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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 September 29, 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 November 1, 2002.
FORM 10-Q
ACORN PRODUCTS, INC.
TABLE OF CONTENTS
-----------------
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
December 31, 2001, September 30, 2001 and September 29, 2002
Consolidated Statements of Operations for the Three Months 4
and Nine Months Ended September 30, 2001 and September 29, 2002
Consolidated Statements of Cash Flows for the Nine Months 5
Ended September 30, 2001 and September 29, 2002
Interim Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications of Chief Executive Officer and Chief Financial Officer 16-17
Under Section 302
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 September 30, 2001 September 29, 2002
----------------- ------------------ ------------------
ASSETS (Audited) (Unaudited) (Unaudited)
Current assets:
Cash $ 1,391 $ 1,198 $ 1,455
Accounts receivable, less allowance for doubtful accounts and
sales allowances ($1,290, $1,398 and $1,156, respectively) 10,831 11,688 13,229
Inventories, less reserves for excess and obsolete inventory
($1,042, $834 and $1,554, respectively) 24,642 21,252 21,448
Prepaids and other current assets 358 472 1,760
-------- -------- --------
Total current assets 37,222 34,610 37,892
Property, plant and equipment, net of accumulated depreciation 11,568 11,901 11,216
Goodwill, net of accumulated amortization 11,808 26,156 7,567
Deferred financing fees 0 0 1,892
Other assets 554 554 553
-------- -------- --------
Total assets $ 61,152 $ 73,221 $ 59,120
======== ======== ========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ 18,132 $ 14,798 $ 10,383
Acquisition facility and junior participation notes 22,348 22,367 0
Accounts payable 5,890 5,745 5,555
Accrued expenses 7,923 7,405 6,725
Income taxes payable 45 46 45
Other current liabilities 76 208 25
-------- -------- --------
Total current liabilities 54,414 50,569 22,733
Term loan facility 0 0 12,500
12% convertible notes 0 0 10,600
Other long term liabilities 676 741 1,052
-------- -------- --------
Total liabilities 55,090 51,310 46,885
Series A redeemable preferred stock 0 0 8,272
Redeemable common stock 0 0 160
Stockholders' equity:
Common stock, par value of $.001 per share,
20,000,000 shares authorized, 6,464,105 shares issued
at December 31, 2001 and September 30, 2001 and
6,783,214 shares issued at September 29, 2002, and
6,062,159 shares outstanding at December 31, 2001,
6,062,359 shares outstanding at September 30, 2001 and
6,397,374 shares outstanding at September 29, 2002 78,262 78,262 78,179
Contributed capital-stock options 460 460 452
Accumulated other comprehensive loss (2,121) (1,551) (2,121)
Retained earnings (deficit) (68,278) (52,999) (70,536)
-------- -------- --------
8,323 24,172 5,974
Common stock in treasury, 401,746 shares at December 31, 2001 and
September 30, 2001 and 385,840 shares at September 29, 2002 (2,261) (2,261) (2,171)
-------- -------- --------
Total stockholders' equity 6,062 21,911 3,803
-------- -------- --------
Total liabilities, redeemable stock and stockholders' equity $ 61,152 $ 73,221 $ 59,120
======== ======== ========
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 Nine Months Ended
----------------------------------------------- -----------------------------------------------
September 30, 2001 September 29, 2002 September 30, 2001 September 29, 2002
---------------------- ----------------------- ---------------------- -----------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 17,414 $ 19,306 $ 74,007 $ 72,797
Cost of goods sold 13,108 14,682 57,024 55,002
----------- ----------- ----------- -----------
Gross profit 4,306 4,624 16,983 17,795
Selling, general and
administrative expenses 3,793 3,097 11,555 9,818
Interest expense 1,616 1,086 5,184 2,904
Amortization of goodwill 218 0 656 0
Goodwill impairment 0 4,241 0 4,241
Other expenses, net (64) 590 (77) 2,768
----------- ----------- ----------- -----------
Loss before income taxes (1,257) (4,390) (335) (1,936)
Income taxes 21 21 63 63
----------- ----------- ----------- -----------
Net loss (1,278) (4,411) (398) (1,999)
Preferred stock dividends 0 254 0 259
----------- ----------- ----------- -----------
Net loss attributable to
common shareholders ($ 1,278) ($ 4,665) ($ 398) ($ 2,258)
=========== =========== =========== ===========
Comprehensive loss ($ 1,278) ($ 4,411) ($ 398) ($ 1,999)
=========== =========== =========== ===========
PER COMMON SHARE DATA
(BASIC AND DILUTED):
Net loss per common
share - basic ($ 0.21) ($ 0.73) ($ 0.07) ($ 0.36)
=========== =========== =========== ===========
Weighted average common
shares outstanding - basic 6,062,359 6,397,374 6,062,359 6,188,498
=========== =========== =========== ===========
Net loss per common
share - diluted ($ 0.21) ($ 0.73) ($ 0.07) ($ 0.36)
=========== =========== =========== ===========
Weighted average common
shares outstanding - diluted 6,062,359 6,397,374 6,062,359 6,188,498
=========== =========== =========== ===========
See accompanying notes.
