As filed with the Securities and Exchange Commission on November 25, 2002
Registration No. 333-100929
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ACORN PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3265462
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
A. CORYDON MEYER
390 WEST NATIONWIDE BOULEVARD 390 WEST NATIONWIDE BOULEVARD
COLUMBUS, OHIO 43215 COLUMBUS, OHIO 43215
(614) 222-4400 (614) 222-4400
(Address, including zip code and telephone number, (Name, address, including zip code and
including area code, of registrant's principal telephone number, including area code, of agent
executive offices) for service)
It is requested that copies of notices and communications be sent to:
ROBERT J. TANNOUS, ESQ.
PORTER, WRIGHT, MORRIS & ARTHUR LLP
41 SOUTH HIGH STREET
COLUMBUS, OHIO 43215
(614) 227-1953
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is being filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 25, 2002
PROSPECTUS
ACORN PRODUCTS, INC.
THE RIGHTS OFFERING
1,766,730 Shares of Common Stock
at $5.00 per share
We are distributing at no charge to holders of our common stock,
nontransferable subscription rights to purchase shares of our common stock at a
cash subscription price of $5.00 per share. You will receive 1,000 subscription
rights for every 100 shares of common stock that you owned on November 21, 2002.
You will not be entitled to receive any subscription rights unless you hold of
record shares of our common stock as of the close of business on November 21,
2002. During the term of this rights offering, we will offer for sale up to
1,766,730 shares of our common stock, issuable upon exercise of the subscription
rights.
The subscription rights are exercisable beginning on the date of this
prospectus and continuing until 5:00 p.m., New York City time, on December 23,
2002, the closing of the rights offering. Subscription rights which are not
exercised by the expiration date of the rights offering will expire and will
have no value. The subscription rights may not be sold or transferred. The
subscription rights will not be listed for trading on any stock exchange.
There is no minimum number of shares that we must sell in order to
complete this offering, and you are not obligated to purchase any shares
pursuant to this offering. Stockholders who do not participate in this offering
will continue to own the same number of shares, but will own a smaller
percentage of our total shares outstanding to the extent that other stockholders
participate in the offering.
Per Share Total(1)
Exercise Price......................................................... $5.00 $8,833,650
Proceeds to Acorn Products, Inc........................................ $5.00 $8,833,650
- ----------
(1) Assumes the full exercise of rights by all holders thereof.
THE SHELF OFFERING BY SELLING STOCKHOLDERS
380,354 Shares of Common Stock
This prospectus may also be used by (and only by) the stockholders
listed under the section entitled "Selling Stockholders" in this prospectus for
their resale of up to 380,354 shares of our common stock. The 380,354 shares are
shares of our common stock currently held by these stockholders and shares which
they will receive upon the occurrence of certain events at the close of the
rights offering. The common stock offered by this prospectus may be offered by
the selling stockholders from time to time in transactions reported on the
Nasdaq SmallCap Market, in negotiated transactions, or otherwise, or by a
combination of these methods, at fixed prices which may be changed, at market
prices at the time of sale, at prices related to market prices, or at negotiated
prices. We will not receive any proceeds from the sale of the shares by the
selling stockholders.
* * *
Shares of our common stock are traded under the symbol "ACRN." On
November 22, 2002, the last reported sales price for our common stock was $3.50
per share. We effected a 1-for-10 reverse stock split on November 21, 2002.
AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD CAREFULLY CONSIDER
THE RISK FACTORS BEGINNING ON PAGE 14 OF THIS PROSPECTUS BEFORE EXERCISING YOUR
SUBSCRIPTION RIGHTS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE, ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is November __, 2002.
TABLE OF CONTENTS
Questions and Answers About this Offering............................1
Summary.............................................................12
Risk Factors........................................................14
Forward-Looking Information.........................................22
The Rights Offering.................................................22
Certain United States Federal Income Tax Consequences...............45
Selling Stockholders................................................46
Description of Capital Stock........................................47
Plan of Distribution................................................53
Use of Proceeds.....................................................55
Experts.............................................................56
Legal Matters.......................................................56
Where You Can Find More Information.................................56
Unless otherwise specified, the information in this prospectus is set
forth as of November __, 2002 and we anticipate that changes will occur in our
affairs after such date. We have not authorized anyone to give any information
or to make any representations, other than as contained in this prospectus,
regarding the offer contained in this prospectus. If anyone gives you any
information or makes any representation regarding this offer, you should not
rely on it as information that we have authorized. This prospectus does not
constitute an offer to sell our common stock in any state or other jurisdiction
where it is unlawful to make such an offer.
i
QUESTIONS AND ANSWERS ABOUT THIS OFFERING
WHO MAY PARTICIPATE IN THIS OFFERING?
Only holders of record of our common stock as of November 21, 2002 are
entitled to participate in this offering. CapitalSource Holdings LLC
("CapitalSource Holdings") and existing stockholders representing funds and
accounts managed by TCW Special Credits ("TCW") and Oaktree Capital Management,
LLC ("Oaktree"), who hold in the aggregate approximately 463,064 shares out of
approximately 639,737 outstanding shares of our common stock, have agreed that
they will not exercise their rights.
ANY ATTEMPT TO PARTICIPATE IN THIS OFFERING BY ANYONE THAT WAS NOT A
HOLDER OF RECORD OF OUR COMMON STOCK ON NOVEMBER 21, 2002, WILL BE NULL AND
VOID.
HOW MANY RIGHTS DO I HAVE?
You will receive 1,000 rights for every 100 shares of our common stock
that you own of record as of the close of business on November 21, 2002. For
example, if you held of record 111 shares of our common stock as of the close of
business on November 21, 2002, you have the right to purchase 1.11 x 1,000 =
1,110 shares of our common stock in this offering.
WHAT IS THE SUBSCRIPTION PRIVILEGE FOR THE RIGHTS?
After giving effect to our reverse stock split, holders of rights may
elect to purchase one share of our common stock for each right held by them at a
purchase price of $5.00 per whole share. No fractional shares will be issued in
this offering.
HOW MUCH MONEY WILL BE RAISED IN THE RIGHTS OFFERING?
The proceeds of the offering to us will depend on the number of rights
that are exercised. Assuming exercise of all rights outstanding, the gross
proceeds to us prior to paying expenses of this offering will be approximately
$8,833,650.
HOW WILL THE PROCEEDS OF THE OFFERING BE USED?
The first $1.1 million of net proceeds received from the rights
offering will be applied toward payment of accrued interest of $35,000
(calculated assuming the rights offering closes on December 23, 2002) and
principal of $600,000 owing to HLHZ Investments, LLC, pursuant to a 12%
convertible note; direct expenses of the rights offering up to $150,000; and
$315,000 toward interest of $583,333 (calculated assuming the rights offering
closes on December 23, 2002) on convertible notes issued to existing
stockholders representing funds and accounts managed by TCW and Oaktree. The
balance of any net proceeds above the first $1.1 million will be applied to our
subsidiary, UnionTools, Inc. ("UnionTools"), which would, pursuant to the terms
of our new credit facility, be required to apply such excess proceeds toward
repayment of borrowings under its $12.5 million term loan with CapitalSource
Finance LLC ("CapitalSource Finance"). Any expenses of the rights offering in
excess of $150,000 will be paid for by us out of borrowings made under our
revolving credit facility. For more information please see "Use of Proceeds"
beginning on page 55.
HOW DO I EXERCISE MY RIGHTS?
To exercise rights, you must properly complete the attached rights
certificate and deliver it to the address included in the rights certificate on
or before 5:00 p.m. on the expiration date referenced on the cover of this
prospectus. Your rights certificate must be accompanied by proper payment for
each share that you wish to purchase. IF YOU DO NOT EXERCISE YOUR RIGHTS ON OR
PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE REFERENCED ON THE COVER OF THIS
PROSPECTUS, YOUR RIGHTS WILL EXPIRE AND ANY ATTEMPTED EXERCISE OF RIGHTS
FOLLOWING SUCH DATE WILL BE NULL AND VOID.
1
AFTER I EXERCISE MY RIGHTS CAN I REVOKE MY EXERCISE?
No. Once you send in your rights certificate and payment, you cannot
revoke the exercise of your rights. You should not exercise your rights unless
you are certain that you wish to purchase additional shares of our common stock
at a purchase price of $5.00 per share.
IS EXERCISING MY RIGHT RISKY?
Yes. The exercise of your rights involves substantial risks. You should
carefully consider the risks of owning our common stock described in "Risk
Factors" beginning on page 14.
WHAT HAPPENS IF I CHOOSE NOT TO EXERCISE MY RIGHTS?
You will retain the number of shares of our common stock that you
currently own. However, if you do not exercise your rights and our other
stockholders do, the percentage of our company that you own may diminish and
your voting and other rights may be diluted depending on the extent to which
rights are exercised.
WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING BUT MY SHARES
ARE HELD IN THE NAME OF MY BROKER, CUSTODIAN BANK, OR OTHER NOMINEE?
If you hold shares of our common stock through a broker, custodian
bank, or other nominee, we will ask your broker, custodian bank, or other
nominee to notify you of the rights offering. If you wish to exercise your
subscription rights, you will need to have your broker, custodian bank, or other
nominee act for you. To indicate your decisions, you should complete and return
to your broker, custodian bank, or other nominee the form entitled "Beneficial
Owner Election Form." You should receive this from your broker, custodian bank,
or other nominee with the other rights offering materials. You should contact
your broker, custodian bank, or other nominee if you believe you are entitled to
participate in the rights offering but you have not received this form.
WHAT IF THE MARKET PRICE OF OUR COMMON STOCK IS LESS THAN THE SUBSCRIPTION PRICE
OF $5.00 PER SHARE, WHICH IS THE CASE AT THE DATE OF THIS PROSPECTUS, WHEN I AM
DECIDING WHETHER TO EXERCISE MY SUBSCRIPTION RIGHTS?
Consult your broker. Depending on the market price of our common stock,
it may be more cost effective for you to purchase shares of our common stock on
the Nasdaq SmallCap Market, if available, rather than exercise your rights,
should you desire to purchase additional shares.
WILL I BE CHARGED A SALES COMMISSION OR FEE BY THE COMPANY IF I EXERCISE MY
SUBSCRIPTION RIGHTS?
No. We will not charge a brokerage commission or a fee to rights
holders for exercising their subscription rights. However, if you exercise your
subscription rights through a broker or nominee, you will be responsible for any
fees charged by your broker or nominee.
CAN I SELL OR GIVE AWAY MY RIGHTS?
No. Any attempt to transfer your rights will render them null and void.
WHEN WILL I RECEIVE THE SHARES OF COMMON STOCK THAT I EXERCISE RIGHTS TO
ACQUIRE?
We will deliver shares of common stock purchased in this offering
promptly following the expiration of this offering.
WHAT HAPPENS IF OUR STOCKHOLDERS DO NOT EXERCISE ALL OF THE RIGHTS?
During the 30-day period following the completion of the rights
offering, TCW and Oaktree will have the right, at their election, to purchase
from us newly-issued shares at a price of $5.00 per share up to a number of
shares that is equal to the number of rights that remain unexercised at the time
of the expiration of the rights offering. As of the date of this prospectus,
representatives of TCW have informed us that they have no intention of
exercising
2
any portion of this purchase right, while representatives of Oaktree have made
no determination as to whether they intend to exercise all or any portion of
this right.
HOW MANY SHARES WILL BE OUTSTANDING BOTH PRIOR TO AND AFTER THE RIGHTS OFFERING,
INCLUDING THOSE SHARES HELD BY TCW, OAKTREE, AND CAPITALSOURCE HOLDINGS?
The following tables set forth information regarding the ownership of
our common stock by the following persons or groups of persons both prior to and
following the rights offering:
- TCW;
- Oaktree;
- CapitalSource Holdings;
- our officers and directors as a group; and
- all of our other stockholders as a group.
Each table provides the percentage of common stock owned by each of the
groups. The percentage of common stock owned is calculated on a fully diluted
basis and assumes that all convertible securities have been fully converted into
common stock and all options have been fully exercised.
All data presented in Tables I through VI are on a post-reverse
split basis.
Table I summarizes ownership information as of November 21, 2002, which
is a time immediately preceding the commencement of the rights offering. In
addition to providing information regarding our common stock, Table I provides
ownership information for other classes of our securities that are either
convertible or exercisable into shares of our common stock, along with the
number of shares issuable upon conversion or exercise into common stock.
Tables II, III, IV, V, and VI present ownership information of our
common stock as of the closing of the rights offering based on five different
assumptions. The ownership calculations assume that the rights offering will
close on December 23, 2002.
The number of shares of our common stock that will be outstanding after
the rights offering will depend on the number of rights that are properly
exercised. Tables II, III, IV, V, and VI account for the conversion of existing
notes and preferred stock held by funds and accounts managed by TCW and Oaktree
into 3,857,982 newly-issued shares of common stock, and the issuance of 221,444
additional shares of common stock to CapitalSource Holdings pursuant to an
existing agreement. In addition, Tables V and VI account for the issuance of
127,000 shares to HLHZ Investments, Inc., pursuant to a 12% convertible note.
Moreover, we will issue 233,000 shares of our common stock (the
"Restricted Stock Shares") to certain key employees and non-employee directors
in exchange for the cancellation of all options held by such key employees and
non-employee directors. The Restricted Stock Shares vest one-third on the date
of grant, one-third on June 30, 2003, and one-third on June 30, 2004. Vesting of
the Restricted Stock Shares may accelerate upon a change of control or sale of
our Company, termination without cause, or upon death or permanent disability.
Additionally, the foregoing excludes 100,000 shares of our common stock that may
become issuable under options held by our non-employee directors at an exercise
price of $5.00 per common share, of which half vest on June 30, 2003, with the
remainder of such options to vest on June 30, 2004. For purposes of calculating
ownership, Tables II, III, IV, V, and VI will assume that all options have been
exercised and all Restricted Stock Shares have vested.
Table II assumes that all of our stockholders (other than TCW, Oaktree,
and CapitalSource Holdings) exercise all of their rights under the rights
offering.
Table III assumes that our stockholders (other than TCW, Oaktree, and
CapitalSource Holdings) exercise 50% of their aggregate rights under the rights
offering, and Oaktree exercises its right to purchase from us 883,365
newly-issued shares at a price of $5.00 per share (TCW and Oaktree were granted
the right to purchase a number of newly-issued shares at a price of $5.00 per
share equal to the number of rights that remain unexercised at the time of the
expiration of the rights offering, although, as of the date hereof, TCW has
advised us that it has no intention of exercising any portion of this purchase
right.).
3
Table IV assumes that our stockholders (other than TCW, Oaktree, and
CapitalSource Holdings) exercise 50% of their aggregate rights under the rights
offering, and Oaktree does not exercise its right to purchase from us 883,365
newly-issued shares at a price of $5.00 per share (TCW and Oaktree were granted
the right to purchase a number of newly-issued shares at a price of $5.00 per
share equal to the number of rights that remain unexercised at the time of the
expiration of the rights offering, although, as of the date hereof, TCW has
advised us that it has no intention of exercising any portion of this purchase
right.).
Table V assumes that none of our stockholders (other than TCW, Oaktree,
and CapitalSource Holdings) exercise any rights under the rights offering, and
Oaktree exercises its right to purchase from us 1,766,730 newly-issued shares at
a price of $5.00 per share (TCW and Oaktree were granted the right to purchase a
number of newly-issued shares at a price of $5.00 per share equal to the number
of rights that remain unexercised at the time of the expiration of the rights
offering, although, as of the date hereof, TCW has advised us that it has no
intention of exercising any portion of this purchase right.).
Table VI assumes that none of our stockholders (other than TCW,
Oaktree, and CapitalSource Holdings) exercise any rights under the rights
offering, and Oaktree does not exercise its right to purchase from us 1,766,730
newly-issued shares at a price of $5.00 per share (TCW and Oaktree were granted
the right to purchase a number of newly-issued shares at a price of $5.00 per
share equal to the number of rights that remain unexercised at the time of the
expiration of the rights offering, although, as of the date hereof, TCW has
advised us that it has no intention of exercising any portion of this purchase
right.).
4
TABLE I
SECURITIES OWNED PRIOR TO THE RIGHTS OFFERING (AS OF NOVEMBER 21, 2002)
COMMON
SHARES ISSUABLE UPON PERCENTAGE OF
CONVERSION COMMON STOCK
NAME OF SECURITY HOLDER CLASS NUMBER (IF APPLICABLE) OWNED
----------------------- --------------- ---------- -------------------- -------------
TCW...................... Common Stock 316,204 -- 49.4%
Series A
Preferred Stock 559.4153 1,118,830(1) --
12% Convertible
Notes $4,620,851 924,170(2) --
Oaktree.................. Common Stock 114,950 -- 18.0%
Series A
Preferred Stock 263.2543 526,508(1) --
12% Convertible
Notes $5,379,149 1,075,829(2) --
CapitalSource
Holdings................. Common Stock 31,910 -- 5.0%
Anti-Dilution -- 221,444(3) --
Right
Officers and Directors
as a Group............... Common Stock 11,560 -- 1.8%
Options -- 100,000(4)(5) --
Restricted Stock -- 233,000(5)(6) --
All Other
Stockholders (7)......... Common Stock 165,113 -- 25.8%
12% Convertible
Note $600,000 120,000(2) --
- ----------
(1) Does not include accrued dividends of approximately $326,325 to TCW and
$153,565 to Oaktree, assuming the rights offering closes on December
23, 2002.
(2) Does not include accrued interest of approximately $269,549 to TCW,
$313,783 to Oaktree and $35,000 to HLHZ Investments, Inc., assuming the
rights offering closes on December 23, 2002.
(3) Shares will be issued upon the close of the rights offering. Assumes
rights offering closes on December 23, 2002.
(4) Options will be issued upon the close of the rights offering.
(5) Messrs. Cebula and Lind expressly disclaim beneficial ownership of
their options and restricted stock. All value that accrues from the
options and restricted stock is for the benefit of Oaktree; however,
for purposes of this table, such options are accounted for under
"Officers and Directors as a Group."
(6) Restricted stock will be issued upon the close of the rights offering.
(7) All Other Stockholders includes all stockholders except TCW, Oaktree,
CapitalSource Holdings, and Officers and Directors as a Group.
5
TABLE II
SECURITIES OWNED AFTER THE RIGHTS OFFERING - FULL EXERCISE OF RIGHTS BY ALL
OTHER STOCKHOLDERS (1) AND OFFICERS AND DIRECTORS AS A GROUP
NUMBER OF PERCENTAGE OF
DESCRIPTION OF HOW SHARES OF COMMON STOCK
NAME OF SECURITY HOLDER COMMON STOCK OBTAINED COMMON STOCK(2) OWNED
----------------------- ------------------------ --------------- --------------
TCW...................... Common Stock Held Prior to
Rights Offering 316,204
From Conversion of Series A
Preferred Stock 1,184,095
From Conversion of 12%
Convertible Notes 948,967
-------------- -------------
Total 2,449,266 36.2%
Oaktree.................. Common Stock Held Prior to
Rights Offering 114,950
From Conversion of Series A
Preferred Stock 557,221
From Conversion of 12%
Convertible Notes 1,104,698
-------------- -------------
Total 1,776,869 26.3%
CapitalSource
Holdings................. Common Stock Held Prior to
Rights Offering 31,910
Anti-Dilution Right 221,444
-------------- -------------
Total 253,354 3.8 %
Officers and Directors
as a Group............... Common Stock Held Prior to
Rights Offering 11,560
Common Stock Obtained from the
Exercise of Rights 115,600
Options(3)(4) 100,000
Restricted Stock(3)(4) 233,000
-------------- -------------
Total 460,160 6.8%
All Other
Stockholders(1).......... Common Stock Held Prior to
Rights Offering 165,113
Common Stock Obtained from the
Exercise of Rights 1,651,130
-------------- -------------
Total 1,816,243 26.9%
- ----------
(1) All Other Stockholders includes all stockholders except TCW, Oaktree,
CapitalSource Holdings, and Officers and Directors as a Group.
(2) Includes accrued dividends and accrued interest through December 23,
2002.
(3) Messrs. Cebula and Lind expressly disclaim beneficial ownership of
their options and restricted stock. All value that accrues from the
options and restricted stock is for the benefit of Oaktree; however,
for purposes of this table, such options are accounted for under
"Officers and Directors as a Group."
(4) Assumes all options are exercised and all shares of restricted stock
are vested.
6
TABLE III
SECURITIES OWNED AFTER THE RIGHTS OFFERING - 50% EXERCISE OF RIGHTS BY ALL
OTHER STOCKHOLDERS(1) AND OFFICERS AND DIRECTORS AS A GROUP, AND OAKTREE
EXERCISES ITS PURCHASE RIGHTS
NUMBER OF PERCENTAGE OF
DESCRIPTION OF HOW SHARES OF COMMON STOCK
NAME OF SECURITY HOLDER COMMON STOCK OBTAINED COMMON STOCK(2) OWNED
----------------------- ------------------------ --------------- --------------
TCW...................... Common Stock Held Prior to 316,204
Rights Offering
From Conversion of Series A
Preferred Stock 1,184,095
From Conversion of 12%
Convertible Notes 948,967
-------------- -------------
Total 2,449,266 36.2%
Oaktree.................. Common Stock Held Prior to
Rights Offering 114,950
From Conversion of Series A
Preferred Stock 557,221
From Conversion of 12%
Convertible Notes 1,104,698
From Exercise of Purchase Rights 883,365
-------------- -------------
Total 2,660,234 39.4%
CapitalSource
Holdings................. Common Stock Held Prior to
Rights Offering 31,910
Anti-Dilution Right 221,444
-------------- -------------
Total 253,354 3.8%
Officers and Directors
as a group............... Common Stock Held Prior to
Rights Offering 11,560
Common Stock Obtained from the
Exercise of Rights 57,800
Options(3)(4) 100,000
Restricted Stock(3)(4) 233,000
-------------- -------------
Total 402,360 6.0%
All Other
Stockholder(1)............. Common Stock Held Prior to
Rights Offering 165,113
Common Stock Obtained from the
Exercise of Rights 825,565
-------------- -------------
Total 990,678 14.6%
- ----------
(1) All Other Stockholders includes all stockholders except TCW, Oaktree,
CapitalSource Holdings, and Officers and Directors as a Group.
(2) Includes accrued dividends and accrued interest through December 23,
2002.
(3) Messrs. Cebula and Lind expressly disclaim beneficial ownership of
their options and restricted stock. All value that accrues from the
options and restricted stock is for the benefit of Oaktree; however,
for purposes of this table, such options are accounted for under
"Officers and Directors as a Group."
(4) Assumes all options are exercised and all shares of restricted stock
are vested.
7
TABLE IV
SECURITIES OWNED AFTER THE RIGHTS OFFERING - 50% EXERCISE OF RIGHTS BY ALL
OTHER STOCKHOLDERS(1) AND OFFICERS AND DIRECTORS AS A GROUP, AND OAKTREE DOES
NOT EXERCISES ITS PURCHASE RIGHTS
NUMBER OF PERCENTAGE OF
DESCRIPTION OF HOW SHARES OF COMMON STOCK
NAME OF SECURITY HOLDER COMMON STOCK OBTAINED COMMON STOCK(2) OWNED
----------------------- ------------------------ --------------- --------------
TCW...................... Common Stock Held Prior to
Rights Offering 316,204
From Conversion of Series A
Preferred Stock 1,184,095
From Conversion of 12%
Convertible Notes 948,967
-------------- -------------
Total 2,449,266 41.7%
Oaktree.................. Common Stock Held Prior to
Rights Offering 114,950
From Conversion of Series A
Preferred Stock 557,221
From Conversion of 12%
Convertible Notes 1,104,698
-------------- -------------
Total 1,776,869 30.3%
CapitalSource
Holdings................. Common Stock Held Prior to
Rights Offering 31,910
Anti-Dilution Right 221,444
-------------- -------------
Total 253,354 4.3%
Officers and Directors
as a group............... Common Stock Held Prior to
Rights Offering 11,560
Common Stock Obtained from the
Exercise of Rights 57,800
Options(3)(4) 100,000
Restricted Stock(3)(4) 233,000
-------------- -------------
Total 402,360 6.8%
All Other
Stockholders(1).......... Common Stock Held Prior to
Rights Offering 165,113
Common Stock Obtained from the
Exercise of Rights 825,565
-------------- -------------
Total 990,678 16.9%
- ----------
(1) All Other Stockholders includes all stockholders except TCW, Oaktree,
CapitalSource Holdings, and Officers and Directors as a Group.
(2) Includes accrued dividends and accrued interest through December 23,
2002.
(3) Messrs. Cebula and Lind expressly disclaim beneficial ownership of
their options and restricted stock. All value that accrues from the
options and restricted stock is for the benefit of Oaktree; however,
for purposes of this table, such options are accounted for under
"Officers and Directors as a Group."
(4) Assumes all options are exercised and all shares of restricted stock
are vested.
8
TABLE V
SECURITIES OWNED AFTER THE RIGHTS OFFERING - 0% EXERCISE OF RIGHTS BY ALL
OTHER STOCKHOLDERS(1) AND OFFICERS AND DIRECTORS AS A GROUP, AND OAKTREE
EXERCISES ITS PURCHASE RIGHTS
NUMBER OF PERCENTAGE OF
DESCRIPTION OF HOW SHARES OF COMMON STOCK
NAME OF SECURITY HOLDER COMMON STOCK OBTAINED COMMON STOCK(2) OWNED
----------------------- ------------------------ --------------- --------------
TCW...................... Common Stock Held Prior to
Rights Offering 316,204
From Conversion of Series A
Preferred Stock 1,184,095
From Conversion of 12%
Convertible Notes 978,080
-------------- -------------
Total 2,478,379 35.7%
Oaktree.................. Common Stock Held Prior to
Rights Offering 114,950
From Conversion of Series A
Preferred Stock 557,221
From Conversion of 12%
Convertible Notes 1,138,586
From Exercise of Purchase Rights
1,766,730
-------------- -------------
Total 3,577,487 51.5%
CapitalSource
Holdings................. Common Stock Held Prior to
Rights Offering 31,910
Anti-Dilution Right 221,444
-------------- -------------
Total 253,354 3.6%
Officers and Directors
as a group............... Common Stock Held Prior to
Rights Offering 11,560
Options(3)(4) 100,000
Restricted Stock(3)(4) 233,000
-------------- -------------
Total 344,560 5.0%
All Other
Stockholders(1).......... Common Stock Held Prior to
Rights Offering 165,113
Conversion of HLHZ Investments
12% Note 127,000
-------------- -------------
Total 292,113 4.2%
- ----------
(1) All Other Stockholders includes all stockholders except TCW, Oaktree,
CapitalSource Holdings, and Officers and Directors as a Group.
(2) Includes accrued dividends and accrued interest through December 23, 2002.
(3) Messrs. Cebula and Lind expressly disclaim beneficial ownership of their
options and restricted stock. All value that accrues from the options and
restricted stock is for the benefit of Oaktree; however, for purposes of
this table, such options are accounted for under "Officers and Directors as
a Group."
(4) Assumes all options are exercised and all shares of restricted stock are
vested.
9
TABLE VI
SECURITIES OWNED AFTER THE RIGHTS OFFERING - 0% EXERCISE OF RIGHTS BY ALL OTHER
STOCKHOLDERS(1) AND OFFICERS AND DIRECTORS AS A GROUP, AND OAKTREE DOES NOT
EXERCISES ITS PURCHASE RIGHTS
NUMBER OF PERCENTAGE OF
DESCRIPTION OF HOW SHARES OF COMMON STOCK
NAME OF SECURITY HOLDER COMMON STOCK OBTAINED COMMON STOCK(2) OWNED
----------------------- ------------------------ --------------- --------------
TCW...................... Common Stock Held Prior to
Rights Offering 316,204
From Conversion of Series A
Preferred Stock 1,184,095
From Conversion of 12%
Convertible Notes 978,080
-------------- -------------
Total 2,478,379 47.9%
Oaktree.................. Common Stock Held Prior to
Rights Offering 114,950
From Conversion of Series A
Preferred Stock 557,221
From Conversion of 12%
Convertible Notes 1,138,586
-------------- -------------
Total 1,810,757 35.0%
CapitalSource
Holdings................. Common Stock Held Prior to
Rights Offering 31,910
Anti-Dilution Right 221,444
-------------- -------------
Total 253,354 4.9%
Officers and Directors
as a group............... Common Stock Held Prior to
Rights Offering 11,560
Options(3)(4) 100,000
Restricted Stock(3)(4) 233,000
-------------- -------------
Total 344,560 6.6%
All Other
Stockholders(1).......... Common Stock Held Prior to
Rights Offering 165,113
Conversion of HLHZ Investments
12% Note 127,000
-------------- -------------
Total 292,113 5.6%
- ----------
(1) All Other Stockholders includes all stockholders except TCW, Oaktree,
CapitalSource Holdings, and Officers and Directors as a Group.
(2) Includes accrued dividends and accrued interest through December 23,
2002.
(3) Messrs. Cebula and Lind expressly disclaim beneficial ownership of
their options and restricted stock. All value that accrues from the
options and restricted stock is for the benefit of Oaktree; however,
for purposes of this table, such options are accounted for under
"Officers and Directors as a Group."
(4) Assumes all options are exercised and all shares of restricted stock
are vested.
10
DOES THE BOARD OF DIRECTORS RECOMMEND THAT I EXERCISE MY RIGHTS?
OUR BOARD OF DIRECTORS HAS NOT MADE ANY RECOMMENDATION TO YOU AS TO
WHETHER OR NOT YOU SHOULD EXERCISE YOUR RIGHTS.
CAN THE COMPANY CANCEL THIS OFFERING?
We may not cancel the rights offering unless required by applicable law
or regulation of any entity with authority over our company.
WHAT IF I HAVE MORE QUESTIONS?
If you have additional questions about this offering, please contact
American Stock Transfer & Trust Company, our rights agent, at (718) 921-8200.
Banks and brokers should call D.F. King & Co., Inc. at (800) 431-9633.
11
SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This prospectus includes or incorporates by reference information
about our business and financial and operating data. Before making an investment
decision, we encourage you to read the entire prospectus carefully, including
the risks discussed under the "Risk Factors" section, beginning on page 14. We
also encourage you to review our financial statements and the other information
we provide in the reports and other documents that we file with the SEC, as
described under "Where You Can Find More Information."
In this prospectus, unless the context otherwise requires a different
meaning, all references to "Acorn," "we," "our," "us," or "our company" refer to
Acorn Products, Inc. and its subsidiaries.
OUR COMPANY
Our primary business is associated with our UnionTools, Inc. subsidiary.
UnionTools was founded in 1890, and is a leading designer, manufacturer, and
marketer of branded non-powered lawn and garden products. Our primary business
is the manufacturing, marketing, and distribution of garden tools through mass
market and other distribution channels in the United States. We also sell our
products to professional and commercial end-users through distributors and
industrial supply outlets. Our principal products include long handled tools
(such as shovels, forks, rakes, and hoes), snow tools, posthole diggers, wheeled
goods (such as wheelbarrows and hand carts), striking tools, cutting tools, hand
tools, and repair handles. In order to focus on our core tool business, in
fiscal 2000, we sold assets related to the manufacturing and sale of watering
products. Our products bear well known brand names, including Landscape
Gardener(R), Perfect Cut(R), Razor-Back(R), SNOFORCE(R), Union(R), Union Pro(R),
UnionTools(R), Yard 'n Garden(R), and, pursuant to a license agreement,
Scotts(R). In addition, we manufacture and supply private label products for a
variety of customers, including products sold to Sears under the Craftsman(R)
brand name and Ace Hardware under the Ace(R) brand name.
RECENT DEVELOPMENTS
On October 11, 2002, we received a Nasdaq Staff Determination indicating
that we fail to comply with the minimum market value of publicly held shares
requirement of $1,000,000 for continued listing, and that our common stock,
therefore, is subject to delisting from the Nasdaq SmallCap Market. We have
requested a hearing before a Nasdaq Listing Qualifications Panel to appeal the
Staff Determination. We believe that upon completion of our rights offering, we
will regain compliance with all Nasdaq listing requirements; however, there can
be no assurance that the Panel will grant our request for continued listing.
On November 20, 2002, our stockholders approved an amendment to our
amended and restated certificate of incorporation, creating transfer
restrictions that are designed to restrict, until November 20, 2012, direct and
indirect transfers of our capital stock that could result in the imposition of
future limitations on our ability to use, for federal income tax purposes, Net
Operating Loss Carryforwards ("NOLs") under Section 382 of the Internal Revenue
Code and other tax attributes that are and will be available to us. For more
information on the transfer restrictions contained in our certificate of
incorporation, see the discussion under the heading "Description of Capital
Stock--Transfer Restrictions," beginning on page 49 of this prospectus.
On November 21, 2002, we effected a 1-for-10 reverse stock split on our
common stock. Unless otherwise noted, all references to shares and per share
amounts herein, including historical information, have been adjusted to give
effect to the reverse stock split.
The reverse stock split does not change our historical financial
performance. Since the number of outstanding shares of our common stock
decreased due to the reverse stock split, our adjusted income (loss) from
continuing operations per common share (basic and diluted) and the weighted
average number of common shares outstanding for the periods shown below are as
follows:
Nine months
Fiscal Year Ended (except calendar year ended 12/31/1999) ended
--------------------------------------------------------------------------------------- ---------------
08/01/1997 07/31/1998 07/30/1999 12/31/1999 12/31/2000 12/31/2001 9/29/02
---------- ---------- ---------- ---------- ---------- ---------- -------
(Unaudited) (Unaudited)
Income (loss) from
continuing
operations per
common share (basic
and diluted) ($4.83) $1.98 ($16.38) ($34.55) ($23.06) ($25.86) ($3.65)
Weighted average
number of common
shares outstanding 198,576 646,411 631,353 614,662 605,736 606,222 618,850
RISK FACTORS
The rights offering, like any investment in the shares of our common stock
involves a high degree of risk, including risks relating to our business, risks
relating to the rights offering, and risks relating to our common stock. A more
detailed discussion of these risks is set forth under "Risk Factors," beginning
on page 14 of this prospectus.
THE RIGHTS OFFERING
Common stock offered by us.... Up to 1,766,730 shares upon exercise of the
common stock purchase rights described below.
12
Common stock to be outstanding
after this offering........... 6,655,892 shares.(1)
Record date................... November 21, 2002.
Exercise Price................ $5.00 per whole share of common stock.
Subscription right............ We will distribute 1,000 rights for every 100
shares of our common stock that you own of
record as of the close of business on
November 21, 2002. For example, if you held
111 shares of our common stock of record as
of the close of business on November 21,
2002, you have the right to purchase 1.11 x
1,000 = 1,110 shares of our common stock in
this offering. You are not obligated to
exercise any rights, and you may exercise
less than all your rights. However, you may
not exercise your rights for fractional
shares of common stock. After giving effect
to our reverse stock split, holders of rights
may elect to purchase one share of our common
stock for each right held by them at a
purchase price of $5.00 per whole share.
Purchase right of TCW and
Oaktree....................... During the 30-day period following completion
of the offering, TCW and Oaktree (or any of
their affiliates or designees) will be
granted the right, at their election, to
purchase from us newly-issued shares at a
price of $5.00 per share up to a number of
shares that is equal to the number of rights
that remain unexercised at the expiration of
the offering. As of the date of this
prospectus, representatives of TCW have
informed us that they have no intention of
exercising any portion of this purchase
right, while representatives of Oaktree have
made no determination as to whether they
intend to exercise all or any portion of this
right.
No transferability............ The rights are not transferable and may only
be exercised by the person to whom they were
granted.
No revocation................. Once exercised, you may not revoke or change
your exercise or request a refund of monies
paid.
Use of proceeds............... The first $1.1 million of net proceeds
received from the rights offering will be
applied toward payment of accrued interest of
$35,000 (calculated assuming the rights
offering closes on December 23, 2002) and
principal of $600,000 owing to HLHZ
Investments, LLC, pursuant to a 12%
convertible note; direct expenses of the
rights offering up to $150,000; and $315,000
toward interest of $583,333 (calculated
assuming the rights offering closes on
December 23, 2002) on convertible notes
issued to existing stockholders representing
funds and accounts managed by TCW and
Oaktree. The balance of any net proceeds
above the first $1.1 million will be applied
to our subsidiary, UnionTools, which would,
pursuant to the terms of our new credit
facility, be required to apply such excess
proceeds toward repayment of borrowings under
its $12.5 million term loan with
CapitalSource Finance. Any expenses of the
rights offering in excess of $150,000 will be
paid for by us out of borrowings made under
our revolving credit facility.
- -----------------------------------
(1) Assumes full exercise of all rights, and includes (i) conversion of
the 12% convertible notes, the Series A preferred stock, and the HLHZ
Investments, LLC 12% note, as of December 23, 2002; (ii) issuance of
anti-dilution rights to CapitalSource Holdings, as of December 23, 2002; and
(iii) issuance of 233,000 shares of restricted stock to officers and directors.
13
No board recommendation....... Our board of directors does not make any
recommendation to stockholders regarding the
exercise of rights.
Cancellation.................. We may not cancel the rights offering unless
required by applicable law or regulation of
any entity with authority over our company.
Procedure for exercise........ To exercise your rights, you must complete
the rights certificate and deliver it to the
rights agent, American Stock Transfer & Trust
Company, with full payment of the
subscription price to the rights agent on or
prior to the expiration date. If you cannot
deliver your rights certificate to the rights
agent on time, you may follow the guaranteed
delivery procedures outlined under "Special
Procedure Under `Notice of Guaranteed
Delivery' Form," beginning on page 43 of this
prospectus.
How rights holders can
exercise rights through
others........................ If you hold shares of our common stock
through a broker, custodian bank, or other
nominee, we will ask your broker, custodian
bank, or other nominee to notify you of the
rights offering. If you wish to exercise your
rights, you will need to have your broker,
custodian bank, or other nominee act for you.
To indicate your decision, you should
complete and return to your broker, custodian
bank, or other nominee the form entitled
"Beneficial Owner Election Form." You should
receive this form from your broker, custodian
bank, or other nominee with the other rights
offering materials. You should contact your
broker, custodian bank, or other nominee if
you believe you are entitled to participate
in the rights offering but you have not
received this form.
Certain United States federal
income tax consequences....... A holder of common stock should not recognize
income or loss for federal income tax
purposes in connection with the receipt or
exercise of subscription rights in connection
with the receipt or exercise of subscription
rights in the rights offering. For a detailed
discussion see, "Certain United States
Federal Income Tax Consequences," beginning
on page 45 of this prospectus.
Issuance of stock
certificates.................. We will issue certificates representing
shares purchased in the rights offering as
soon as practicable after the expiration of
the rights offering.
Nasdaq SmallCap Market
trading symbol................ "ACRN."
Rights agent.................. American Stock Transfer & Trust Company.
RISK FACTORS
This offering and an investment in the shares of our common stock involve
a high degree of risk. You should carefully consider the following factors and
other information presented or incorporated by reference in this prospectus
before deciding to invest in our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us may also impair our operations and
business. If we do not successfully address any one or more of the risks
described below, there could be a material adverse effect on our financial
condition, operating results, and business. We cannot assure you that we will
successfully address these or other risks.
14
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS AND PROFITABILITY MAY BE ADVERSELY AFFECTED BY THE WEATHER.
Weather is the most significant factor in determining market demand for
our products and is inherently unpredictable. Inclement weather during the
spring gardening season and lack of snow during the winter may have a material
adverse effect on our business, financial condition, and results of operations.
OUR BUSINESS IS HIGHLY SEASONAL AND SEASONAL FLUCTUATIONS MAY HAVE AN ADVERSE
IMPACT ON OUR RESULTS OF OPERATIONS.
The lawn and garden industry is seasonal in nature, with a high proportion
of sales and operating income generated in January through May. Accordingly, our
sales tend to be greater during those months. As a result, our operating results
depend significantly on the spring selling season. To support this sales peak,
we must anticipate demand and build inventories of finished goods throughout the
fall and winter. Accordingly, our levels of raw materials and finished goods
inventories tend to be at their highest, relative to sales, during the fourth
quarter of the fiscal year. These factors increase variations in our quarterly
results of operations and potentially expose us to greater adverse effects of
changes in economic and industry trends. Moreover, actual demand for our
products may vary substantially from the anticipated demand, leaving us with
either excess inventory or insufficient inventory to satisfy customer orders.
WE RELY ON A SMALL NUMBER OF CUSTOMERS FOR A MAJORITY OF OUR SALES.
Our ten largest customers in the aggregate accounted for approximately 57%
of gross sales in fiscal 2001. A substantial reduction or cessation of sales to
these or other major customers could have a material adverse effect on our
business, financial condition, and results of operations.
A CONSOLIDATION OF DISTRIBUTION CHANNELS IN OUR INDUSTRY MAY HAVE AN ADVERSE
IMPACT ON OUR RESULTS OF OPERATIONS.
Certain retail distribution channels in the lawn and garden industry, such
as mass merchants and home centers, are experiencing consolidation. There can be
no assurance that such consolidation will not have an adverse impact on certain
customers or result in a substantial reduction or cessation of purchases of our
products by certain customers. In addition, we are facing increasing pressure
from retailers with respect to pricing, cooperative advertising, and other
rebates as the market power of large retailers continues to grow. There can be
no assurance that such pressures will not have an adverse impact on our
business, financial condition, and results of operations.
A REDUCTION IN THE GROWTH OF RETAILERS IN OUR INDUSTRY MAY HAVE AN ADVERSE
IMPACT ON OUR SALES.
A key element of our growth strategy is to increase sales in certain
distribution channels that we believe are growing more rapidly than the overall
industry, such as home centers and mass merchants through retailers such as
Sears and Home Depot. There can be no assurance that retailers in such
distribution channels will continue to open a significant number of new stores
or, if opened, that we will be chosen to supply our products to all or a
significant portion of such stores. In addition, there can be no assurance that
such stores will generate significant additional sales for us or that such
stores will not result in a reduction of sales to our other customers, whether
through consolidation or otherwise.
IF WE LOSE ONE OR MORE OF OUR KEY EXECUTIVE OFFICERS, OUR ABILITY TO MANAGE OUR
BUSINESS COULD BE ADVERSELY IMPACTED AND OUR BUSINESS AND FINANCIAL CONDITION
MAY BE HARMED.
Our future growth and development is largely dependent upon the services
of A. Corydon Meyer, our President and Chief Executive Officer, as well as our
other executive officers. The loss of Mr. Meyer's services, or the services of
one or more of our other executive officers, could have a material adverse
effect on us.
15
IF WE ARE UNABLE TO OBTAIN RAW MATERIALS AT OUR CURRENT PRICES, THEN OUR RESULTS
OF OPERATION AND ABILITY TO MANUFACTURE GOODS MAY BE IMPACTED.
Our products require the supply of raw materials consisting primarily of
steel, plastics, and ash wood. Although we have several suppliers for most of
our raw materials, there can be no assurance that we will not experience
shortages of raw materials or components essential to our production processes
or be forced to seek alternative sources of supply. In addition, there can be no
assurance that prices for such materials will remain stable. Any shortages of
raw materials may result in production delays and increased costs which could
have a material adverse effect on our business, financial condition, and results
of operations.
WE FACE INTENSE COMPETITION IN THE LAWN AND GARDEN INDUSTRY THAT MAY AFFECT OUR
ABILITY TO MAKE SALES.
All aspects of the lawn and garden industry, including attracting and
retaining customers and pricing, are highly competitive. We compete for
customers with large consumer product manufacturers and numerous other companies
that produce specialty home and garden products, as well as with foreign
manufacturers that export their products to the United States. Many of these
competitors are larger and have significantly greater financial resources than
us. There can be no assurance that increased competition in the lawn and garden
industry, whether from existing competitors, new domestic manufacturers, or
additional foreign manufacturers entering the United States market, will not
have a material adverse effect on our business, financial condition, and results
of operations.
IF WE HAVE A LABOR DISPUTE WITH OUR EMPLOYEES IN THE FUTURE, IT MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF
OPERATION.
Most of our hourly associates are covered by collective bargaining or
similar labor agreements. We currently are a party to three such agreements: two
expire in 2003 and one expires in 2004. There can be no assurance that we will
be successful in negotiating new labor contracts on terms satisfactory to us or
without work stoppages or strikes. A prolonged work stoppage or strike at any of
our facilities could have a material adverse effect on our business, financial
condition, and results of operations.
WE MAY INCUR SUBSTANTIAL COSTS IN COMPLYING WITH ENVIRONMENTAL REGULATIONS THAT
WILL IMPACT OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATION.
We are subject to various federal, state, and local environmental laws,
ordinances, and regulations governing, among other things, emissions to air,
discharge to waters, and the generation, handling, storage, transportation,
treatment, and disposal of hazardous substances and wastes. We have made, and
will continue to make, expenditures to comply with these environmental
requirements and regularly review our procedures and policies for compliance
with environmental laws. We also have been involved in remediation actions with
respect to certain facilities. Amounts expended by us in such compliance and
remediation activities have not been material to us. Current conditions and
future events, such as changes in existing laws and regulations, may, however,
give rise to additional compliance or remediation costs that could have a
material adverse effect on our business, financial condition, or results of
operations. Furthermore, as is the case with manufacturers in general, if a
release of hazardous substances occurs on or from our properties or any
associated offsite disposal location, or if contamination from prior activities
is discovered at any of our properties, we may be held liable and the amount of
such liability could be material.
A DECREASE IN NEW HOUSING STARTS COULD ADVERSELY IMPACT DEMAND FOR OUR PRODUCTS.
New housing starts often represent an addition to the overall number of
consumers in the lawn and garden tool market and, accordingly, an increase in
demand. Similarly, government spending on highways, bridges, and other
construction projects often represents an increase in demand for long handled
tools. A decline in housing starts or government spending on construction
projects could result in a decrease in demand for our products and, accordingly,
could have a material adverse effect on our business, financial condition, and
results of operations.
16
ADVERSE ECONOMIC CHANGES IN THE UNITED STATES COULD RESULT IN DECREASED DEMAND
FOR OUR PRODUCTS.
Adverse changes in general economic conditions in the United States,
including the level and availability of consumer debt, the level of interest
rates, and consumer sentiment regarding the economy in general, could result in
a decrease in demand for our products and, accordingly, could have a material
adverse effect on our business, financial condition, and results of operations.
WE MAY LOSE OUR ABILITY TO USE CERTAIN NET OPERATING LOSS CARRYFORWARDS
("NOLS"), WHICH MAY SIGNIFICANTLY RESTRICT US FROM OFFSETTING FUTURE TAXABLE
INCOME.
On November 20, 2002, our stockholders approved an amendment to our
amended and restated certificate of incorporation, creating transfer
restrictions that are designed to restrict, until November 20, 2012, direct and
indirect transfers of our capital stock that could result in the imposition of
future limitations on our ability to use, for federal income tax purposes, Net
Operating Loss Carryforwards ("NOLs") under Section 382 of the Internal Revenue
Code and other tax attributes that are and will be available to us. Section 382
limits the use of losses and other tax benefits by a company that has undergone
certain ownership changes. If the transfer restrictions in our amended and
restated certificate of incorporation, which are designed to prevent these
certain ownership changes, are found to be unenforceable or if an ownership
change otherwise occurs, we may be significantly restricted in our ability to
utilize our existing NOLs to offset taxable income in the future.
We believe the transfer restrictions are enforceable under Delaware law.
However, similar transfer restrictions have not been tested in Delaware courts.
Purchases by other stockholders of our common stock and other events that occur
prior to the transfer restrictions' becoming effective can affect the percentage
shift in our ownership as determined for purposes of Section 382, and any such
acquisition could increase the likelihood that we will experience an ownership
change if such shift causes the ownership of 5% shareholders to increase. There
also can be no assurance, in the event transfers in violation of the Transfer
Restrictions are attempted, that the Internal Revenue Service will not assert
that such transfers have federal income tax significance notwithstanding the
transfer restrictions.
At December 31, 2001, we had net operating loss carryforwards of
approximately $76.8 million for income tax purposes that expire in varying
amounts in the years 2009 through 2021. Of this amount, approximately $28.6
million of net operating losses that originated prior to our initial public
offering (IPO) on June 27, 1997 are subject to limitation under Internal Revenue
Code Section 382. There are no Section 382 limitations on the remaining $48.2
million of net operating loss carryforwards. In accordance with the provisions
of Section 382, utilization of the pre-IPO net operating losses is limited to
approximately $1.2 million annually unless the Section 382 limitation exceeds
the taxable income for a given year, in which case the excess amount carries
over to and increases the annual Code Section 382 limitation for the succeeding
year. Due to the carryover of excess Code Section 382 limited net operating
losses, at December 31, 2001, we have approximately $6.1 million of Code Section
382 limited net operating losses that are available to offset taxable income in
2002 (in addition to the $48.2 million of net operating loss carryforwards that
are not limited). We also have capital loss carryforwards of approximately $6.2
million for income tax purposes that expire in 2002 and 2003. A table of
available net operating loss carryforwards is as follows:
17
NOL Generated
Period During the Year Expiration Year
- --------------------------------- ---------------- -------------------------
(in thousands)
NOLS LIMITED BY CODE SECTION 382
FYE July 1994 $2,369 2008
FYE July 1995 5,579 2009
FYE July 1996 9,765 2010
Short period ended 6/27/97 10,864 2011
--------------
28,577 Pre-IPO NOLs
--------------
NOLS NOT LIMITED BY CODE SECTION 382
Period 6/28/97 through 8/1/97 1,152 2011
FYE July 1998 7,284 2012
FYE July 1999 6,645 2018
FYE December 1999 12,022 2019
FYE December 2000 14,593 2020
FYE December 2001 6,513 2021
--------------
48,209 Post-IPO NOLs
--------------
$76,786 Total NOLs at December 31, 2001
==============
NOLs benefit us by offsetting taxable income dollar-for-dollar by the amount of
the NOLs, thereby eliminating (subject to a relatively minor alternative minimum
tax) the federal corporate tax on that income. The maximum federal corporate tax
rate is currently 35%.
Despite the adoption of the Transfer Restrictions, there still remains a
risk that certain changes in relationships among stockholders or other events
will cause an "ownership change" of our Company under Section 382.
RISKS RELATED TO THIS RIGHTS OFFERING
YOUR PERCENTAGE OF OWNERSHIP AND VOTING RIGHTS MAY DECREASE, EVEN IF YOU
EXERCISE YOUR SUBSCRIPTION RIGHT IN FULL.
This rights offering may result in our issuance of up to an additional
1,766,730 shares of our common stock. Even if you choose to exercise your basic
subscription privilege in full, your relative ownership interest in us may be
diluted depending upon the extent to which other rights holders exercise their
subscription rights and whether TCW and Oaktree, in their sole discretion,
purchase from us newly-issued shares at a price of $5.00 per share up to a
number of shares that is equal to the number of rights that remain unexercised
at the time of the expiration of the rights offering. Your voting rights and
percentage interest in any of our net earnings may also be diluted whether or
not you exercise your rights in full. We are unable to determine the precise
total number of shares that will actually be sold in the rights offering.
THE SUBSCRIPTION PRICE DETERMINED FROM THIS OFFERING IS NOT AN INDICATION OF OUR
VALUE.
The subscription price does not necessarily bear any relationship to the
book value of our assets, past operations, cash flows, losses, financial
condition, or any other established criteria for value. You should not consider
the subscription price as an indication of our value or any assurance of future
value. After the date of this prospectus, our common stock may trade at prices
above or below the subscription price.
18
IF YOU EXERCISE YOUR SUBSCRIPTION RIGHTS, YOU MAY LOSE MONEY IF OUR SHARES ARE
TRADING LESS THAN THE SUBSCRIPTION PRICE ON THE NASDAQ SMALLCAP MARKET.
If you exercise your rights, you may lose money if there is a decline in
the trading price of our shares of common stock. The trading price of our common
stock in the future may decline below the subscription price. We cannot assure
you that the subscription price will remain below any future trading price for
the shares of our common stock. Future prices of the shares of our common stock
may adjust positively or negatively depending on various factors including our
future revenues and earnings, changes in earnings estimates by analysts, our
ability to meet analysts' earnings estimates, speculation in the trade or
business press about our operations, and overall conditions affecting our
businesses, economic trends, and the securities markets.
YOU MAY NOT REVOKE THE EXERCISE OF YOUR RIGHTS EVEN IF THERE IS A DECLINE IN OUR
COMMON STOCK PRICE PRIOR TO THE EXPIRATION DATE OF THE SUBSCRIPTION PERIOD.
Even if our common stock price declines below the subscription price for
the common stock, resulting in a loss on your investment upon the exercise of
rights to acquire shares of our common stock, you may not revoke or change your
exercise of rights after you send in your subscription forms and payment.
YOU WILL NOT RECEIVE INTEREST ON SUBSCRIPTION FUNDS RETURNED TO YOU.
If we cancel the rights offering, neither we nor the rights agent will
have any obligation with respect to the subscription rights except to return,
without interest, any subscription payments to you.
YOUR PARTICIPATION IN THE OFFERING IS NOT ASSURED BECAUSE WE MAY TERMINATE THE
OFFERING.
Once you exercise your subscription rights, you may not revoke the
exercise for any reason unless we amend the offering. If we decide to terminate
the offering, we will not have any obligation with respect to the subscription
rights except to return any subscription payments, without interest.
TO EXERCISE YOUR SUBSCRIPTION RIGHTS, YOU NEED TO ACT PROMPTLY AND FOLLOW
SUBSCRIPTION INSTRUCTIONS.
Stockholders who desire to purchase shares in this rights offering must
act promptly to ensure that all required forms and payments are actually
received by the rights agent prior to December 23, 2002, the expiration date. If
you fail to complete and sign the required subscription forms, send an incorrect
payment amount, or otherwise fail to follow the subscription procedures that
apply to your desired transaction the rights agent may, depending on the
circumstances, reject your subscription or accept it to the extent of the
payment received. Neither we nor our rights agent undertakes to contact you
concerning, or attempt to correct, an incomplete or incorrect subscription form
or payment. We have the sole discretion to determine whether a subscription
exercise properly follows the subscription procedures.
IF A MATERIAL ADVERSE CHANGE OCCURS PRIOR TO THE CLOSE OF THE RIGHTS OFFERING,
TCW AND OAKTREE MAY NOT CONVERT THEIR PREFERRED STOCK AND 12% CONVERTIBLE NOTES.
If a material adverse change occurs prior to the completion 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), TCW and Oaktree
will not be required to convert their preferred stock. In addition, TCW and
Oaktree will not be required to convert their 12% convertible notes. The
occurrence of a material adverse change would prohibit us from exchanging a
substantial amount of debt into common equity of our Company, and the resulting
interest payments on the 12% convertible notes and cumulative dividends on the
preferred stock may have an adverse affect on our financial condition.
19
RISKS RELATING TO OUR COMMON STOCK
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN THE PRICE PER SHARE OF OUR COMMON
STOCK FOR A VARIETY OF REASONS, SOME OF WHICH ARE OUT OF OUR CONTROL.
The market price of our common stock may fluctuate significantly from time
to time for a variety of factors, many of which are outside of our control,
including:
- variations in our financial results;
- changing conditions in our industry; or
- changing conditions in the general economy.
Stock markets generally experience price and volume volatility from time to time
and this may affect the price of our common stock for reasons unrelated to our
business performance.
WE DO NOT INTEND TO PAY DIVIDENDS ON SHARES OF OUR COMMON STOCK IN THE
FORESEEABLE FUTURE.
We currently expect to retain our future earnings, if any, to reduce debt
and to use in the operation of our business. In addition, our credit agreement
with CapitalSource Finance and the Series A convertible preferred stock held by
TCW and Oaktree limit our ability to provide dividends to our common
stockholders. We do not anticipate paying any cash dividends on shares of our
common stock in the foreseeable future.
THE ISSUANCE OF PREFERRED STOCK OR ADDITIONAL STOCK MAY ADVERSELY AFFECT OUR
STOCKHOLDERS.
Our board of directors has the authority to issue up to 1,000,000 shares
of our preferred stock, of which 822.6696 are currently issued and outstanding.
Our board of directors is authorized to determine the terms, including voting
rights, of the preferred shares, without any further vote or action by our
common stockholders. The voting and other rights of the holders of our common
stock, will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. We may issue
additional preferred stock in connection with one or more of the following:
- acquisitions;
- strategic investments;
- financing transactions, such as the public or private offering of
convertible securities; or
- otherwise for corporate purposes that have not been identified.
Similarly, our board has the right to issue additional shares of our
common stock, up to the total number of shares authorized, without any further
vote or action by common stockholders (as long as the additional shares of
common stock are not reserved for any other purpose including issuance of common
stock upon the conversion of outstanding Series A convertible preferred stock
and conversion of the 12% convertible notes), which would have the effect of
diluting common stockholders. We may issue additional common stock in connection
with one or more of the following:
- acquisitions;
- strategic investments;
- financing transactions, such as the public or private offering of
securities;
- future employee benefit plans; or
- otherwise for corporate purposes that have not yet been identified.
ISSUED SHARES OF PREFERRED STOCK HAVE A LIQUIDATION PREFERENCE OVER OUR COMMON
STOCK.
The 822.6696 outstanding shares of preferred stock have a liquidation
preference of $10,000 per share or approximately $8,226,696 in the aggregate. In
addition, any unpaid cumulative dividends on the preferred stock will be added
to the liquidation preference. This liquidation preference must be paid in full
before any distributions
20
may be made to the holders of our common stock. These shares of preferred stock,
however, are mandatorily convertible into shares of our common stock upon the
completion of this rights offering.
SHARES ELIGIBLE FOR FUTURE SALE COULD CAUSE OUR STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of future
sales of substantial amounts of our common stock, or the perception that such
sales could occur. Further, TCW and Oaktree have the right to require us to
register shares of common stock underlying the outstanding preferred stock and
convertible notes that they own, which may facilitate their sale of shares in
the public market. In addition, we may be obligated to register the shares of
our common stock that TCW and Oaktree may purchase in connection with this
transaction.
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION CONTAINS TRANSFER
RESTRICTIONS THAT MAY AFFECT YOUR ABILITY TO BUY OR SELL OUR COMMON STOCK.
Article Fifth of our amended and restated certificate of incorporation
generally restricts, until November 20, 2012, any direct or indirect transfer of
"stock" (which term, for purposes of the transfer restrictions, includes our
common stock, our preferred stock and any other equity security treated as
"stock" under Section 382) if:
- the effect would be to increase the ownership of stock by any person
who during the preceding three-year period owned 4.5% or more of our
stock,
- would otherwise increase the percentage of stock owned by a "5
percent shareholder" (as defined in Section 382, substituting "4.5
percent" for "5 percent"), or
- otherwise would cause an ownership change of our Company within the
meaning of Section 382.
The transfer restrictions will restrict a stockholder's ability to
acquire, directly or indirectly, additional stock of our Company in excess of
the specified limitations. Further, a stockholder's ability to dispose of our
stock may be restricted as a result of the transfer restrictions, and a
stockholder's ownership of our stock may become subject to the transfer
restrictions upon the actions taken by related persons. The transfer
restrictions may result in a decreased valuation of our common stock due to the
resulting restrictions on transfers to persons directly or indirectly owning or
seeking to acquire a significant block of our common stock.
OUR COMMON STOCK COULD BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH COULD
SERIOUSLY LIMIT LIQUIDITY AND NEGATIVELY AFFECT THE VALUE OF OUR COMMON STOCK.
Under the rules of the Nasdaq SmallCap Market, our common stock may be
subject to delisting if the closing bid price for our common stock is less than
$1.00 over a 30 consecutive trading-day period, or if the market value of our
publicly held shares is less than $1,000,000. Before we commenced the 10-for-1
reverse stock split on November 21, 2002, the closing bid price for our common
stock was less than $1.00 for over a 30 consecutive trading-day period. We
cannot assure you that we will be successful in meeting this requirement in the
future.
On October 11, 2002, we received a Nasdaq Staff Determination indicating
that we fail to comply with the minimum market value of publicly held shares
requirement of $1,000,000 for continued listing, and that our common stock,
therefore, is subject to delisting from the Nasdaq SmallCap Market. We have
requested a hearing before a Nasdaq Listing Qualifications Panel to appeal the
Staff Determination. We believe that upon completion of our rights offering, we
will regain compliance with all Nasdaq listing requirements; however, there can
be no assurance that the Panel will grant our request for continued listing.
The market value of our common shares held by non-affiliates is
approximately $689,581, based on the closing stock price of $3.50 per share as
of November 22, 2002. Assuming that the rights offering closes on December 23,
2002, with no exercise of the rights, CapitalSource Holdings will be issued an
additional 221,444 shares of our common stock and HLHZ Investments, LLC will be
issued 127,000 shares of our common stock upon conversion of their 12%
convertible notes, thereby bringing the total number of our publicly held
shares to approximately 545,467 shares. Upon consummation of the foregoing
events, the market value of our common shares held by non-affiliates will be
$1,909,135, if the stock price is $3.50. Based on these assumptions, we will
meet the $1,000,000 market value of publicly held shares requirement upon the
close of the rights offering, even
21
if there are no subscriptions for shares thereunder by recipients of the rights;
however, we cannot assure you that we will continue to meet the minimum market
value of publicly held shares, and a decline in our stock price may affect our
ability to meet this requirement in the future. Based upon the foregoing, the
trading price of our common stock would need to decrease below $1.8333 per share
(on a post-reverse split basis) for the market value of our publicly held
shares to be less than $1,000,000.
If we are delisted, stockholders may experience a greater difficulty in
trading shares of our common stock and the price of our common stock could be
adversely affected. The lack of liquidity may also make it more difficult for us
to raise capital.
In addition to satisfying the above requirements, we would also need to
continue to satisfy all other applicable continuing listing requirements of the
Nasdaq SmallCap Market. We cannot assure you that we will be successful in
meeting these and other continued listing criteria of the Nasdaq SmallCap Market
or that, in the event our common stock is delisted from the Nasdaq SmallCap
Market, we will be successful in obtaining listing on any other stock exchange
our quotation system.
* * *
The factors set forth above are not exhaustive. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and we will not undertake, and specifically decline, any obligation to
publicly release the results of any revisions which may be made to any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of anticipated or
un-anticipated events. New factors emerge from time to time and it is not
possible for us to predict all such factors, nor can we assess the impact of
each such factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Therefore, forward-looking
statements should not be relied upon as a prediction of actual future results.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify such forward-looking statements by the
words "expects," "intends," "plans," "projects," "believes," "estimates," and
similar expressions. In the normal course of business, we, in an effort to help
keep our stockholders and the public informed about our operations, may from
time to time issue such forward-looking statements, either orally or in writing.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or
projections involving anticipated revenues, earnings, or other aspects of
operating results. We base the forward-looking statement on our current
expectations, estimates, and projections. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties, and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Therefore, the actual results of the future events described in
the forward-looking statements in this prospectus or elsewhere, could differ
materially from those stated in the forward-looking statements. Additional
information concerning factors that could cause actual results to differ
materially from those in our forward-looking statements is contained under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations," in our Annual Report on Form 10-K/A, for the year ended December
31, 2001.
THE RIGHTS OFFERING
Before exercising any rights, you should read carefully the information
set forth under "Risk Factors" beginning on page 14 of this prospectus.
BACKGROUND OF THE RIGHTS OFFERING
The rights offering is part of a plan of recapitalization which was
approved by our stockholders at a meeting held on November 20, 2002.
22
We entered into a purchase agreement, dated as of June 26, 2002, whereby
we intend to recapitalize by converting preferred stock and existing debt owed
to existing stockholders representing funds and accounts managed by TCW and
Oaktree into our common stock and allow our other stockholders to purchase
additional shares of common stock through a rights offering.
We have included below pro forma condensed financial statements reflecting
the 1-for-10 reverse stock split on our common stock and the effects of the
rights offering based on a range of participation. Specifically, we have
included a pro forma condensed Statement of Operations for fiscal 2001 and for
the nine months ended September 29, 2002, and a pro forma condensed Balance
Sheet as of September 29, 2002. The different scenarios assume that the
recapitalization plan as described below is fully executed, with the range
variability driven by the level of participation in the subsequent rights
offering.
In summary, the pro forma condensed balance sheet indicates on a pro forma
basis, that at September 29, 2002, Stockholders' Equity would equal $22.9
million assuming 0% participation in the rights offering. At 50% and 100%
participation, Stockholders' Equity would increase to $26.7 million and $31.1
million, respectively.
For the fiscal 2001 pro forma condensed statement of operations, the
increase in equity and corresponding reduction in debt would have reduced
interest expense between $1.7 million to $2.4 million based on the range of
adjustments. The weighted average number of common shares outstanding
calculated to a range of 4,716,172 to 6,359,088 shares based on the range of
adjustments. The result was a range of net losses per common share of $2.97
with no participation, $2.50 with 50% participation, and $2.09 at 100%
participation in the rights offering.
For the pro forma condensed statement of operations for the nine months
ended September 29, 2002, similar effects to the fiscal 2001 adjustments have
resulted in a range of net losses per common share of $0.16 with no
participation, $0.11 with 50% participation, and $0.07 at 100% participation in
the rights offering.
The pro forma condensed financial statements contained below are intended
for information purposes, and do not purport to represent what the recapitalized
entity's results of continuing operations or financial position would have
actually been had the transaction in fact occurred on an earlier date, or
project the result for any future date or period.
23
Pro Forma Condensed Balance Sheet
As of September 29, 2002
(Dollars in thousands, except per common share data)
Range of Adjustments Pro Forma as Adjusted
---------------------------------- --------------------------------
Recapitalization Completed Recapitalization Completed
Plus Rights Offering: Plus Rights Offering:
---------------------------------- --------------------------------
0% 50% 100% 0% 50% 100%
Unaudited Subscribed Subscribed Subscribed Subscribed Subscribed Subscribed
--------- ---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Current assets:
Accounts Receivable $ 13,229 $ -- $ -- $ -- $ 13,229 $ 13,229 $ 13,229
Inventory 21,448 21,448 21,448 21,448
Prepaids and other current assets 3,215 3,215 3,215 3,215
-------- -------- -------- -------- -------- -------- --------
Total current assets 37,892 -- -- -- 37,892 37,892 37,892
Property, plant and equipment, net of accumulated
depreciation 11,216 11,216 11,216 11,216
Goodwill, net of accumulated amortization 7,567 7,567 7,567 7,567
Other assets 2,445(1) 949 949 949 3,394 3,394 3,394
-------- -------- -------- -------- -------- -------- --------
Total assets $ 59,120 $ 949 $ 949 $ 949 $ 60,069 $ 60,069 $ 60,069
======== ======== ======== ======== ======== ======== ========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS'
EQUITY
Current liabilities:
Revolving credit facility $ 10,383(2) $ 262 $ (238) $ (238) $ 10,645 $ 10,145 $ 10,145
Accounts payable 5,555 5,555 5,555 5,555
Accrued expenses 6,725(4) (591) (591) (591) 6,134 6,134 6,134
Other current liabilities 70 70 70 70
-------- -------- -------- -------- -------- -------- --------
Total current liabilities 22,733 (329) (829) (829) 22,404 21,904 21,904
Term loan facility 12,500(2) -- (3,298) (7,715) 12,500 9,202 4,785
12% Convertible notes 10,600(3) (10,600) (10,600) (10,600) -- -- --
Other long term liabilities 1,052 1,052 1,052 1,052
-------- -------- -------- -------- -------- -------- --------
Total liabilities 46,885 (10,929) (14,727) (19,144) 35,956 32,158 27,741
Series A redeemable preferred stock 8,272(4) (8,272) (8,272) (8,272) -- -- --
Redeemable common stock 160(5) 1,087 1,087 1,087 1,247 1,247 1,247
Total stockholders' equity 3,803(6) 19,063 22,861 27,278 22,866 26,664 31,081
-------- -------- -------- -------- -------- -------- --------
Total liabilities, redeemable stock and
stockholders' equity $ 59,120 $ 949 $ 949 $ 949 $ 60,069 $ 60,069 $ 60,069
======== ======== ======== ======== ======== ======== ========
Notes: (1) Additional redeemable common stock issued to affiliate of
lender, valued at $5.00 per share. 217,350 x $5.00 =
$1,086,750. All calculations are performed on a post-reverse
split basis. $138,000 of expenses already incurred reclassed
out of Other Assets and applied against gross proceeds in
stockhoders' equity.
(2) Gross proceeds from rights offering less payoff of $619,000
12% note plus accrued interest to financial advisor. $500,000
or remainder goes to company (applied on revolver) and the
rest reduces the term loan. Revolver includes payment of
$295,000 of unpaid related expenses.
(3) $10,000,000 of 12% notes converted to common stock (2,000,000
shares), $600,000 converted to common stock in 0% scenario or
repaid with proceeds from rights offering.
(4) $8,272,000 of redeemable preferred stock plus $259,000 of
accrued dividends converted to common stock at $5.00 per
share: 1,706,200 shares. Accrued interest of $332,000
converted to common stock at $5.00 per share; 66,400 shares.
(5) Additional redeemable common stock issued to affiliate of
lender.
(6) Conversion of 12% notes ($10,000,000) and redeemable preferred
stock ($8,272,000). Rights offering contributes $4,416,788 at
50% subscribed, $8,833,580 at 100% subscribed. Net of $400,000
of related expenses.
Pro Forma Condensed Statements of Operations
For the Year Ended December 31, 2001
(Dollars in thousands, except per common share data)
Range of Adjustments Pro Forma as Adjusted
---------------------------------- ------------------------------------
Recapitalization Completed Recapitalization Completed
Plus Rights Offering: Plus Rights Offering:
---------------------------------- ------------------------------------
0% 50% 100% 0% 50% 100%
Audited Subscribed Subscribed Subscribed Subscribed Subscribed Subscribed
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net sales $ 93,482 $ 93,482 $ 93,482 $ 93,482
Cost of goods sold 70,404 70,404 70,404 70,404
--------- --------- --------- ---------
gross profit 23,078 23,078 23,078 23,078
Selling, general and administrative expenses 17,329 17,329 17,329 17,329
Interest expense 5,895(1) (1,695) (1,998) (2,376) 4,200 3,897 3,519
Amortization of intangibles 876 876 876 876
Asset impairment 14,130 14,130 14,130 14,130
Other expenses 443 443 443 443
Income taxes 84 84 84 84
--------- ------- ------- ------- --------- --------- ---------
Net loss $ (15,679) $ 1,695 $ 1,998 $ 2,376 $ (13,984) $ (13,681) $ (13,303)
========= ======= ======= ======= ========= ========= =========
Basic and Diluted Earnings per Common
Share Data:
Weighted average number of common shares
outstanding (basic and diluted) 606,222(2)(3) 4,716,172 5,475,730 6,359,088
Net loss per common share $(25.86)(2) $ (2.97) $ (2.50) $ (2.09)
Notes: (1) Reduction in interest expense due to lower debt levels: 8.56%
on revolver/term borrowings, 12% on subordinated debt.
(2) Effective November 21, 2002, the Company executed a 1-for-10
reverse stock split. All information, including previously
reported balances, is presented on a post-reverse split basis.
(3) Weighted average number of common shares outstanding
As originally reported 6,062,224
1-for-10 reverse stock split divide by 10
---------------
606,222
Conversion of 12% Notes 2,186,400 ($10,600,000 + $332,000) divided by $5.00 per share
Conversion of Preferred Stock 1,706,200 ($8,272,000 + $259,000) divided by $5.00 per share
Issued to Affiliate of Lender 217,350 per agreement with lender
---------------
0% Subscribed 4,716,172
===============
Rights offering-50% subscribed 883,358 1,766,716 shares available x 50%
Less: payoff of $600,000 12% note (123,800) $619,000 divided by $5.00 for financial advisor
---------------
50% Subscribed 5,475,730
===============
Rights offering-100% subscribed 883,358 1,766,716 shares available x remaining 50%
---------------
100% Subscribed 6,359,088
===============
Pro Forma Condensed Statements of Operations
For the Nine Months Ended September 29, 2002
(Dollars in thousands, except per common share data)
Range of Adjustments
------------------------------------------------
Recapitalization Completed Plus Rights Offering:
------------------------------------------------
Unaudited 0% Subscribed 50% Subscribed 100% Subscribed
----------- ------------- -------------- ---------------
Net sales $ 72,797
Cost of goods sold 55,002
-----------
gross profit 17,795
Selling, general and administrative expenses 9,818
Interest expense 2,904(1) (1,230) (1,381) (1,570)
Amortization of intangibles --
Goodwill impairment 4,241
Other expenses 2,768
Income taxes 63
Preferred stock dividends 259 (259) (259) (259)
----------- ----------- ----------- -----------
Net loss attributable to common shareholders $ (2,258) $ 1,489 $ 1,640 $ 1,829
=========== =========== =========== ===========
Basic and Diluted Earnings per Common
Share Data:
Weighted average number of common shares
outstanding (basic and diluted) 618,850(2)(3)
Net loss per common share $ (3.65)(2)
Pro Forma as Adjusted
------------------------------------------------
Recapitalization Completed Plus Rights Offering:
------------------------------------------------
0% Subscribed 50% Subscribed 100% Subscribed
------------- -------------- ---------------
Net sales $ 72,797 $ 72,797 $ 72,797
Cost of goods sold 55,002 55,002 55,002
----------- ----------- -----------
gross profit 17,795 17,795 17,795
Selling, general and administrative expenses 9,818 9,818 9,818
Interest expense 1,674 1,523 1,334
Amortization of intangibles -- -- --
Goodwill impairment 4,241 4,241 4,241
Other expenses 2,768 2,768 2,768
Income taxes 63 63 63
Preferred stock dividends -- -- --
----------- ----------- -----------
Net loss attributable to common shareholders $ (769) $ (618) $ (429)
=========== =========== ===========
Basic and Diluted Earnings per Common
Share Data:
Weighted average number of common shares
outstanding (basic and diluted) 4,728,800 5,488,358 6,371,716
Net loss per common share $ (0.16) $ (0.11) $ (0.07)
Notes: (1) Reduction in interest expense due to lower debt levels: 8.56%
on revolver/term borrowings and 12% on subordinated debt
through June 30, 2002. Interest on convertible notes of 12%
and dividends on preferred stock of 12% reduced from July 1,
2002 to September 29, 2002
(2) Effective November 21, 2002, the Company executed a 1-for-10
reverse stock split. All information, including previously
reported balances, is presented on a post-reverse split basis.
(3) Weighted average number of common shares outstanding
As originally reported 6,188,498
1-for-10 reverse stock split divide by 10
---------
618,850
Conversion of 12% Notes 2,186,400 ($10,600,000 + $332,000) divided by $5.00 per share
Conversion of Preferred Stock 1,706,200 ($8,272,000 + $259,000) divided by $5.00 per share
Issued to Affiliate of Lender 217,350 per agreement with lender
----------------
0% Subscribed 4,728,800
================
Rights offering-50% subscribed 883,358 1,766,716 shares available x 50%
Less: payoff of $600,000 12% note (123,800) $619,000 divided by $5.00 for financial advisor
----------------
50% Subscribed 5,488,358
================
Rights offering-100% subscribed 883,358 1,766,716 shares available x remaining 50%
----------------
100% Subscribed 6,371,716
================
BACKGROUND OF THE RECAPITALIZATION PLAN
In connection with the anticipated expiration of our credit facility
agented by Heller Financial, Inc., we retained the investment banking firm of
Houlihan Lokey Capital to act as our financial advisor on June 21, 2001, to seek
strategic alternatives for us.
On February 1, 2002, we entered into a letter of intent with
entities representing a majority of our stockholders that would lead to a
financial restructuring of the company. Investment funds managed by TCW and
Oaktree, which together owned approximately 71% of the company, agreed under
certain conditions to purchase $18 million of newly-issued shares of our common
stock for the purpose of repaying outstanding indebtedness (inclusive of $8
million of indebtedness owed to TCW and Oaktree on account of a capital
infusion). The letter of intent contemplated a rights offering to unaffiliated
stockholders whereby our stockholders would be afforded the opportunity to
purchase approximately $6 million of our newly-issued common stock on the same
terms and conditions as TCW and Oaktree.
On February 1, 2002, our board of directors created a special
committee of the board to review the terms of a possible transaction with TCW
and Oaktree. The special committee consisted of Messrs. Abbott (Chairman),
Mariotti, and Kahl, each of whom is an independent director.
The special committee held its first meeting by teleconference on
January 31, 2002. The special committee discussed in detail the letter of
intent. The special committee observed that the letter of intent did not contain
an exclusivity provision and, therefore, allowed us to explore other offers. The
special committee also noted that while the letter of intent would satisfy our
covenant under our credit facility, it also proposed a transaction that would
allow our minority stockholders to participate in any future upside growth. The
special committee also discussed some of the issues that needed to be addressed
and negotiated before entering into a definitive agreement.
The special committee held its second meeting by teleconference on
February 1, 2002. The special committee continued to discuss some of the issues
that needed to be addressed and negotiated before entering into a definitive
agreement and recommended to our board of directors that the letter of intent in
the form presented to the special committee was acceptable.
The special committee held its third meeting by teleconference on
March 1, 2002. The special committee ratified the selection of Squire, Sanders &
Dempsey L.L.P. ("SS&D") as its legal counsel. The special committee received a
report that there were no outstanding offers regarding either the purchase or
capitalization of our company other than the recapitalization plan. The special
committee also received an update on details concerning our credit facility and
negotiations regarding our fee arrangements with Houlihan Lokey Capital. SS&D
then briefed the special committee on its fiduciary duties under Delaware law in
considering the recapitalization plan.
A member of our management, the members of the special committee and
SS&D participated in a telephone conference on April 1, 2002, to discuss the
status of negotiations with existing lenders regarding extension of the existing
credit facility, the exploration of available mezzanine financing, the status of
negotiations with Houlihan Lokey Capital and the need to be prepared to extend
the letter of intent if necessary.
The special committee held its fourth meeting by teleconference on
April 24, 2002. The special committee was advised that our existing credit
facility was being extended from April 30 to June 30, 2002, and that we were
continuing to negotiate a fee arrangement with Houlihan Lokey Capital. The
special committee was also advised that we had commenced negotiations with a new
senior lender to refinance our existing credit facility. The proposed
refinancing would consist of $45.0 million, $32.5 million of which would be a
revolving loan facility under which borrowings would bear interest at prime plus
3% and $12.5 million of which would be a term loan bearing interest at prime
plus 5%.
The special committee held its fifth meeting by teleconference on
June 6, 2002. At the meeting, a representative of TCW and Oaktree presented the
revised terms of the recapitalization plan. Among other things, TCW and Oaktree
committed to invest $10.0 million in new money in our company with no subsequent
reduction tied to the outcome of a subsequent rights offering. In order to
complete the refinancing of our credit facility with a
27
new lender by June 30, 2002, however, TCW and Oaktree proposed to invest in
convertible promissory notes bearing interest at 12% per annum and to exchange
existing notes held by TCW and Oaktree in the principal amount of approximately
$8.3 million for convertible preferred stock with a dividend rate of 12% per
annum. The convertible promissory notes and convertible preferred stock would
automatically convert into common stock upon completion of the rights offering
at the rights offering per share price. The recapitalization plan would also
include a 1-for-10 reverse stock split which would be implemented before
commencement of the rights offering. The rights offering would allow each
stockholder to purchase 10 shares of our common stock for each share of common
stock then held rather than the 3.5 shares originally proposed in the February
1, 2002 letter of intent. While the rights offering price was decreased from
$1.00 to $.50 per share (on a pre-reverse split basis) or $5.00 per share after
giving effect to the reverse stock split, total cash proceeds to us would, if
such rights issued in the rights offering were exercised in full, increase from
$6.3 million as originally proposed to $8.8 million. If our public stockholders
fully exercised the rights, they would own approximately the same percentage of
the outstanding common stock as they currently own.
The special committee asked questions of TCW and Oaktree concerning
the revised recapitalization plan and the refinancing of our credit facility.
The special committee was advised that the proposed refinancing had been
designed to fit our capital structure following completion of the
recapitalization plan. The special committee also discussed the status of a
fairness opinion to be delivered by Houlihan Lokey Howard & Zukin Financial
Advisors, Inc., an affiliate of Houlihan Lokey Capital, and was advised that
Houlihan Lokey Financial Advisors would be prepared to make its presentation to
the special committee regarding the fairness of the transaction on or about June
21, 2002. The special committee then concluded that it would be prepared to
consider its recommendation to our board of directors concerning the
recapitalization plan following the presentation to it by Houlihan Lokey
Financial Advisors.
On June 13, 2002, we entered into a new letter of intent with TCW
and Oaktree whereby TCW and Oaktree would agree to purchase $10 million of 12%
convertible notes due 2005 and $8.3 million of Series A preferred stock, all of
which newly-issued securities (together with accrued interest and dividends
thereon) would be convertible into newly-issued shares of common stock at the
rate of $0.50 per share (on a pre-reverse split basis). We also announced that
we would, as part of the recapitalization plan, seek to obtain stockholder
approval for the ultimate conversion of such newly-issued securities, implement
a 1-for-10 reverse stock split, and make a rights offering to unaffiliated
stockholders wherein such holders could purchase from us newly-issued shares of
common stock at the same $0.50 per share (on a pre-reverse split basis) price.
The special committee held its sixth meeting by teleconference on
June 25, 2002. At the meeting, Houlihan Lokey Financial Advisors made a
presentation to the special committee regarding the fairness of the
recapitalization plan. Houlihan Lokey Financial Advisors noted that Houlihan
Lokey Capital, its affiliate, had originally been retained by us in connection
with the prior marketing effort to sell our company as required by our senior
lenders. As a result of their participation in that marketing effort,
representatives of Houlihan Lokey Financial Advisors expressed their view that
the recapitalization plan was more favorable than any alternative that had been
previously considered. Houlihan Lokey Financial Advisors noted that we were
facing an imminent liquidity crisis on June 30, 2002, at which time our existing
credit facility was scheduled to mature. Houlihan Lokey Financial Advisors
further advised the special committee that the only apparent alternatives to the
recapitalization plan were a distressed sale of our company or continuing to
operate under short-term waivers from our existing lenders, neither of which
appeared likely to provide greater value to us and our stockholders than the
recapitalization plan.
Houlihan Lokey Financial Advisors further advised the special
committee that the value to our stockholders assuming consummation of the
recapitalization plan as contemplated and successful implementation of our
business plan as a going concern was greater than any of the following:
- the value the stockholders would have likely received under
the highest and best proposal received by us during the
marketing process;
- the value indicated by the public market which Houlihan Lokey
Financial Advisors felt was a poor indicator of value in any
event; or
28
- the value implied by Houlihan Lokey Financial Advisors'
theoretical valuation of our company assuming the
recapitalization plan was not consummated.
Houlihan Lokey Financial Advisors concluded its presentation by
stating that it was their opinion that the recapitalization plan was fair, from
a financial point of view, to our company and our stockholders. See "Report of
Our Financial Advisor" below.
Following completion of Houlihan Lokey Financial Advisors' report,
during which the special committee and SS&D asked questions concerning the
presentation and the fairness opinion, the special committee asked questions of
management concerning the recapitalization plan. The special committee was
advised that if the recapitalization plan was not approved by our board of
directors on or before July 1, 2002, we would be charged significant fees for
extending our existing credit facility. Management also assured the special
committee that refinancing alternatives had been exhaustively explored before
selecting the new lender. After further discussion, the special committee
concluded that the recapitalization plan was fair to our company and our
stockholders and was the best available plan to maximize stockholder value.
Accordingly, the special committee unanimously resolved to recommend the
recapitalization plan to our board of directors for approval.
Immediately following the June 25, 2002 special committee meeting,
our entire board convened. The special committee reported on their
recommendation that our board unanimously approve the recapitalization plan. Our
board of directors unanimously approved the recapitalization plan.
We negotiated the final terms of the recapitalization plan on June
26, 2002. Loan documentation relating to our new credit facility and other
ancillary agreements were finalized on June 28, 2002, on which date borrowings
under our credit facility were repaid in full (including amounts in which TCW
and Oaktree had a participation interest), and the 12% convertible notes and the
Series A preferred stock were issued to TCW and Oaktree.
On September 10, 2002, TCW, Oaktree, and HLHZ Investments, Inc.
agreed to waive the right to an increase in the interest rate on the 12%
convertible notes and an increase in the dividend rate on the Series A preferred
stock from 12% to 19% if the conversion of the 12% convertible notes and the
Series A preferred stock had not occurred prior to December 15, 2002.
Additionally, TCW and Oaktree agreed to waive the increased redemption price of
the Series A preferred stock in the event of a mandatory redemption. Previously,
the redemption price equaled the liquidation preference amount plus accrued and
unpaid dividends times two. Giving effect to the waiver, the redemption price
now equals the liquidation preference amount plus accrued and unpaid dividends.
REPORT OF OUR FINANCIAL ADVISOR
We retained Houlihan Lokey Capital to act as financial advisor to us
in connection with exploring merger and sale alternatives and, in connection
with these advisory services, to render (or to arrange for an affiliate to
render) an opinion as to the fairness, from a financial point of view, of any
resulting transaction. Houlihan Lokey Capital was retained as our financial
advisor based on its qualifications, expertise, and reputation.
On June 25, 2002, Houlihan Lokey Financial Advisors delivered to the
special committee a draft written opinion that, based upon the factors and
assumptions discussed in the opinion, the proposed terms of the recapitalization
plan as presented to Houlihan Lokey Financial Advisors, taken as a whole, were
fair from a financial point of view to us and our stockholders. Subsequently, on
June 28, 2002, Houlihan Lokey Financial Advisors delivered to the special
committee a final written opinion that, based upon the factors and assumptions
discussed in the final opinion, the proposed terms of the recapitalization plan
as presented to Houlihan Lokey Financial Advisors, taken as a whole, were fair
from a financial point of view to us and our stockholders.
The opinion letter was provided to the special committee for its
information and is directed only to the fairness from a financial point of view
of the recapitalization plan to us and our stockholders. In arriving at its
opinion, Houlihan Lokey Financial Advisors, among other things:
29
- reviewed our annual reports to stockholders on Form 10-K for
the fiscal years ended 1997, 1998, 1999, 2000, and 2001,
quarterly report on Form 10-Q for the three months ended March
31, 2002, proxy statement dated April 30, 2001, and certain
other documents filed with the Securities and Exchange
Commission;
- reviewed historical financial data prepared by our management
with respect to the company for the fiscal years ended 1996
through 2001;
- reviewed preliminary financial data prepared by our management
with respect to the company for the four months ended April
2002;
- reviewed forecasts and projections prepared by our management
with respect to the company for the years ending December 31,
2002 through 2006;
- met with certain members of our senior management to discuss
our operations, financial condition, future prospects, and
projected operations and performance;
- visited certain of our facilities and business offices;
- reviewed the February 1, 2002, letter of intent between TCW
and Oaktree and us setting forth the preliminary terms of the
recapitalization plan;
- reviewed the June 13, 2002, letter of intent between TCW and
Oaktree and us setting forth the final terms of the
recapitalization plan;
- reviewed our amended and restated credit agreement, dated as
of May 20, 1997, and all amendments thereto;
- reviewed publicly available financial data for companies
deemed comparable to us and publicly available prices and
premiums paid in transactions that we considered similar to
the recapitalization plan;
- negotiated directly with potential buyers in our earlier
marketing effort and continued active involvement in
contacting potential purchasers in an attempt to achieve
higher value for us;
- reviewed drafts of the purchase agreement, 12% convertible
notes, Series A convertible preferred stock, the registration
rights agreements, the stockholders agreements, and other
agreements related thereto (other than certain option and
incentive plan amendments and the new lending facility and
related agreements); and
- conducted such other studies, analyses, and inquiries deemed
appropriate.
The forecasts and projections provided by our management to Houlihan
Lokey Financial Advisors showed net sales of $101,832,000 for fiscal 2003 and
$103,868,000 for fiscal 2004, and net income of $5,322,000 for fiscal 2003 and
$3,939,000 for fiscal 2004. These forecasts and projections are forward looking
statements and were based upon information available to our management as of May
24, 2002, the date which they were provided to Houlihan Lokey Financial
Advisors. Actual results could differ materially from these forecasts and
projections. Factors that could cause or contribute to such differences include,
but are not limited to, the factors and risks discussed in our Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2001 and other reports that
we file from time to time with the Securities and Exchange Commission.
In preparing its opinion, Houlihan Lokey Financial Advisors relied
on the accuracy and completeness of all information supplied or otherwise made
available to it by us, including our management team's assessment of the
strategic benefits of the recapitalization plan. Houlihan Lokey Financial
Advisors did not independently verify the accuracy and completeness of the
information provided to it by and with respect to the company and does not
30
assume any responsibility with respect to such information. Houlihan Lokey
Financial Advisors did not make any independent appraisal of any of our
properties or assets. Houlihan Lokey Financial Advisors relied upon and assumed,
without independent verification, that the financial forecasts and projections
which we provided to it were reasonably prepared and reflected the best
available estimates at that time of our future financial results and condition,
and also that there had been no material change in our assets, financial
condition, business, or prospects of the Company since the date of the most
recent financial statements made available to it. In particular and without
limitation, Houlihan Lokey Financial Advisors assumed that these financial
forecasts and projections accurately portrayed the terms and conditions of, and
financial impact of, the new lending facility and certain option and incentive
plan amendments, and relied upon management's representation that the terms and
conditions of the new lending facility will provide sufficient liquidity to us
to effectuate our business plan even without the receipt of any material
proceeds from the rights offering.
In addition, Houlihan Lokey Financial Advisors assumed that:
- it had been kept fully informed of every expression of
interest in any alternative transaction or financing made
available to us;
- TCW and Oaktree have agreed to vote as stockholders to approve
the issuance of shares and other requirements necessary for
the consummation of the rights offering, including the
conversion of the securities contemplated to be purchased by
TCW and Oaktree pursuant to the recapitalization plan;
- there was no foreseeable reason to believe that the
consummation of the rights offering would not occur as
contemplated; and
- in the course of obtaining the necessary regulatory or other
consents or approvals, contractual or otherwise, for the
recapitalization plan, no requirements of divestiture or
separation of business units or other restrictions on, or
amendments or modifications to, material provisions of the
purchase agreement or related agreements, will be imposed that
will have a material adverse effect on the contemplated
benefits of the recapitalization plan.
Houlihan Lokey Financial Advisors' opinion was necessarily based
upon business, economic, market, and other conditions as they existed and as
could be evaluated on, and on the information made available to Houlihan Lokey
Financial Advisors as of June 28, 2002. Under its engagement, Houlihan Lokey
Financial Advisors has no obligation to, and did not, update the opinion or take
into account events occurring subsequent to the date that the opinion was
delivered to our board.
Houlihan Lokey Financial Advisors expressed no opinion as to the
prices at which our common stock will trade following the consummation of the
recapitalization plan.
Houlihan Lokey Capital was paid a fee of $1,200,000, consisting of
$600,000 in cash and a $600,000 12% convertible note payable to its affiliate,
HLHZ Investments LLC. Houlihan Lokey Financial Advisors did not receive an
additional fee for issuing its fairness opinion.
Subsequent to engaging Houlihan Lokey Capital as described above, we
engaged Houlihan Lokey Financial Advisors to perform an analysis for financial
reporting purposes associated with out implementation of SFAS 142. In connection
with such engagement, we agreed to pay Houlihan Lokey Financial Advisors a fee
of $45,000 payable in two equal installments. The first installment was paid
upon entering into the engagement. The second installment is due upon completion
of the services relating to the analysis.
The following is a brief summary of the material analyses discussed
by representatives of Houlihan Lokey Financial Advisors with our board of
directors in connection with Houlihan Lokey Financial Advisors' opinion.
In preparing its opinion, Houlihan Lokey Financial Advisors analyzed
and considered the value of the company implied by various commonly accepted
valuation approaches and methodologies. The valuation approaches used by
Houlihan Lokey Financial Advisors are listed below.
31
- Value Implied by Public Market. Houlihan Lokey Financial
Advisors analyzed the valuation of the company implied by the
market for our publicly traded common stock.
- Value Based on a Theoretical Stand-Alone Scenario. Houlihan
Lokey Financial Advisors analyzed the value theoretically
attributable to us assuming we did not consummate the
recapitalization plan.
- Value Implied by Precedent Transaction Scenario. Houlihan
Lokey Financial Advisors analyzed the value theoretically
attributable to us assuming we consummated a sale to a third
party on terms similar to, but likely more favorable than, the
results of our previous marketing process.
- Value Implied by the Recapitalization Plan. Houlihan Lokey
Financial Advisors analyzed our valuation implied by the terms
of the recapitalization plan.
- Value Based on the Transaction Scenario. Houlihan Lokey
Financial Advisors analyzed the value realistically
attributable to us assuming we consummated the
recapitalization plan and had the financial flexibility to
achieve management's financial projections.
The table below summarizes the valuation indications provided by
each of these valuation approaches. A valuation range is shown for each approach
where multiple scenarios or methodologies were considered. Two kinds of value,
enterprise value and equity value, are shown. Enterprise value is a term used to
describe the total value of a company's ongoing business operations. Equity
value is a term used to describe the portion of a company's enterprise value
available to the company's stockholders. One can calculate a company's equity
value by subtracting total debt from and adding cash to the enterprise value.
The table shows our total equity value, the portion of its equity value held by
our minority stockholders, and the equity value per share of our common stock.
($ in Millions, Except per Share) Equity Value
----------------------------------------------
Enterprise To Minority
Value Total Holders Per Share(1)
----- ----- ------- ------------
Value Implied by Public Market $49.1 - $49.3 $3.0 - $3.2 $0.9 $0.50 - $0.53
Value Based on a Theoretical Stand-Alone Scenario $38.5 - $46.0 $0.0 - $3.3 $0.0 - $0.9 $0.00 - $0.54
Value Implied by Precedent Transaction Scenario $48.0 - $52.0 $0.3 - $3.0 $0.1 - $0.9 $0.05 - $0.49
Value Implied by the Recapitalization Plan $49.4 $24.6 $0.9 $0.50
Value Based on the Transaction Scenario $56.5 $13.2 - $45.5 $1.2 - $13.4 $0.70 - $1.31
__________________________
(1) All per share numbers are on a pre-reverse split basis.
Houlihan Lokey Financial Advisors observed that the enterprise value
and equity value implied by the recapitalization plan were either approximately
equal to or greater than the midpoint valuations implied by the public market,
based on a theoretical stand-alone scenario, and implied by the precedent
transaction scenario. This analysis suggests that the value of the company
implied by the recapitalization plan is at least as great as any scenario
considered in which we do not consummate the recapitalization plan. Houlihan
Lokey Financial Advisors also observed that the enterprise value and equity
value based on the recapitalization plan scenario appear greater than those from
all other valuation approaches considered. This analysis suggests that our value
of as an ongoing operation following the recapitalization plan is likely greater
than in any scenario considered in which we would not consummate the
recapitalization plan.
A summary of each valuation approach is set forth below.
VALUE IMPLIED BY PUBLIC MARKET. Houlihan Lokey Financial Advisors
analyzed both the enterprise value and equity value of the company implied by
the market for our publicly traded common stock. One way that
32
enterprise value can be calculated by observing the public equity market is by
first adding a company's total debt to the aggregate market value of a company's
common stock and then subtracting the company's cash balance. In this approach,
our total equity value is equal to the aggregate market value of our common
stock. Houlihan Lokey Financial Advisors performed this calculation using
figures from our quarterly report on Form 10-Q dated March 31, 2002, the latest
financial information for us that was publicly available at the time the
analysis was performed. Houlihan Lokey Financial Advisors also performed three
versions of the analysis, using our closing stock price on June 16, 2002, as
well as the 5-day and 20-day average closing prices as of June 16, 2002. June
16, 2002 was used because it was the last day prior to our announcement of the
proposed terms of the recapitalization plan and the stock price on that day was
judged to be unaffected by the announcement. Houlihan Lokey Financial Advisors
believed that the trading price indicated by the public market was not a
reliable indication of value principally because of the low trading activity of
our common stock. The table below summarizes the valuation indications provided
based on this approach.
($ in Millions Except per Share) Stock Price 5-Day Average 20-Day Average
As of 6/16/02 Stock Price Stock Price
------------- ----------- -----------
Enterprise Value $49.1 $49.1 $49.3
Total Equity Value $ 3.0 $ 3.0 $ 3.2
Price per Share(1) $0.50 $0.50 $0.53
________________________________
(1) All per share numbers are on a pre-reverse split basis.
VALUE BASED ON A THEORETICAL STAND-ALONE SCENARIO. Houlihan Lokey
Financial Advisors analyzed the value theoretically attributable to us assuming
we did not consummate the recapitalization plan. Under this assumption, we would
have faced immediate liquidity constraints given that our credit facility was
due to mature on June 30, 2002. In this analysis, Houlihan Lokey Financial
Advisors considered two scenarios deemed reasonable on a theoretical basis. In
the first scenario, we would continue as a going concern following the scheduled
maturity date of our credit facility. In the second scenario, we would cease as
a going concern and our assets would be liquidated.
In the first scenario, Houlihan Lokey Financial Advisors analyzed
the value of the company using two widely used valuation methodologies, the
market multiple methodology and the comparable transaction methodology. A brief
description of each of these methodologies is set forth below.
MARKET MULTIPLE METHODOLOGY. The market multiple methodology
provides a valuation of a company based on a comparison between the company and
publicly traded companies deemed comparable to it. To value the company using
this methodology, different measures of a company's earnings, such as revenues
or earnings before interest expenses and taxes, are multiplied by quantities
known as valuation multiples that are deemed appropriate to the company. The
selection of appropriate valuation multiples is guided by an inspection of the
comparable companies themselves and their valuation multiples based on the
public market for their common stock. To calculate valuation multiples for a
given comparable company, its enterprise value is divided by different measures
of its earnings, such as revenues or earnings before interest expenses and
taxes. The resulting number is a ratio of the given comparable company's
enterprise value to its different earnings measures. In other words, the ratio
indicates the company's enterprise value as a multiple of its earnings. More
valuable companies have higher multiples. Once valuation multiples for the
comparable companies have been calculated, the company's financial
characteristics are compared to those of the comparable companies. Based on this
comparison, valuation multiples appropriate to the company are selected and
applied to the company's earnings as discussed above. After the company's
enterprise value is calculated, equity value is calculated as discussed above.
Under the market multiple methodology, Houlihan Lokey Financial
Advisors considered the valuation multiples of the following publicly traded
companies: Acme United Corp., Alamo Group, Inc., CTB International Corp., L.S.
Starrett Co., P&F Industries, Inc., and Q.E.P. Co. The market multiple
methodology produced a range of indicated enterprise value of $39.0 million to
$49.0 million.
COMPARABLE TRANSACTION METHODOLOGY. The comparable transaction
methodology provides a valuation of a company based on a comparison between the
company and other companies deemed comparable to it that have been acquired. As
with the market multiple methodology, to value the company using this
methodology, different
33
measures of a company's earnings are multiplied by valuation multiples that are
deemed appropriate to the company. The selection of appropriate valuation
multiples is guided by an inspection of the acquired comparable companies
themselves and the valuation multiples implied by their acquisitions. To
calculate valuation multiples for a given acquired company, its enterprise value
is divided by different measures of its earnings. In the case of an acquisition,
an acquired company's enterprise value is calculated by adding its total debt
prior to the acquisition to the aggregate value paid for the company's common
stock and then subtracting the company's cash balance prior to the acquisition.
The resulting number is a ratio of the acquired company's implied enterprise
value to its different earnings measures. In other words, the ratio indicates
the company's enterprise value as a multiple of its earnings. More valuable
companies have higher multiples. Once valuation multiples for the acquired
companies have been calculated, the company's financial characteristics are
compared to those of the acquired companies. Based on this comparison, valuation
multiples appropriate to the company are selected and applied to the company's
earnings as discussed above. After the company's enterprise value is calculated,
equity value is calculated as discussed above.
Under the comparable transaction methodology, Houlihan Lokey
Financial Advisors reviewed a total of 85 transactions announced between January
1998 and May 2002 and focused on transactions involving companies deemed most
comparable to our company. The comparable transaction methodology produced a
range of indicated enterprise values of $44.0 million to $54.0 million.
In the second scenario, Houlihan Lokey Financial Advisors analyzed
the value of our company using an asset liquidation methodology to estimate the
net proceeds that might be realized upon a liquidation our assets. A brief
description of this methodology is set forth below.
ASSET LIQUIDATION METHODOLOGY. The asset liquidation methodology
provides a valuation of a company's assets based on the estimated proceeds that
could be raised were the company to cease as a going concern and be liquidated.
In a liquidation scenario, the net proceeds of a company's assets is equivalent
to its enterprise value because it represents the total value available to all
investors in the company from the liquidation of those assets. To estimate the
net proceeds of such a liquidation using this methodology, an assumed recovery
percentage, between 0% and 100%, is applied to each of the company's major asset
classes as reflected on the company's balance sheet to reflect the percentage of
book value of each asset class that would be realized upon a liquidation of such
asset. The selection of appropriate recovery percentages is guided by, among
other things, industry norms and discussions with the company's management. The
total gross proceeds calculated are reduced to reflect the assumed commission
that would be required by a party administering the liquidation. After the net
proceeds amount is calculated, the proceeds available to stockholders can be
estimated by subtracting the company's total debt from the net proceeds. If this
amount is zero or negative, it is understood that there would be no proceeds
available to stockholders.
Under the asset liquidation methodology, Houlihan Lokey Financial
Advisors estimated the proceeds that would be generated from a liquidation of
our assets as reflected on our balance sheet projected as of June 30, 2002. The
net proceeds amount determined under the liquidation methodology was estimated
to be approximately $29 million to $33 million. Based on this net proceeds
amount, no proceeds would be available to our stockholders.
To determine a range for our overall valuation based on a
theoretical stand-alone scenario, Houlihan Lokey Financial Advisors considered
the average of the valuation indications from the going concern scenario as well
as the average of the valuation indications from both the going concern and
liquidation scenarios. The following table summarizes the valuation ranges:
($ in Millions Except per Share) Low High
--- ----
Enterprise Value $38.5 $46.0
Equity Value $ 0.0 $ 3.3
Equity Value per Share(1) $0.00 $0.54
_____________________________
(1) All per share numbers are on a pre-reverse split basis.
34
VALUE IMPLIED BY PRECEDENT TRANSACTION SCENARIO. Houlihan Lokey
Financial Advisors analyzed the value theoretically attributable to our company
assuming it had consummated a sale to a third party, as of June 30, 2002, on
terms similar to, but likely more favorable than, the results of our previous
marketing process that ended in January 2002. In this scenario, the total
consideration that would be received by us represents its enterprise value.
Houlihan Lokey Financial Advisors calculated the consideration that
theoretically would be available our stockholders, or its equity value, by
subtracting our projected total debt and estimated transaction expenses and bank
fees from the total consideration. To create a range of valuation indications,
Houlihan Lokey Financial Advisors considered ranges of total consideration that
theoretically would have been payable under the highest proposal received as
well as ranges in transaction expenses and bank fees. The following table
summarizes the valuation ranges:
($ in Millions Except per Share) Low High
--- ----
Enterprise Value $48.0 $52.0
Equity Value $ 0.3 $ 3.0
Equity Value per Share(1) $0.05 $0.49
________________________________
(1) All per share numbers are on a pre-reverse split basis.
VALUE IMPLIED BY THE RECAPITALIZATION PLAN. Houlihan Lokey Financial
Advisors analyzed the valuation of our company implied by the terms of the
recapitalization plan. In this approach, the equity value per share and our
aggregate equity value are determined by the purchase price of $0.50 per share
(on a pre-reverse split basis) specified in the recapitalization plan. Houlihan
Lokey Financial Advisors calculated the enterprise value of our company
according to the formula discussed above, using our pro forma total debt and
cash balance projected as of June 30, 2002. Our implied enterprise value and
implied equity value were calculated to be approximately $49.4 million and $24.6
million, respectively.
VALUE BASED ON TRANSACTION CONSUMMATION. Houlihan Lokey Financial
Advisors analyzed the value realistically attributable to us assuming we
consummated the recapitalization plan. Under this assumption, we would continue
as a going concern following the consummation of the recapitalization plan and
have the financial flexibility to implement its business plan and achieve the
financial projections prepared by our management. Houlihan Lokey Financial
Advisors analyzed the value of our company using three widely used valuation
methodologies, the market multiple methodology, the comparable transaction
methodology, and the discounted cash flow methodology.
In this approach, the procedures used to perform the market multiple
methodology and the comparable transaction methodology are as discussed above.
The market multiple methodology produced a range of indicated enterprise value
of $43.0 million to $53.0 million. The comparable transaction methodology
produced a range on indicated enterprise values of $43.0 million to $54.0
million.
A brief description of the discounted cash flow methodology is set
forth below.
DISCOUNTED CASH FLOW METHODOLOGY. The discounted cash flow
methodology provides a valuation of a company based on the present value of the
cash flows generated by the company over time. The cash flows analyzed are the
projected cash flows of the company's ongoing business operations after the
effects of taxes, working capital changes, and capital expenditures have been
taken into consideration. These cash flows are projected by the company's
management. The cash flows for all periods following the last projected period
are represented by a single cash flow called a terminal value, which is based on
the final period's earnings multiplied by an appropriate valuation multiple
called a terminal multiple. To calculate the present value of these cash flows,
the total cash flow for each projected period is multiplied by a factor called a
discount factor that discounts that cash flow depending on how far in the future
the cash flow occurs. Cash flows that are projected to occur later in time are
discounted more. The discount factor for a given time period also depends on
another quantity, expressed as a percentage, called a discount rate that
determines by how much the cash flow is discounted. Higher discount rates
produce more severe discounts. Discount rates are selected based on an
inspection of the weighted average costs of capital for the company's publicly
traded comparable companies. A company's weighted average cost of capital is
35
an average rate of return, expressed as a percentage, that is observed for that
company's securities based on the interest rates of its debt securities and the
volatility of the price of its common stock in the public market.
In the discounted cash flow methodology, Houlihan Lokey Financial
Advisors considered different scenarios with respect to certain projects
reflected in the company's financial projections that impacted the projected
cash flows. Houlihan Lokey Financial Advisors selected a terminal value based on
a terminal multiple of 6.5x multiplied by our projected earnings before
interest, taxes, depreciation and amortization for 2006, the last projected
period. Houlihan Lokey Financial Advisors selected a discount rate of 9.5% based
on an analysis of the weighted average costs of capital for our comparable
companies. Houlihan Lokey Financial Advisors considered a range of terminal
multiples and discount rates. The discounted cash flow methodology produced a
range of indicated enterprise values of $55.0 million to $75.0 million.
In addition to analyzing the enterprise value of our company based
on the transaction scenario, Houlihan Lokey Financial Advisors analyzed the
present value attributable to tax savings that we could realize based on our
significant net operating loss carryforwards. To calculate the present value of
these tax savings, Houlihan Lokey Financial Advisors used a discounted cash flow
methodology and discounted the estimated cash tax expenses we could incur
without the benefit of our net operating loss carryforwards. Houlihan Lokey
Financial Advisors selected a discount rate of 12% and did not consider any
benefit of tax savings occurring beyond 2006.
Houlihan Lokey Financial Advisors also analyzed the impact on our
equity value of different scenarios with respect to the contemplated rights
offering. Houlihan Lokey Financial Advisors considered scenarios in which 100%,
50%, and 0% of the rights issued are exercised by their original recipients,
other than TCW and Oaktree. Houlihan Lokey Financial Advisors also considered
scenarios in which TCW and Oaktree do and do not exercise any unexercised rights
as well as a scenario in which the rights offering does not occur.
The following table summarizes the ranges of valuations under this
approach, based on different rights offering scenarios. The ranges for equity
values reflect the range of midpoints calculated in the different rights
offering scenarios considered.
($ in Millions Except per Share) Low High
--- ----
Enterprise Value $49.0 $64.0
Equity Value $13.2 $45.5
Equity Value per Share(1) $0.70 $1.31
_______________________________
(1) All per share numbers are on a pre-reverse split basis.
In addition to analyzing our enterprise value and equity value,
Houlihan Lokey Financial Advisors compared the terms of the securities to be
issued in the recapitalization plan with the terms of a set of securities deemed
to be comparable. Houlihan Lokey Financial Advisors analyzed the terms of 49
convertible debt securities with warrants and 64 convertible debt securities
without warrants issued between January 2001 and May 2002. In addition, Houlihan
Lokey Financial Advisors analyzed the terms of 146 convertible preferred stock
securities but deemed such securities to be, on a relative basis, less
applicable given that (i) the majority of the aggregate face amount of
securities to be issued in the recapitalization plan was convertible debt as
opposed to convertible preferred stock and (ii) the term of the securities to be
issued in the recapitalization plan was more similar to the median term of the
convertible debt securities considered than the median term of the convertible
preferred securities considered. Houlihan Lokey Financial Advisors observed that
the terms of the securities to be issued in the recapitalization plan generally
were within the range of terms observed in the set of securities considered.
The summary of these analyses is not a complete description of the
analyses performed by Houlihan Lokey Financial Advisors. Preparing a fairness
opinion is a complex analytic process and is not readily summarized or described
partially. Houlihan Lokey Financial Advisors believes that its analyses must be
considered as a whole. Selecting portions of its analyses without considering
all analyses could create a misleading or incomplete view of the processes
underlying the analyses and Houlihan Lokey Financial Advisors' opinion.
36
In its analyses, Houlihan Lokey Financial Advisors made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions, and other matters, many of which are beyond our
control. The estimates contained in these analyses and the valuation ranges
resulting from any particular analysis do not necessarily indicate actual values
or predict future results or values. Such actual values or future results or
values may be significantly more or less favorable than those suggested by these
analyses. In addition, analyses relating to the value of businesses or
securities are not appraisals and do not reflect the prices at which the
businesses or securities may actually be sold or the prices at which their
securities may trade. As a result, these analyses and estimates are inherently
subject to substantial uncertainty.
OUR REASONS FOR THE RECAPITALIZATION PLAN AND RECOMMENDATION OF OUR BOARD OF
DIRECTORS
Our board of directors has unanimously approved the recapitalization
plan. The board believes that the terms of the recapitalization plan are fair to
our stockholders and in the best interests of our company and our stockholders
and, therefore, recommended that our stockholders approve the recapitalization
plan. Our board of directors based their recommendation on the following
factors:
- the necessity to enter into a new credit facility as our
current facility was expiring;
- the fact that our stockholders would have the ability to
participate in a rights offering enabling them to purchase
shares of our common stock on the same terms as the Oaktree
and TCW and avoid dilution;
- the results of the board of director's market solicitation
conducted by Houlihan Lokey Financial Advisors, our financial
advisors, to determine whether there were other strategic
alternatives for our company;
- the written opinion of Houlihan Lokey Financial Advisors,
financial advisors to the board, dated June 25, 2002, that,
based on the considerations set forth in the opinion, the
recapitalization plan is fair from a financial point of view
to our company and our stockholders;
- the information and presentations by our management and legal
and financial advisors concerning the results of their
business and legal due diligence;
- the benefit that we would remain a public entity after the
recapitalization plan was completed providing continued
liquidity to our stockholders; and
- the terms of the Series A preferred stock and 12% convertible
notes and the related rights offering.
Our board of directors also considered the potential adverse effects
and risks associated with the recapitalization plan, and concluded that the
potential benefits of the recapitalization plan outweighed the potential adverse
effects and risks. The list of potential adverse effects and risks considered by
our board included, but was not limited to, the following:
- the risk that the Series A preferred stock and 12% convertible
notes would not be converted into shares of our common stock;
- the risk that if the public stockholders did not exercise
their right to purchase additional shares of our common stock
in the rights offering they would experience substantial
dilution; and
- the risk that even if the rights offering is completed, we
would not have an active trading market for our common stock
and thus our stockholders would have limited liquidity.
This discussion of the information and factors considered by our
board is not intended to be exhaustive, but includes the material factors
considered. In view of the variety of material factors considered in connection
with the
37
evaluation of the recapitalization plan, our board of directors did not find it
practicable to quantify or otherwise assign relative weights or rank to the
factors it considered in approving the transactions. In considering the factors
described above, individual members of our board may have given different weight
to various ones. Instead, our board of directors considered all these factors as
a whole and overall considered them to be favorable and to support its
recommendation.
Our board of directors was aware that some directors have interests
in the recapitalization plan that are separate from the interests of our
stockholders generally. Therefore, our board of directors created a special
committee of independent directors to review the recapitalization plan and make
a recommendation to our board of directors on the recapitalization plan.
The foregoing discussion of the information and factors considered
by our board of directors is not meant to be exhaustive, but includes the
principal factors considered by our board. Our board of directors did not
specifically adopt the conclusions of the opinion of our financial advisors. The
fairness opinion relating to the recapitalization plan was only one of many
factors considered by our board in their evaluation of the recapitalization
plan.
In light of the variety of factors considered by our board of
directors, our board did not quantify or otherwise attempt to assign relative
weights to the specific factors considered in making its determination. However,
in the view of our board of directors, the potentially negative factors they
considered were not sufficient, either individually or collectively, to outweigh
the positive factors relating to the recapitalization plan. Consequently, after
considering all of the factors set forth above, together with an analysis of the
presentations of management and our legal and financial advisors, our board
determined that the terms and conditions of the recapitalization plan are fair
and in the best interest of our company and our stockholders.
NEW CREDIT FACILITY
In connection with the recapitalization plan, we also entered into a
five-year, $45 million credit facility, agented by CapitalSource Finance,
consisting of a $12.5 million term loan and a $32.5 million revolving credit
component. In conjunction with the new facility, we issued to CapitalSource
Holdings, an affiliate of CapitalSource Finance, 31,910 shares (on a
post-reverse split basis) of redeemable common stock on June 28, 2002. Moreover,
we are committed to issue to CapitalSource Holdings approximately 221,444
additional shares (on a post-reverse split basis) of redeemable common stock
upon completion of the rights offering described below with the effect that, as
of the date hereof and upon completion of the rights offering, CapitalSource
Holdings will hold 253,354 shares of our common stock. If no shares are
purchased pursuant to the rights offering, the CapitalSource Holdings shares
would represent approximately a 4.9% interest in our issued and outstanding
shares of common stock (including 233,000 shares granted to our executive
officers and non-employee directors and assuming 100,000 options granted to
non-employee directors are fully exercised). If the rights offering is fully
subscribed, CapitalSource Holding's interest in our common stock would be
reduced to approximately 3.8% (including 233,000 shares granted to our executive
officers and non-employee directors and assuming 100,000 options granted to
non-employee directors are fully exercised). The common stock issued to our
lender is considered redeemable in that a future termination in full of this new
credit facility, CapitalSource Holdings has the right to require us to
repurchase all the shares issued to CapitalSource Holdings at a price per share
that is dependent on certain measures of cash flow, debt, and cash at a future
date. At the close of the rights offering, our theoretical repurchase obligation
on account of all shares issued or to be issued to CapitalSource Holdings was
approximately $1.2 million. All shares issued to CapitalSource Holdings will be
recorded as redeemable common stock and as a cost of financing within deferred
financing fees, amortized over the life of the credit facility.
SALE OF CONVERTIBLE NOTES
Pursuant to the purchase agreement, TCW and Oaktree have 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 (as discussed below), the
convertible notes will be converted into shares of our common stock at the
rights offering price of $5.00 per shares (on a post-reverse split basis). If a
material adverse change occurs prior to the completion 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), TCW and Oaktree will not
be required to convert their 12% convertible notes. If the rights offering is
completed by December 23, 2002, then TCW and Oaktree will receive 2,000,000
shares of our common
38
stock (on a post-reverse split basis) upon conversion of the 12% convertible
notes held by such entities plus between 53,666 and 111,666 additional shares of
common stock, depending on the amount of proceeds received from exercises of the
rights to cover $583,333 of accrued interest, which would then be owing on
account of the 12% convertible notes.
NOTE EXCHANGE
TCW and Oaktree, in connection with the purchase agreement, received
822.6696 shares of newly-issued Series A preferred stock, $10,000 per share
liquidation preference, in exchange for all of their previously existing and
outstanding interests in the 12% exchangeable notes of UnionTools, which
represented the total amount of principal and accrued interest on the
exchangeable notes.
SERIES A PREFERRED STOCK
The Series A preferred stock has an initial aggregate liquidation
preference equal to $8,226,696 and accrues dividends at a 12% annual rate. The
Series A preferred stock becomes mandatorily convertible into common stock at
the rights offering price of $5.00 per share (on a post-reverse split basis)
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. If a material adverse change occurs prior to the
completion 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), TCW and Oaktree will not be required to convert their Series A
preferred stock. If the rights offering is completed on December 23, 2002, then
TCW and Oaktree will receive 1,645,338 shares of our common stock upon
conversion of the preferred stock held by such entities plus an additional
95,978 shares of our common stock in respect of $479,891 of accrued dividends
which would then be owing on account of such preferred stock as of that date.
AMENDMENT TO CERTIFICATE OF INCORPORATION INCREASING THE NUMBER OF AUTHORIZED
SHARES
In order to facilitate the transactions contemplated by the purchase
agreement, including the possible issuance of shares of our common stock
pursuant to the 12% convertible notes and Series A preferred stock, we were
required to amend our certificate of incorporation to increase the number of
authorized shares of our common stock from 20,000,000 to 200,000,000.
REVERSE STOCK SPLIT
Before consummation of the rights offering, we effected a 1-for-10
reverse stock split on November 21, 2002. Assuming no exercise of rights, there
will be approximately 5.1 million shares of common stock (including 233,000
shares granted to our executive officers and non-employee directors)
outstanding. Additionally, upon consummation of the reverse stock split, the
number of authorized shares of common stock was decreased from 200,000,000 to
20,000,000.
RESTRICTED STOCK GRANT; GRANT OF OPTIONS TO NON-EMPLOYEE DIRECTORS
Upon completion of the rights offering, options to purchase
approximately 88,565 shares of our common stock that are held by certain key
employees and by all directors will be cancelled. We will issue 233,000 shares
of our common stock (the "Restricted Stock Shares") to certain key employees and
non-employee directors. Grants of the Restricted Stock Shares to key employees
will be made under our 1997 Stock Incentive Plan and grant to the non-employee
directors will be made under our 1997 Non-Employee Director Stock Option Plan.
The Restricted Stock Shares will vest one-third on the date of grant, one-third
on June 30, 2003, and one-third on June 30, 2004. The issuance of the Restricted
Stock Shares at the completion of the rights offering would represent
approximately 4.5% of our outstanding common stock if no rights are exercised
and approximately 3.4% of our outstanding common stock if the rights offering is
fully subscribed (assuming 100,000 options granted to non-employee directors are
fully exercised.) Vesting of the Restricted Stock Shares may accelerate upon a
change of control on sale of our Company, termination without cause, or upon
death or permanent disability.
Additionally, non-employee directors will be granted in the
aggregate options to purchase 100,000 shares of our common stock (20,000 shares
each) at an exercise price of $5.00 per common share upon completion of the
rights offering. The options will vest as follows: one-half of the option
granted to each non-employee director will
39
vest on June 30, 2003, with the remaining portion of the option to vest of June
30, 2004. Vesting may be accelerated in certain circumstances including a change
in control.
The table below sets forth the names and number of shares of
Restricted Stock (on a post-split basis) each executive officer, non-employee
director and director nominee will receive (on a post-split basis):
Number of Shares of Number of Options Range of Exercise
Name Restricted Stock Cancelled Price
William W. Abbott 30,000 14,282.0 $12.50 - $102.50
Vincent J. Cebula 22,500 927.3 $15.00
John J. Kahl, Jr. 12,500 3,333.4 $15.00
James R. Lind 22,500 * --
John L. Mariotti 12,500 3,333.4 $15.00
A. Corydon Meyer 83,500 41,904.7 $5.80 - $22.50
John G. Jacob 21,500 10,765.1 $12.50 - $48.10
Gary W. Zimmerman 20,000 10,000.0 $5.80 - $12.50
Carol B. LaScala 8,000 4,020.0 $12.50 - $30.00
* Mr. Barrett's options for 4,282.0 shares will be cancelled in
connection with the issuance of the shares of restricted stock to
Mr. Lind.
USE OF PROCEEDS FROM SALE OF CONVERTIBLE NOTES
We advanced $10,000,000 to UnionTools that it applied, together with
borrowings under a new secured credit facility agented by CapitalSource Finance,
as payment of all outstanding obligations of UnionTools due and payable under
the then existing revolving loan and term loan agreements. Contemporaneously
with repayment of existing bank borrowings, UnionTools reimbursed Houlihan Lokey
Capital for remaining expenses that were unpaid and paid Houlihan Lokey
Financial Advisors and its affiliates $1,200,000 in connection with financial
advisory work and the fairness opinion on behalf of us and our stockholders, of
which $600,000 was paid in cash and $600,000 pursuant to the HLHZ Investments,
LLC 12% convertible note.
Any convertible notes (which includes notes held by TCW and Oaktree
and the HLHZ Investments, LLC note) that remain outstanding upon completion of
the rights offering (together with any accrued interest remaining thereon),
shall be automatically converted into shares of our common stock at the rate
equal to the $5.00 per share exercise price of the rights. Assuming that the
rights offering is completed on December 23, 2002 and that there are no
subscriptions for shares thereunder, HLHZ Investments, LLC will receive 127,000
shares of our common stock upon conversion of its 12% convertible notes
representing approximately a 2.5% interest in our outstanding common stock
(including 233,000 shares granted to our executive officers and non-employee
directors and assuming 100,000 options granted to non-employee directors are
fully exercised). To the extent that there are purchases of shares in connection
with the rights offering, the shares of our common stock issuable to HLHZ
Investments, LLC shall be reduced such that, if at least $635,000 is raised
thereby, the HLHZ Investments, LLC 12% convertible note will be repaid in full
and Houlihan Lokey Financial Advisors and their affiliates will retain no
ownership interest in our common stock.
THE RIGHTS
Each holder of our common stock as of the close of business on the
record date of November 21, 2002, will receive the right to purchase 1,000
shares of our common stock for every 100 shares of common stock owned at that
time, at a purchase price of $5.00 per whole share after giving effect to our
1-for-10 reverse stock split. The number of rights issued to stockholders is not
affected by our reverse stock split. Stockholders are not obligated to exercise
any rights, and may exercise less than all of their rights. However,
stockholders may not exercise their rights for fractional shares of our common
stock. On November 22, 2002, the last reported sales price for our common stock
on the Nasdaq SmallCap Market was $3.50 per share.
40
The rights entitle the holders thereof to purchase 1,000 shares of
post reverse stock split for every 100 shares of common stock held as of the
close of business on November 21, 2002. For example, if you held 111 shares of
our common stock of record as of the close of business on November 21, 2002, you
have the right to purchase 1.11 x 1,000 = 1,110 shares of our common stock in
this offering.
We will not issue fractional shares. If the number of shares of
common stock you held on the record date would have resulted in your receipt of
rights exercisable for fractional shares, the number of shares you may purchase
pursuant to your rights will be rounded down to the nearest whole right.
SUBSCRIPTION PRICE
The subscription price for this rights offering is $5.00 per share
payable in cash. All payments must be cleared on or before the expiration date.
Any exercise will be null and void if corresponding payments do not clear by the
expiration date.
SUBSCRIPTION RIGHT
You are entitled to purchase one share of common stock at a price of
$5.00 per whole share for every right issued to you.
PURCHASE RIGHT OF CAPITALSOURCE HOLDINGS, TCW, AND OAKTREE
CapitalSource Holdings, TCW, and Oaktree have agreed that they will
not exercise their rights; however, during the 30-day period following the
completion of the rights offering, TCW and Oaktree will have the right, at their
election, to purchase from us newly-issued shares at price of $5.00 per share
for a number of shares equal to the number of rights that remain unexercised at
the time of the expiration of the rights offering. Representatives of Oaktree
have made no determination as of the date of this prospectus as to whether they
intend to exercise all or any portion of this right. Representatives of TCW have
indicated that TCW does not intend to exercise any of its purchase rights as of
the date of this prospectus.
NO BOARD INVESTMENT RECOMMENDATION TO STOCKHOLDERS
Our board of directors does not make any recommendation to you about
whether you should exercise any rights. In making the decision to exercise or
not exercise your rights, you must consider your own best interests.
If you choose not to exercise your subscription rights in full, your
relative ownership interest and voting interest of our company may be diluted
depending on the extent other stockholders exercise their rights. If you
exercise your rights, you risk investment loss on new money invested. The
trading price of our common stock may decline below the subscription price. We
cannot assure you that the trading price for our common stock will not decline
to a price that is below the subscription price during or after this rights
offering.
EXPIRATION TIME AND DATE
The rights may be exercised beginning as of the date of this
prospectus and expire at 5:00 p.m., New York City time, on the expiration date
referenced on the cover of this prospectus. Rights not exercised by the
expiration date will be null and void.
In order to exercise rights in a timely manner, the rights agent
must receive, prior to the expiration date, the properly executed and completed
rights certificate or "Form of Notice of Guaranteed Delivery," together with
full payment for all shares you wish to purchase. Any exercise will be null and
void if corresponding payments do not clear by the expiration date.
NO REVOCATION
You are not allowed to revoke or change your exercise of rights
after you send in your subscription forms and payment.
41
TRANSFERABILITY OF RIGHTS
The rights are not transferable and may be exercised only by the
persons to whom they are issued. Any attempt to transfer your rights will render
them null and void.
EXTENSION, WITHDRAWAL AND AMENDMENT
We may not cancel or amend the rights offering unless required by
applicable law or regulation of any entity with authority over us.
EXERCISE ONLY BY RECORD HOLDERS
We are sending a rights certificate to each record holder along with
this prospectus and related instructions. Each record holder's rights
certificate indicates the maximum number of whole shares such record holder may
purchase pursuant to the rights issued to such record holder. In order to
exercise rights, you must fill out and sign the rights certificate and deliver
it with full payment for the shares to be purchased in a timely fashion. Only
the holders of record of our common stock as of the close of business as of the
record date may exercise rights. You are a record holder for this purpose only
if your name is registered as a stockholder with our transfer agent, American
Stock Transfer & Trust Company, as of the record date.
A depository bank, trust company, or securities broker or dealer
that is a record holder for more than one beneficial owner of shares may
exercise rights held as of the record date by their beneficial owners as of the
record date.
If you own shares held in a brokerage, bank, or other custodial or
nominee account, in order to exercise your rights you must promptly send the
proper instruction form to the person holding your shares. Your broker, dealer,
depository, or custodian bank or other person holding your shares is the record
holder of your shares and will have to act on your behalf in order for you to
exercise your rights. We have asked your broker, dealer, or other nominee
holders of our stock to contact the beneficial owners to obtain instructions
concerning rights the beneficial owners it represents are entitled to exercise.
FOREIGN AND UNKNOWN ADDRESSES
We are not mailing rights certificates to stockholders whose
addresses are outside the United States or who have an APO or FPO address. In
those cases, the rights certificates will be held by the rights agent for those
stockholders. To exercise their rights, these stockholders must notify the
rights agent on or before the third business day prior to the expiration date.
RIGHT TO BLOCK EXERCISE DUE TO REGULATORY ISSUES
We reserve the right to refuse the exercise of rights by any holder
of rights who would, in our opinion, be required to obtain prior clearance or
approval from any state, federal, or foreign regulatory authorities for the
exercise of rights or ownership of additional shares if, at the expiration date,
this clearance or approval has not been obtained. We are not undertaking to pay
any expenses incurred in seeking such clearance or approval.
We are not offering or selling, or soliciting any purchase of,
shares in any state or other jurisdiction in which this rights offering is not
permitted. We reserve the right to delay the commencement of this rights
offering in certain states or other jurisdictions if necessary to comply with
local laws. However, we may elect not to offer rights to residents of any state
or other jurisdiction whose law would require a change in this rights offering
in order to carry out this rights offering in such state or jurisdiction.
PROCEDURE TO EXERCISE RIGHTS
Please do not send rights certificates or related forms to us.
Please send the properly completed and executed form of rights certificate with
full payment to the rights agent for this rights offering.
42
You should read carefully the rights certificate and related
instructions and forms which accompany this prospectus. You should call American
Stock Transfer & Trust Company, at the address and telephone number listed below
under the caption "-- Questions and Assistance Concerning the Rights" promptly
with any questions you may have.
You may exercise your rights by delivering to the rights agent at
the address specified below and in the instructions accompanying this
prospectus, on or prior to the expiration date:
- Properly completed and executed rights certificate(s) which
evidence your rights. See "-- Delivery of Rights Certificate"
below for instructions on where to send these; and
- Payment in full of the subscription price for each share of
our common stock you wish to purchase pursuant to the
subscription right. See "-- Required Forms of Payment of
Subscription Price" below for payment instructions.
REQUIRED FORMS OF PAYMENT OF SUBSCRIPTION PRICE
The subscription price is $5.00 per share subscribed for, payable in
cash. All payments must be cleared on or before the expiration date. If you
exercise any rights, you must deliver to the rights agent full payment in the
form of:
- a certified check or bank draft drawn on a U.S. bank, or a
U.S. postal, telegraphic or express money order, payable to
"American Stock Transfer & Trust Company, as rights agent"; or
- a wire transfer of immediately available funds to the account
maintained by the rights agent for this rights offering. If
you desire to make payment by wire transfer, you must contact
American Stock Transfer & Trust Company, at (718) 921-8200, to
receive a "Wire Authorization Form."
In order for you to timely exercise your rights, the rights agent
must actually receive the subscription price before the expiration date. Any
exercise will be null and void if corresponding payments do not clear by the
execution date. We are not responsible for any delay in payment by you.
DELIVERY OF RIGHTS CERTIFICATE AND OTHER DOCUMENTS
All rights certificates, payments of the subscription price, nominee
holder certifications, and notices of guaranteed delivery, to the extent
applicable to your exercise of rights, must be delivered to the rights agent as
follows:
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, New York 10038
Eligible institutions may deliver "Notice of Guaranteed Delivery"
forms by facsimile transmission. The rights agents' facsimile number is (718)
234-5001. You should confirm receipt of all facsimiles by calling (718)
921-8200.
SPECIAL PROCEDURE UNDER "NOTICE OF GUARANTEED DELIVERY FORM"
If you wish to exercise rights but cannot ensure that the rights
agent will actually receive the executed rights certificate before the
expiration date, you may alternatively exercise rights by causing all of the
following to occur within the time prescribed:
- Full payment must be received by the rights agent prior to the
expiration date for all of the shares of our common stock you
desire to purchase pursuant to the subscription right.
43
- A properly executed "Notice of Guaranteed Delivery"
substantially in the form distributed by us with your rights
certificate and accompanied by a Medallion Guaranty must be
received by the rights agent at or prior to the expiration
date.
- The "Notice of Guaranteed Delivery" form must be executed by
both you and one of the following:
- a member firm of a registered national securities
exchange,
- a member of the National Association of Securities
Dealers, Inc. (NASD),
- a commercial bank or trust company having an
office or correspondent in the United States, or
- other eligible guarantor institution qualified
under a guarantee program acceptable to the rights
agent.
The co-signing institution must provide a Medallion
Guaranty on the Notice of Guaranteed Delivery
guaranteeing that the rights certificate will be
delivered to the rights agent within three business days
after the date of the form. Your Notice of Guaranteed
Delivery form must also provide other relevant details
concerning the intended exercise of your rights.
- The properly completed rights certificate(s) with any required
signature guarantee must be received by the rights agent
within three business days following the date of the related
Notice of Guaranteed Delivery.
- If you are a nominee holder of rights, the "Nominee Holder
Certification" must also accompany the Notice of Guaranteed
Delivery.
A Notice of Guaranteed Delivery may be delivered to the rights agent
in the same manner as rights certificates at the addresses set forth above under
the caption "-- Delivery of Rights Certificate" or facsimile transmission.
Additional copies of the form of Notice of Guaranteed Delivery are
available upon request from the rights agent, whose address and telephone number
were previously listed under the caption "-- Delivery of Rights Certificate and
Other Documents."
INCOMPLETE FORMS; INSUFFICIENT OR EXCESS PAYMENT
If you do not indicate on your rights certificate the number of
rights being exercised, or do not forward sufficient payment for the number of
rights that you indicate are being exercised, then we will accept the
subscription forms and payment only for the maximum number of rights that may be
exercised based on the actual payment delivered.
PROHIBITION ON FRACTIONAL SHARES
You may not purchase fractional shares pursuant to the rights. We
will accept any inadvertent subscription indicating a purchase of fractional
shares by rounding down to the nearest whole share and, as soon as practicable,
refunding without interest any payment received for a fractional share.
INSTRUCTIONS TO NOMINEE HOLDERS
If you are a broker, trustee, or depository for securities or other
nominee holder for beneficial owners of our common stock, we are requesting that
you contact such beneficial owners as soon as possible to obtain instructions
and related certifications concerning their rights. Our request to you is
further explained in the suggested form of letter of instructions from nominee
holders to beneficial owners accompanying this prospectus.
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To the extent so instructed, nominee holders should complete
appropriate rights certificates on behalf of beneficial owners and submit them
on a timely basis to the rights agent with the proper payment.
RISK OF LOSS ON DELIVERY OF RIGHTS CERTIFICATE FORMS AND PAYMENTS
Each holder of rights bears all risk of the method of delivery to
the rights agent of rights certificates and payments of the subscription price.
If rights certificates and payments are sent by mail, you are urged to send
these by registered mail, properly insured, with return receipt requested, and
to allow a sufficient number of days to ensure delivery to the rights agent and
clearance of payment prior to the expiration date.
HOW PROCEDURAL AND OTHER QUESTIONS ARE RESOLVED
We are entitled to resolve all questions concerning the timeliness,
validity, form, and eligibility of any exercise of rights. Our determination of
such questions will be final and binding. We, in our sole discretion, may waive
any defect or irregularity, or permit a defect or irregularity to be corrected
within such time as we may determine, or reject the purported exercise of any
right because of any defect or irregularity.
Rights certificates will not be considered received or accepted
until all irregularities have been waived or cured within such time as we
determine in our sole discretion. Neither we nor the rights agent have any duty
to give notification of any defect or irregularity in connection with the
submission of rights certificates or any other required document. Neither we nor
the rights agent will incur any liability for failure to give such notification.
We reserve the right to reject any exercise of rights if the
exercise does not comply with the terms of this rights offering or is not in
proper form or if the exercise of rights would be unlawful or materially
burdensome.
ISSUANCE OF STOCK CERTIFICATES
Stock certificates for shares purchased in this rights offering will
be issued promptly after the expiration date. The rights agent will deliver
subscription payments to us only after consummation of this rights offering and
the issuance of stock certificates to our stockholders that exercised rights.
Unless you instruct otherwise in your rights certificate form, shares purchased
by the exercise of rights will be registered in the name of the person
exercising the rights.
QUESTIONS AND ASSISTANCE CONCERNING THE RIGHTS
You should direct any questions, requests for assistance concerning
the rights or requests for additional copies of this prospectus, forms of
instructions or the Notice of Guaranteed Delivery to rights agent, American
Stock Transfer & Trust Company, at (718) 921-8200. Banks and brokers should call
D.F. King & Co., Inc. at (800) 431-9633.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material United States
federal income tax consequences of this rights offering to the holders of our
common stock that hold such stock as a capital asset within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). This
discussion is based on the Code and the laws, regulations, rulings, and
decisions in effect on the date of this prospectus, all of which are subject to
change (possibly with retroactive effect) and to differing interpretations. In
addition, this discussion only applies to holders that are U.S. persons, which
is defined as a citizen or resident of the United States, a domestic
partnership, a domestic corporation, any estate (other than a foreign estate),
and any trust so long as a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the trust.
Generally, for federal income tax purposes, an estate is
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classified as a "foreign estate" based on the location of the estate assets, the
country of the estate's domiciliary administration, and the nationality and
residency of the domiciliary personal representative.
This discussion does not address all aspects of federal income
taxation that may be relevant to holders in light of their particular
circumstances or to holders who may be subject to special tax treatment under
the Code, including holders of outstanding convertible preferred stock, options,
or restricted stock, holders who are dealers in securities or foreign currency,
foreign persons (defined as all persons other than U.S. persons), insurance
companies, tax-exempt organizations, banks, financial institutions,
broker-dealers, real estate investment trusts, regulated investment companies,
holders who hold common stock as part of a hedge, straddle, conversion, or other
risk reduction transaction, or who acquired common stock pursuant to the
exercise of compensatory stock options or warrants or otherwise as compensation.
We have not sought, and will not seek, an opinion of counsel or a
ruling from the Internal Revenue Service regarding the federal income tax
consequences of this rights offering or the related share issuance. The
following summary does not address the tax consequences of the rights offering
or the related shares issuance under foreign, state, or local tax laws.
ACCORDINGLY, EACH HOLDER OF COMMON STOCK SHOULD CONSULT HIS OR HER TAX ADVISOR
WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF THE RIGHTS OFFERING OR THE
RELATED SHARE ISSUANCE TO SUCH HOLDER.
The federal income tax consequences for a holder of common stock on
a receipt of subscription rights under the rights offering should be as follows:
- Receipt of the Rights. A holder should not recognize taxable
income for federal income tax purposes in connection with the
receipt of the subscription rights in the rights offering.
- Exercise of the Rights; Basis and Holding Period of the Common
Stock. Holders of the rights will not recognize any gain or
loss upon the exercise of the rights. The tax basis of the
shares of our common stock acquired through the exercise of
the rights will be equal to the sum of the subscription price
for such rights and the holder's tax basis in the rights if
any. An allocation to the rights of a portion of the tax basis
of the common stock with respect to which the rights are
distributed should not be made unless (i) the fair market
value of the rights equaled at least 15% of the fair market
value of such stock at the time of distribution, or (ii) you
file with your tax return a statement of election to allocate
the tax basis between such stock and the rights in proportion
to their fair market values. The holding period for the shares
acquired through the exercise of the rights will begin on the
date that the rights are exercised.
- Lapse of the Rights. A holder that allows the subscription
rights received in the rights offering to expire should not
recognize any gain or loss, and the tax basis of the common
stock owned by such holder with respect to which such
subscription rights were distributed should be equal to the
tax basis of such common stock immediately before the receipt
of the subscription rights in the rights offering.
- Sale of Common Stock. The sale of common stock acquired
through the exercise of the rights will result in the
recognition of capital gain or loss to the holder in an amount
equal to the difference between the amount realized and the
holder's tax basis in the common stock sold. The gain or loss
will be long-term capital gain or loss if the common stock is
held for more than one year.
- Information Reporting and Backup Withholding. Information
reporting may apply to a holder that is not a corporation (or
other exempt recipient) to any dividend payments on common
stock received upon the exercise of the rights and to payments
on the proceeds of a sale of the common stock. A backup
withholding tax rate of 30% (subject to periodic reduction
through 2006) may apply to these payments unless the holder
provides a correct taxpayer identification number ad otherwise
complies with the backup withholding requirements.
