)
========== ========= ============ ============ =========== =========
2000
First quarter $ 40,737 $ 8,861 $653 $0.11 $0 $653
Second quarter 35,170 7,549 (4,978) (0.82) 0 (4,978)
Third quarter 22,098 3,295 (5,692) (0.94) 0 (5,692)
Fourth quarter 18,586 2,422 (3,951) (0.66) 0 (3,951)
---------- --------- ------------ ------------ ----------- ---------
$ 116,591 $ 22,127 ($13,968) ($2.31) $0 ($13,968)
========== ========= ============ ============ =========== =========
11. OTHER EXPENSES
In January 1999, we incurred expenses of $355,000 in consolidating our
watering products business into a single facility. We incurred expenses for
legal, accounting, consulting, and other expenses of $994,000 in fiscal 1999
related to certain strategic transactions.
In March 1999, we announced that we would consolidate our Columbus,
Ohio manufacturing facility into our primary manufacturing facility in
Frankfort, New York. The Columbus manufacturing facility continued to operate
through August 1999, at which time operations ceased. Costs incurred as it
related to this consolidation totaled $787,000 in transition 1999 and $993,000
in fiscal 1999. During fiscal 1999, we commenced a restructuring of our
executive management team, whereby certain key executives were replaced. Costs
incurred as it related to this initiative totaled $408,000 in fiscal 2000,
$1,238,000 in transition 1999, and $668,000 in fiscal 1999.
In fiscal 2000, we sold certain assets related to our watering
products. Total proceeds received in connection with the sale of these assets
were approximately $4 million and we recognized a loss on disposal of
approximately $1.2 million.
F-21
51
12. COMPANY OPERATIONS
Our 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. We have incurred net losses for
the last three reporting periods, our revolving Credit Facility expires on April
30, 2001, our Acquisition Facility matures on April 30, 2001, and our Junior
Participation Term Loan Note matures on August 1, 2001. We have been
substantially dependent upon borrowings under our credit arrangements.
We believe the operating losses have been largely due to operational
control issues related to the consolidation of our manufacturing facilities,
unfavorable customer and vendor terms, and large non-recurring adjustments.
Our primary cash needs are for working capital, capital expenditures,
and debt service. We continue to finance these needs through internally
generated cash flow and funds borrowed under the Credit Facility. We are
currently in negotiations to extend our existing Credit Facility through April
30, 2002. In addition, in fiscal 2000, we sold substantially all the assets
related to our watering products. Total proceeds received in connection with the
sale of these assets were approximately $4 million.
During fiscal 2000, we focused substantial effort on identifying
opportunities to reduce operating costs, including outsourcing certain
manufacturing and administrative functions, consolidating distribution
facilities, and re-negotiating customer and vendor terms.
We will take actions to generate cash from sources other than
operations and the potential extension of our Credit Facility. We continue to
evaluate opportunities to reduce borrowing costs, including the potential to
refinance if financial performance improves. We will also continue to evaluate
all non-strategic assets for purposes of sale, particularly the liquidation of
excess or obsolete inventory.
13. RELATED PARTY TRANSACTIONS
We received certain professional services from the firm in which
Acorn's former Chairman of the Board of Directors is a Partner. We paid
approximately $221,000 in transition 1999 and $762,000 in fiscal 1999 for these
services. At December 31, 1999, we had a payable of approximately $22,000
related to these services. We had no related party transactions in fiscal 2000.
F-22
52
ACORN PRODUCTS, INC.
(PARENT COMPANY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
December 31,
----------------------------------
1999 2000
--------------- --------------
(In thousands)
ASSETS
Cash $0 $102
Accounts receivable 0 0
Prepaid and other assets 414 150
--------------- --------------
Total current assets 414 252
Property, plant and equipment, net 0 0
Goodwill 6,186 6,003
Other assets (principally investment in and 32,407 17,273
--------------- --------------
amounts due from wholly-owned subsidiaries)
Total assets $39,007 $23,528
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $1,148 $1,168
Income taxes payable 60 0
Other current liabilities 685 50
--------------- --------------
Total current liabilities 1,893 1,218
Long-term debt 150 0
--------------- --------------
Total liabilities 2,043 1,218
Stockholders' equity:
Common stock 78,262 78,262
Contributed capital - stock options 460 460
Minimum pension liability (778) (1,551)
Retained earnings (deficit) (38,632) (52,600)
--------------- --------------
39,312 24,571
Common stock in treasury (2,348) (2,261)
--------------- --------------
Total stockholders' equity 36,964 22,310
--------------- --------------
Total liabilities and stockholders' equity $39,007 $23,528
=============== ==============
See accompanying notes.
