UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number 0-22717
ACORN PRODUCTS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 22-3265462
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
390 W. NATIONWIDE BLVD., COLUMBUS, OHIO 43215
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (614) 222-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common stock, par value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 21, 2003, the aggregate market value of our shares of
common stock (based on the last sale price of the common stock on the Nasdaq
SmallCap Market on that date) held by non-affiliates of the registrant was
approximately $1,845,267.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES NO X
--- ---
As of June 28, 2002, the aggregate market value of our shares of common
stock (based on the last sale price of the common stock on the Nasdaq SmallCap
Market on that date) held by non-affiliates of the registrant was approximately
$825,664.
As of March 21, 2003, 5,010,321 shares of our common stock, par value
$.01 per share, were outstanding.
TABLE OF CONTENTS
DESCRIPTION PAGE
----
Part I
Item 1. Business............................................................................. 3
Item 2. Properties........................................................................... 9
Item 3. Legal Proceedings.................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders.................................. 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 11
Item 6. Selected Financial Data ............................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................... 26
Item 8. Financial Statements and Supplementary Data ......................................... 26
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure................................................................. 26
Part III
Item 10. Directors and Executive Officers of the Registrant................................... 27
Item 11. Executive Compensation............................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 35
Item 13. Certain Relationships and Related Transactions....................................... 37
Item 14. Controls and Procedures.............................................................. 37
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 38
Signatures........................................................................................... 41
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, by the Chief Executive Officer.............................................................. 42
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, by the Chief Financial Officer.............................................................. 43
Financial Statements................................................................................. F-1
Schedules to Financial Statements.................................................................... S-1
2
PART I
ITEM 1. BUSINESS
As used in this Annual Report on Form 10-K and except as the context
otherwise may require, "Company", "we", "us", and "our" refers to Acorn
Products, Inc. and its subsidiary UnionTools, Inc. ("UnionTools"). References to
fiscal years 1998 and 1999 reflect the fiscal year ended on the Friday closest
to July 31 of the applicable year (e.g., "fiscal 1999" reflects the fiscal year
ended July 30, 1999). References to transition year 1999 reflect the five-month
period ended December 31, 1999 ("transition 1999"). References to calendar year
1999 reflect the calendar year period ended December 31, 1999 ("calendar 1999").
References to fiscal years 2000, 2001, and 2002 reflect the fiscal year period
ended on December 31 of the applicable year. As used in this Annual Report on
Form 10-K, "Ace Hardware" refers to Ace Hardware Corporation, "Home Depot"
refers to The Home Depot, Inc., "Lowe's" refers to Lowe's Companies, Inc.,
"Mid-States" refers to Mid-States Distributing Company, Inc., "Oklahoma Rig"
refers to Oklahoma Rig & Supply Company, Inc., "Orgill" refers to Orgill, Inc.,
"Sears" refers to Sears, Roebuck & Company, "Tractor Supply" refers to Tractor
Supply Company, Inc., "Wal-Mart" refers to Wal-Mart Stores, Inc., and "White
Cap" refers to White Cap Pro-Contractor Supplier. Our primary registered
trademarks include: Garden Craft(R), Gardener's Value(R), Landscape Gardener(R),
Perfect Cut(R), Razor-Back(R), SNOFORCE(R), Union(R), Union Pro(R),
UnionTools(R), and Yard `n Garden(R). Craftsman(R) and Sears(R) are registered
trademarks of Sears.
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 Annual Report on Form 10-K or elsewhere,
could differ materially from those stated in the forward-looking statements.
Additional information concerning factors that could cause actual results to
differ materially from those in our forward-looking statements is contained
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
GENERAL
Our primary business is associated with our UnionTools subsidiary.
UnionTools was founded in 1890, and is a leading designer, manufacturer, and
marketer of branded non-powered lawn and garden products. Our primary business
is the manufacturing, marketing, and distribution of garden tools through mass
market and other distribution channels in the United States. We also sell our
products to professional and commercial end-users through distributors and
industrial supply outlets. Our principal products include long handle tools
(such as shovels, forks, rakes, and hoes), snow tools, posthole diggers, wheeled
goods (such as wheelbarrows and hand carts), striking tools, cutting tools, hand
tools, and repair handles. Our products bear well known brand names, including
Garden Craft(R), Gardener's Value(R), 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.
3
GOING PRIVATE TRANSACTION
In February 2003, Acorn Merger Corporation ("AMC"), The TCW Group,
Inc., Trust Company of the West, TCW Asset Management Company, TCW Special
Credits, Oaktree Capital Management, LLC, OCM Principal Opportunities Fund,
L.P., A. Corydon Meyer, John G. Jacob, Gary W. Zimmerman, and Carol B. LaScala
(collectively, the "Filing Persons"), who collectively own approximately 92.5%
of our common stock, filed a Schedule 13E-3 with the Securities and Exchange
Commission ("Commission") stating that they intend to merge AMC with and into
our Company. Upon consummation of the merger and filing of a Form 15 with the
Commission, we will no longer be subject to the reporting requirements of the
Securities Exchange Act of 1934 and cease to be a "public" company. In the
merger, each share of our common stock not owned by AMC will be converted into
the right to receive $3.50. For more information about the merger, see the
Schedule 13E-3 filed by the Filing Persons.
PRODUCTS
We sell non-powered lawn and garden tools, with our primary products
being long handle tools. We design, manufacture, source, and market tools in the
following product categories:
- Shovels, including round point and square point shovels;
garden/nursery shovels; roof rippers; irrigation and trenching
shovels; metal and plastic head snow shovels and pushers; garden,
nursery, and transplanting spades; drain and post spades;
- Posthole Diggers and Augers;
- Scoops, including aluminum, plastic, and steel scoops; general
and special purpose scoop shovels;
- Rakes, including steel and plastic/steel lawn, leaf and shrub
rakes; plastic lawn, leaf and shrub rakes; bow head and level head
rakes; specialty rakes and brooms;
- Garden Tools, including garden and special purpose hoes; weeders
and scrapers; rotary and half-moon edgers; fruit harvesters; bulb
planters; small hand tools like trowels, weeders, and cultivators;
- Cultivators and Forks, including forged cultivators and hooks in
different sizes and spread; spading forks, manure forks, and
special purpose forks;
- Striking Tools, including sledges and heavy hammers; axes, mauls,
and wedges; picks and mattocks; tampers; heavy bars; bars,
pullers, and rippers;
- Cutting Tools, including bypass and anvil hand pruners; hedge and
grass shears; bypass and anvil loppers and mini loppers; tree
pruners and saws;
- Wheeled Goods, including wheelbarrows and hand trucks; and
- Miscellaneous Products, including garden tool organizers, repair
handles, and edging tools.
We continue to develop new products and enhance existing products in
order to maintain and improve our position in the market. Our marketing and
engineering departments develop new products with assistance from independent
consultants.
Shovels and other steel head implements are primarily manufactured at
our Frankfort, New York facility. Forks, cutting tools, and other implements are
sourced worldwide. We process North American ash wood logs at our seven wood
mills and purchase fiberglass handles. Our Hebron, Ohio injection molding
facility manufactures some of the plastic components used in our products, such
as plastic snow shovel heads. In addition, this facility manufactures
proprietary custom molded products and component parts for other manufacturers
and distributors.
4
SALES AND MARKETING
The non-powered lawn and garden industry is mature and, due in part to
the low-cost nature of non-powered equipment, generally is non-cyclical. Demand
for non-powered lawn and garden tools generally is driven by the desire of
do-it-yourself, or "DIY", consumers to maintain and landscape residential
properties and by the need of industrial and farm professionals to acquire and
utilize high-quality tools that will aid them in efficiently completing their
jobs. We promote our products primarily through cooperative advertising and
where applicable, provide customers with merchandising plan-o-grams and custom
designed product displays complete with informative signs to assist at the
retail level.
We market our products primarily within the United States. Sales within
the United States comprised 98% of total sales in fiscal 2001 and 96% of total
sales in fiscal 2002. Our products are sold primarily through mass merchants,
home centers, buying groups, and distributors. We market our products through
our own sales staff with significant support from manufacturers' representative
organizations.
Our sales force is comprised of regional managers and direct sales
professionals who regularly call on customers and manage manufacturers'
representatives who provide store level support to customers. These
manufacturers' representatives also sell lawn and garden products for other
manufacturers, but not products that compete with ours.
We also have an Internet web site at www.uniontools.com which provides
consumers with product information, dealer locations, and customer service
contacts. In addition, customers can download Company information, catalogs, and
line art and photographs for use in advertisements. The reference to our web
site address does not constitute incorporation by reference of the information
contained on our web site, so you should not consider any information on our web
site to be a part of this Annual Report on Form 10-K.
LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS
Under a licensing agreement, we pay royalties to The Scotts Company and
therefore have the right to produce and market a line of garden tools bearing
the Scotts(R) trademark. We anticipate the licensing agreement with The Scotts
Company will expire on December 31, 2003. We also have other licensing
agreements that are not material to our business.
We apply for patents and trademarks as applicable. Patents presently
owned by us are considered, in the aggregate, to be important to the conduct of
our business. Patent protection does not, however, deter competitors from
attempting to develop similar products. We are licensed under a number of
patents, none of which individually is considered material to our business. We
own a number of patents and trademarks registered in the United States Patent
and Trademark Office, as well as the patent and trademark offices of certain
other countries. These include the trademarks:
- Garden Craft(R);
- Gardener's Value(R);
- Landscape Gardener(R);
- Perfect Cut(R);
- Razor-Back(R);
- SNOFORCE(R);
- Union(R);
- Union Pro(R);
- UnionTools(R); and
- Yard `n Garden(R).
Such registrations will continue as new patents and trademarks are developed or
acquired. We aggressively monitor and protect our brands against infringement
and other violations.
5
ACQUISITIONS AND DIVESTITURES
During fiscal 2000, we discontinued the manufacture and sale of
watering products, and subsequently sold the related assets. These actions
represent the desire to dedicate our attention to core products: long handle
tools, cutting tools, striking tools, and wheeled goods.
COMPETITION
The markets for non-powered lawn and garden tools are highly
competitive, especially with respect to product pricing, product quality,
innovation in the design of new products, availability, customer service and
support, although the degree and nature of such competition vary by location and
product line. We are generally perceived by our customers to be the highest
quality provider and to have the best service levels in our industry. We also
enjoy strong brand name recognition. We believe that our commitment to customer
service, product innovation, and distribution systems position us well to
compete in the markets for non-powered lawn and garden tools.
We compete with various manufacturers and distributors. These
competitors also possess widely recognized brand names. With the merger of
Ames(R) and True Temper(R) in February 1999, the long handle tool market is now
primarily supplied by two domestic competitors - Ames(R) True Temper(R) and us.
Primary competitors in the cutting tools market are Fiskars(R) and Corona(R).
Our other product lines primarily compete with those of numerous small
manufacturers and distributors. In addition, we compete with various other
international manufacturers that export parts and finished goods to the United
States.
Our strategy requires that we continue to focus on customer service and
end-user needs, partly through the development and marketing of innovative new
products at competitive prices. We are also facing pricing pressures which, if
not mitigated by cost and expense reductions, may result in lower profitability
and could jeopardize our ability to grow or maintain market share. We believe
that our future success will depend upon our ability to produce and procure low
cost quality products and satisfy consumer tastes with respect to function and
design, and our ability to market such products in each applicable category at
competitive prices. No assurance can be given that we will be able to
successfully compete on the basis of these factors in the future.
CUSTOMERS
We sell our products through a variety of distribution channels
including:
- mass merchants such as Sears and Wal-Mart;
- home centers such as Home Depot and Lowe's;
- buying co-ops such as Ace Hardware;
- distributors and retailers such as Mid-States, Orgill, and Tractor
Supply; and
- industrial distributors such as Oklahoma Rig and White Cap.
Our largest customer is Home Depot and we have been a supplier to them
since 1997. Sears, which includes Sears' Orchard Supply division, is another
major customer. We have been a continuous supplier to Sears for more than eighty
years and the primary supplier of long handle tools to Sears for more than fifty
years. Home Depot and Sears together account for 32% of gross sales. Our ten
largest customers accounted for approximately 53% of gross sales during fiscal
2000, 57% of gross sales during fiscal 2001, and 65% of gross sales during
fiscal 2002. Most of our major customers are on electronic data interchange
(EDI) systems.
There can be no assurance that our sales to Home Depot, Sears, or other
major customers will continue at existing levels. A substantial reduction or
cessation of sales to Home Depot, Sears, or other major customers could have a
material adverse effect on our business, financial condition, and results of
operations. In addition, we continue to face increasing pressures 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.
6
DISTRIBUTION AND LOGISTICS
Customer orders are placed and processed centrally at our headquarters
in Columbus, Ohio and then allocated from our current stock of finished goods in
our distribution facility in Louisville, Kentucky. We use common carriers to
ship finished products from our facilities to customer delivery points. We
continue to reassess the structure and processes of our logistics program for
opportunities to reduce costs and improve customer service.
In fiscal 2000, we exited our western distribution facility in
conjunction with the sale of assets related to the manufacture and sale of
watering products.
In fiscal 2001, in order to increase efficiency and verify accuracy of
shipments, we added a product scanning software enhancement that utilizes RF
technology at our distribution facility.
In fiscal 2002, we relocated our sole distribution facility from
Columbus, Ohio into a newly built customized facility in Louisville, Kentucky.
We utilize an information system that allows us to determine the status
of customer orders, process orders quickly, respond to customer inquiries, and
adjust shipping schedules to meet customer requirements. We believe that these
systems enable efficient order processing, expedite shipments, and improve
customer service. Prioritizing our efforts in distribution and logistics has
resulted in an improvement in service levels, and we consistently strive to
achieve On Time, In Full, Error Free ("OTIFEF") shipments.
MANUFACTURING AND SOURCING
We continue to strengthen our expertise and infrastructure. Our ongoing
efforts continued to improve both manufacturing and sourcing capabilities in
order to pursue the "world's low cost production" on all products and
components.
The production of non-powered lawn and garden tools is an extensive
manufacturing and assembly process that involves several different technologies,
including sawmill operations, wood finishing, heavy gauge forging, stamping,
grinding, metal painting, machining, and injection molding. Over the last 100
years, we have developed unique processes that enable us to perform these
complex tasks in an efficient manner.
In addition, we use our own injection molding facility to manufacture
proprietary custom molded products and component parts for other manufacturers
and distributors, as well as to manufacture certain plastic components used in
our own products.
Since many products and components are more competitively manufactured
outside our facilities, we began strategic sourcing of some product components
in China in 1999. During fiscal 2001 and 2002, we continued to expand our
sourcing capabilities to include manufacturers in Europe, Asia, Mexico, and
South America, and dedicated resources to manage these relationships.
INFORMATION TECHNOLOGY
In fiscal 2000, we outsourced our information technology function to
Acxiom Corporation. Acxiom is a global leader in real-time customer data
integration offering innovative database marketing services, infrastructure
management, premier data content, and integration technologies. Founded in 1969,
Acxiom is currently headquartered in Little Rock, Arkansas, with operations in
the United States, the United Kingdom, France, Spain, and Australia.
This relationship has allowed us to tap into the substantial resources
and expertise of Acxiom that were unavailable to us on a standalone basis.
Acxiom provides all information technology services support for us, including
server management, data network services, local area and wide area networks,
desktop support, help desk services, and all of our application software support
needs. We expect technology to provide significant efficiencies and capabilities
to us in servicing our customers in the future.
7
RAW MATERIALS
The primary raw materials used to produce our products are steel,
fiberglass, and ash wood.
- Steel. We purchase our steel requirements from several domestic
suppliers. The primary considerations in specialty steel sourcing
are metallurgy, price, and width. We have strong and
long-established relationships with our steel suppliers and have
never experienced sourcing problems. We do not enter into
long-term contracts for steel purchases. We purchased the majority
of our steel requirements from Steel Technologies and Shiloh
Industries, Inc. in fiscal 2002.
- Fiberglass. The primary considerations for sourcing fiberglass are
production capacities, quality, and cost. Fiberglass is used
primarily in the production of high-end tools. We purchased the
majority of our fiberglass requirements from Strongwell in fiscal
2002.
- Ash Wood. Ash is the ideal hardwood for handles because it is
lightweight, flexible, and splinters less than most hardwoods. We
employ wood specialists who maintain relationships with numerous
log suppliers and are responsible for sourcing our ash needs. We
believe that sufficient quantities of ash will continue to be
available. Each of our sawmills typically maintains a five to
eight week inventory of ash to cover occasional short-term
fluctuations in supply. We import wood handles for some of our
promotionally priced products, such as rakes and hoes. Imported
wood is less expensive than ash and is of sufficient quality for
tools (other than shovels) designed for opening-price-point
levels. Our sawmills were "Green" certified in fiscal 2001. "Green
Certification" is to ensure that forests are managed in an
ecologically sound, socially responsible, and economically viable
manner.
We have several suppliers for most of our raw materials. There can be
no assurance, however, that we will not experience shortages of raw materials or
of components essential to our production processes or be forced to seek
alternative sources of supply. In addition, there can be no assurance that
prices for such materials will remain stable. Any shortages of raw materials may
result in production delays and increased costs, which could have a material
adverse effect on our business, financial condition, and results of operations.
ASSOCIATES
As of December 31, 2002, we employed approximately 450 people
(including seasonal associates), approximately 350 of whom were paid on an
hourly basis. Our staffing requirements fluctuate during the year due to the
seasonal nature of sales in the lawn and garden industry, and approximately 50
additional seasonal associates are utilized during our busy season. The average
tenure of our hourly associates is over 10 years. Hourly associates at the
Delaware, Ohio sawmill are represented by the International Association of
Machinists ("IAM"). Our contract with the IAM expires in April 2003. During
2002, we negotiated a Closure Agreement with the IAM for our Columbus, Ohio
distribution facility. The International Brotherhood of Boilermakers, Iron Ship
Builders, Blacksmiths, Forgers and Helpers ("IBB") represents the hourly
associates in Frankfort, New York. Our contract with the IBB expires in June
2004. During 2002, we negotiated a Closure Agreement with the International
Brotherhood of Teamsters ("IBT") for our Portville, New York sawmill. The Glass,
Molders, Pottery, Plastics & Allied Workers International Union AFL-CIO ("AGM")
represents hourly associates at our Hebron, Ohio injection molding facility. Our
contract with the AGM expires in March 2005. No other associates are represented
by unions.
We have not been subject to a strike or work stoppage in over 20 years,
and management believes that our relationships with associates, the IAM, the
IBB, and the AGM are good. There can be no assurance, however, that future labor
contract negotiations will be successful or occur without work stoppages or
strikes. A prolonged work stoppage or strike at any of our facilities could have
a material adverse effect on our business, financial condition, and results of
operations.
ENVIRONMENTAL MATTERS
We are subject to various federal, state, and local environmental laws,
ordinances, and regulations governing, among other things, emissions to air,
discharge to waters, and the generation, handling, storage, transportation,
treatment, and disposal of hazardous substances and wastes. We have made, and
will continue to
8
make, expenditures to comply with these environmental requirements and regularly
review our procedures and policies for compliance with environmental laws. We
also have been involved in remediation actions with respect to certain
facilities. The amounts thus far expended for such compliance and remediation
activities have been minimal. Current conditions and future events such as
changes in existing laws and regulations may, however, give rise to additional
compliance or remediation costs that could have a material adverse effect on our
business, financial condition, or results of operations. Furthermore, as is the
case with manufacturers in general, if a release of hazardous substances occurs
on or from any of our properties or associated offsite disposal location, or if
contamination from prior activities is discovered at any of our properties, we
may be held liable and the amount of such liability could be material.
At December 31, 2002, we believe that we have no significant
outstanding environmental issues.
ITEM 2. PROPERTIES
Our headquarters and executive offices, located in Columbus, Ohio,
occupy approximately 40,000 square feet in a facility that we lease. As of
December 31, 2002, we owned or leased the following other principal properties
for use in our business as set forth below:
Location Owned or Leased Square Feet
-------- --------------- -----------
DISTRIBUTION FACILITY:
Louisville, Kentucky Leased 250,000
MANUFACTURING FACILITIES:
Frankfort, New York(1) Owned 263,710
Hebron, Ohio Owned 107,200
SAWMILLS:
Frankfort, New York(1) Owned 59,490
Delaware, Ohio Owned 51,100
Shippensburg, Pennsylvania Owned 15,000
Lebanon, Kentucky Owned 13,500
Cookeville, Tennessee Owned 12,100
Portville, New York Owned 9,000
Huntington, Indiana Owned 7,600
(1) Our 351,000 square foot Frankfort, New York facility is
comprised of a manufacturing facility, a sawmill, and
approximately 27,800 square feet of office space.
We believe that our existing manufacturing facilities, distribution
facility, and sawmills are adequate for the current level of operations. We
believe that our manufacturing facilities have sufficient excess capacity to
accommodate a 35% to 50% increase in the current level of output.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in routine litigation incidental to
the conduct of business. We believe that no currently pending litigation to
which we are a party will have a material adverse effect on our financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2002 Annual Meeting of Stockholders on November 20, 2002.
Holders of 6,251,816 shares of our common stock were present representing 92.1%
of our common shares issued and outstanding and entitled to vote at the meeting.
9
The following persons were elected as members of our Board of Directors
to serve until the annual meeting following their election or until their
successors are duly elected and qualified. Each person received the number of
votes for or the number of votes with authority withheld indicated below.
Name Voted For Votes Withheld
---- --------- --------------
William W. Abbott 5,951,585 300,231
Vincent J. Cebula 5,951,585 300,231
John J. Kahl, Jr. 5,941,750 310,066
James R. Lind 5,976,437 275,379
John L. Mariotti 5,951,437 300,379
A. Corydon Meyer 5,944,937 306,879
The proposal to approve Ernst & Young LLP as our independent certified
public accountants passed with 6,135,602 shares voting in favor, 84,279 shares
voting against, and 31,935 shares abstaining.
The proposal to approve the amendment to our 1997 Non-Employee Director
Stock Option Plan to increase the number of shares available for issuance from
500,000 to 3,000,000 shares passed with 4,586,928 shares voting in favor,
349,654 shares voting against, and 1,372 shares abstaining.
The proposal to approve the amendment to our 1997 Stock Incentive Plan
to increase the number of shares available for issuance from 1,000,000 to
2,500,000 shares passed with 4,588,228 shares voting in favor, 348,354 shares
voting against, and 1,372 shares abstaining.
The proposal to approve our Long-Term Incentive Plan passed with
4,739,740 shares voting in favor, 195,579 shares voting against, and 2,635
shares abstaining.
The proposal to approve the amendment to our Certificate of
Incorporation increasing the number of shares of preferred stock available for
issuance from 1,000 to 1,000,000 shares passed with 4,598,928 shares voting in
favor, 331,494 shares voting against, and 7,532 shares abstaining.
The proposal to approve the amendment to our Certificate of
Incorporation that would establish restrictions on transfers of our common stock
passed with 5,946,090 shares voting in favor, 303,354 shares voting against, and
2,372 shares abstaining.
The proposal to approve the grant of stock options and restricted stock
to our key employees and non-employee directors passed with 4,574,700 shares
voting in favor, 362,454 shares voting against, and 800 shares abstaining.
The proposal to approve the issuance of shares of our common stock upon
conversion of our 12% convertible notes passed with 5,935,962 shares voting in
favor, 314,929 shares voting against, and 925 shares abstaining.
The proposal to approve the issuance of shares of our common stock upon
conversion of our preferred stock passed with 4,620,000 shares voting in favor,
317,029 shares voting against, and 925 shares abstaining.
The proposal to approve the amendment of our Certification of
Incorporation increasing the number of shares of common stock available for
issuance from 20,000,000 to 200,000,000 shares passed with 5,933,197 shares
voting in favor, 317,494 shares voting against, and 1,125 shares abstaining.
The proposal to approve the issuance of shares of our common stock
pursuant to our rights offering passed with 4,602,060 shares voting in favor,
334,769 shares voting against, and 1,125 shares abstaining.
The proposal to approve the 1-for-10 reverse stock split passed with
6,027,565 shares voting in favor, 222,779 shares voting against, and 1,472
shares abstaining.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the Nasdaq National Market in June
1997 under the symbol "ACRN". On December 17, 1999, our common stock began
trading under the same symbol on the Nasdaq SmallCap Market. The following table
sets forth the closing sales prices of the common stock on the Nasdaq SmallCap
Market during the periods indicated:
Market Price
------------------------
Fiscal (Calendar) Period High Low
------------------------ ----- -----
2001: First Quarter $9.06 $5.00
Second Quarter 13.30 5.00
Third Quarter 7.40 3.60
Fourth Quarter 5.80 3.30
2002: First Quarter $7.65 $3.50
Second Quarter 6.80 4.00
Third Quarter 4.50 3.00
Fourth Quarter 4.13 1.10
2003: First Quarter $3.51 $2.50
(through March 21, 2003)
As of March 21, 2003, the approximate number of record holders of our
common stock was 28. The closing sales price of our common stock on March 21,
2003 was $3.45 per share.
We have never paid, and currently do not intend to pay, any cash
dividends on our common stock. We are a holding company with no business
operations of our own. Therefore, we are dependent upon payments, dividends, and
distributions from UnionTools for funds to pay dividends to our stockholders.
UnionTools currently intends to retain any earnings for support of its working
capital, repayment of indebtedness, capital expenditures, and other general
corporate purposes. UnionTools has no current intention of paying dividends or
making other distributions to us in excess of amounts necessary to pay our
operating expenses and taxes. Our revolving credit facility contains
restrictions on UnionTools' ability to pay dividends or make payments or other
distributions to us. The credit facility provides that, unless UnionTools meets
certain financial tests, it may not declare any dividends or make any other
payments or distributions to us except for amounts necessary to pay our
operating expenses up to $300,000 per year and to pay our federal and state
income taxes.
In connection with the Recapitalization Transaction (see Item 7), we
received stockholder approval for a 1-for-10 reverse stock split. Our common
stock began trading on a reverse-split basis on November 21, 2002. As a result
of the reverse stock split, every 10 shares of our common stock issued and
outstanding as of November 21, 2002, was combined into one share of our common
stock. In lieu of fractional shares, we paid cash to our stockholders. The
reverse stock split also affected options, warrants, and other securities
convertible into or exchangeable for shares of our common stock that were issued
and outstanding immediately prior to November 21, 2002.
ITEM 6. SELECTED FINANCIAL DATA
We have derived the selected consolidated financial data for fiscal
1998, fiscal 1999, fiscal 2000, fiscal 2001, and fiscal 2002 from our audited
consolidated financial statements. We have derived the selected consolidated
financial data for calendar 1999 from our unaudited consolidated financial
statements. Certain amounts from prior years have been reclassified to conform
to the fiscal 2002 presentation. The selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the consolidated financial statements and
notes thereto, and the other financial information included elsewhere in this
Annual Report on Form 10-K.
11
Fiscal Year Ended (except calendar year ended 12/31/1999)
(In thousands, except per share data)
------------ ------------ ------------- ------------- ------------ -------------
07/31/1998 07/30/1999 12/31/1999 12/31/2000 12/31/2001 12/31/2002
------------ ------------ ------------- ------------- ------------ -------------
(Unaudited)
STATEMENT OF OPERATIONS DATA:
Net sales $109,538 $114,025 $115,215 $112,946 $91,304 $91,203
Cost of goods sold 87,389 97,166 102,376 94,464 70,404 70,088
------------ ------------ ------------- ------------- ------------ -------------
Gross profit 22,149 16,859 12,839 18,482 20,900 21,115
Selling, general and 16,904 19,245 20,250 18,407 15,151 15,566
administrative expenses
Interest expense 2,560 3,401 4,097 6,947 5,895 4,068
Amortization of intangibles 917 1,087 1,091 974 876 0
Asset impairment(1) 0 0 2,800 4,402 14,130 4,241
Other expenses, net(2) 259 3,321 5,080 1,640 443 3,004
------------ ------------ ------------- ------------- ------------ -------------
Income (loss) from continuing 1,509 (10,195) (20,479) (13,888) (15,595) (5,764)
operations before income taxes
Income taxes (benefit) 230 145 755 80 84 (51)
Preferred stock dividends 0 0 0 0 0 480
------------ ------------ ------------- ------------- ------------ -------------
Income (loss) from continuing 1,279 (10,340) (21,234) (13,968) (15,679) (6,193)
operations
Loss from discontinued 0 (936) (921) 0 0 0
------------ ------------ ------------- ------------- ------------ -------------
operations(3)
Net income (loss) $1,279 ($11,276) ($22,155) ($13,968) ($15,679) ($6,193)
============ ============ ============= ============= ============ =============
Income (loss) from continuing $1.98 ($16.38) ($34.55) ($23.06) ($25.86) ($8.61)
operations per share
(basic and diluted)
Weighted average number of 646,411 631,353 614,662 605,736 606,222 718,987
shares outstanding
OTHER DATA:
Gross margin 20.2% 14.8% 11.1% 16.4% 22.9% 23.2%
Net cash provided by (used in) ($233) $1,359 ($4,743) $4,056 $3,362 $2,685
operating activities
Net cash provided by (used in) ($13,418) ($4,935) ($5,343) $2,528 ($1,211) ($2,272)
investing activities
Net cash provided by (used in) $13,382 $3,558 $9,864 ($7,314) ($1,356) ($623)
financing activities
BALANCE SHEET DATA:
Working capital from $30,645 $15,118 $10,702 $5,690 $5,156 $9,833
continuing operations(4)
Total assets 112,633 108,867 105,073 81,881 61,152 55,467
Total debt 32,317 38,363 49,387 41,942 40,565 21,842
Stockholders' equity 64,351 50,190 36,964 22,310 6,062 14,000
12
(1) A goodwill impairment charge of $4.2 million was recognized in fiscal
2002 based on management review of the recoverability of goodwill in
accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Intangible Assets. A goodwill impairment charge of $14.1
million was recognized in fiscal 2001 based on management review of the
recoverability of goodwill. There were asset impairment charges of $4.4
million in fiscal 2000 and $2.8 million in calendar 1999 based on our
review of the net realizable value of certain long-lived assets
(primarily goodwill) related to the manufacture and sale of watering
products.
(2) In fiscal 1999, we recognized expenses related to strategic
transactions of $994,000, consolidation of manufacturing facilities of
$993,000, and consolidation of watering products operations of
$355,000.
In calendar 1999, we recognized expenses related to management
restructuring charges, including severance and relocation expenses, of
$668,000.
In fiscal 2000, we recognized a $1.2 million loss in connection with
the sale of certain assets related to our watering products operations
and other expenses of $408,000 in connection with management
restructuring charges, including severance and relocation expenses.
In fiscal 2001, expenses of $545,000 were recognized for financial
advisory, consulting and legal fees incurred to evaluate strategic
alternatives.
In fiscal 2002, we incurred $1.0 million of expense for financial
advisory, consulting and legal fees associated with our
recapitalization and refinancing. We also incurred $2.0 million of
expense related to the relocation of our distribution facility from
Columbus, Ohio to Louisville, Kentucky.
(3) In fiscal and calendar 1999, we incurred a loss from discontinued
operations primarily due to a workers' compensation adjustment of
$758,000 related to divested operations and sales tax obligation of
$128,000 related to the sale of a subsidiary.
(4) Represents current assets less current liabilities (excluding the
Acquisition Facility and the Junior Participation Term Loan Note).
13
We have derived the selected consolidated financial data for transition
year 1999 and for the comparable period of 1998 from our audited consolidated
financial statements. We include this reference because we changed from a fiscal
year end (the Friday closest to July 31 of the applicable year) to a calendar
year end after we filed our Annual Report on Form 10-K for fiscal 1999. The 1999
transition year is the five-month period from July 31, 1999 to December 31,
1999. The selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations", the consolidated financial statements and notes thereto, and the
other financial information included elsewhere in this Annual Report on Form
10-K.
Five-Month Period Ended
(In thousands,
except per share data)
-------------------------------------
1/3/1999 12/31/1999
----------------- -----------------
(Unaudited)
STATEMENT OF OPERATIONS DATA:
Net sales $35,178 $36,366
Cost of goods sold 28,517 33,727
----------------- -----------------
Gross profit 6,661 2,639
Selling, general and administrative expenses 6,622 7,625
Interest expense 1,209 1,905
Amortization of intangibles 444 448
Asset impairment 0 2,800
Other expenses, net 1,010 2,769
----------------- -----------------
Loss from continuing operations before income taxes (2,624) (12,908)
Income taxes (benefit) (527) 83
----------------- -----------------
Loss from continuing operations (2,097) (12,991)
Loss from discontinued operations (165) (150)
----------------- -----------------
Net loss ($2,262) ($13,141)
================= =================
Loss from continuing operations per share ($3.24) ($21.57)
(basic and diluted)
Weighted average number of shares outstanding 646,410 602,317
OTHER DATA:
Gross margin 18.9% 7.3%
Net cash used in operating activities ($2,266) ($8,368)
Net cash used in investing activities ($2,155) ($2,563)
Net cash provided by financing activities $4,729 $11,035
BALANCE SHEET DATA:
Working capital from continuing operations $28,067 $10,702
Total assets 114,893 105,073
Total debt 37,046 49,387
Stockholders' equity 62,090 36,964
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
selected consolidated financial data, our consolidated financial statements and
the notes thereto, and the other financial information included elsewhere in
this Annual Report on Form 10-K, as well as the factors set forth under the
caption "Forward-Looking Statements" below.
OVERVIEW
We are a leading manufacturer and distributor of non-powered lawn and
garden tools. We are a holding company with no business operations of our own.
Our only material asset is all of the outstanding capital stock of UnionTools.
In February 2003, Acorn Merger Corporation ("AMC"), The TCW Group,
Inc., Trust Company of the West, TCW Asset Management Company, TCW Special
Credits, Oaktree Capital Management, LLC, OCM Principal Opportunities Fund,
L.P., A. Corydon Meyer, John G. Jacob, Gary W. Zimmerman, and Carol B. LaScala
(collectively, the "Filing Persons"), who collectively own 92.5% of our common
stock, filed a Schedule 13E-3 with the Securities and Exchange Commission
("Commission") stating that they intend to merge AMC with and into our Company.
Upon consummation of the merger and filing of a Form 15 with the Commission, we
will no longer be subject to the reporting requirements of the Securities
Exchange Act of 1934 and cease to be a "public" company. In the merger, each
share of our common stock not owned by AMC will be converted into the right to
receive $3.50. For more information about the merger, see the Schedule 13E-3
filed by the Filing Persons.
Founded in 1890, we completed an initial public offering in 1997. We
used a portion of the proceeds of such offering to repay debt associated with a
1988 leveraged buyout. Since 1991, we have implemented a business strategy
designed to transform us from a manufacturing-oriented industrial company into a
marketing-oriented consumer products and service company. The central elements
of our approach include a market segmentation strategy based primarily on brand
management and a merchandising strategy based on attractive and informative
product displays and labeling. We have structured the organization toward and
have maintained sufficient inventory levels such that we deliver on time and in
full to our customers.
In fiscal 2000, we focused on strategically rationalizing our business
model to restore profitability. This included discontinuing the manufacture and
sale of watering products and an emphasis on profitable products and
relationships with customers. Since fiscal 2000, improvements in our forecasting
and planning processes, we believe, have allowed us to consistently provide the
highest service levels in the industry.
We experienced manufacturing inefficiencies during the first half of
fiscal 2000, primarily due to the effects of consolidating manufacturing
facilities in the second half of calendar 1999. Those issues were addressed and
resolved in fiscal 2001, with the focus on cost savings opportunities. During
fiscal 2000, we also decreased the cost of our logistical processes, reducing
the number of distribution facilities from three to one. These reductions were
accomplished with minimal effect on service level performance. The net result is
that we believe that we have been able to correct the problems that arose in
calendar 1999 and contributed to the operating losses during that time period.
The discontinuation of watering products and cost management on sales
support and other overhead expenses allowed us to lower our selling, general and
administrative costs in fiscal 2000. This was partially offset late in fiscal
2000 by our decision to outsource all information system functions and support
to Acxiom Corporation. The transition was completed in fiscal 2001, with no
disruption to our business and resulting in a strengthened technology platform
and resources available to us.
In fiscal 2002 and fiscal 2001, we were able to see the results of our
cost savings efforts across all areas of the business. Margins were up and
overhead costs were down versus prior years. During fiscal 2001, we were able to
make favorable changes in the employee benefit programs, including the
termination of certain retiree medical and life benefits. During fiscal 2001, we
were able to leverage our strong relationship with employees to negotiate a
one-year extension of our current agreement at our injection molding facility,
in addition to a three-year contract with the union representing the workers at
our primary manufacturing facility in Frankfort, New York. During
15
fiscal 2002, we were successful in relocating our primary distribution facility
from Columbus, Ohio to Louisville, Kentucky. The Louisville distribution center
should provide cost savings estimated to be $1.0 million per annum.
While we made significant progress in fiscal 2001 in terms of improved
operating profitability primarily through cost reductions, this was dampened due
to the effect of the ongoing retail consolidation within our industry. We had
several customers file for bankruptcy or liquidation during fiscal 2001, with
the resulting loss of business and bad debt negatively affecting our financial
performance.
During fiscal 2002, we entered into a Recapitalization Transaction,
resulting in a new $10.0 million equity investment and a conversion of $8.3
million of subordinated debt into equity from our majority stockholders
representing funds and accounts managed by TCW Special Credits and Oaktree
Capital Management, LLC (the "Principal Holders"). We also entered into a new
$45.0 million credit facility, agented by CapitalSource Finance, LLC (the
"Lender"), consisting of a $12.5 million term loan and a $32.5 million revolving
credit component. The term loan bears interest at prime plus 5.0% and the
revolving credit component bears interest at prime plus 3.0%. The facility
expires in June 2007.
RESULTS OF OPERATIONS
The following table sets forth certain components of our consolidated
statement of operations data expressed as a percentage of net sales:
Fiscal Year Ended (12 months)
--------------------------------------------
12/31/2000 12/31/2001 12/31/2002
------------- ------------- -------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 83.6% 77.1% 76.8%
------------- ------------- -------------
Gross profit 16.4% 22.9% 23.2%
Selling, general and administrative expenses 16.3% 16.6% 17.1%
Interest expense 6.2% 6.4% 4.5%
Amortization of intangibles 0.9% 1.0% 0.0%
Asset impairment 3.9% 15.5% 4.7%
Other expenses, net 1.4% 0.5% 3.3%
------------- ------------- -------------
Loss before income taxes -12.3% -17.1% -6.4%
Income taxes 0.1% 0.1% -0.1%
------------- ------------- -------------
Net loss -12.4% -17.2% -6.3%
Preferred stock dividends 0.0% 0.0% 0.5%
------------- ------------- -------------
Net loss attributable to common stockholders -12.4% -17.2% -6.8%
============= ============= =============
FISCAL 2002 COMPARED TO FISCAL 2001
Net Sales. Net sales decreased 0.1%, or $0.1 million, to $91.2 million
in fiscal 2002 compared to $91.3 million in fiscal 2001. The decline in net
sales was due to the absence of certain customers in fiscal 2002, who had
purchased approximately $2.0 million in fiscal 2001, but subsequently filed for
bankruptcy or liquidation. In addition, we experienced softer demand for our
products due to general economic conditions and cold spring weather in the
second quarter of fiscal 2002. This effect was partially offset by gains in our
custom injection molded products and an improvement in customer deductions, a
result of ongoing programs to drive operational efficiencies and service levels.
Gross Profit. Gross profit increased 1.0%, or $0.2 million, to $21.1
million for fiscal 2002 compared to $20.9 million in fiscal 2001. Gross margin
increased to 23.2% for fiscal 2002 from 22.9% for fiscal 2001. The increase is
primarily due to continued cost improvements and efficiencies in our
manufacturing and logistical processes, lowering our product cost and generating
fewer customer deductions. These gains were partially offset
16
by the absence in fiscal 2002 of a gain of $2.0 million less related expenses
recognized in fiscal 2001, related primarily to the net favorable effect of the
termination of certain retiree medical and life benefits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.4 million, or 2.7%, to $15.6 million for
fiscal 2002 versus $15.2 million in fiscal 2001. As a percentage of net sales,
selling, general and administrative expenses increased to 17.1% in fiscal 2002
as compared to 16.6% in fiscal 2001. During fiscal 2002, we incurred $1.2
million with respect to restricted stock and director bonuses for the success of
the strategic alternative process and our performance. In the fourth quarter of
fiscal 2002, we recognized $1.1 million in expense related to a long-term cash
incentive program approved and implemented during the quarter. It replaces a
stock option driven long-term management incentive program. The increase in
selling, general and administrative expenses is primarily due to the long-term
cash incentive program in addition to restricted stock agreements and directors'
bonuses, offset by lower sales support costs, in part due to lower sales volume,
an increase in information technology costs as a component of product cost, and
reductions in employee related costs and other discretionary expenses.
Operating Profit. Operating profit (gross profit less selling, general
and administrative expenses) decreased 3.5%, or $0.2 million, to $5.5 million
for fiscal 2002 compared to $5.7 million in the comparable period of fiscal
2001. The decrease in operating profit is attributable primarily to the items
discussed above.
Interest Expense. Interest expense decreased $1.8 million, or 31.0%, to
$4.1 million in fiscal 2002 compared to $5.9 million in fiscal 2001. We have
benefited from lower debt levels, lower interest rates and the absence of fees
associated with the extension of our credit facility in fiscal 2001.
Goodwill. Amortization of goodwill decreased $0.9 million, or 100.0%,
in fiscal 2002 compared to $0.9 million in the comparable period of fiscal 2001
due to the adoption of Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". Goodwill is no longer amortized under
the new accounting rule.
Asset Impairment. We performed the required transitional impairment
tests of goodwill as of January 1, 2002 and concluded that goodwill at that date
was not impaired. However, market conditions arising during fiscal 2002
indicated that goodwill impairment may have occurred during fiscal 2002.
Accordingly, pursuant to Statement No. 142, we performed the next phase of the
impairment evaluation and concluded that goodwill was impaired which resulted in
a $4.2 million goodwill impairment charge in the third quarter of fiscal 2002.
The outcome of the evaluation was influenced by the valuation of individual
assets and liabilities as required under Statement No. 142, particularly with
regard to deferred financing fees, fixed assets, pension obligations,
trademarks, and employment agreements. In addition, the enterprise fair value
used for purposes of determining the implied fair value of goodwill was derived
from the value ascribed to us under the Recapitalization Transaction discussed
in Note 3 to our consolidated financial statements. We recognized a $14.1
million goodwill impairment charge in fiscal 2001 based on management evaluation
of the recoverability of goodwill at that time.
Other Expenses, Net. Other expenses, net, of $3.0 million were incurred
in fiscal 2002 compared to $0.4 million in fiscal 2001. In the second quarter of
fiscal 2002, we incurred $1.0 million of financial advisory, consulting and
legal fees associated with our recapitalization and refinancing. During fiscal
2002, we also incurred $2.0 million related to the relocation of our primary
distribution facility from Columbus, Ohio to Louisville, Kentucky. The
Louisville distribution facility, now fully functioning as our primary
distribution facility, should provide cost savings estimated to be $1.0 million
per annum. In fiscal 2001, we spent $0.5 million, primarily in financial
advisory, consulting and legal fees, to pursue and evaluate strategic
alternatives leading up to the Recapitalization Transaction.
Loss Before Income Taxes. Loss before income taxes improved $9.8
million, to a loss of $5.8 million for fiscal 2002 compared to a loss of $15.6
million in fiscal 2001. The decline in losses is attributable primarily to the
items discussed above, in particular the goodwill impairment charge.
Net Loss. Net loss improved $10.0 million, to a loss of $5.7 million
for fiscal 2002 compared to a loss of $15.7 million in fiscal 2001 due to the
items described above.
Preferred Stock Dividends. As part of our Recapitalization Transaction
discussed under "Liquidity and Capital Resources" below, we issued $8.2 million
of 12% preferred stock that was outstanding during the second
17
half of fiscal 2002. As a result, we incurred a preferred stock dividend of $0.5
million in fiscal 2002. The preferred stock, including accrued dividends, was
converted to common stock upon closing of the Rights Offering, also discussed
under "Liquidity and Capital Resources."
Net Loss Attributable to Common Stockholders. Net loss attributable to
common stockholders improved $9.5 million, to a loss of $6.2 million for fiscal
2002 compared to a loss of $15.7 million in fiscal 2001. Net loss attributable
to common stockholders per common share (basic and diluted) was $8.61 for fiscal
2002 based on a weighted average number of common shares outstanding of
approximately 718,987, compared to net loss per common share of $25.86 (basic
and diluted) for fiscal 2001, based on a weighted average number of common
shares outstanding of approximately 606,222.
FISCAL 2001 COMPARED TO FISCAL 2000
Net Sales. Net sales decreased 19.2%, or $21.6 million, to $91.3
million for fiscal 2001 compared to $112.9 million in fiscal 2000. The decline
in net sales was driven by a drop in the sale of long handle tools, caused by
soft demand during the spring season and the credit condition of a few key
customers, limiting our ability to ship their full demand in fiscal 2001. We
believe the soft demand has been industry wide and resulted from customer
actions to manage to lower retail inventories, as well as, a longer winter
weather pattern across the country that negatively effected spring season
purchases. The discontinuation of the sale and manufacture of watering products
and the ongoing rationalization of customers and products within our custom
injection molding product line also contributed to the decline in net sales in
fiscal 2001. These unfavorable factors were partially offset by favorable gains
in allowances and deductions, driven by the continued improvement in our
logistical and manufacturing operations.
Gross Profit. Gross profit increased 13.1%, or $2.4 million, to $20.9
million for fiscal 2001 compared to $18.5 million in fiscal 2000. Gross margin
increased to 22.9% for fiscal 2001 from 16.4% for fiscal 2000. The increase in
gross profit was due to cost improvements partially offset by lower sales volume
and the related loss of overhead absorption from lower production levels.
Included in the cost improvements are the net favorable effect of changes in
certain employee benefit plans, including the termination of certain retiree
medical and life benefits, which resulted in a one-time gain of $2.0 million
less related expenses. Also included are the favorable gains from allowances and
deductions, driven by the continued improvement in our logistical and
manufacturing operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $3.2 million, or 17.7%, to $15.2 million for
fiscal 2001 versus $18.4 million in fiscal 2000. As a percentage of net sales,
selling, general and administrative expenses increased to 16.6% in fiscal 2001
as compared to 16.3% in fiscal 2000. The decrease in selling, general and
administrative expenses is due to cost reductions in sales support costs and
administrative overhead in response to lower sales volume, including the effect
of the discontinuation of watering products.
Operating Profit. Operating profit (gross profit less selling, general
and administrative expenses) increased $5.6 million, to a profit of $5.7 million
for fiscal 2001 compared to a profit of $0.1 million in fiscal 2000. The
increase in operating profit was primarily due to the items discussed above.
Interest Expense. Interest expense decreased $1.0 million, to $5.9
million for fiscal 2001 compared to $6.9 million in the comparable period of
fiscal 2000. The decrease was primarily due to lower interest rates and debt
levels partially offset by costs incurred to extend our credit facility.
Amortization of Goodwill. Amortization of goodwill decreased $0.1
million, or 10.1%, to $0.9 million for fiscal 2001 compared to $1.0 million in
fiscal 2000. The decrease in amortization is due to the lower amount of goodwill
to be amortized, as a result of asset impairment charges recognized in fiscal
2000.
Asset Impairment Charge. An asset impairment charge of $14.1 million
was recognized in fiscal 2001 based on management review of the recoverability
of goodwill given the completion of our evaluation of strategic alternatives.
There was an asset impairment charge of $4.4 million in fiscal 2000 based on our
review of the net realizable value on certain long-lived assets (primarily
goodwill) related to the manufacture and sale of watering products.
18
Other Expenses, Net. Other expenses decreased $1.2 million, or 73.0%,
to $0.4 million for fiscal 2001 compared to $1.6 million in fiscal 2000. The
improvement is primarily due to the absence of costs associated with the sale of
certain assets related to the manufacturing and sale of watering products. In
fiscal 2001, we spent $0.5 million, primarily in financial advisory, consulting
and legal fees, to pursue and evaluate strategic alternatives leading up to the
Recapitalization Transaction.
Loss Before Income Taxes. Loss before income taxes deteriorated to a
loss of $15.6 million for fiscal 2001 compared to a loss of $13.9 million in
fiscal 2000. The deterioration was due primarily to the goodwill writedown
discussed above.
Net Loss. Net loss was $15.7 million for fiscal 2001 compared to a net
loss of $14.0 million in fiscal 2000. Net loss per share was $25.86 (basic and
diluted) for fiscal 2001 based on a weighted average number of shares
outstanding of approximately 606,222, compared to net loss per share of $23.06
(basic and diluted) for fiscal 2000, based on a weighted average number of
shares outstanding of approximately 605,736.
SEASONAL AND QUARTERLY FLUCTUATIONS; IMPACT OF WEATHER
The lawn and garden industry is seasonal in nature, with a high
proportion of sales and operating income generated in January through May.
Accordingly, our sales tend to be greater during those months. As a result, our
operating results depend significantly on the spring selling season. To support
this sales peak, we must anticipate demand and build inventories of finished
goods throughout the fall and winter. Accordingly, our levels of raw materials
and finished goods inventories tend to be at their highest, relative to sales,
during the 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 excess inventory or insufficient inventory to satisfy customer
orders.
Weather is the single most important factor in determining market
demand for our products and also is the least predictable. For example,
springtime flooding unfavorably affects the sale of most types of lawn and
garden equipment, while moderate to heavy snowfall during winters usually
results in a surge in demand for snow shovels. Bad weather during the spring
gardening season can adversely affect overall annual sales, but if the weather
is favorable during construction projects, such as new housing starts and
government spending on highways, this usually represents an increase in demand
for long handle tools.
19
The following table sets forth certain unaudited data for each of the
quarters in fiscal 2001 and fiscal 2002. The financial data for each of these
quarters is unaudited but includes all adjustments which we believe to be
necessary for a fair presentation. All quarters include normal recurring
adjustments. These operating results, however, are not necessarily indicative of
results for any future period.
Fiscal 2001
Quarter Ended (Unaudited - in thousands)
------------------------------------------------------------------
04/01/2001 07/01/2001 09/30/2001 12/31/2001
-------------- --------------- --------------- ---------------
Net sales $27,842 $28,752 $17,414 $17,296
Cost of goods sold 20,626 23,291 13,108 13,379
-------------- --------------- --------------- ---------------
Gross profit 7,216 5,461 4,306 3,917
Selling, general and administrative 3,775 3,971 3,793 3,612
-------------- --------------- --------------- ---------------
expenses (SG&A)
Gross profit less SG&A(1) $3,441 $1,490 $513 $305
============== =============== =============== ===============
Net sales as a percentage of 30.5% 31.5% 19.1% 18.9%
full year net sales
Gross profit as a percentage of 34.5% 26.1% 20.6% 18.8%
full year gross profit
Fiscal 2002
Quarter Ended (Unaudited - in thousands)
------------------------------------------------------------------
03/31/2002 06/30/2002 09/29/2002 12/31/2002
-------------- --------------- --------------- ---------------
Net sales $26,835 $26,655 $19,306 $18,407
Cost of goods sold 20,083 20,236 14,682 15,087
-------------- --------------- --------------- ---------------
Gross profit 6,752 6,419 4,624 3,320
Selling, general and administrative 3,303 3,418 3,097 5,748
-------------- --------------- --------------- ---------------
expenses (SG&A)
Gross profit less SG&A(1) $3,449 $3,001 $1,527 ($2,428)
============== =============== =============== ===============
Net sales as a percentage of 29.4% 29.2% 21.2% 20.2%
full year net sales
Gross profit as a percentage of 32.0% 30.4% 21.9% 15.7%
full year gross profit
(1) Does not include amortization of intangibles and other expenses, each of
which generally are non-seasonal in nature.
LIQUIDITY AND CAPITAL RESOURCES
We are substantially dependent upon borrowing under our credit
facility. Our primary cash needs are for working capital, capital expenditures,
and debt service. We have financed our working capital, capital expenditures,
and debt service through internally generated cash flow and funds borrowed under
our revolving credit facility. As of December 31, 2002, approximately $7.5
million was available under the revolving portion of the credit facility.
Indebtedness outstanding bears interest at prime plus 5.0% for the term loan
portion and prime plus 3.0% for the revolving portion of the credit facility.
Net cash provided by operations was $2.7 million in fiscal 2002
compared to net cash provided by operations of $3.4 million in fiscal 2001.
Changes in operating assets and liabilities contributed $0.4 million to net cash
provided by operations in fiscal 2002 compared to a $1.1 million contribution in
fiscal 2001. The decrease
20
was due to many factors, in particular an increase in deferred financing fees of
$1.2 million. We have made significant progress in reducing inventory levels to
support the business in the past year, generating $3.6 million in cash flow in
fiscal 2002. Sales were relatively flat in fiscal 2002 compared to fiscal 2001,
generating only a slight improvement in cash flow from receivables. Accounts
payable and accrued expenses were a use of cash of $2.1 million in fiscal 2002,
due to a payment of accrued success fees of $2.0 million during fiscal 2002.
We made capital expenditures of approximately $2.4 million in fiscal
2002, $1.2 million in fiscal 2001, and $1.5 million in fiscal 2000. The capital
expenditures relate to ongoing improvements of property, plant and equipment,
manufacturing process improvements, increased manufacturing capacity, and
system/technology infrastructure upgrades or enhancements. Capital expenditures
were higher in fiscal 2002 primarily due to the investments made at our new
distribution facility in Louisville, Kentucky.
On June 28, 2002, we entered into a Recapitalization Transaction,
resulting in a new $10.0 million equity investment and a conversion of $8.2
million of subordinated debt into equity from our majority stockholders
representing funds and accounts managed by TCW Special Credits and Oaktree
Capital Management, LLC (the "Principal Holders"). We also entered into a new
$45.0 million credit facility, agented by CapitalSource Finance, LLC (the
"Lender"), consisting of a $12.5 million term loan and a $32.5 million revolving
credit component. The term loan bears interest at prime plus 5.0% and the
revolving credit component bears interest at prime plus 3.0%. The facility
expires in June 2007. The majority of the proceeds from this transaction were
applied to our previous credit facility ($33.7 million was borrowed as of June
27, 2002), that otherwise expired on June 30, 2002. At December 31, 2002, we had
$7.5 million available to borrow under our new credit facility and were in
compliance with the covenants of our credit facility.
Our primary cash needs are for working capital, capital expenditures
and debt service. We continue to finance these needs through internally
generated cash flow and funds borrowed under the credit facility. We believe
that the liquidity provided by the Recapitalization Transaction and new credit
facility will be sufficient to move through our operating cycle.
Rights Offering
In connection with the Recapitalization Transaction, holders of common
stock received rights (at the rate of 1,000 rights per 100 shares of common
stock) to purchase one share of newly-issued common stock at $5.00 per share
(post-split) for each right received (the "Rights Offering"). Participation in
the Rights Offering resulted in the issuance of two hundred shares of common
stock.
New Credit Facility
In conjunction with the new facility, we issued to the Lender 233,355
shares of our common stock during 2002, the value of which has been included in
deferred financing fees and redeemable common stock in the balance sheet. In
connection with a future termination in full of this new credit facility, the
Lender has the right to require us to repurchase all the shares issued to such
Lender at a price per share that is dependent on certain measures of cash flow,
debt and cash at a future date. As of December 31, 2002, our potential
repurchase obligation does not exceed the carrying value of the redeemable
common stock.
Sale of Convertible Notes
The Principal Holders purchased for cash from us $10.0 million
principal amount of 12% Convertible Notes due June 15, 2005 (the "Convertible
Notes"). Upon the closing of the Rights Offering, the Convertible Notes
(together with accrued interest thereon) were converted into shares of our
common stock at the Rights Offering price of $5.00 per share.
Note Exchange and Preferred Stock
The Principal Holders received 822.6696 shares of newly-issued Series A
Preferred Stock, $10,000 per share liquidation preference (the "Preferred
Stock"), in exchange for all of their previously existing and outstanding
interests in the 12% Junior Participation Notes (the "Junior Participation
Notes") of UnionTools, our subsidiary, which represented the total amount of
principal and accrued interest on the Junior Participation Notes.
21
The Preferred Stock had an initial aggregate liquidation preference
equal to $8.2 million and accrued dividends at a 12% annual rate. The Preferred
Stock was converted into common stock at the Rights Offering price upon the
closing of the Rights Offering based on the liquidation preference and accrued
dividends owing thereon as of the closing date of the Rights Offering.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, we evaluate our estimates and
judgments, including those related to revenue recognition, customer programs,
allowance for doubtful accounts, inventories, pensions and post-employment
benefits. We base our estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies, among others,
affect the more significant judgments and estimates used in the preparation of
the consolidated financial statements.
Revenue Recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectibility is reasonably assured.
With regard to criterion (2), we recognize revenue when our customer
takes title to the goods. If the customer relationship is such that we arrange
and pay for the shipping and delivery (FOB-destination), the revenue is not
recognized until the customer takes title and physical possession of the goods
at their location. If the responsibility for shipping and delivery rests with
the customer, revenue is recognized when the goods and title are transferred to
their carrier.
Customer Programs. To promote our business within a competitive
industry, we selectively offer programs to customers such as cooperative
advertising or volume rebates. We accrue for these programs monthly, based on
the amount earned at that point in time, typically as it relates to year to date
sales volume. In addition, customers will take deductions unexpectedly for
operational errors such as shortages, pricing, and defectives. We recognize
these costs immediately in the month that the customer takes a deduction from
payment. In addition, we set up a reserve against accounts receivable for
deductions that we can reasonably estimate will occur when the outstanding
receivables are paid, i.e., an incurred but not reported reserve based on
current run rate of operational deductions. If market conditions were to
decline, we may take actions to increase customer incentives, possibly resulting
in an incremental reduction of revenue or increase in costs at the time the
incentive is offered. In addition, if actual customer deductions exceed the
amounts projected by us, additional reserves would be necessary.
Allowance for Doubtful Accounts. We evaluate the collectibility of our
accounts receivable based on a combination of factors. In circumstances where we
are aware of a specific customer's inability to meet its financial obligations
to us (e.g., bankruptcy filings, substantial downgrading of credit scores), we
record a specific reserve for bad debts against amounts due to reduce the net
recognized receivable to the amount we reasonably believe will be collected. For
all other customers, we recognize reserves for bad debts based on the length of
time the receivables are past due ranging from 10% for amounts one to thirty
days past due to 100% for amounts more than 180 days past due based on our
historical experience. If circumstances change (i.e., higher than expected
defaults or an unexpected material adverse change in a major customer's ability
to meet its financial obligations to us), our estimations of the recoverability
of amounts due us could be reduced by a material amount.
22
Inventory. We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions.
Every month we update our sales forecast and production plan on a
rolling twelve month basis. We evaluate our inventory against that forecast.
Items that are inactive or active with on-hand quantities exceeding twelve
months usage in the sales forecast or production plan are reviewed for value
deterioration and an appropriate obsolescence reserve is recognized. This review
is of particular importance due to the inventory builds required during an
operating cycle to deal with the seasonality of the business. If actual demand
or market conditions are less favorable than projected by us, additional
inventory write-downs may be required.
Goodwill. In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets". Statement 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. Statement 142 requires that
these assets be reviewed for impairment at least annually. Intangible assets
with finite lives will continue to be amortized over their estimated useful
lives. In accordance with SFAS 142, we performed the required transitional
impairment tests of goodwill as of January 1, 2002 and concluded that goodwill
at that date was not impaired. However, market conditions arising during fiscal
2002 indicated that goodwill impairment may have occurred during fiscal 2002.
Accordingly, pursuant to Statement No. 142, we performed the next phase of the
impairment evaluation and concluded that goodwill was impaired which resulted in
a $4.2 million goodwill impairment charge in the third quarter of fiscal 2002.
The outcome of the evaluation was influenced by the valuation of individual
assets and liabilities as required under Statement No. 142, particularly with
regard to deferred financing fees, fixed assets, pension obligations,
trademarks, and employment agreements. In addition, the enterprise fair value
used for purposes of determining the implied fair value of goodwill was derived
from the value ascribed to us under the Recapitalization Transaction. As
required by Statement No. 142, we will perform an annual evaluation of goodwill
impairment and, on an ongoing basis, assess whether there are indicators of
impairment that will require additional testing for impairment.
Income Taxes. We account for income taxes under the liability method
pursuant to Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Based on
our history of operating losses and in accordance with SFAS No. 109, we record a
100% valuation allowance resulting in no net deferred tax asset being
recognized.
Stock-Based Compensation. We maintain several stock-based compensation
plans. We account for the plans under the recognition and measurement principles
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income for options that are granted with an exercise price equal to or greater
than the market value of the underlying common stock on the date of grant.
Compensation cost is recognized on a straight-line basis over the vesting period
for options granted with an exercise price less than the market value of the
underlying common stock on the date of grant. Pro forma information regarding
net income and earnings per share is required by SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, and has been determined as
if we had accounted for our employee stock options under the fair value method
of SFAS No. 123, Accounting for Stock-Based Compensation. The fair value of
these options is estimated at the date of grant using the Black-Scholes option
pricing model.
EFFECTS OF INFLATION
We are adversely affected by inflation primarily through the purchase
of raw materials, increased operating costs and expenses, and higher interest
rates. We believe that the effects of inflation on our operations have not been
material in recent years.
FORWARD-LOOKING STATEMENTS
Statements in the foregoing discussion that indicate our intentions,
hopes, beliefs, expectations, or predictions of the future are forward-looking
statements. It is important to note that our actual results could differ
23
materially from those projected in such forward-looking statements due to, among
other risks and uncertainties inherent in our business, the following important
factors:
- The Filing Persons have filed a Schedule 13E-3 with the
Commission indicating their intention to take our Company
private. There can be no assurance that the merger with AMC will
be completed.
- Weather is the most significant factor in determining market
demand for our products and is inherently unpredictable.
Inclement weather during the spring gardening season and lack of
snow during the winter may have a material adverse effect on our
business, financial condition, and results of operations.
- The lawn and garden industry is seasonal in nature, with a high
proportion of sales and operating income generated in January
through May. Accordingly, our sales tend to be greater during
those months. As a result, our operating results depend
significantly on the spring selling season. To support this sales
peak, we must anticipate demand and build inventories of finished
goods throughout the fall and winter. Accordingly, our levels of
raw materials and finished goods inventories tend to be at their
highest, relative to sales, during the 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.
- Our ten largest customers in the aggregate accounted for
approximately 65% of gross sales in fiscal 2002. A substantial
reduction or cessation of sales to these or other major customers
could have a material adverse effect on our business, financial
condition, and results of operations.
- Certain retail distribution channels in the lawn and garden
industry, such as mass merchants and home centers, are
experiencing consolidation. There can be no assurance that such
consolidation will not have an adverse impact on certain
customers or result in a substantial reduction or cessation of
purchases of our products by certain customers. In addition, we
are facing increasing pressure from retailers with respect to
pricing, 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 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 Home Depot, Wal-Mart, and
Lowe's. There can be no assurance that retailers in such
distribution channels will continue to open a significant number
of new stores or, if opened, that we will be chosen to supply our
products to all or a significant portion of such stores. In
addition, there can be no assurance that such stores will
generate significant additional sales for us or that such stores
will not result in a reduction of sales to our other customers,
whether through consolidation or otherwise.
- Our future growth and development is largely dependent upon the
services of A. Corydon Meyer, our Chairman, President, and Chief
Executive Officer, as well as our other executive officers. The
loss of Mr. Meyer's services, or the services of one or more of
our other executive officers, could have a material adverse
effect on us.
- Our products require the supply of raw materials consisting
primarily of steel, plastics, and ash wood. Although we have
several suppliers for most of our raw materials, there can be no
assurance that we will not experience shortages of raw materials
or components essential to our production processes or be forced
to seek alternative sources of supply. In addition, there can be
no assurance that prices for such materials will remain stable.
Any shortages of raw materials may result in production delays
and increased costs which could have a material adverse effect on
our business, financial condition, and results of operations.
24
- All aspects of the lawn and garden industry, including attracting
and retaining customers and pricing, are highly competitive. We
compete for customers with large consumer product manufacturers
and numerous other companies that produce specialty home and
garden products, as well as with foreign manufacturers that
export their products to the United States. Many of these
competitors are larger and have significantly greater financial
resources than us. There can be no assurance that increased
competition in the lawn and garden industry, whether from
existing competitors, new domestic manufacturers, or additional
foreign manufacturers entering the United States market, will not
have a material adverse effect on our business, financial
condition, and results of operations.
- Most of our hourly associates are covered by collective
bargaining or similar labor agreements. We currently are a party
to three such agreements: one expires in 2003, one expires in
2004, and one expires in 2005. There can be no assurance that we
will be successful in negotiating new labor contracts on terms
satisfactory to us or without work stoppages or strikes. A
prolonged work stoppage or strike at any of our facilities could
have a material adverse effect on our business, financial
condition, and results of operations.
- We are subject to various federal, state, and local environmental
laws, ordinances, and regulations governing, among other things,
emissions to air, discharge to waters, and the generation,
handling, storage, transportation, treatment, and disposal of
hazardous substances and wastes. We have made, and will continue
to make, expenditures to comply with these environmental
requirements and regularly review our procedures and policies for
compliance with environmental laws. We also have been involved in
remediation actions with respect to certain facilities. Amounts
expended by us in such compliance and remediation activities have
not been material to us. Current conditions and future events,
such as changes in existing laws and regulations, may, however,
give rise to additional compliance or remediation costs that
could have a material adverse effect on our business, financial
condition, or results of operations. Furthermore, as is the case
with manufacturers in general, if a release of hazardous
substances occurs on or from our properties or any associated
offsite disposal location, or if contamination from prior
activities is discovered at any of our properties, we may be held
liable and the amount of such liability could be material.
- New housing starts often represent an addition to the overall
number of consumers in the lawn and garden tool market and,
accordingly, an increase in demand. Similarly, government
spending on highways, bridges, and other construction projects
often represents an increase in demand for long handle tools. A
decline in housing starts or government spending on construction
projects could result in a decrease in demand for our products
and, accordingly, could have a material adverse effect on our
business, financial condition, and results of operations.
- Adverse changes in general economic conditions in the United
States, including the level and availability of consumer debt,
the level of interest rates, and consumer sentiment regarding the
economy in general, could result in a decrease in demand for our
products and, accordingly, could have a material adverse effect
on our business, financial condition, and results of operations.
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.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INFLATION AND INTEREST RATES
We have not been significantly affected by inflation in recent years
and anticipate that we will not be significantly affected by inflation in the
near term. A material change in interest rates could have an impact on our
financial results as we are presently paying a variable interest rate on our
outstanding debt. On June 28, 2002, we entered into a five-year, $45.0 million
credit facility. In connection with the facility, the interest rate charged on
outstanding borrowings is prime plus 5.0% for the term loan and prime plus 3.0%
for the revolving line of credit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with the report thereon
of Ernst & Young LLP, are set forth on pages F-1 through F-24 hereof (see Item
15 of this Annual Report on Form 10-K for the index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth for each of our directors, such person's
name, age, and his position with us:
Name Age Position
---- --- --------
William W. Abbott 71 Director
Vincent J. Cebula 39 Director
John J. Kahl, Jr. 62 Director
John L. Mariotti 61 Director
A. Corydon Meyer 48 Chairman, President, and Chief Executive Officer
William W. Abbott became a director in January 1997, Chairman in
October 1999, and resigned his position as Chairman in December 2002. Mr. Abbott
currently is self-employed as a business consultant. From August 1989 to January
1995, Mr. Abbott served as Senior Advisor to the United Nations Development
Programme. In 1989, Mr. Abbott retired from 35 years of service at Procter &
Gamble as a Senior Vice President in charge of worldwide sales, marketing and
other operations. He currently serves as Chairman and Director of Rotech
Healthcare, Inc., a member of the Boards of Directors of Horace Mann Educators
Corporation and Millenium Bank of Edwards, Colorado, a member of the Advisory
Board of Manco, Inc., a member of the Board of Overseers of the Duke Cancer
Center, and an Executive Professor at Florida Gulf Coast University.
Vincent J. Cebula became a director in June 2001. Mr. Cebula is a
Managing Director of Oaktree Capital Management, LLC ("Oaktree"), where he has
worked since June 1995. From April 1994 until May 1995, Mr. Cebula was a Senior
Vice President of TCW Asset Management Company.
John J. Kahl, Jr. became a director in December 1999. Mr. Kahl is
currently President and Chief Executive Officer of Jack Kahl & Associates, LLC.
From 1963 to 2000, Mr. Kahl served as Chief Executive Officer of Manco, Inc., a
subsidiary of Henkel Corporation, the North American operating company of the
Henkel Group. Mr. Kahl currently serves on the Boards of Directors of Royal
Appliance Mfg. Co. and American Greetings Corporation.
John L. Mariotti became a director in December 1999. Mr. Mariotti
currently serves as President and Chief Executive Officer of The Enterprise
Group, a coalition of time-shared business advisors. From 1992 to 1994, Mr.
Mariotti served as President of Rubbermaid's Office Products Group. From 1983 to
1992, Mr. Mariotti served as President of Huffy Bicycles. Mr. Mariotti is
currently the Chairman of the Board of WKI Holding Company, Inc. of Reston,
Virginia, a Director of Home Care Industries, Amrep, Inc. of Marietta, Georgia,
a Director of Doskocil Manufacturing of Arlington, Texas, and a member of the
Advisory Board of Manco, Inc.
A. Corydon Meyer became a director, the President, and Chief Executive
Officer of the Company and UnionTools in September 1999. Mr. Meyer was elected
Chairman in December 2002. Mr. Meyer joined the Company in June 1999 as Senior
Vice President of Sales and Marketing. From 1998 to 1999, Mr. Meyer served as
Vice President and Chief Operating Officer of Reiker Enterprises, Inc. From 1990
to 1998, Mr. Meyer served as Vice President and Business Unit Manager of Lamson
& Sessions Co. From 1977 to 1990, Mr. Meyer served in various finance,
manufacturing, sales, and marketing positions with White Consolidated
Industries, most recently as Vice President, Sales and Marketing, of Cooking
Products.
MEETINGS, COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS
Our Board of Directors had a total of twelve meetings during the fiscal
year ended December 31, 2002 ("fiscal 2002"). During fiscal 2002, each of the
directors attended 75% or more of the total number of meetings of (i) the Board
and (ii) the committees of the Board on which such director served. Messrs.
Abbott, Kahl, and
27
Mariotti receive the following annual compensation: (i) $5,000
per calendar quarter and (ii) reimbursement of reasonable out-of-pocket
expenses. We pay $5,000 per calendar quarter to Oaktree Capital Management for
Mr. Cebula's services as a director and reimburse Mr. Cebula's reasonable
out-of-pocket expenses. Additionally, in fiscal 2002, Mr. Abbott, our former
Chairman of the Board, received additional compensation of $40,000 for his
services and Mr. Mariotti, Chairman of our Audit Committee received additional
compensation of $3,500 for his services. Compensation under our Deferred Equity
Compensation Plan for Directors (the "Director Stock Plan") ceased in the second
quarter of fiscal 2002.
In December 2002, Mr. Abbott resigned as Chairman of the Board and Mr.
Meyer was elected as Chairman.
James R. Lind resigned from the Board of Directors in March 2003.
In December 2002 and upon completion of the Rights Offering, we entered
into agreements with Messrs. Abbott, Mariotti and Kahl which provide for
restricted stock grants in the amounts of 30,000 shares, 12,500 shares, and
12,500 shares, respectively. In consideration of these grants, all
previously-issued stock options were terminated. These shares vest as follows:
1/3 during fiscal 2002, 1/3 vesting during fiscal 2003, and 1/3 during fiscal
2004, subject to continued service as a director. These grants were approved by
our stockholders in November 2002.
In December 2002 and upon completion of the Rights Offering, we granted
each of Messrs. Abbott, Mariotti and Kahl options to purchase 20,000 shares of
our common stock at an exercise price of $5.00 per share. In connection with an
amendment to the restricted stock agreements of Messrs. Abbott, Mariotti and
Kahl, all of these options were terminated on December 31, 2002.
In January 2002, we created a Special Committee (the "Special
Committee") consisting of Messrs. Abbott, Kahl, and Mariotti, each of whom is an
independent director, to review the terms of the Recapitalization Transaction
with the Principal Holders that was completed during fiscal 2002. During fiscal
2002, our Special Committee met six times.
In March 1997, we created a Management Development and Compensation
Committee (the "Compensation Committee") and an Audit Committee (the "Audit
Committee"). The Compensation Committee has the authority to (i) administer our
1997 Stock Incentive Plan, including the selection of optionees and the timing
of option grants and restricted stock grants, (ii) administer our 1997
Non-Employee Director Stock Option Plan, (iii) review and monitor key associate
compensation policies and administer our management compensation plans, and (iv)
monitor the performance of our executive officers and develop succession and
career planning related thereto. Currently, Messrs. Abbott (Chairman), Cebula,
Kahl, and Mariotti serve on our Compensation Committee. During fiscal 2002, our
Compensation Committee met one time.
Our Audit Committee recommends the annual appointment of our
independent public accountants with whom the Audit Committee reviews the scope
of audit and non-audit assignments and related fees, the accounting principles
used by us in financial reporting, internal financial auditing procedures, and
the adequacy of our internal control procedures. Currently, Messrs. Mariotti
(Chairman), Abbott, and Kahl serve on our Audit Committee. During fiscal 2002,
our Audit Committee met two times.
In November 2001, our Board of Directors agreed to pay a one-time
extraordinary director fee of $50,000 to each of Messrs. Kahl and Mariotti in
recognition of the additional time commitment expected from such individuals,
payable in January 2002.
In March 2002, our Board of the Directors paid a one-time extraordinary
director fee of $150,000 to Mr. Abbott in recognition of the additional time
commitment expected from him.
28
EXECUTIVE OFFICERS
In addition to Mr. Meyer, the following persons are our executive
officers:
John G. Jacob, age 43, was named Vice President and Chief Financial
Officer in June 1999. From 1998 to June 1999, Mr. Jacob served as Vice President
of Finance for Sun Apparel Company/Polo Jeans Company. Prior to that, Mr. Jacob
served as Vice President of Finance and Treasurer of Maidenform Worldwide, Inc.
from 1996 to 1998. From 1991 to 1996, Mr. Jacob served in various positions at
Kayser-Roth Corporation, most recently as Vice President and Treasurer.
Gary W. Zimmerman, age 45, was named Senior Vice President of
Operations in September 2000. Prior to that, Mr. Zimmerman served as General
Manager of U.S. Operations for Lexmark International, Inc. from July 1998 to
September 2000. From January 1979 to July 1998, Mr. Zimmerman served in various
positions at Huffy Corporation, most recently as Vice President, Plant
Operations and Logistics, for Huffy Bicycles.
Carol B. LaScala, age 43, was named Vice President of Human Resources
in December 2000. Ms. LaScala joined the Company in November 1999 as Director of
Human Resources. From June 1999 to November 1999, Ms. LaScala served as Director
of Human Resources for the Longaberger Company. Prior to that, Ms. LaScala
served as Manager, Human Resources, for Rubbermaid Incorporated from September
1995 to June 1999. From February 1984 to September 1995, Ms. LaScala served in
various positions with The Stanley Works, most recently as Division Human
Resources Manager for the Hand Tools Division.
Hubert (Hugh) B. Martin III, age 46, was named Senior Vice President,
Sales and Marketing, in December 2002. From February 2001 to December 2002, Mr.
Martin served as Executive Vice President, Sales and Marketing, for Manco Power
Sports. Prior to that, from June 1988 to December 2000, Mr. Martin served in
various positions with Ames True Temper, most recently as Senior Vice President,
Sales. From May 1984 to May 1988, Mr. Martin served in various positions with
Atlas Copco Industrial Compressors, Inc., most recently as Manager of Marketing
and Sales for Lubricated Products.
Officers are elected annually by the Board of Directors and serve at
its discretion. There are no family relationships among our directors and
executive officers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors and greater than 10% stockholders to file reports of
ownership and changes in ownership of our securities with the Securities and
Exchange Commission ("SEC"). Copies of the reports are required by SEC
regulation to be furnished to us. Based on our review of such reports, we
believe that all reporting persons complied with all filing requirements during
the fiscal year ended December 31, 2002, except for a late Form 4 filings for
Oaktree Capital Management, LLC, OCM Principal Opportunities Fund, L.P., The TCW
Group, Trust Company of the West, TCW Asset Management Company, and TCW Special
Credits.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information
concerning the annual and long-term compensation earned by our chief executive
officer and each of our other most highly compensated executive officers (the
"Named Executive Officers"). Non-cash compensation, other than options to
purchase common stock, was paid by UnionTools.
29
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------------------------
Restricted Securities LTIP All Other
Name and Stock Underlying Payouts Compensation
Principal Position Year Salary ($) Bonus ($) Awards ($) Options (#)(1) ($) ($) (2)(3)(4)(5)
- ------------------------- ------ ------------ ------------ ------------ --------------- --------- ---------------
A. Corydon Meyer 2002 $303,343 $140,931 $292,250 -- -- $11,071
President and Chief 2001 277,404 138,700 -- -- -- 9,648
Executive Officer 2000 257,192 40,000 -- 11,905 -- 22,481
John G. Jacob 2002 $219,808 $96,716 $75,250 -- -- $9,568
Chief Financial Officer 2001 206,539 84,000 -- -- -- 8,821
and Vice President 2000 192,785 22,000 -- 7,619 -- 9,091
Gary W. Zimmerman(6) 2002 $214,871 $92,285 $70,000 -- -- $10,488
Senior Vice President, 2001 203,077 84,000 -- -- -- 17,732
Operations 2000 57,355 40,000 -- 10,000 -- 66,483
Carol B. LaScala 2002 $121,632 $44,101 $28,000 -- -- $6,122
Vice President, 2001 110,000 44,000 -- 3,520 -- 5,774
Human Resources 2000 95,809 15,000 -- 500 -- 2,535
- --------------------
(1) All options that were granted in previous years were cancelled in fiscal
2002. Shares of restricted stock were granted in exchange for the
cancellation of options as follows: 83,500, 21,500, 20,000, and 8,000 for
Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively.
(2) Amounts shown include matching benefits paid under our defined contribution
401(k) plan and other miscellaneous cash benefits, but do not include
retirement benefits under our Salaried Employee Pension Plan (see "Pension
Plans").
(3) Amounts shown for fiscal 2000 include the following: $596, $291, $358, and
$114 paid by us with respect to supplementary life insurance for Messrs.
Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively; $9,385, $8,800,
and $2,421 of matching benefits paid under our defined contribution 401(k)
plan for Messrs. Meyer and Jacob, and Ms. LaScala, respectively; and
$66,125 paid by us with respect to relocation expenses for Mr. Zimmerman.
(4) Amounts shown for fiscal 2001 include the following: $859, $321, $303, and
$46 paid by us with respect to supplementary life insurance for Messrs.
Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively; $8,500, $8,500,
$7,462, and $5,500 of matching benefits paid under our defined contribution
401(k) plan for Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala,
respectively; and $9,678 paid by us with respect to relocation expenses for
Mr. Zimmerman.
(5) Amounts shown for fiscal 2002 include the following: $1,071, $333, $488,
and $51 paid by us with respect to supplementary life insurance for Messrs.
Meyer, Jacob, and Zimmerman, and Ms. LaScala, respectively; $10,000,
$9,235, $10,000, and $6,071 of matching benefits paid under our defined
contribution 401(k) plan for Messrs. Meyer, Jacob, and Zimmerman, and Ms.
LaScala, respectively.
(6) Mr. Zimmerman's employment with us and UnionTools began on September 11,
2000.
30
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grant of
stock options to our Named Executive Officers during the fiscal year ended
December 31, 2002.
INDIVIDUAL GRANTS
Potential Realized Value at
Number of % of Total Assumed Annual Rates of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise Option Terms(2)(3)
Options Granted Associates in Price Expiration ----------------------------------
Name (#) Fiscal Year(1) ($/Share) Date 5% ($) 10% ($)
- ----------------------- ------------------ -------------- --------- ---------- -------------- ---------------
A. Corydon Meyer 0 -- -- -- -- --
John G. Jacob 0 -- -- -- -- --
Gary W. Zimmerman 0 -- -- -- -- --
Carol B. LaScala 0 -- -- -- -- --
(1) Percentage is based upon 250 options granted to associates in fiscal 2002.
(2) The dollar amounts in these columns are the product of (a) the difference
between (1) the product of the per share market price at the date of grant
and the sum of 1 plus the assumed rate of appreciation (5% and 10%)
compounded over the term of the option (ten years) and (2) the per share
exercise price and (b) the number of shares underlying the grant.
(3) The appreciation rates stated are arbitrarily assumed, and may or may not
reflect actual appreciation in the stock price over the life of the option.
Regardless of any theoretical value that may be placed on a stock option,
no increase in its value will occur without an increase in the value of the
underlying shares. Whether an increase will be realized will depend not
only on the efforts of the recipient of the option, but also upon
conditions in our industry and market area, competition, and economic
conditions, over which the optionee may have little or no control.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END
OPTION VALUE TABLE
The following table provides certain information regarding the number
and value of stock options held by our Named Executive Officers at December 31,
2002.
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money Options
On Value Options at Year-End (#) at Year-End ($) (2)
Exercise Realized ------------------------------ ----------------------------
Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
---- --- ------- ----------- ------------- ----------- -------------
A. Corydon Meyer 0 0 0 0 0 0
John G. Jacob 0 0 0 0 0 0
Gary W. Zimmerman 0 0 0 0 0 0
Carol B. LaScala 0 0 0 0 0 0
31
- ---------------
(1) Value realized represents the difference between the exercise price of the
option shares and the market price of the option shares on the date the
option was exercised. The value realized was determined without
consideration for any taxes or brokerage expenses that may have been owed.
(2) Represents the total gain which would be realized if all in-the-money
options held at year-end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at
year-end. An option is in-the-money if the fair market value of the
underlying shares exceeds the exercise price of the option.
EQUITY COMPENSATION PLAN TABLE
The following table sets forth additional information as of December
31, 2002, about shares of common stock that may be issued upon the exercise of
options and other rights under our existing equity compensation plans and
arrangements, divided between plans approved by our stockholders and plans or
arrangements not submitted to the stockholders for approval. The information
includes the number of shares covered by, and the weighted average exercise
price of, outstanding options and other rights and the number of shares
remaining available for future grants excluding the shares to be issued upon
exercise of outstanding options, warrants, and other rights.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
Number of Securities remaining available
to be issued upon for issuance under
exercise of Weighted-average equity compensation
outstanding options, exercise price of plans (excluding
warrants and rights outstanding options, securities reflected
Plan Category warrants and rights in column (a))
- ------------------------------------- ---------------------- ------------------------- ----------------------
Equity compensation plans approved 196,654(2) $78.95(2) 353,346
by security holders(1)
Equity compensation plans not 578 $121.00 0
approved by security holders(3)
Total 197,232 $81.58 353,346
(1) Equity compensation plans approved by stockholders include the 1997
Stock Incentive Plan, as amended; the Amended and Restated Deferred
Equity Compensation Plan for Directors; and the 1997 Non-Employee
Director Stock Incentive Plan, as amended.
(2) Includes 188,000 shares of restricted stock and options to purchase
8,654 shares of our common stock. For purposes of calculating the
weighted average exercise price, the shares of restricted stock are
excluded from the calculation.
(3) Represents options issued under the VHG Option Plan which was not
approved by the stockholders. We became the successor issuer to the VHG
Option Plan upon our acquisition of VHG Tools, Inc. All outstanding
options granted under the VHG Option Plan terminate in 2003. Pursuant
to the terms of the VHG Option Plan, we can not issue any additional
options under that Plan.
TEN YEAR OPTION REPRICING
In December 2002, as part of our Recapitalization Transaction, the
following executive officers agreed to cancel all outstanding options to
purchase shares of our common stock. In exchange for the cancellation of all
options, each executive officer was granted shares of restricted stock. The
table below presents the required disclosure with respect to any repricing of
options held by any executive officer during the last ten completed years.
32
Length of
Number of Original
Securities Market Price Option Term
Underlying of the Stock Exercise Price Remaining
Options at the Time of at Time of New at Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name/Title Date Amended (#) Amendment ($) Amendment ($) Price ($) Amendment
---------- ---- ----------- ------------- ------------- --------- ---------
A. Corydon Meyer 10/3/00 1,690 $9.70 $48.10 $22.25 8.8 years
Chairman, President 10/3/00 8,309 $9.70 $38.80 $22.25 8.9 years
and CEO 12/24/02 41,904 $2.53 $5.80 - $22.50 N/A(1) N/A(1)
John G. Jacob 12/24/02 10,765 $2.53 $12.50 - $48.10 N/A(1) N/A(1)
Vice President and
Chief Financial Officer
Gary W. Zimmerman 9/17/01 25,000 $4.50 $12.50 $5.80 8.0 years
Senior VP, Operations 12/24/02 10,000 $2.53 $5.80 - $12.50 N/A(1) N/A(1)
Carol B. LaScala 12/24/02 4,020 $2.53 $12.50 - $30.00 N/A(1) N/A(1)
Vice President,
Human Resources
- --------------
(1) Each of the named executives in the table agreed to terminate all options
that they currently own in exchange for the issuance of restricted stock.
Our Management Development and Compensation Committee and our
stockholders approved the exchange of options for shares of restricted common
stock. The termination of options to our executives and grant of restricted
stock in lieu thereof was done to incentivize our executive officers and was
done as part of our Recapitalization Transaction. Our Management Development and
Compensation Committee believes that the issue of the restricted stock will more
closely align the interests of our executives with our interests.
MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE
William W. Abbott (Chairman)
Vincent J. Cebula
John J. Kahl, Jr.
John L. Mariotti
PENSION PLANS
UnionTools maintains six noncontributory defined benefit pension plans
covering most of our hourly associates. UnionTools also maintains a
noncontributory defined benefit pension plan covering our salaried,
administrative and supervisory associates (the "Salaried Employee Pension
Plan"). In 2000, the plan was amended to exclude further plan participants. In
2001, the plan was frozen for all plan participants.
The following table sets forth the estimated annual benefits payable
upon retirement under the Salaried Employee Pension Plan based on retirement at
age 65 and fiscal 2002 covered compensation.
Years of Service
-----------------------------------------------------------------------
Remuneration(1) 15 20 25 30 35
--------------- --------- --------- --------- -------- ---------
$125,000 $42,187 $56,250 $70,313 $70,313 $70,313
$170,000 and above 54,000 72,000 90,000 90,000 90,000
- --------------
(1) Based on final earnings.
33
Compensation under the Salaried Employee Pension Plan is limited to
$170,000 as required by the Employee Retirement Income Security Act of 1974 and
is based on years of credited service and final earnings (the highest average
monthly earnings over any 60 consecutive calendar month period in the 120
calendar months preceding retirement or termination of employment). Monthly
compensation is paid under the Salaried Employee Pension Plan in an amount equal
to 2.25% of the associates' final earnings multiplied by the lesser of 25 years
or the total number of years of credited service. Compensation under the
Salaried Employee Pension Plan is not subject to any offset.
AGREEMENTS WITH KEY EXECUTIVES
In November 2002 and upon completion of the Rights Offering, we entered
into agreements with Messrs. