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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 0-22717
ACORN PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3265462
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
390 WEST NATIONWIDE BOULEVARD, COLUMBUS, OHIO 43215
(Address of principal executive offices, including zip code)
(614) 222-4400
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since
last report)
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 the
filing requirements for at least the past 90 days. YES X NO
---- -----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 6,397,374 shares of
Common Stock, $.001 par value, were outstanding at August 1, 2002.
FORM 10-Q
ACORN PRODUCTS, INC.
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
December 31, 2001, June 30, 2002 and July 1, 2001
Consolidated Statements of Operations for the Three Months 4
and Six Months Ended July 1, 2001 and June 30, 2002
Consolidated Statements of Cash Flows for the Six Months 5
Ended July 1, 2001 and June 30, 2002
Interim Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, 2001 June 30, 2002 July 1, 2001
----------------- -------------- ---------------
(Audited) (Unaudited) (Unaudited)
ASSETS
Current assets:
Cash $ 1,391 $ 1,598 $ 1,447
Accounts receivable, less allowance for doubtful accounts
and sales allowances ($1,290, $1,337 and $2,561, respectively) 10,831 16,097 21,682
Inventories, less reserves for excess and obsolete inventory
($1,042, $1,381 and $833, respectively) 24,642 20,094 20,053
Prepaids and other current assets 358 3,328 313
-------- -------- --------
Total current assets 37,222 41,117 43,495
Property, plant and equipment, net of accumulated depreciation 11,568 10,707 12,646
Goodwill, net of accumulated amortization 11,808 11,808 26,375
Deferred financing fees 0 1,787 0
Other assets 554 553 645
-------- -------- --------
Total assets $ 61,152 $ 65,972 $ 83,161
======== ======== ========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ 18,132 $ 13,435 $ 23,583
Acquisition facility and junior participation notes 22,348 0 22,231
Accounts payable 5,890 5,232 5,151
Accrued expenses 7,923 6,499 6,414
Income taxes payable 45 45 44
Other current liabilities 76 25 208
-------- -------- --------
Total current liabilities 54,414 25,236 57,631
Term loan facility 0 12,500 0
12% convertible notes 0 10,600 0
Other long term liabilities 676 728 2,340
-------- -------- --------
Total liabilities 55,090 49,064 59,971
Series A redeemable preferred stock 0 8,272 0
Redeemable common stock 0 160 0
Stockholders' equity:
Common stock, par value of $.001 per share, 20,000,000 shares authorized,
6,464,105 shares issued, and 6,062,359, 6,397,374 and 6,062,159 shares
outstanding at December 31, 2001, June 30, 2002 and July 1, 2001 78,262 78,179 78,262
Contributed capital-stock options 460 460 460
Accumulated other comprehensive loss (2,121) (2,121) (1,551)
Retained earnings (deficit) (68,278) (65,871) (51,720)
-------- -------- --------
8,323 10,647 25,451
Common stock in treasury, 401,746, 385,840 and 401,946 shares
at December 31, 2001, June 30, 2002 and July 1, 2001 (2,261) (2,171) (2,261)
-------- -------- --------
Total stockholders' equity 6,062 8,476 23,190
-------- -------- --------
Total liabilities, redeemable stock and stockholders' equity $ 61,152 $ 65,972 $ 83,161
======== ======== ========
See accompanying notes.