S-1
53
ACORN PRODUCTS, INC.
(PARENT COMPANY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year
--------------------------------------------- Five Months Ended
1998 1999 2000 December 31, 1999
------------ ----------- ------------ ---------------------
(In thousands)
Selling and administrative expenses $2,625 $3,973 $2,756 $759
Interest expense 83 16 194 0
Amortization of goodwill 183 183 175 76
Other expenses (54) 1,075 80 1,844
------------ ----------- ------------ ---------------------
Loss before equity in earnings and (2,837) (5,247) (3,205) (2,679)
losses of subsidiaries
Equity in earnings (loss) of wholly- 4,346 (6,029) (10,763) (10,462)
owned subsidiaries
Income taxes (230) 0 0 0
------------ ----------- ------------ ---------------------
Net income (loss) $1,279 ($11,276) ($13,968) ($13,141)
============ =========== ============ =====================
See accompanying notes.
S-2
54
ACORN PRODUCTS, INC.
(PARENT COMPANY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Fiscal Year
------------------------------------------ Five Months Ended
1998 1999 2000 December 31, 1999
------------ ------------ ------------ ---------------------
(In thousands)
Net cash from operating activities $390 $2,488 $15 ($87)
INVESTING ACTIVITIES:
Property and equipment 0 0 0 0
FINANCING ACTIVITIES:
Net activity on revolving loan 0 0 0 0
Redemption of subordinated debt 0 0 0 0
Issuance of common stock 0 0 0 0
Issuance (purchase) of treasury stock 0 (2,488) 87 11
Retirement of preferred stock 0 0 0 0
------------ ------------ ------------ ---------------------
0 (2,488) 87 11
------------ ------------ ------------ ---------------------
Increase (decrease) in cash $390 $0 $102 ($76)
============ ============ ============ =====================
See accompanying notes.
S-3
55
ACORN PRODUCTS, INC.
(PARENT COMPANY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the parent company-only financial statements, Acorn's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries. Acorn'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
Acorn is a guarantor of the Credit Facility of UnionTools, Inc., a
wholly-owned subsidiary. Cash utilized by Acorn is provided through
inter-company borrowings and is subject to certain restrictions. See Note 4 to
the Company's Consolidated Financial Statements.
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56
UNIONTOOLS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2000
Additions
------------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
- ---------------------------------------- --------------- --------------- ------------- --------------- ---------------
PERIOD ENDED DECEMBER 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $642,000 $1,192,332 $0 $1,013,872 $820,460
Reserve for sales, discounts and 1,498,446 3,495,906 0 3,690,757 1,303,595
other allowances
--------------- --------------- ------------- --------------- ---------------
Total $2,140,446 $4,688,238 $0 $4,704,629 $2,124,055
PERIOD ENDED DECEMBER 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $940,764 $272,029 $0 $570,793 $642,000
Reserve for sales, discounts and 1,303,245 985,471 0 790,270 1,498,446
other allowances
--------------- --------------- ------------- --------------- ---------------
Total $2,244,009 $1,257,500 $0 $1,361,063 $2,140,446
PERIOD 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 634,401 668,844 0 0 1,303,245
other allowances
--------------- --------------- ------------- --------------- ---------------
Total $893,779 $1,369,947 $0 $19,717 $2,244,009
PERIOD 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 537,949 96,452 0 0 634,401
other allowances
--------------- --------------- ------------- --------------- ---------------
Total $713,340 $295,101 $0 $114,662 $893,779
S-5