4
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Nine Months Ended
---------------------------------------
September 30, 2001 September 29, 2002
------------------ ------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 5,820 $ 2,167
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (534) (1,643)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net activity on revolving loan (4,988) (7,749)
Net activity on term loans and notes (478) (3,311)
Proceeds from 12% convertible notes 0 10,600
Proceeds from subordinated debt 782 0
-------- --------
Net cash used in financing activities (4,684) (460)
-------- --------
Net increase in cash 602 64
Cash at beginning of period 596 1,391
-------- --------
Cash at end of period $ 1,198 $ 1,455
======== ========
Interest paid $ 3,009 $ 3,952
======== ========
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/A 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
September 29, 2002.
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.
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 September 30, 2001 September 29, 2002
----------------- ------------------ ------------------
(in thousands)
Finished goods $14,401 $11,601 $13,162
Work in process 5,653 5,699 4,628
Raw materials and supplies 4,588 3,952 3,658
------- ------- -------
Total inventories $24,642 $21,252 $21,448
======= ======= =======
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 $2,000,000 less related
expenses in the first nine months of fiscal 2001 related to the termination of
these benefits.
4. The FASB's Emerging Issues Task Force (EITF) has issued EITF 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products", effective for years beginning after December 15, 2001.
The Company adopted EITF 00-25 in the first quarter of fiscal 2002. In
accordance with the provisions of this EITF, the Company has reclassified co-op
advertising expenses from selling, general and administrative expenses to net
sales for the third quarter and the first nine months of fiscal 2001.
In June 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations", effective for business combinations
initiated after June 30, 2001, and No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests in accordance with
Statement No. 142. Other intangible assets continue to be amortized over their
useful lives. The Company adopted the new rules on accounting for goodwill in
the first quarter of 2002. The impact of the non-amortization provisions of
Statement No. 142 is as follows:
6
For the Three Months Ended For the Nine Months Ended
---------------------------------------- --------------------------------------
September 30, 2001 September 29, 2002 September 30, 2001 September 29, 2002
------------------ ------------------ ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------ ------------------ ------------------ ------------------
(in thousands, except per share data)
Reported net loss ($ 1,278) ($ 4,411) ($ 398) ($ 1,999)
Goodwill amortization 218 0 656 0
--------- --------- --------- ---------
Adjusted net income (loss) ($ 1,060) ($ 4,411) $ 258 ($ 1,999)
========= ========= ========= =========
Basic earnings per share:
Reported net loss ($ 0.21) ($ 0.73) ($ 0.07) ($ 0.36)
Goodwill amortization 0.04 0.00 0.11 0.00
--------- --------- --------- ---------
Adjusted net income (loss) ($ 0.17) ($ 0.73) $ 0.04 ($ 0.36)
========= ========= ========= =========
Diluted earnings per share:
Reported net loss ($ 0.21) ($ 0.73) ($ 0.07) ($ 0.36)
Goodwill amortization 0.04 0.00 0.11 0.00
--------- --------- --------- ---------
Adjusted net income (loss) ($ 0.17) ($ 0.73) $ 0.04 ($ 0.36)
========= ========= ========= =========
The Company performed the required transitional impairment tests of goodwill as
of January 1, 2002 and concluded that goodwill at that date was not impaired.
However, certain market conditions arising during 2002 have indicated that
goodwill impairment may have occurred during 2002. Accordingly, pursuant to
Statement No. 142, the Company performed the next phase of the impairment
evaluation and concluded that goodwill was impaired which resulted in a $4.2
million goodwill impairment charge in the third quarter of the fiscal year. The
outcome of the evaluation was influenced by the valuation of individual assets
and liabilities as required under Statement No. 142, particularly with regard to
deferred financing fees, fixed assets, prepaid pension plan assets, trademarks
and employment agreements. In addition, the fair value of the Company used for
purposes of determining the implied fair value of goodwill was derived from the
value ascribed to the Company under the recapitalization transaction discussed
in Note 5.