3
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months Ended For the Six Months Ended
------------------------------- -------------------------------
July 1, 2001 June 30, 2002 July 1, 2001 June 30, 2002
------------- --------------- ------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 28,752 $ 26,655 $ 56,593 $ 53,490
Cost of goods sold 23,291 20,236 43,916 40,319
----------- ----------- ----------- -----------
Gross profit 5,461 6,419 12,677 13,171
Selling, general and administrative expenses 3,971 3,418 7,749 6,721
Interest expense 1,730 949 3,568 1,818
Amortization of goodwill 218 0 438 0
Other expenses, net 0 1,599 0 2,178
----------- ----------- ----------- -----------
Income (loss) before income taxes (458) 453 922 2,454
Income taxes 21 21 42 42
----------- ----------- ----------- -----------
Net income (loss) (479) 432 880 2,412
Preferred stock dividends 0 5 0 5
----------- ----------- ----------- -----------
Net income (loss) attributable to
common shareholders ($ 479) $ 427 $ 880 $ 2,407
=========== =========== =========== ===========
Comprehensive income (loss) ($ 479) $ 432 $ 880 $ 2,412
=========== =========== =========== ===========
PER COMMON SHARE DATA (BASIC AND DILUTED):
Net income (loss) per common share - basic ($ 0.08) $ 0.07 $ 0.15 $ 0.40
=========== =========== =========== ===========
Weighted average common shares
outstanding - basic 6,062,159 6,092,292 6,062,159 6,082,329
=========== =========== =========== ===========
Net income (loss) per common share - diluted ($ 0.08) $ 0.07 $ 0.14 $ 0.40
=========== =========== =========== ===========
Weighted average common shares
outstanding - diluted 6,062,159 6,092,292 6,078,065 6,082,329
=========== =========== =========== ===========
See accompanying notes.
4
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Six Months Ended
---------------------------------
July 1, 2001 June 30, 2002
------------ --------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities ($ 2,603) ($ 1,889)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (417) (444)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net activity on revolving loan 3,797 (4,697)
Net activity on term loans and notes (339) (3,363)
Proceeds from 12% convertible notes 0 10,600
Proceeds from subordinated debt 413 0
-------- --------
Net cash provided by financing activities 3,871 2,540
-------- --------
Net increase in cash 851 207
Cash at beginning of period 596 1,391
-------- --------
Cash at end of period $ 1,447 $ 1,598
======== ========
Interest paid $ 2,758 $ 3,427
======== ========
See accompanying notes.
5
ACORN PRODUCTS, INC. AND SUBSIDIARIES
INTERIM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Footnote disclosure which would substantially duplicate the
disclosure contained in the Annual Report to Stockholders on Form 10-K for the
year ended December 31, 2001 has not been included. The unaudited interim
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments), that in the opinion of management, are necessary to a
fair statement of results for the periods presented and to present fairly the
consolidated financial position of Acorn Products, Inc. (the "Company") as of
June 30, 2002.
2. Inventories of the Company 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:
December 31, 2001 June 30, 2002 July 1, 2001
----------------- ------------- ------------
(in thousands)
Finished goods $14,401 $11,619 $10,655
Work in process 5,653 4,401 5,733
Raw materials and supplies 4,588 4,074 3,665
------- ------- -------
Total inventories $24,642 $20,094 $20,053
======= ======= =======
3. In February 2001, the Company, acting in its capacity as plan
sponsor and policy holder, notified certain of its retirees of its decision to
eliminate retiree medical and life benefits. The amended change in the
post-retirement benefit plans was effective in the second quarter of fiscal
2001. The Company recognized a gain of approximately $500,000 in the first
quarter of fiscal 2001 related to the termination of these benefits.
4. The FASB's Emerging Issues Task Force (EITF) has issued EITF 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products", effective for years beginning after December 15, 2001.
The Company adopted EITF 00-25 in the first quarter of fiscal 2002. In
accordance with the provisions of this EITF, the Company has reclassified co-op
advertising expenses from selling, general and administrative expenses to net
sales for the second quarter and the first six months of fiscal 2001.
In June 2001, the FASB issued Statements of Financial
Accounting Standards No. 141, "Business Combinations", effective for business
combinations initiated after June 30, 2001, and No. 142, "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but are subject to annual impairment
tests in accordance with Statement No. 142. Other intangible assets continue to
be amortized over their useful lives. The Company adopted the new rules on
accounting for goodwill in the first quarter of 2002. Application of the
non-amortization provisions of Statement No. 142 resulted in an increase in net
income of approximately $218,000, or $0.04 per share, for the quarter ended June
30, 2002 and $438,000, or $0.07 per share, for the six months ended June 30,
2002. The Company has performed the required transitional impairment tests of
goodwill as of January 1, 2002 and concluded that goodwill at that date was not
impaired. However, at June 30, 2002, certain market conditions indicate that an
impairment may exist at that date. Accordingly, pursuant to Statement No. 142,
the Company expects to perform the next phase of the impairment evaluations
during the second half of the fiscal year. The net book value of goodwill at
June 30, 2002 was $11,808,000.
