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 October 1, 2000 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) 390 Dublin Avenue, Columbus, Ohio 43215 (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: 6,062,159 shares of Common Stock, $.001 par value, were outstanding at November 1, 2000. 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, 1999 and October 1, 2000 Consolidated Statements of Operations for the Three Months 4 And Nine Months Ended October 3, 1999 and October 1, 2000 Consolidated Statements of Cash Flows for the Nine Months 5 Ended October 3, 1999 and October 1, 2000 Interim Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 7 Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 1999 October 1, 2000 --------------------- ----------------- (Unaudited) (Unaudited) ASSETS Current assets: Cash $ 1,326 $ 745 Accounts receivable, less allowance for doubtful accounts and sales allowances ($2,140 and $3,194, respectively) 18,021 16,936 Inventories 33,168 21,487 Prepaids and other current assets 1,012 899 --------------------- ----------------- Total current assets 53,527 40,067 Property, plant and equipment, net of accumulated depreciation 17,571 14,877 Goodwill, net of accumulated amortization 32,544 27,033 Other intangible assets 1,431 1,148 --------------------- ----------------- Total assets $105,073 $ 83,125 ===================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility $ 27,228 $ 32,240 Accounts payable 9,004 7,226 Accrued expenses 5,694 6,758 Income taxes payable 206 52 Other current liabilities 843 308 -------------------- ---------------- Total current liabilities 42,975 46,584 Long-term debt 22,009 6,828 Other long-term liabilities 3,125 2,679 -------------------- ---------------- Total liabilities 68,109 56,091 Stockholders' equity: Common stock, par value of $.001 per share, 20,000,000 shares authorized, 6,464,105 shares issued, 6,046,680 and 6,062,159 shares outstanding at December 31, 1999 and October 1, 2000, respectively 78,262 78,262 Contributed capital-stock options 460 460 Accumulated other comprehensive loss (778) (778) Retained earnings (deficit) (38,632) (48,649) -------------------- ---------------- 39,312 29,295 Common stock in treasury, 417,425 and 401,946 shares at December 31, 1999 and October 1, 2000, respectively (2,348) (2,261) -------------------- ---------------- Total stockholders' equity 36,964 27,034 -------------------- ---------------- Total liabilities and stockholders' equity $105,073 $ 83,125 ==================== ================ 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 ------------------------------------ ---------------------------------- October 3, 1999 October 1, 2000 October 3, 1999 October 1, 2000 ----------------- ---------------- --------------- --------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net sales $ 21,088 $ 22,098 $ 96,677 $ 98,005 Cost of goods sold 19,895 18,803 83,054 78,300 ---------------- --------------- --------------- -------------- Gross profit 1,193 3,295 13,623 19,705 Selling, general and administrative expenses 6,691 5,928 18,830 17,743 Interest expense 928 1,701 3,140 5,413 Asset impairment charge 0 0 0 4,402 Amortization of goodwill 308 181 830 747 Other expenses, net 1,729 1,156 2,470 1,356 ---------------- --------------- --------------- -------------- Loss before income taxes (8,463) (5,671) (11,647) (9,956) Income taxes 122 21 683 61 ---------------- --------------- --------------- -------------- Loss from continuing operations (8,585) (5,692) (12,330) (10,017) Loss from discontinued operations, net of tax (12) 0 (770) 0 ---------------- --------------- --------------- -------------- Net loss ($8,597) ($5,692) ($13,100) ($10,017) ================ =============== =============== ============== Comprehensive loss ($8,597) ($5,692) ($13,100) ($10,017) ================ =============== =============== ============== Per Share Data (Basic and Diluted): Loss from continuing operations ($1.42) ($0.94) ($2.00) ($1.65) Loss from discontinued operations $0.00 $ 0.00 ($0.13) $ 0.00 ---------------- --------------- --------------- -------------- Net loss ($1.42) ($0.94) ($2.13) ($1.65) ================ =============== =============== ============== Weighted average shares outstanding - basic and diluted 6,053,652 6,058,728 6,164,652 6,055,789 ================ =============== =============== ============== See accompanying notes. -4- ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Nine Months Ended --------------------------------------- October 3, 1999 October 1, 2000 ------------------ ---------------- (Unaudited) (Unaudited) Cash Flows From Operating Activities: Net cash provided by (used in) operating activities ($103) $ 9,563 Cash Flows From Investing Activities: Purchases of property, plant and equipment, net (4,654) (1,193) Net proceeds from sale of assets 0 1,305 -------------- ------------- Net cash provided by (used in) investing activities (4,654) 112 Cash Flows From Financing Activities: Net activity on revolving loan 6,391 (10,664) Proceeds from issuance of long-term debt 0 322 Purchase of treasury stock (2,488) 86 -------------- ------------- Net cash provided by (used in) financing activities 3,903 (10,256) -------------- ------------- Net decrease in cash (854) (581) Cash at beginning of period 1,548 1,326 -------------- ------------- Cash at end of period $ 694 $ 745 ============== ============= Interest paid $ 2,833 $ 4,058 ============== ============= 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 for the year ended July 30, 1999 has not been included. The unaudited interim consolidated financial statements reflect all 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 October 1, 2000. All such adjustments are of a normal recurring nature, except for the adjustments as described in notes 3 and 4. 2. Inventories of Acorn Products, Inc. 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, 1999 October 1, 2000 (in thousands) (in thousands) ------------------ ---------------- Finished goods $18,272 $10,869 Work in process 3,836 2,187 Raw materials and supplies 11,060 8,431 ---------------- --------------- Total inventories $33,168 $21,487 3. An asset impairment charge of $4.4 million was recognized in the second quarter of fiscal 2000 based on management review of the net realizable value of long-lived assets, specifically the value of goodwill related to the acquisitions of the Company's watering product line. 4. On August 11, 2000, the Company entered into an agreement to sell certain assets related to the manufacturing and sale of its watering products. The transaction closed on September 8, 2000, at which time the Company discontinued offering watering products for sale. The Company recognized a $1.2 million loss in connection with this transaction. This loss is reflected in "Other expenses, net" on the Consolidated Statements of Operations. 5. 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, the Company has reclassified freight expenses from sales to cost of goods sold for the third quarter of fiscal 2000, the nine month period of fiscal 2000, and for comparable reporting periods in 1999. -6- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Company's 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 the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the Company's 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 the Company's Annual Report on Form 10-K for the year ended July 30, 1999 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 October 1, 2000 Compared to Three Months Ended October 3, 1999 Net Sales. Net sales increased 4.8%, or $1.0 million, to $22.1 million in the third quarter of fiscal year 2000 compared to $21.1 million in the comparable period of calendar year 1999. The growth in net sales was caused primarily by stronger gross sales of long handled tools and injection molding products, partially offset by lower sales of watering products. Improved customer service performance of on-time and complete shipments continues to drive the core long handled tool business. The increase in injection molding sales is due to new customer activity and pricing gains. The decline in sales of watering products reflects a poor season in that product category due to weather and the Company's actions to discontinue selling watering products. Gross Profit. Gross profit increased 176%, or $2.1 million, to $3.3 million for the third quarter of fiscal year 2000 compared to $1.2 million in the comparable period of calendar 1999. Gross margin increased to 14.9% for the third quarter from 5.7% for the comparable period of calendar 1999. The increase in gross profit and margin were driven by several factors. Improved customer service levels and shipment fulfillment processes have significantly lowered distribution and freight costs versus a year ago. In addition, the Company has continued to focus on cost reductions and improvements in logistical and manufacturing processes and controls to drive year to year gains in fiscal year 2000. An emphasis on profitable relationships with customers has also favorably influenced margins. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.8 million, or 11.4%, to $5.9 million for the third quarter of fiscal year 2000 versus $6.7 million in the comparable period of 1999. As a percentage of net sales, selling, general and administrative expenses decreased to 26.8% in the third quarter of fiscal 2000 as compared to 31.7% in the comparable period of calendar 1999. The improvement reflects the absence of senior management restructuring charges and the recognition of uncollectible receivables incurred in the prior year. The improvement also reflects productivity gains and cost reductions, including lower sales expenses and a reduction in personnel. Operating Loss. Operating loss improved $2.9 million, to a loss of $2.6 million for the third quarter of fiscal year 2000 compared to a loss of $5.5 million in the comparable period of calendar 1999. The improvement in operating loss for the third quarter was primarily due to the items discussed above. Interest Expense. Interest expense increased $0.8 million, to $1.7 million for the third quarter of fiscal year 2000 compared to $0.9 million in the comparable period of 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 the Company's loan agreement, and higher borrowing levels. Amortization of Goodwill and Other Expenses, Net. Other expenses, net, including amortization of intangibles, decreased to $1.3 million in the third quarter of fiscal year 2000 compared to $2.0 million in the comparable period of calendar 1999. In fiscal year 2000, other expenses, net, consist of the loss incurred on the sale -7- by the Company of certain assets related to the manufacturing and sale of its watering products. In the comparable period of calendar 1999, other expenses, net, included the severance and other costs associated with the Company's manufacturing facility consolidation. Loss from Continuing Operations Before Income Taxes. Loss from continuing operations before income taxes improved to a loss of $5.7 million for the third quarter of fiscal year 2000 compared to $8.5 million in the comparable period of calendar 1999. The improvement in profit was attributed primarily to the items discussed above. Net Loss. Net loss was $5.7 million for the third quarter of fiscal year 2000 compared to $8.6 million in the comparable period of calendar 1999. Net loss per share (basic and diluted) was $0.94 for the third quarter of fiscal year 2000 based on a weighted average number of shares outstanding of approximately 6.1 million, compared to net loss per share of $1.42 for the comparable period of calendar 1999, based on a weighted average number of shares outstanding of approximately 6.1 million. Nine Months Ended October 1, 2000 Compared to Nine Months Ended October 3, 1999 Net Sales. Net sales increased $1.3 million or 1.4%, to $98.0 million for the first nine months of fiscal year 2000 compared to $96.7 million in the comparable period of calendar year 1999. Gains in the sale of long handled tools and injection molding products were partially offset by lower sales of watering products. Improvements in customer service levels and dissolution of the Company's wheelbarrow joint venture, resulting in wheelbarrow sales being included in results, drove the increase in core products, with loss of volume occurring at a few customer accounts as the Company continues to focus on profitable relationships. The increase in injection molding sales is due to new customer activity and pricing gains. The decline in sales of watering products reflects a poor season in that product category due to weather and the Company's actions to discontinue selling watering products. Gross Profit. Gross profit increased 44.7%, or $6.1 million, to $19.7 million for the first nine months of fiscal year 2000 compared to $13.6 million in the comparable period of calendar 1999. Gross margin increased to 20.1% for the first nine months, up from 14.1% for the comparable period of calendar 1999. The increase in gross profit and margin is due to several factors. The Company has continued to focus on cost reductions and improvements in logistical and manufacturing processes and controls to drive year to year gains in the Company's results in fiscal year 2000. This includes improvements in inventory control, including the standardization of product offerings and instituting forecasting disciplines, that have resulted in lower levels of obsolescence and shrinkage versus a year ago. Improved customer service levels and shipment fulfillment processes have significantly lowered distribution and freight costs versus a year ago. An emphasis on profitable relationships with customers has also favorably influenced margins. In 1999, the Company wrote off product tooling and obsolete inventory related to a discontinued product offering. These improvements versus prior year were partially offset by the expediting costs and manufacturing inefficiencies incurred in fiscal year 2000 related to the final effects of the consolidation of the Company's manufacturing operations. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1.1 million, or 5.8%, to $17.7 million for the first nine months of fiscal year 2000 versus $18.8 million in the comparable period of calendar 1999. As a percentage of net sales, selling, general and administrative expenses decreased to 18.1% in the first nine months of fiscal 2000 as compared to 19.5% in the comparable period of calendar 1999. The improvement reflects the absence of senior management restructuring charges and the recognition of uncollectible receivables incurred in the prior year. The improvement also reflects productivity gains and cost reductions, including lower sales expenses and a reduction in personnel. These gains were partially offset by incremental investments in information technology and other key infrastructure areas. Operating Income. Operating income increased $7.2 million, to a profit of $2.0 million for the first nine months of fiscal year 2000 compared to a loss of $5.2 million in the comparable period of calendar 1999. The improvement in operating profit for the first nine months was primarily due to the items discussed above. Interest Expense. Interest expense increased $2.3 million, to $5.4 million for the first nine months of fiscal year 2000 compared to $3.1 million in the comparable period of 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 the Company's loan agreement, and higher borrowing levels. -8- Amortization of Goodwill and Other Expenses, Net. Other expenses, net, including special charges and amortization of intangibles, decreased to $2.1 million for the first nine months of fiscal year 2000 compared to $3.3 million in the comparable period of calendar 1999. In fiscal year 2000, other expenses, net, consist of the loss incurred on the sale by the Company of certain assets related to the manufacturing and sale of its watering products. In the comparable period of calendar 1999, other expenses, net, included the severance and other costs associated with the Company's manufacturing facility consolidation and acquisition activity related costs. Asset Impairment Charge. An asset impairment charge of $4.4 million was recognized in the first nine months of fiscal 2000 based on management review of the net realizable value of certain long-lived assets. There was no asset impairment charge taken in the comparable period of calendar 1999. Loss from Continuing Operations Before Income Taxes. Loss from continuing operations before income taxes improved to a loss of $10.0 million for the first nine months of fiscal year 2000 compared to $11.6 million in the comparable period of calendar 1999. The improvement in profit was attributed primarily to the items discussed above. Net Loss. Net loss was $10.0 million for the first nine months of fiscal year 2000 compared to $13.1 million in the comparable period of calendar 1999. Net loss per share (basic and diluted) was $1.65 for the first nine months of fiscal year 2000 based on a weighted average number of shares outstanding of approximately 6.1 million, compared to net loss per share of $2.13 for the comparable period of calendar 1999, based on a weighted average number of shares outstanding of approximately 6.2 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 June. Accordingly, the Company's 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, the Company 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 last six months of the year. The seasonality of sales also causes variability in selling, general and administrative expenses as a percentage of net sales, with the fixed component of these expenses driving a lower percentage relationship to net sales in the first half of the year and a higher percentage relationship to net sales in the second half of the year. These factors increase variations in quarterly results of operations and potentially expose the Company to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for products may vary substantially from the anticipated demand, leaving the Company with excess inventory or insufficient inventory to satisfy customer orders. Liquidity and Capital Resources There have been no significant changes in the Company's liquidity and capital resources as of October 1, 2000 from those discussed in the Annual Report on Form 10-K for the fiscal year ended July 30, 1999. It is the Company's belief that it will be able to extend or refinance the existing credit facility by the end of the first quarter of fiscal 2001. Effects of Inflation The Company is adversely affected by inflation primarily through the purchase of raw materials, increased operating costs and expenses and higher interest rates. The Company believes that the effects of inflation on operations have not been material between the third quarter of fiscal 2000 and the comparable period of 1999. -9- PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit Exhibit Number Description 27 Financial Data Schedule. (b) Reports on Form 8-K. None. -10- 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, 2000 By: /s/ A. Corydon Meyer ----------------------------------------------- A. Corydon Meyer, President and Chief Executive Officer (Principal Executive Officer) Date: November 13, 2000 By: /s/ John G. Jacob ----------------------------------------------- John G. Jacob, Vice President and Chief Financial Officer (Principal Financial Officer) -11- ACORN PRODUCTS, INC. AND SUBSIDIARIES FORM 10-Q EXHIBIT INDEX Exhibit Exhibit Number Description 27 Financial Data Schedule.