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
the selling stockholders and their common stock ownership before and after their
proposed sale of their shares. Our company will not receive any of the
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proceeds from the sale of the selling stockholders' common stock. The notes to
the table describe, among other matters, the existing and former relationships
of each selling stockholder to our company.
Beneficial ownership Amount Beneficial
before offering of common ownership
----------------------------- stock to after
Name Direct Other %(1) be offered the Sale
- ---- ------ ----- ---- ---------- --------
CapitalSource Holdings, LLC(2) 31,910 221,444(3) 5.0% 253,354 0
HLHZ Investments, LLC(4) 0 127,000(5) 2.5% 127,000 0
(1) Based upon 5,079,063 shares of our common stock outstanding on December
23, 2002, including no exercise of any rights.
(2) We entered into a five-year, $45 million credit facility with
CapitalSource Finance (an affiliate of CapitalSource Holdings), consisting
of a $12.5 million term loan and a $32.5 million revolving credit
component.
(3) Represents the number of additional shares that we are committed to issue
to CapitalSource Holdings upon completion of the rights offering assuming
that the rights offering is completed on December 23, 2002.
(4) Houlihan, Lokey, Howard & Zukin, Inc., an affiliate of HLHZ Investments,
LLC, acted as our financial adviser in connection with our
recapitalization.
(5) Represents shares of common stock that will be issued upon conversion of
12% convertible notes at the close of the rights offering assuming that
the rights offering is completed on December 23, 2002, and that no rights
are exercised thereby.
DESCRIPTION OF CAPITAL STOCK
As of November 21, 2002, our authorized capital stock consisted on
20,000,000 shares of common stock, $.01 par value, and 1,000,000 shares of
preferred stock, $.001 par value, of which 827 shares have been designated as
Series A Convertible preferred stock. As of November 21, 2002, we had 639,737
shares of common stock outstanding and 822.6696 shares of Series A convertible
preferred stock outstanding.
The following is a summary of the material terms of our capital
stock. The summary does not purport to be complete or to contain all the
information that may be important to you, and is qualified in its entirety by
our amended and restated certificate of incorporation, bylaws, the certificate
of designation for our Series A convertible preferred stock, and the purchase
agreement with TCW and Oaktree. We encourage you to read the provisions of these
documents to the extent they relate to your individual investment strategy.
COMMON STOCK
Voting Rights. Each share of our common stock is entitled to one
vote in the election of directors and other matters. A majority of shares of our
voting stock constitutes a quorum at any meeting of stockholders. Common
stockholders are not entitled to cumulative voting rights.
Dividends. Subject to preferential rights of any outstanding shares
of preferred stock and the restrictive terms of our credit agreement with
CapitalSource Finance, which prohibits the payment of dividends in certain
circumstances, dividends may be paid to holders of common stock as may be
declared by our board of directors out of funds legally available for that
purpose. We do not intend to pay dividends at the present time or in the near
future.
Liquidation. If we liquidate, dissolve, or wind-up our business,
either voluntarily or not, common stockholders will receive pro-rata assets
remaining after we pay our creditors and satisfy the liquidation preference to
our preferred stockholders.
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Miscellaneous. Holders of common stock have no preemptive,
subscription, redemption, or conversion rights.
COMMON STOCK PURCHASE RIGHTS
On November 21, 2002, each stockholder (other than certain
stockholders who have agreed to contractually waive their right to exercise
rights) was granted rights, at the rate of 1,000 non-transferable rights per
100 shares of our common stock owned, to purchase one share of newly-issued
common stock at $5.00 per share for each right received. Stockholders holding an
aggregate of approximately 463,054 shares of our common stock out of 639,737
eligible shares have agreed that they will not exercise their rights. This means
that the rights offering will be exercisable for 1,766,730 shares of our common
stock (176,673 shares x 10 rights per share). The non-transferable rights become
exercisable on the date of this prospectus and expire on the expiration date
referenced on the cover of this prospectus.
PREFERRED STOCK
Our amended and restated certificate of incorporation authorizes us
to issue preferred stock in one or more series having designations, rights, and
preferences determined from time to time by our board of directors. Accordingly,
subject to applicable stock exchange rules and the terms of existing preferred
stock, our board of directors is empowered, without the approval of the holders
of common stock, to issue shares of preferred stock with dividend, liquidation,
conversion, voting, or other rights that could adversely affect the voting power
or other rights of the holders of common stock.
Currently, we have one series of preferred stock: the Series A
convertible preferred stock. The terms of the Series A convertible preferred
stock are discussed below. In some cases, the issuance of preferred stock could
delay a change in control of us or make it harder to remove present management.
In addition, the voting and conversion rights of a series of preferred stock
could adversely affect the voting power of our common stockholders. Preferred
stock could also restrict dividend payments to holders of our common stock.
Although we have no present intention to create any new series or issue any
additional shares of preferred stock, we could do so at any time in the
future, subject to the rights of holders of our existing preferred stock.
SERIES A CONVERTIBLE PREFERRED STOCK
Our board of directors has designated 827 shares of Series A
convertible preferred stock pursuant to certificate of designation of,
preferences and relative, participating, optional and other special rights and
qualifications, limitations and restrictions, filed with the Secretary of State
of Delaware. Currently, 822.6696 shares of our Series A convertible preferred
stock are outstanding, all of which are held by TCW and Oaktree.
Voting Rights. Other than the voting and approval rights provided in
the stockholder agreement between us and Oaktree, HLHZ Investments, Inc., and
CapitalSource Holdings, or as required by law, the Series A preferred
stockholders shall not have any voting rights.
Dividends. The Series A convertible preferred stock bears a
preferred cumulative dividend at the rate of 12% per year or, if the rights
offering does not take place on or prior to December 15, 2002, at a rate of 19%
per year. On September 10, 2002, TCW, Oaktree, and HLHZ Investments, Inc. agreed
to waive the right to an increase in the dividend rate on the Series A preferred
stock from 12% to 19% if the conversion of the Series A preferred stock had not
occurred prior to December 15, 2002. The declaration or payment of dividends
(other than dividends or distributions payable in stock, or split-ups or
reclassifications of our stock) is subject to the terms of our credit agreement
with CapitalSource Finance. So long as any shares of the Series A convertible
preferred stock are outstanding, we will not pay cash dividends on our common
stock or any other class of capital stock that may be authorized in the future.
Dividends on our common stock paid in common stock are permitted; however, the
holders of Series A convertible preferred stock are entitled to participate pari
passu with the holders of the common stock in any and all dividends or other
such distributions declared on the common stock, based on the number of shares
of common stock that holders of the Series A convertible preferred stock would
have obtained had the Series A convertible preferred stock (together with
accrued buy unpaid dividends thereon) been converted in full immediately prior
to the date of such dividend.
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Liquidation Preference. Each share of Series A convertible preferred
stock has a liquidation preference of $10,000 per share. Any unpaid cumulative
dividends will be added to the liquidation preference. If we liquidate, no
distribution may be made to the holders of our common stock or the holders of
any class or series of our capital stock ranking junior to the Series A
convertible preferred stock until the holders of the Series A convertible
preferred stock have received their preference.
Conversion into Common Stock. Immediately upon the expiration of the
rights offering, all of the Series A convertible preferred stock shall be
converted into such number of shares of common stock determined by dividing the
liquidation preference amount (including all accrued and unpaid dividends) by
$5.00. The Series A convertible preferred stock shall not convert if any of the
following occurs:
- the threatened or actual loss or termination of one of our key
employees (Cory Meyer, John Jacob, Gary Zimmerman and Carol
LaScala);
- the occurrence of a material adverse effect; or
- the occurrence, or likely occurrence, of a default or event of
default with respect to any loan facility or loan agreement of
ours or our subsidiary, UnionTools, Inc.
If the rights offering is completed on December 23, 2002, then TCW
and Oaktree will receive 1,645,338 shares of our common stock upon conversion of
the preferred stock held by such entities plus an additional 95,978 shares of
our common stock in respect of $479,890 of accrued dividends which would then be
owing on account of such preferred stock as of that date.
Mandatory Redemption. The Series A convertible preferred stock shall
be redeemed by the Corporation on June 15, 2005, at a price per share equal to
the Liquidation Preference Amount plus accrued and unpaid dividends thereon. We
may redeem the Series A convertible preferred stock prior to June 15, 2005 at
the same price.
TRANSFER RESTRICTIONS
Our amended and restated certificate of incorporation contains
transfer restrictions that are designed to restrict, until November 20, 2012,
direct and indirect transfers of our capital stock that could result in the
imposition of future limitations on our ability to use, for federal income tax
purposes, Net Operating Loss Carryforwards ("NOLs") under Section 382 of the
Internal Revenue Code and other tax attributes that are and will be available to
us, as discussed more fully below.
Description of the Transfer Restrictions. Article Fifth of our
amended and restated certificate of incorporation generally restricts, until
November 20, 2012, any direct or indirect transfer of "stock" (which term, for
purposes of the transfer restrictions, includes our common stock, our preferred
stock and any other equity security treated as "stock" under Section 382) if:
- the effect would be to increase the ownership of stock by any
person who during the preceding three-year period owned 4.5%
or more of our stock,
- would otherwise increase the percentage of stock owned by a "5
percent shareholder" (as defined in Section 382, substituting
"4.5 percent" for "5 percent"), or
- otherwise would cause an ownership change of our Company
within the meaning of Section 382.
Transfers included under the transfer restrictions include sales to persons
whose resulting percent ownership would exceed the thresholds discussed above,
or to persons whose ownership of shares would by attribution cause another
person to exceed these thresholds, as well as sales by persons who exceeded the
thresholds prior to the transfer restrictions' becoming effective. Numerous
rules of attribution, aggregation, and calculation prescribed under the Internal
Revenue Code (and related regulations) will be applied in determining whether
the 4.5% threshold has been met and whether a group of less than 4.5%
stockholders will be treated as a "public group" that is a 5% shareholder under
Section 382. As a result of these attribution rules, the transfer restrictions
could result in prohibiting ownership of our stock as a result of a change in
the relationship between two or more persons or entities, or a transfer of an
interest other than our stock, such as an interest in an entity that, directly
or indirectly, owns our stock.
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The transfer restrictions may also apply to proscribe the creation or transfer
of certain "options" (which are broadly defined by Section 382) in respect of
our stock to the extent, generally, that exercise of the option would result in
a proscribed level of ownership.
Generally, the transfer restrictions will be imposed only with
respect to the amount of our stock (or options with respect to our stock)
purportedly transferred in excess of the threshold established in the transfer
restrictions. In any event, the restrictions will not prevent a transfer if the
purported transferee obtains the approval of the board of directors, which
approval shall be granted or withheld in the sole and absolute discretion of our
board of directors, after considering all facts and circumstances including but
not limited to future events deemed by our board of directors to be reasonably
possible. The approval may be granted to permit a transaction to raise
additional capital, at a level likely to result in an ownership change, but our
board of directors will weigh the risks of a limitation on the use of the NOLs
against the need for additional capital before granting such approval.
We believe that, as of the date hereof, the only stockholders that
would, or may, be treated under Section 382 as beneficially owning 4.5% or more
of our stock are CapitalSource Holdings, and Weyerhaeuser Master Retirement
Trust, and the persons or entities controlling TCW Special Credits Trust IIIb
and TCW Special Credits Fund IIIb, the persons or entities controlling TCW
Special Credits Fund IV, TCW Special Credits Trust IV, TCW Special Credits Trust
IVa, and TCW Special Credits Plus Fund, the persons or entities controlling TCW
Special Credits Trust, the persons or entities controlling TCW Special Credits,
and the persons or entities controlling OCM Principal Opportunities Fund, L.P.
(the "Majority Holders"). There may be other stockholders that beneficially own
4.5% or more of our stock, although we are not aware of any such stockholders.
Except as discussed below (including the discussion of our board of directors'
power to waive the transfer restrictions), the transfer restrictions would
restrict any other person or entity (or group thereof) from acquiring sufficient
shares of our stock to cause such person or entity to become the owner of 4.5%
or more of our stock, and would prohibit persons that own over 4.5% of our stock
generally from increasing their ownership of our stock, without obtaining the
approval of our board of directors. Notwithstanding the foregoing, the transfer
restrictions shall not apply to transfers to or from entities controlled,
directly or indirectly, by the Majority Holders or their affiliates.
Furthermore, nothing in the transfer restrictions prohibits the Majority Holders
from acquiring additional shares of our stock.
Until November 20, 2012, all newly issued certificates representing
our stock will bear the following legend: "THE TRANSFER OF THE SECURITIES
REPRESENTED HEREBY IS SUBJECT TO RESTRICTIONS PURSUANT TO ARTICLE FIFTH OF THE
CERTIFICATE OF INCORPORATION OF ACORN PRODUCTS, INC." or similar legend. Our
board of directors also intends to issue instructions to or make arrangements
with our transfer agent to implement the transfer restrictions. The transfer
restrictions provide that the transfer agent shall not record any transfer of
our stock purportedly transferred in excess of the threshold established in the
transfer restrictions. The transfer agent also has the right, prior to and as a
condition to registering any transfers of our stock on our stock transfer
records, to request an affidavit from the purported transferee of the stock
regarding such purported transferee's actual and constructive ownership of our
stock, and if the transfer agent does not receive such affidavit or the
affidavit evidences that the transfer would violate the transfer restrictions,
the transfer agent is required to notify us and not to enter the transfer in our
stock transfer records. These provisions may result in the delay or refusal of
certain requested transfers of our stock.
Any direct or indirect transfer of stock attempted in violation of
the restrictions would be void ab inito as to the purported transferee, and the
purported transferee would not be recognized as the owner of the shares owned in
violation of the restrictions for any purpose, including for purposes of voting
and receiving dividends or other distributions in respect of such stock, or in
the case of options, receiving stock in respect of their exercise. Stock
acquired in violation of the transfer restrictions is referred to as "Excess
Stock."
Excess Stock automatically will be transferred to a trustee for the
benefit of a charitable beneficiary designated by us, effective as of the close
of business on the business day prior to the date of the violative transfer. Any
dividends or other distributions paid prior to discovery by us that the stock
has been transferred to the trustee are treated as held by the purported
transferee as agent for the trustee and must be paid to the trustee upon demand,
and any dividends or other distributions declared but unpaid after such time
shall be paid to the trustee. Votes cast by a purported transferee with respect
to Excess Stock prior to the discovery by us that the Excess Stock was
transferred to the trustee will be rescinded as void and recast in accordance
with the desire of the trustee acting for the benefit of the charitable
beneficiary. The trustee will have all rights of ownership of the Excess Stock.
As soon
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as practicable following the receipt of notice from us that Excess Stock was
transferred to the trustee, the trustee is required to sell such Excess Stock in
an arms-length transaction that would not constitute a violation under the
transfer restrictions. The net proceeds of the sale, after deduction of all
costs incurred by us, the transfer agent and the trustee, will be distributed
first to the violating stockholder in an amount equal to the lesser of such
proceeds or the cost incurred by the stockholder to acquire such Excess Stock,
and the balance of the proceeds, if any, will be distributed to the charitable
beneficiary together with any other distributions with respect to such Excess
Stock received by the trustee. If the Excess Stock is sold by the purported
transferee, such person will be treated as having sold the Excess Stock as an
agent for the trustee, and shall be required to remit all proceeds to the
trustee (less, in certain cases, an amount equal to the amount such person
otherwise would have been entitled to retain had the trustee sold such shares).
If the violative transaction results from indirect ownership of
stock, the transfer restrictions provide a mechanism that is intended to
invalidate the ownership of our stock actually owned by the violating
stockholder and any persons within such stockholder's control group. Only if
such provisions will not be effective to prevent a violation of the transfer
restrictions will ownership of stock by other persons be invalidated under the
transfer restrictions.
The transfer restrictions provide that any person who knowingly
violates the transfer restrictions or any persons in the same control group with
such person shall be jointly and severally liable to us for, and shall indemnify
and hold us harmless against, any and all damages suffered as a result of such
violation, including but not limited to damages resulting from a reduction in or
elimination of our ability to use our NOLs.
The transfer restrictions will not apply to:
- any transfer described in Code Section 382(1)(3)(B) (relating
to transfers upon death or divorce and certain gifts) if the
transferor held the stock transferred for longer than the
entire three-year period preceding the date of the transfer,
- any sale of common stock by a person who owns more than 4.5%
of the outstanding common stock on the date of this proxy
statement if such sale would not result in a net increase in
the amount of stock owned by 5% shareholders (as determined
for purposes of Section 382) during the three-year period
ending on the date of such sale, provided such sale would not
otherwise be prohibited under the transfer restrictions but
for such transferor's ownership of our stock, and
- any transfer which our board of directors has approved in
writing, which approval may be given in the sole and absolute
discretion of our board of directors after considering all
facts and circumstances, including but not limited to future
events the occurrence of which are deemed to be reasonably
possible. Such approval may be granted to issue additional
stock if the benefits of doing so outweigh the costs of
limitations on the availability of the NOLs.
We do not believe that adoption of the transfer restrictions will
adversely affect the continued listing of our common stock on Nasdaq.
Enforceability of the Transfer Restrictions. We believe the transfer
restrictions are in the best interest of our company and our stockholders and
are reasonable, and we will act vigorously to enforce the restrictions against
all current and future holders of our stock regardless of how they vote on the
transfer restrictions. Among other things, the transfer restrictions require a
stockholder (and any persons in such stockholder's control group) who knowingly
violates the transfer restrictions to indemnify us for any damages suffered as a
result of such violation, including damages resulting from a reduction in or
elimination of our ability to utilize the NOLs. Even if the transfer
restrictions are approved, there can be no assurance that the transfer
restrictions or portions thereof will be enforceable in Delaware courts.
However, we believe the transfer restrictions are enforceable under Delaware
law. Because under Delaware law, the transfer restrictions are not enforceable
against a transferee of shares without knowledge of such restriction unless such
restriction is stated on the share certificate, a restrictive legend will be
placed on all shares of our stock.
Further, under Delaware law, the transfer restrictions are not
binding with respect to shares of our common stock issued prior to the adoption
of the transfer restrictions unless the holders thereof vote in favor of the
transfer restrictions.
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Board Power to Waive Transfer Restrictions. Our board of directors
has the discretion to approve a transfer of stock that would otherwise violate
the transfer restrictions. If our board of directors decides to permit a
transfer that would otherwise violate the transfer restrictions, that transfer
or later transfers may result in an ownership change that would limit the use of
our NOLs. Our board of directors would only permit such an attempted transfer
after making the determination that it is in our best interests, after
consideration of the risk that an ownership change might occur and any other
factors that our board deems relevant (including possible future events).
As a result of the foregoing, the transfer restrictions serve to
reduce, but not necessarily eliminate, the risk that Section 382 will cause the
limitations described above on our use of certain tax attributes.
Antitakeover Effect. Because some corporate takeovers occur through
the acquiror's purchase, in the public market or otherwise, of sufficient stock
to give it control of a company, any provision that restricts the
transferability of shares can prevent such a takeover. The Transfer Restrictions
therefore have an "antitakeover" effect because they will restrict, for up to
ten years, the ability of a person or entity or group thereof from accumulating
an aggregate of 4.5% or more of our capital stock and the ability of persons,
entities or groups now owning 4.5% or more of our capital stock from acquiring
additional securities. The Transfer Restrictions would discourage or prohibit
accumulations of substantial blocks of shares for which stockholders might
receive a premium above market value.
The "antitakeover" effect of the Transfer Restrictions is not the
reason for the Transfer Restrictions. Our board of directors considers the
Transfer Restrictions to be reasonable and in the best interests of our Company
and our shareholders because the Transfer Restrictions reduce certain of the
risks that we will be unable to utilize its available NOLs. In the opinion of
the board of directors, the fundamental importance to our stockholders of
maintaining the availability of the NOLs to us is a more significant
consideration than the "antitakeover" effect the Transfer Restrictions may have.
Possible Effect on Liquidity. The transfer restrictions will
restrict a stockholder's ability to acquire, directly or indirectly, additional
stock of our Company in excess of the specified limitations. Furthermore, a
stockholder's ability to dispose of our stock may be restricted as a result of
the transfer restrictions, and a stockholder's ownership of our stock may become
subject to the transfer restrictions upon the actions taken by related persons.
The transfer restrictions may result in a decreased valuation of our common
stock due to the resulting restrictions on transfers to persons directly or
indirectly owning or seeking to acquire a significant block of our common stock.
DELAWARE ANTI-TAKEOVER LAWS
Section 203 of the Delaware General Corporation Law prevents a
publicly held Delaware corporation held of record by more than 2,000
stockholders from engaging in a "business combination" (as defined in Section
203) with any "interested stockholder" (defined in Section 203, generally, as a
person owning 15% or more of a corporation's outstanding voting stock) for three
years following the date such person became an interested stockholder, unless:
- before such person became an interested stockholder, the board
of directors of the corporation approved the transaction in
which the interested stockholder became an interested
stockholder or approved the business combination;
- upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction
commenced (excluding stock hold by directors who are also
officers of the corporation and by employee stock plans that
do not provide employees with the rights to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or
- following the transaction in which such person became an
interested stockholder, the business combination is approved
by the board of directors of the corporation and authorized at
a meeting of stockholders by an affirmative vote of the
holders of two-thirds of the outstanding voting stock of the
corporation, which is not owned by the interested stockholder.
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REGISTRATION RIGHTS
We have granted to TCW, Oaktree, CapitalSource Holdings, and HLHZ
Investments, LLC (the "Registration Rights Holders") certain demand registration
rights and "piggy-back" registration rights with respect to shares of our common
stock held by them now or in the future. The Registration Rights Holders hold
approximately 463,064 shares of common stock, in the aggregate as of November
21, 2002 and will, assuming that the rights offering is completed on December
23, 2002, hold approximately 4,669,490 shares (if all rights are exercised
thereby) or approximately 6,436,220 shares (if no rights are exercised thereby
and Oaktree exercises its right to purchase from us 1,766,730 newly-issued
shares at a price of $5.00 per share). The Registration Rights Holders are
entitled to rights with respect to the registration of their shares under the
Securities Act of 1933 as follows:
Demand Registration Rights
Under the terms of the certain registration rights agreements, the
Registration Rights Holders may require us to file a registration statement
under the Securities Act of 1933 with respect to shares of common stock owned by
them now or in the future, under certain circumstances, and we are required to
use our reasonable best efforts to effect such a resignation. Such rights are
subject to various customary cutback and holdback provisions.
Piggy-Back Registration Rights
If we propose to register any of our securities under the Securities
Act, subject to certain exceptions, the Registration Rights Holders are entitled
to notice of, and to include in the registration, shares of common stock owned
by them, subject to customary cutback and holdback provisions.
PLAN OF DISTRIBUTION
THE RIGHTS OFFERING
We are offering shares of our common stock directly to you pursuant
to the rights issued to record holders of our common stock on November 21, 2002.
We have not employed any underwriters, brokers, or dealers to solicit the
exercise of subscription rights in this offering. Our directors, officers, and
employees may solicit responses from you, but they will not receive any
compensation for such services other than their normal directors' fees or
employment compensation.
If you wish to exercise your subscription rights and purchase shares
of our common stock, you should complete the attached rights certificate and
deliver it to the address included in the rights certificate on or before 5:00
p.m. on the expiration date referenced on the cover of this prospectus.
If you hold shares of our common stock through a broker, custodian
bank, or other nominee, we will ask your broker, custodian bank, or other
nominee to notify you of the rights offering. If you wish to exercise your
subscription rights, you will need to have your broker, custodian bank, or other
nominee act for you. To indicate your decisions, you should complete and return
to your broker, custodian bank or other nominee the form entitled "[Beneficial
Owner Election Form]." You should receive this from your broker, custodian bank
or other nominee with the other rights offering materials. You should contact
your broker, custodian bank or other nominee if you believe you are entitled to
participate in the rights offering but you have not received this form.
Shares of our common stock received through the exercise of
subscription rights will be reported on the Nasdaq SmallCap Market under the
symbol "ACRN" as our currently outstanding shares of common stock now trade.
THE SHELF OFFERING BY SELLING STOCKHOLDERS
The shares covered by this prospectus may be offered and sold from
time to time by the selling stockholders or by their permitted transferees. The
selling stockholders will act independently of us in making
53
decisions with respect to the timing, manner, and size of each sale. To our
knowledge, the selling stockholders have not entered into any agreement,
arrangement, or understanding with any particular broker-dealer or underwriter
that will participate in the offering. There is no obligation of any selling
stockholder to sell any portion of their shares of common stock.
The selling stockholders may sell shares in any of the following
transactions:
- through broker-dealers;
- through agents; or
- directly to one or more purchasers.
From time to time, the selling stockholders may sell their shares in
one or more transactions in the over-the-counter market, on the Nasdaq SmallCap
Market, or in privately negotiated transactions at market prices prevailing at
the time of sale, at prices related to such prevailing market prices, or at
negotiated prices. In addition, any shares covered by this prospectus which
qualify for sale under Rule 144 of the Securities Act may be sold under Rule 144
rather than under this prospectus.
Broker-dealers and the selling stockholders who act in connection
with the sale of the shares may be underwriters. Profits on any resale of the
shares as a principal by such broker-dealers and selling stockholders and any
commissions received by such broker-dealers may be underwriting discounts and
commissions under the Securities Act.
Any broker-dealers participating in transactions as agents may
receive commissions from a selling stockholder and, if they act as agent for the
purchaser of the shares, from the purchaser. Broker-dealers may agree with a
selling stockholder to sell a specified number of shares at a stipulated price
per share and, to the extent a broker-dealer is unable to do so acting as agent
for the selling stockholder, to purchase as principal any unsold shares at a
price required to fulfill the broker-dealer commitment to the selling
stockholder. Broker-dealers who acquire shares as a principal may resell the
shares from time to time in transactions (which may involve crosses and block
transactions and which may involve sales to and through other broker-dealers,
including transactions of the nature described above) in the over-the-counter
market, in negotiated transactions or otherwise at market prices prevailing at
the time of sale or at negotiated prices, and may pay to or receive from the
purchasers of the shares commissions computed as described above.
When the selling stockholders offer their shares, to the extent
required, we will provide you with a prospectus supplement detailing:
- the aggregate number of shares being offered;
- the terms of the offering, including the name or names of any
underwriters, broker-dealers, or agents;
- any commissions, discounts, or concessions and other items
constituting compensation from the selling stockholders; and
- any commissions, discounts, or concessions allowed or repaid
to broker-dealers.
Regulation M under the Securities Exchange Act of 1934 prohibits
persons engaged in a distribution of securities from bidding or from purchasing
(including offers to bid or purchase) the common stock being distributed until
their distribution is completed. One of the purposes of Regulation M is to
preclude persons with a financial interest in a distribution from affecting the
integrity of the independent pricing mechanisms of the market for the securities
that are in distribution.
Distribution is defined broadly, distinguishing the concept from
ordinary trading transactions, with certain criteria such as the magnitude of
the offering and the presence of special selling efforts and selling methods.
The
54
definition applies to "shelf offerings" of securities as is the case with
secondary offerings by selling stockholders from time to time in the open market
at current market prices. Whether sales by the selling stockholders are deemed
to be a distribution under Regulation M depends, among other factors, on the
amount of securities registered, the public float, the trading volume and the
presence of any special selling effort. If it is determined that a distribution
exists, the bidding for and the purchasing prohibitions of Regulation M will
apply to those securities being distributed by those persons participating in
the distribution.
Since there may be extended periods during which there are no
selling efforts under an effective shelf-registered securities offering, the SEC
believes it is unnecessary to subject issuers, broker-dealers, selling
stockholders and other persons who may be deemed participating in the offering
to the strict prohibitions of bidding for, purchasing or inducing others to
purchase the securities subject to the distribution throughout the life of the
shelf registration. In situations where a broker-dealer sells shares on behalf
of a selling security holder in ordinary trading transactions into an
independent market without any special selling efforts, the offering will not be
considered a distribution.
The selling stockholders have been apprised of the restrictions of
Regulation M and have agreed to abide by their obligations under the Exchange
Act. Nothing in this prospectus is deemed a determination as to whether this
shelf-registered offering by the selling stockholders is a distribution, whether
any selling stockholders may be deemed an underwriter, or at what point the
prohibition relating to selling stockholders bidding for or purchasing our
common stock commences or relaxes.
The selling stockholder will pay any commissions associated with the
sale of the shares. The shares offered by this prospectus are being registered
to comply with contractual obligations, and we have paid the expenses of the
preparation of this prospectus. We have agreed to indemnify the selling
stockholders against liabilities, including liabilities under the Securities
Act, or, if the indemnity is unavailable, to contribute toward amounts required
to pay the liabilities.
USE OF PROCEEDS
THE RIGHTS OFFERING
Our net proceeds from the rights offering will depend on the number
of shares that are purchased. If all shares being offered pursuant to this
rights offering are sold, we estimate that the proceeds to us will be
approximately $8,833,650, before payment of fees and expenses related to this
offering. The first $1.1 million of net proceeds received from the rights
offering will be applied in the following order:
(1) toward payment of accrued interest and principal owing to HLHZ
Investments, LLC, pursuant to a 12% convertible note, which
assuming the rights offering is completed on December 23, 2002
would approximate $35,000 in total payments;
(2) for direct expenses of the rights offering up to $150,000; and
(3) toward $315,000 of interest on the $10 million principal
amount of convertible notes issued to existing stockholders
representing funds and accounts managed by TCW and Oaktree,
which interest would total $583,333 if the rights offering
is completed on December 23, 2002.
The balance of any net proceeds above the first $1.1 million will be
applied to our subsidiary, UnionTools, which would, pursuant to the terms of our
new credit facility, be required to apply such excess proceeds toward repayment
of borrowings under the $12.5 million term loan. Direct expenses of the rights
offering (if in excess of $150,000) would be funded out of borrowing under our
revolving credit facility.
THE SHELF OFFERING BY SELLING STOCKHOLDERS
The proceeds from the sale of the shares offered by a selling stockholder
under this prospectus are solely for such selling stockholder who currently owns
and is selling the shares under this prospectus. We will not receive any of the
proceeds from the sale of these shares.
55
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedules included in our Annual report on Form 10-K for the year
ended December 31, 2001, as set forth in their report, which is incorporated by
reference into this prospectus and elsewhere in the registration statement. Our
financial statements and schedules are incorporated by reference in reliance on
the report of Ernst & Young LLP, given on their authority as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for us by Porter, Wright, Morris & Arthur LLP.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements, and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's website at http://www.sec.gov. You may also read and
copy any document we file with the SEC at the SEC's public reference room
located at 450 Fifth Street, N.W., Washington D.C. 20549. You can also obtain
copies of the documents at prescribed rates by writing to the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington D.C. 20549. You may
obtain further information regarding the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330. Because our common stock is listed on
the Nasdaq SmallCap Market, you can also obtain information about us at the
offices of the Nasdaq Stock Market located at 1735 K Street, N.W., Washington,
D.C. 20006-1504.
We "incorporate by reference" into this prospectus the information
we file with the SEC, which means that we can disclose important information to
you by referring you to those documents. The information incorporated by
reference is an important part of this prospectus. We incorporate by reference
the documents listed below and any future filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934:
- our annual report on Form 10-K, as amended, for the fiscal
year ended December 31, 2001 (filed on April 16, 2002 and
amended on October 17, 2002);
- our quarterly reports on Form 10-Q, as amended, for the
quarters ended March 31, 2002 (filed on May 10, 2002), June
30, 2002 (filed on August 9, 2002 and amended on October 17,
2002), and September 29, 2002 (filed on November 13, 2002);
- our current reports on Form 8-K, dated February 1, 2002 (filed
on February 5, 2002), May 29, 2002 (filed on June 6, 2002),
June 13, 2002 (filed on June 17, 2002), June 28, 2002 (filed
July 2, 2002), October 11, 2002 (filed on October 16,
2002), and November 21, 2002 (filed November 22, 2002);
- our definitive proxy statement for the annual meeting of
stockholders held on November 20, 2002 (filed on October 22,
2002), in connection with our 2002 Annual Meeting of
Stockholders; and
- the description of our common stock contained in our
registration statement on Form S-1 (Registration No.
333-25325) under the Securities Act of 1933, as amended, filed
on April 17, 1997, which appears in the prospectus contained
in the Registration Statement under the caption "Description
of Capital Stock--Common Stock."
Our SEC file number is 0-22717.
This prospectus is part of a registration statement on Form S-3 that
we have filed with the SEC relating to the securities that we are offering under
this prospectus. As permitted by the SEC rules, this prospectus does not contain
all of the information included in the registration statement and the
accompanying exhibits that we file with the SEC. You should read the
registration statement and the exhibits for more information about us. In
addition, statements that we make in this prospectus about any document filed as
an exhibit are not necessarily complete. In each instance, you should refer to
the exhibit directly. Information that we file later with the SEC and that is
56
incorporated by reference into this prospectus will automatically update and
supercede information in this prospectus.
You may request a copy of any or all of the documents incorporated
by reference in this prospectus at no cost, by writing to or telephoning us at
the following address:
Acorn Products, Inc.
390 West Nationwide Blvd.
Columbus, Ohio 43215
Attention: John G. Jacob
(614) 222-4400
You should rely only on the information included or incorporated by
reference in this prospectus. We have not authorized anyone else to provide you
with different information. We are only offering these securities in states
where the offer is permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of this
prospectus. Information on our website is not a part of this prospectus.
57
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection
with the sale and distribution of the securities being registered hereby, other
than underwriting discounts and commissions, if any. All amounts shown are
estimates, except the SEC registration fee:
SEC registration fee................................... $917
Printing and engraving fee............................. $10,000*
Legal fees, blue sky fees and expenses................. $120,000*
Accounting fees and expenses........................... $5,000*
Transfer agent and registrar fees and expenses......... $5,000*
Miscellaneous fees and expenses........................ $9,083*
--------
Total.................................... $150,000*
========
* Estimated
All the costs identified above will be paid by the company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware law, our amended and restated certificate of incorporation,
and our amended and restated bylaws contain provisions relating to the
limitation of liability and indemnification of our directors and officers. We
describe these provisions below.
Under Section 145 of Delaware General Corporation Law,
indemnification of any person who is or was a party or threatened to be made so
in any action by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation or was serving as such of another
corporation or enterprise at the request of the corporation is permitted against
expenses, including attorneys' fees, judgments, fines, and amounts paid in
settlement actually and reasonably incurred by the indemnified person in such
proceeding where:
- the indemnified person acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the
best interests of the corporation;
- in criminal actions, where he or she had no reasonable cause
to believe his conduct was unlawful; and
- in lawsuits brought by or on behalf of the corporation, if the
standards of conduct described above are met, except that no
indemnification is permitted in respect to any matter in which
the person is adjudged to be liable to the corporation unless
a court shall determine that indemnification is fair and
reasonable in view of all the circumstances of the case.
Indemnification against expenses, including attorneys' fees,
actually and reasonably incurred by directors, officers, employees, and agents
is required in those cases where the person to be indemnified has been
successful on the merits or otherwise in defense of a lawsuit of the type
described above. In cases where indemnification is permissive, a determination
as to whether the person met the applicable standard of conduct must be made,
unless ordered by a court, by majority vote of the disinterested directors, by a
committee of the disinterested directors designated by a majority vote of such
directors, even though less than a quorum, by independent legal counsel, or by
the stockholders. Such indemnification rights are specifically not deemed to be
exclusive of other rights of indemnification by agreement or otherwise and the
corporation is authorized to advance expenses incurred prior to the final
disposition of a matter upon receipt of an undertaking to repay such amounts on
a determination that indemnification was not permitted in the circumstances of
the case.
II-1
Our amended and restated certificate of incorporation provides that
we shall indemnify all person whom we shall have the power to indemnify under
Delaware law to the fullest extent permitted by the Delaware General Corporation
Law.
Our amended and restated bylaws provide that we may indemnify and
hold harmless any person who was or is a party or is threatened to be a party
to, or is involved in, any threatened, pending or completed civil, criminal,
administrative, or investigative action, suit, or proceeding by reason of the
fact that the person:
- is or was one of our directors or officers, or
- is or was serving at our request as a director, officer,
employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise,
against expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit, or proceeding if such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to our best
interests, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
Our amended and restated bylaws also provide that we may indemnify
any person who was or is a party or is threatened to be a party to, or is
involved in, any threatened, pending, or completed action or suit by us or on
our behalf to procure a judgment in our favor by reason of the fact that such
person:
- is or was one of our directors or officers; or
- is or was serving at our request as a director, officer,
employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise,
against expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit, or proceeding if such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to our best
interests, except that no indemnification may be made in respect of any claim,
issue, or matter as to which such person shall have been adjudged to be liable
to us unless any only to the extent that the Delaware Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that despite the adjudication of liability, but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expense which the Court of Chancery or such other court shall deem proper.
Under our amended and restated bylaws, indemnification against
expenses is required in those cases where the person to be indemnified has been
successful on the merits or otherwise in defense of a lawsuit of the type
described above. Otherwise indemnification shall be made unless a determination
is reasonably and promptly made:
- by our board by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or
proceeding, or
- if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or
- by the stockholders,
that such person acted in bad faith and in a manner that such person did not
believes to be in or not opposed to our best interests, or, with respect to any
criminal proceeding, that such person believed or had reasonable cause to
believe that his or her conduct was unlawful. In addition, we shall advance
expenses incurred prior to the final disposition of a matter upon receipt of an
undertaking from such person to repay such amounts on a determination that
indemnification was not permitted in the circumstances of the case.
II-2
Our amended and restated bylaws require that any indemnification or
any advance of expenses shall be made promptly and, in any event, within 90
days, in the case of indemnification, and 30 days, in the case of advancement,
of the receipt by our secretary of the written request of the indemnitee, unless
such indemnification or advance is otherwise prohibited as discussed above.
Our certificate of incorporation also provides that our directors
are not personally liable to us or our stockholders for monetary damages for
breach of their fiduciary duties as directors to the fullest extent permitted by
Delaware law. Existing Delaware law permits the elimination of limitation of
directors' personal liability to us or our shareholders for monetary damages for
breach of their fiduciary directors, except for:
- any breach of a director's duty of loyalty to us or our
stockholders;
- acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
- any transaction for which a director derived improper personal
benefits;
- the unlawful payment of dividends; and
- unlawful stock repurchases or redemptions.
Under Delaware law and our amended and restated bylaws, we may
purchase and maintain insurance on behalf of our directors and officers against
any liability incurred by such directors and officers in any such capacity. We
intend to purchase and maintain insurance on behalf of any person who:
- is or was one of our directors, officers, employees, or
agents; or
- is or was serving at our request as a director, officer,
employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against any liability
asserted against and incurred by the person in any such
capacity, or arising out of the person's status as such,
whether or not we would have the power or obligation to
indemnify the person against such liability under our amended
and restated bylaws.
This discussion of our amended and restated certificate of
incorporation, amended and restated bylaws, and of Section 145 of Delaware Law
is not intended to be exhaustive and is respectively qualified in its entirety
by such amended and restated certificate of incorporation, bylaws, and Delaware
law.
ITEM 16. EXHIBITS.
Exhibit No. Description
----------- -----------
3.1 Third Amended and Restated Certificate of Incorporation of
Acorn Products, Inc.**
3.2 Amended and Restated Bylaws of Acorn Products, Inc.*
3.3 Certificate of Designation of, Preferences and Relative,
Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions of Series A
Convertible Preferred Stock of Acorn Products, Inc.
(reference is made to Exhibit 3.1 to Form 8-K, dated
June 28, 2002, filed with the Securities & Exchange
Commission on July 2, 2002, and incorporated herein by
reference)
4.1 Specimen Stock Certificate for Common Stock*
4.2 Form of Rights Certificate***
5.1 Opinion of Porter, Wright, Morris & Arthur LLP**
II-3
10.1.1 Employment Severance Agreement, dated as of August 31,
1999, among the Company, UnionTools, Inc., and A.
Corydon Meyer (reference is made to Exhibit 10.1.2 to
Form 10-K for the fiscal year ended July 30, 1999, filed
with the Securities and Exchange Commission on November
12, 1999, and incorporated herein by reference)
10.1.2 Employment Severance Agreement, dated as of August 31,
1999, among the Company, UnionTools, Inc., and John G.
Jacob (reference is made to Exhibit 10.2.3 to Form 10-K
for the fiscal year ended July 30, 1999, filed with the
Securities and Exchange Commission on November 12, 1999,
and incorporated herein by reference)
10.2 Compensation Agreement, dated as of October 28, 1999,
between the Company and William W. Abbott (reference is
made to Exhibit 10.22 to Form 10-K for the fiscal year
ended July 30, 1999, filed with the Securities and
Exchange Commission on November 12, 1999, and
incorporated herein by reference)
10.3 Acorn Products, Inc. Amended and Restated Deferred
Equity Compensation Plan for Directors (reference is
made to Appendix B to the Definitive Proxy Statement for
the Annual Meeting of Stockholders, dated April 30,
2001, filed with the Securities and Exchange Commission
on April 30, 2001, and incorporated herein by reference)
10.4 Acorn Products, Inc. 1997 Stock Incentive Plan*
10.5 Standard Form of Acorn Products, Inc. Stock Option
Agreement*
10.6 UnionTools, Inc. Retirement Plan for Salaried
Employees*
10.7 Amendment No. 1 to UnionTools, Inc. Retirement Plan for
Salaried Employees*
10.8 Acorn Products, Inc. Supplemental Pension Plan for
Executive Employees*
10.9 Revolving Credit, Term Loan and Security Agreement among
Acorn Products, Inc. and UnionTools, Inc. as Borrower,
CapitalSource Finance LLC, as Agent and Lender and other
Lenders thereto, dated as of June 28, 2002 (reference is
made to Exhibit 10.1 to Form 8-K, dated June 28, 2002,
filed with the Securities & Exchange Commission on July
2, 2002, and incorporated herein by reference)
10.10 Purchase Agreement by and among Acorn Products, Inc. and
UnionTools, Inc., as Issuers, and TCW Special Credits
and OCM Principal Opportunities Fund, L.P., as
Purchasers, dated as of June 26, 2002 (reference is made
to Exhibit 10.2 to Form 8-K, dated June 28, 2002, filed
with the Securities & Exchange Commission on July 2,
2002, and incorporated herein by reference)
10.11 Stockholders' Rights Agreement by and among Acorn
Products, Inc. and OCM Principal Opportunities Fund,
L.P., Houlihan Lokey Howard & Zukin Capital, LLC and
CapitalSource Holdings LLC, dated as of June 28, 2002
(reference is made to Exhibit 10.3 to Form 8-K, dated
June 28, 2002, filed with the Securities & Exchange
Commission on July 2, 2002, and incorporated herein by
reference)
10.12 Registration Rights Agreement by and among Acorn
Products, Inc. and OCM Principal Opportunities Fund,
L.P., Houlihan Lokey Howard & Zukin Capital, LLC and
CapitalSource Holdings LLC, dated as of June 28, 2002
(reference is made to Exhibit 10.4 to Form 8-K, dated
June 28, 2002, filed with the Securities & Exchange
Commission on July 2, 2002, and incorporated herein by
reference)
II-4
10.13 Registration Rights Agreement by and among Acorn
Products, Inc. and TCW Special Credits, dated as of June
28, 2002 (reference is made to Exhibit 10.5 to Form 8-K,
dated June 28, 2002, filed with the Securities &
Exchange Commission on July 2, 2002, and incorporated
herein by reference)
10.14 License Agreement, dated as of August 1, 1992, between
UnionTools, Inc. and The Scotts Company (reference is
made to Exhibit 10.10 to Form 10-K for the year ended
December 31, 2001, filed with the Securities & Exchange
Commission on April 16, 2002, and incorporated herein by
reference)
10.15 Master Lease Agreement, dated as of June 4, 1998,
between BancBoston Leasing, Inc., and UnionTools, Inc.
(reference is made to Exhibit 10.13 to Form 10-K for the
year ended October 29, 1998, and incorporated herein by
reference)
10.16 Rider No. 1 to Master Lease Agreement, dated as of June
4, 1998, between BancBoston Leasing, Inc., and
UnionTools, Inc. (reference is made to Exhibit 10.14 to
Form 10-K for the year ended October 29, 1998, and
incorporated herein by reference)
21.1 Subsidiaries of the Company (reference is made to
Exhibit 21.1 to Form 10-K/A for the year ended December
31, 2001, and incorporated herein by reference)
23.1 Consent of Ernst & Young LLP**
23.2 Consent of Porter, Wright, Morris & Arthur LLP (included
in Exhibit 5.1 hereto)
24.1 Power of Attorney***
99.1 Form of Instructions to Stockholders as to Use of Rights
Certificate***
99.2 Form of Notice of Guaranteed Delivery***
99.3 Form of Letter to be Sent by Company to Holders of
Record of the Rights***
99.4 Form of Letter to be Sent to Beneficial Owners***
99.5 Form of Beneficial Owner Election Form***
99.6 Form of Letter to Banks and Brokers***
99.7 Form of Nominee Holder Certification***
- ----------------
* Previously filed with the same exhibit number on a Registration
Statement on Form S-1 (Registration Number 333-25325) filed with the
Securities and Exchange Commission on April 17, 1997, as amended,
and incorporated herein by reference.
** Filed herewith.
*** Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file during any period in which offers or sales are being
made, a post effective amendment to this registration statement:
II-5
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume or
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this
Pre-Effective Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Columbus,
State of Ohio, on November 25, 2002.
ACORN PRODUCTS, INC.
By: /s/ John G. Jacob
-------------------------------------------
John G. Jacob,
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* President, Chief Executive November 25, 2002
- -------------------------------------
A. Corydon Meyer Officer, and Director
(Principal Executive Officer)
* Vice President and November 25, 2002
- -------------------------------------
John G. Jacob Chief Financial Officer
(Principal Financial and
Accounting Officer)
* Chairman of the Board November 25, 2002
- -------------------------------------
William W. Abbott of Directors
* Director November 25, 2002
- -------------------------------------
Vincent J. Cebula
* Director November 25, 2002
- -------------------------------------
John J. Kahl, Jr.
Director
- -------------------------------------
James R. Lind
* Director November 25, 2002
- -------------------------------------
John L. Mariotti
*By: /s/ John G. Jacob
---------------------------------
John G. Jacob, attorney-in-fact
for each of the persons indicated
II-7