5. The Company's consolidated financial statements have been presented
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company is
substantially dependent upon borrowing under its credit facility.
On June 28, 2002, the Company entered into a recapitalization
transaction, obtaining a new $10.0 million investment from its majority
stockholders representing funds and accounts managed by TCW Special Credits and
Oaktree Capital Management, LLC (the "Principal Holders"). The Company also
entered into a new $45.0 million credit facility, agented by CapitalSource
Finance, LLC (the "Lender"), consisting of a $12.5 million term loan and a $32.5
million revolving credit component. The term loan bears interest at prime plus
5.0% and the revolving credit component bears interest at prime plus 3.0%. The
Lender's facility terminates initially in December 2004 which is automatically
extended to June 2007 upon completion of an offering of common shares to
minority shareholders (the "Rights Offering") and conversion of certain
convertible notes and preferred stock described below. The majority of the
proceeds from this transaction went to pay off borrowings under the Company's
previous credit facility ($33.7 million was borrowed as of June 27, 2002), that
otherwise expired on June 30, 2002. At June 30, 2002, the Company had $6.7
million available to borrow under its new credit facility.
6
In conjunction with the new facility, the Company issued to
the Lender 319,109 shares of its common stock on June 28, 2002, the value of
which has been included in deferred financing fees and redeemable common stock
in the balance sheet. Moreover, the Company is committed to issue to the Lender
additional shares of common stock upon completion of the Rights Offering. In
connection with a future termination in full of this new credit facility, the
Lender has the right to require the Company to repurchase all the shares issued
to such Lender at a price per share that is dependent on certain measures of
cash flow, debt and cash at a future date. As of June 28, 2002, the Company's
theoretical repurchase obligation on account of all shares issued to the Lender
was approximately $0.2 million. Under the Company's commitment to issue
additional shares of common stock to the Lender, the theoretical repurchase
obligation could increase up to $1.2 million.
As part of the recapitalization transaction, the Principal
Holders purchased for cash from the Company $10,000,000 principal amount of 12%
Convertible Notes due June 15, 2005 (the "Convertible Notes"). Upon the closing
of the Rights Offering, the Convertible Notes will be converted into shares of
the Company's common stock at the Rights Offering price of $0.50 per share,
expected to be completed during the fourth quarter of fiscal 2002.
The recapitalization transaction also caused the Principal
Holders to receive 822.6696 shares of newly-issued Series A Preferred Stock,
$10,000 per share liquidation preference (the "Preferred Stock"), in exchange
for all of their previously existing and outstanding interests in the 12% Junior
Participation Notes (the "Junior Participation Notes") of UnionTools, Inc., the
Company's subsidiary, which represented the total amount of principal and
accrued interest on the Junior Participation Notes. The Preferred Stock has an
initial aggregate liquidation preference equal to $8,226,696 and accrues
dividends at a 12% annual rate. The Preferred Stock becomes mandatorily
convertible into common stock at the Rights Offering price upon the closing of
the Rights Offering based on the liquidation preference and accrued dividends
owing thereon as of the closing date of the Rights Offering.
The Rights Offering, the conversion of the Preferred Stock and
the conversion of the Convertible Notes are conditioned on the receipt of
stockholder approval of the transactions. To the extent that stockholder
approval is not obtained for the foregoing transactions, (1) the Preferred Stock
shall not convert into common stock but instead shall have an initial investment
value of 200% of the initial liquidation preference (the "Investment Value")
which shall increase based upon the amount of unpaid dividends, accreted at an
effective annual rate of 19% from the date of issuance and the Preferred Stock
shall be mandatorily redeemable at June 15, 2005; and (2) the Convertible Notes
shall not convert into common stock, but instead shall remain outstanding and
the interest rate shall increase to 19% retroactive from the date of issuance of
the Convertible Notes. The Principal Holders have agreed to vote their shares in
favor of the foregoing transactions and as such the Company believes it is
unlikely that the Preferred Stock and Convertible Notes will not be converted
into common stock unless a material adverse change shall have occurred prior to
the consummation of the Rights Offering (which shall include an actual or
prospective default under the Company's debt agreements and the actual or
threatened loss of a key employee). If such a material adverse change were to
occur, the Principal Holders will not be required to convert the Preferred Stock
or Convertible Notes and the terms of the Preferred Stock and Convertible Notes
will change to the same terms described above in the case where stockholder
approval of the transactions is not obtained.