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 stockholders (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. Relative to the extension and termination of
its previous credit facility, the Company paid $2.0 million of success fees
during the second quarter of fiscal 2002. At September 29, 2002, the Company had
$8.4 million available to borrow under its new credit facility.
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 on 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 September 29, 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.
7
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 first quarter of fiscal 2003.
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 increase based upon the
amount of unpaid dividends and the Preferred Stock shall be mandatorily
redeemable at June 15, 2005; and (2) the Convertible Notes shall not convert
into common stock, but shall increase based upon the amount of unpaid interest
and the Convertible Notes shall mature on June 15, 2005. 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. During the second quarter of 2002, the Company implemented a
restructuring plan to relocate its primary distribution center from Columbus,
Ohio to Louisville, Kentucky. As a result, the Company incurred a restructuring
charge of $533,000, which is comprised of employee separation costs of $292,000
and $241,000 in lease termination and other costs, and is included in Other
Expenses, net, in the Consolidated Statements of Operations. The Company expects
payments associated with employee separation costs and lease termination and
other costs to be substantially paid by the end of the first quarter of fiscal
2003. Subsequent to the recognition of the restructuring charge, the Company has
and will continue to recognize expense related to additional costs to relocate
machinery and equipment and employees upon the closure of the Columbus
distribution center. The amounts charged against this restructuring reserve
during the period ended September 29, 2002 are as follows (in thousands):
Balance at Costs incurred in excess of Balance at
6/30/02 original restructuring accrual Activity 9/29/02
------- ------------------------------ -------- -------
Cash charges:
- -------------
Employee separation costs $ 204 $ 88 $ (184) $ 108
Other exit costs 241 - (107) 134
-------- ------- --------- --------
$ 445 $ 88 $ (291) $ 242
======== ====== ========= ========
8
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/A 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 SEPTEMBER 29, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Net Sales. Net sales increased 10.9%, or $1.9 million, to $19.3 million
in the third quarter of fiscal 2002 compared to $17.4 million in the comparable
period of fiscal 2001. The increase in net sales was primarily due to gains in
both our lawn and garden and custom injection molded products, and fewer
customer deductions. The improvement in customer deductions is a result of
ongoing programs to drive operational efficiencies and service levels.
Gross Profit. Gross profit increased 7.4%, or $0.3 million, to $4.6
million for the third quarter of fiscal 2002 compared to $4.3 million in the
comparable period of fiscal 2001. Gross margin decreased to 24.0% for the third
quarter of fiscal 2002 from 24.7% for the comparable period of fiscal 2001. The
increase in gross profit was due to higher sales volume, including the favorable
effect of fewer deductions, and continued improvements to our product cost
structure. While gross margin was favorably influenced by the benefit of lower
deductions and cost improvements, such improvement was more than offset by the
absence in fiscal 2002 of a one-time gain of $1.5 million less related expenses
in the third quarter of fiscal 2001, related primarily to the net favorable
effect of the termination of certain retiree medical and life benefits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.7 million, or 18.4%, to $3.1 million for
the third quarter of fiscal 2002 versus $3.8 million in the comparable period of
fiscal 2001. As a percentage of net sales, selling, general and administrative
expenses decreased to 16.0% in the third quarter of fiscal 2002 as compared to
21.8% in the comparable period of fiscal 2001. The decrease in selling, general
and administrative expenses is primarily due to lower sales support costs, 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 $1.0 million, or 197.7%,
to $1.5 million for the third quarter of fiscal 2002 versus $0.5 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 $0.5 million, or 32.8%, to
$1.1 million in the third quarter of fiscal 2002 compared to $1.6 million in the
comparable period of fiscal 2001. We have benefited from lower debt levels,
interest rates and the absence of fees associated with the extension of our
credit facility in fiscal 2001.
Goodwill. Amortization of goodwill decreased $0.2 million, or 100.0%,
in the third quarter of fiscal 2002 compared to the comparable period of fiscal
2001 due to the adoption of the new accounting rules for goodwill. In fiscal
2001, the FASB issued Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001.
The Company performed the required transitional impairment tests of
goodwill as of January 1, 2002 and concluded that goodwill at that date was not
impaired. However, certain market conditions arising during 2002 have indicated
that goodwill impairment may have occurred during 2002. Accordingly, pursuant to
Statement No. 142, the Company performed the next phase of the impairment
evaluation and concluded that goodwill was impaired which resulted in a $4.2
million goodwill impairment charge in the third quarter of the fiscal year. The
outcome of the evaluation was influenced by the valuation of individual assets
9
and liabilities as required under Statement No. 142, particularly with regard to
deferred financing fees, fixed assets, prepaid pension plan assets, trademarks
and employment agreements. In addition, the fair value of the Company used for
purposes of determining the implied fair value of goodwill was derived from the
value ascribed to the Company under the recapitalization transaction discussed
in Note 5.