The Company's primary cash needs are for working capital,
capital expenditures and debt service. The Company continues to finance these
needs through internally generated cash flow and funds borrowed under the credit
facility. The Company believes that the liquidity provided by the
recapitalization transaction and new credit facility will be sufficient to move
through its operating cycle.
6. Restructuring. During the second quarter of 2002, the Company
implemented a restructuring plan to relocate its primary distribution center
from Columbus, Ohio to Louisville, Kentucky. The total cost of the plan is
estimated at $600,000, which is comprised of severance costs of $300,000
associated with 40 terminated distribution center associates and $300,000 in
lease termination costs, and is included in Other Expenses, net, in the
Consolidated Statements of Operations. Payments associated with severance costs
are expected to be made in the third quarter of 2002 and lease termination
payments are expected to be paid through the first quarter of 2003. There has
not yet been any payments related to these restructuring items as of June 30,
2002.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the other financial information included
elsewhere in this Quarterly Report on Form 10-Q, as well as the factors set
forth under the caption "Forward-Looking Information" below.
FORWARD-LOOKING INFORMATION
Statements in the following discussion that indicate our Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that our actual
results could differ materially from those projected in such forward-looking
statements. Additional information concerning factors that could cause actual
results to differ materially from those suggested in the forward-looking
statements is contained under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in our Annual Report on Form
10-K for the year ended December 31, 2001, as well as in the Current Report on
Form 8-K filed with the Securities and Exchange Commission on September 18,
1997, as amended on October 29, 1998 and November 12, 1999, and as the same may
be amended from time to time.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JULY 1, 2001
Net Sales. Net sales decreased 7.3%, or $2.1 million, to $26.7 million
in the second quarter of fiscal 2002 compared to $28.8 million in the comparable
period of fiscal 2001. The decline in net sales was due to a softer demand for
our products and the absence of certain customers due to bankruptcy or
liquidation, who accounted for $1.0 million of net sales in the second quarter
of fiscal 2001. The softer demand for long handled tools was a result of cold
spring weather, not conducive to gardening or general yard work, and general
economic conditions which have unfavorably affected our industrial business
activity. This effect was partially offset by new business gains in the sale of
wheelbarrows and in our custom injection molding facility.
Gross Profit. Gross profit increased 17.5%, or $0.9 million, to $6.4
million for the second quarter of fiscal 2002 compared to $5.5 million in the
comparable period of fiscal 2001. Gross margin increased to 24.1% for the second
quarter of fiscal 2002 from 19.0% for the comparable period of fiscal 2001. The
increase in gross profit and gross margin was due to continued cost improvements
and efficiencies in our manufacturing and logistical processes.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.6 million, or 13.9%, to $3.4 million for
the second quarter of fiscal 2002 versus $4.0 million in the comparable period
of fiscal 2001. As a percentage of net sales, selling, general and
administrative expenses decreased to 12.8% in the second quarter of fiscal 2002
as compared to 13.8% in the comparable period of fiscal 2001. The decrease in
selling, general and administrative expenses is primarily due to lower sales
support costs, in part due to lower sales volume, an increase in information
technology costs as a component of product cost, and reductions in employee
related costs and other discretionary expenses.
Operating Profit. Operating profit increased $1.5 million, or 101.4%,
to $3.0 million for the second quarter of fiscal 2002 versus $1.5 million in the
comparable period of fiscal 2001. The increase in operating profit is
attributable primarily to the items discussed above.
Interest Expense. Interest expense decreased $0.8 million, or 45.1%, to
$0.9 million in the second quarter of fiscal 2002 compared to $1.7 million in
the comparable period of fiscal 2001. We have benefited from lower debt levels
and interest rates.
Amortization of Goodwill. Amortization of goodwill decreased $0.2
million, or 100.0%, in the second quarter of fiscal 2002 compared to the
comparable period of fiscal 2001 due to the adoption of the new accounting rules
for goodwill.
Other Expenses, Net. Other expenses, net, of $1.6 million were incurred
in the second quarter of fiscal 2002 as a result of $0.9 million incurred with
respect to investment banking and other costs associated with the strategic
alternative process initiated in fiscal 2001 and $0.6 million related to the
relocation of our primary distribution center from Columbus, Ohio to Louisville,
Kentucky. The Louisville distribution center will provide
8
additional cost savings estimated to be approximately $1.0 million in
annualized savings once it is fully functional, which is expected by the end
of the third quarter of fiscal 2002.
Income (Loss) Before Income Taxes. Income (loss) before income taxes
improved $0.9 million to a profit of $0.4 million for the second quarter of
fiscal 2002 compared to a loss of $0.5 million in the comparable period of
fiscal 2001. The improvement in income is attributable primarily to the items
discussed above.
Income Taxes. We have not recognized any federal or state income tax
liability as we expect to utilize a portion of our $76.9 million net operating
loss carryforwards to offset any taxable income for this year.
Net Income (Loss). Net income and net income (loss) attributable to
common shareholders was $0.4 million for the second quarter of fiscal 2002
compared to a loss of $0.5 million in the comparable period of fiscal 2001. Net
income per common share (basic and diluted) was $0.07 for the second quarter of
fiscal 2002 based on a weighted average number of common shares outstanding of
approximately 6.1 million, compared to net loss per common share of $0.08 (basic
and diluted) for the comparable period of fiscal 2001, based on a weighted
average number of common shares outstanding of approximately 6.1 million.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JULY 1, 2001
Net Sales. Net sales decreased 5.5%, or $3.1 million, to $53.5 million
in the first six months of fiscal 2002 compared to $56.6 million in the
comparable period of fiscal 2001. The decline in net sales was due to the
absence of certain customers in the first six months of fiscal 2002, who had
purchased approximately $2.0 million in the first six months of fiscal 2001, but
subsequently filed for bankruptcy or liquidation. In addition, we experienced
softer demand for our products due to general economic conditions and cold
spring weather in the second quarter of fiscal 2002. This effect was partially
offset by new business we obtained from a few key customers.
Gross Profit. Gross profit increased 3.9%, or $0.5 million, to $13.2
million for the first six months of fiscal 2002 compared to $12.7 million in the
comparable period of fiscal 2001. Gross margin increased to 24.6% for the first
six months of fiscal 2002 from 22.4% for the comparable period of fiscal 2001.
The increase is primarily due to continued cost improvements and efficiencies in
our manufacturing and logistical processes.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1.0 million, or 13.3%, to $6.7 million for
the first six months of fiscal 2002 versus $7.7 million in the comparable period
of fiscal 2001. As a percentage of net sales, selling, general and
administrative expenses decreased to 12.6% in the first six months of fiscal
2002 as compared to 13.7% in the comparable period of fiscal 2001. The decrease
in selling, general and administrative expenses is primarily due to lower sales
support costs, in part due to lower sales volume, an increase in information
technology costs as a component of product cost, and reductions in employee
related costs and other discretionary expenses.
Operating Profit. Operating profit increased 30.9%, or $1.6 million, to
$6.5 million for the first six months of fiscal 2002 compared to $4.9 million in
the comparable period of fiscal 2001. The increase in operating profit is
attributable primarily to the items discussed above.
Interest Expense. Interest expense decreased $1.8 million, or 49.1%, to
$1.8 million in the first six months of fiscal 2002 compared to $3.6 million in
the comparable period of fiscal 2001. We have benefited from lower debt levels
and interest rates.
Amortization of Goodwill. Amortization of goodwill decreased $0.4
million, or 100.0%, in the first six months of fiscal 2002 compared to $0.4
million in the comparable period of fiscal 2001 due to the adoption of the new
accounting rules for goodwill.
Other Expenses, Net. Other expenses, net, of $2.2 million were incurred
in the first six months of fiscal 2002. In the first quarter of fiscal 2002, we
incurred $0.6 million with respect to restricted stock and director bonuses for
the success of the strategic alternative process and our performance. In the
second quarter of fiscal 2002, we incurred $0.9 million related to investment
banking and other costs associated with the strategic alternative process
initiated in fiscal 2001. Also in the second quarter of fiscal 2002, we incurred
$0.6 million related to the relocation of our primary distribution center from
Columbus, Ohio to Louisville, Kentucky. The Louisville distribution center will
provide
9
additional cost savings estimated to be approximately $1.0 million in annualized
savings once it is fully functional, which is expected by the end of the third
quarter of fiscal 2002.
Income Before Income Taxes. Income before income taxes improved $1.5
million, or 166.2%, to a profit of $2.5 million for the first six months of
fiscal 2002 compared to a profit of $0.9 million in the comparable period of
fiscal 2001. The improvement in profit is attributable primarily to the items
discussed above.
Income Taxes. We have not recognized any federal or state income tax
liability as we expect to utilize a portion of our $76.9 million net operating
loss carryforwards to offset any taxable income for this year.
Net Income. Net income and net income attributable to common
shareholders increased 174.1%, or $1.5 million, to a profit of $2.4 million for
the first six months of fiscal 2002 compared to a profit of $0.9 million in the
comparable period of fiscal 2001. Net income per common share (basic and
diluted) was $0.40 for the first six months of fiscal 2002 based on a weighted
average number of common shares outstanding of approximately 6.1 million,
compared to net income per common share of $0.15 (basic) and $0.14 (diluted) for
the comparable period of fiscal 2001, based on a weighted average number of
common shares outstanding of approximately 6.1 million.
SEASONAL AND QUARTERLY FLUCTUATIONS
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,
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, inventory levels tend to be
at their highest, relative to sales, during the fourth quarter of the fiscal
year. These factors increase variations in quarterly results of operations and
potentially expose us to greater adverse effects of changes in economic and
industry trends. Moreover, actual demand for products may vary substantially
from the anticipated demand, leaving us with excess inventory or insufficient
inventory to satisfy customer orders.
LIQUIDITY AND CAPITAL RESOURCES
On June 28, 2002, we entered into a recapitalization transaction with
our Principal Holders, and entered into a new $45.0 million credit facility. The
majority of the proceeds from this transaction went to pay off borrowings under
our previous credit facility ($33.7 million), that otherwise was due to expire
on June 30, 2002. At June 30, 2002, we had $6.7 million available to borrow
under our new credit facility.
NEW CREDIT FACILITY
In June 2002, we entered into a five-year, $45.0 million credit
facility, agented by CapitalSource Finance, LLC, consisting of a $12.5 million
term loan and a $32.5 million revolving credit component. The term loan bears
interest at prime plus 5.0% and the revolving credit component bears interest at
prime plus 3.0%. The Lender's facility terminates initially in December 2004,
but automatically extends to June 2007 upon completion of the Rights Offering
and conversion of certain convertible notes and preferred stock described below.
In conjunction with the new facility, we issued to the Lender 319,109
shares of our common stock on June 28, 2002, the value of which has been
included in deferred financing fees and redeemable common stock in the balance
sheet. Moreover, we are committed to issue to the Lender additional shares of
common stock upon completion of the Rights Offering. In connection with a future
termination in full of this new credit facility, the Lender has the right to
require us to repurchase all the shares issued to such Lender at a price per
share that is dependent on certain measures of cash flow, debt and cash at a
future date. As of June 28, 2002, our theoretical repurchase obligation on
account of all shares issued to the Lender was approximately $0.2 million. Under
our commitment to issue additional shares of common stock to the Lender, the
theoretical repurchase obligation could increase up to $1.2 million.
SALE OF CONVERTIBLE NOTES
The Principal Holders purchased for cash from us $10,000,000 principal
amount of 12% Convertible Notes due June 15, 2005. Upon the closing of the
Rights Offering, the Convertible Notes will be converted into shares of our
common stock at the Rights Offering price of $0.50 per share, expected to be
completed during the fourth quarter of fiscal 2002. To the extent that
10
stockholder approval is not obtained for the foregoing transactions, the
Convertible Notes shall not convert into common stock, but instead shall remain
outstanding and the interest rate shall increase to 19% retroactive from the
date of issuance of the Convertible Notes.
NOTE EXCHANGE
The Principal Holders received 822.6696 shares of newly-issued Series A
Preferred Stock, $10,000 per share liquidation preference (the "Preferred
Stock"), in exchange for all of their previously existing and outstanding
interests in the 12% Junior Participation Notes of UnionTools, Inc., our
subsidiary, which represented the total amount of principal and accrued interest
on the Junior Participation Notes.
PREFERRED STOCK
The Preferred Stock has an initial aggregate liquidation preference
equal to $8,226,696 and accrues dividends at a 12% annual rate. The Preferred
Stock becomes mandatorily convertible into common stock at the Rights Offering
price upon the closing of the Rights Offering (as discussed below) based on the
liquidation preference and accrued dividends owing thereon as of the closing
date of the Rights Offering. The Rights Offering (and the conversion of the
Preferred Stock and the Convertible Notes) are conditioned on the receipt of
stockholder approval of the transactions. To the extent that stockholder
approval is not obtained for the foregoing transactions, the Preferred Stock
shall not convert into common stock but instead shall have an initial investment
value of 200% of the initial liquidation preference (the "Investment Value")
which shall increase based upon the amount of unpaid dividends. Such Investment
Value shall accrete at an effective annual rate of 19% from the date of issuance
and the Preferred Stock shall be mandatorily redeemable at June 15, 2005. The
Principal Holders have agreed to vote their shares in favor of the foregoing
transactions and as such it is unlikely that the Preferred Stock will not be
converted into common stock unless a material adverse change shall have occurred
prior to the consummation of the Rights Offering (which shall include an actual
or prospective default under our debt agreements and the actual or threatened
loss of a key employee).
PRO FORMA IMPACT OF RECAPITALIZATION AFTER COMPLETION OF THE RIGHTS OFFERING
We are pursuing stockholder approval and the Rights Offering, expected
to be completed in the fourth quarter of fiscal 2002. The following table shows
the effect, at June 30, 2002, as if stockholder approval and the Rights Offering
had already been completed (assuming no proceeds are received from the Rights
Offering). To the extent shares are sold in the Rights Offering, the net
proceeds must be applied to reduce up to $600,000 of redeemable common stock,
with the next $500,000 paid to us and amounts greater than $1.1 million to
reduce the long-term debt. While we expect the full transaction to be
completed, there can be no assurance as to when and if the transaction will be
finalized.
June 30, 2002
-------------
Actual Pro Forma
------ ---------
Long-Term Debt and Notes $23,100 $12,500
Series A Redeemable Preferred Stock 8,272 0
Redeemable Common Stock 160 1,847
Stockholders' Equity 8,476 26,748
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 operations have not been
material between the first six months of fiscal 2002 and the comparable period
of fiscal 2001.
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ITEM 3. 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. On June 28, 2002, we entered into a five-year, $45.0 million
credit facility. In connection with the facility, the interest rate charged on
outstanding borrowings is prime plus 5.0% for the term loan and prime plus 3.0%
for the revolving line of credit.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit No. Description
99.1 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer
99.2 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 by the Chief
Financial Officer
(b) REPORTS ON FORM 8-K.
On June 6, 2002, we filed with the SEC a report on Form 8-K
dated May 29, 2002 (Items 5 and 7).
On June 17, 2002, we filed with the SEC a report on Form 8-K
dated June 13, 2002 (Items 5 and 7).
On July 2, 2002, we filed with the SEC a report on Form 8-K
dated June 28, 2002 (Items 5 and 7).
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SIGNATURES
Pursuant to the requirements 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.
Date: August 9, 2002 By: /s/ A. Corydon Meyer
----------------------------------------
A. Corydon Meyer, President and Chief
Executive Officer
(Principal Executive Officer)
Date: August 9, 2002 By: /s/ John G. Jacob
----------------------------------------
John G. Jacob, Vice President and Chief
Financial Officer
(Principal Financial Officer)
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