Other Expenses, Net. Other expenses, net, of $0.6 million were incurred
in the third quarter of fiscal 2002, primarily as a result of $0.5 million
incurred related to the relocation of our primary distribution center from
Columbus, Ohio to Louisville, Kentucky. The Louisville distribution center, now
fully functioning and our primary distribution facility, will provide cost
savings estimated to be $1.0 million per annum.
Loss Before Income Taxes. Loss before income taxes declined $3.1
million to a loss of $4.4 million for the third quarter of fiscal 2002 compared
to a loss of $1.3 million in the comparable period of fiscal 2001. The decline
in income is attributable to the items discussed above, in particular the
goodwill impairment charge.
Income Taxes. We have not recognized any federal or state income tax
liability as we expect to utilize a portion of our $76.8 million net operating
loss carryforwards to offset any taxable income for this year.
Preferred Stock Dividends. As part of our recapitalization transaction
discussed under "Liquidity and Capital Resources" below, we issued $8.3 million
of 12% preferred stock that was outstanding during the third quarter of fiscal
2002. As a result, we accrued a preferred stock dividend of $0.3 million in the
third quarter of fiscal 2002.
Net Loss. Net loss attributable to common shareholders was $4.7 million
for the third quarter of fiscal 2002 compared to a loss of $1.3 million in the
comparable period of fiscal 2001. Net loss per common share (basic and diluted)
was $0.73 for the third quarter of fiscal 2002 based on a weighted average
number of common shares outstanding of approximately 6.4 million, compared to
net loss per common share of $0.21 (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.
NINE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Net Sales. Net sales decreased 1.6%, or $1.2 million, to $72.8 million
in the first nine months of fiscal 2002 compared to $74.0 million in the
comparable period of fiscal 2001. The decline in net sales was due to the
absence of certain customers in the first nine months of fiscal 2002, who had
purchased approximately $2.0 million in the first nine 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 gains in our custom injection molded products and an
improvement in customer deductions, a result of ongoing programs to drive
operational efficiencies and service levels.
Gross Profit. Gross profit increased 4.8%, or $0.8 million, to $17.8
million for the first nine months of fiscal 2002 compared to $17.0 million in
the comparable period of fiscal 2001. Gross margin increased to 24.4% for the
first nine months of fiscal 2002 from 22.9% for the comparable period of fiscal
2001. The increase is primarily due to continued cost improvements and
efficiencies in our manufacturing and logistical processes, lowering our product
cost and generating fewer customer deductions. These gains were partially offset
by the absence in the first nine months of fiscal 2002 of a one-time gain of
$2.0 million less related expenses recognized in fiscal 2001, related primarily
to the net favorable effect of the termination of certain retiree medical and
life benefits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1.7 million, or 15.0%, to $9.8 million for
the first nine months of fiscal 2002 versus $11.6 million in the comparable
period of fiscal 2001. As a percentage of net sales, selling, general and
administrative expenses decreased to 13.5% in the first nine months of fiscal
2002 as compared to 15.6% 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 47.0%, or $2.6 million, to
$8.0 million for the first nine months of fiscal 2002 compared to $5.4 million
in the comparable period of fiscal 2001. The increase in operating profit is
attributable primarily to the items discussed above.
10
Interest Expense. Interest expense decreased $2.3 million, or 44.0%, to
$2.9 million in the first nine months of fiscal 2002 compared to $5.2 million in
the comparable period of fiscal 2001. We have benefited from lower debt levels,
interest rates and the absence of fees associated with the extension of our
credit facility in fiscal 2001.
Goodwill. Amortization of goodwill decreased $0.7 million, or 100.0%,
in the first nine months of fiscal 2002 compared to $0.7 million in the
comparable period of fiscal 2001 due to the adoption of the new accounting rules
for goodwill. In fiscal 2001, the FASB issued Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets", effective for fiscal
years beginning after December 15, 2001.
The Company performed the required transitional impairment tests of
goodwill as of January 1, 2002 and concluded that goodwill at that date was not
impaired. However, certain market conditions arising during 2002 have indicated
that goodwill impairment may have occurred during 2002. Accordingly, pursuant to
Statement No. 142, the Company performed the next phase of the impairment
evaluation and concluded that goodwill was impaired which resulted in a $4.2
million goodwill impairment charge in the third quarter of the fiscal year. The
outcome of the evaluation was influenced by the valuation of individual assets
and liabilities as required under Statement No. 142, particularly with regard to
deferred financing fees, fixed assets, prepaid pension plan assets, trademarks
and employment agreements. In addition, the fair value of the Company used for
purposes of determining the implied fair value of goodwill was derived from the
value ascribed to the Company under the recapitalization transaction discussed
in Note 5.
Other Expenses, Net. Other expenses, net, of $2.8 million were incurred
in the first nine 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. In the second and third quarters of fiscal 2002, we
incurred $1.1 million related to the relocation of our primary distribution
center from Columbus, Ohio to Louisville, Kentucky. The Louisville distribution
center, now fully functioning as our primary distribution facility, will provide
cost savings estimated to be $1.0 million per annum.
Loss Before Income Taxes. Loss before income taxes declined $1.6
million, to a loss of $1.9 million for the first nine months of fiscal 2002
compared to a loss of $0.3 million in the comparable period of fiscal 2001. The
decline in profit is attributable primarily to the items discussed above, in
particular the goodwill impairment charge.
Income Taxes. We have not recognized any federal or state income tax
liability as we expect to utilize a portion of our $76.8 million net operating
loss carryforwards to offset any taxable income for this year.
Preferred Stock Dividends. As part of our recapitalization transaction
discussed under "Liquidity and Capital Resources" below, we issued $8.3 million
of 12% preferred stock that was outstanding during the third quarter of fiscal
2002. As a result, we accrued a preferred stock dividend of $0.3 million in the
first nine months of fiscal 2002.
Net Loss. Net loss attributable to common shareholders decreased $1.9
million, to a loss of $2.3 million for the first nine months of fiscal 2002
compared to a loss of $0.4 million in the comparable period of fiscal 2001. Net
loss per common share (basic and diluted) was $0.36 for the first nine months of
fiscal 2002 based on a weighted average number of common shares outstanding of
approximately 6.2 million, compared to net loss per common share of $0.07 (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.
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.
11
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 September 29, 2002, we had $8.4 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 on 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 September 29, 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, expected to be completed during the
first quarter of fiscal 2003. To the extent that stockholder approval is not
obtained for the foregoing transactions, the Convertible Notes shall not convert
into common stock, but instead shall remain outstanding and increase based upon
the amount of unpaid interest at an annual rate of 12% from the date of
issuance. The Convertible Notes shall mature on June 15, 2005.
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 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 remain outstanding and shall increase based
upon the amount of unpaid dividends at an annual rate of 12% from the date of
issuance. 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).
12
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 first quarter of fiscal 2003. The following table shows
the effect, at September 29, 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 repay interest and principal owing in respect of
existing 12% Convertible Notes held by unaffiliated parties ($635,000), expenses
of the Rights Offering of up to $150,000 and accrued interest of up to $380,000
owing on the remaining $10 million of Convertible Notes held by the Principal
Holders, combined in total not to exceed $1.1 million, with any excess proceeds
to be applied as a prepayment of 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.
September 29, 2002
-----------------------
Actual Pro Forma
------ ---------
Deferred Financing Fees $1,892 $2,981
Accrued Expenses $6,725 $6,135
Long-Term Debt and Notes 23,100 12,500
Series A Redeemable Preferred Stock 8,272 0
Redeemable Common Stock 160 1,249
Stockholders' Equity 3,803 23,265
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 nine months of fiscal 2002 and the comparable period
of fiscal 2001.
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.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our
Chief Executive Officer along with our Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
CHANGES IN INTERNAL CONTROLS
Since the date of our evaluation to the filing date of this Quarterly
Report, there have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
13
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 11, 2002, the Company received a Nasdaq Staff Determination
indicating that the Company failed to comply with the minimum market value of
publicly held shares requirement required for continued listing its common stock
and, therefore, is subject to delisting from the Nasdaq SmallCap Market. The
Company has requested a hearing before a Nasdaq Listing Qualifications Panel to
appeal the Staff Determination.
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 October 16, 2002, we filed with the SEC a report on Form 8-K
dated October 11, 2002 (Items 5 and 7).
14
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: November 13, 2002 By: /s/ A. Corydon Meyer
----------------------------------------------------------
A. Corydon Meyer, President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2002 By: /s/ John G. Jacob
----------------------------------------------------------
John G. Jacob, Vice President and Chief Financial Officer
(Principal Financial Officer)
15
CERTIFICATION
I, A. Corydon Meyer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Acorn
Products, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
/s/ A. Corydon Meyer
-----------------------------------
A. Corydon Meyer, President and
Chief Executive Officer
16
CERTIFICATION
I, John G. Jacob, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Acorn
Products, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
/s/ John G. Jacob
---------------------------------------
John G. Jacob, Chief Financial Officer
17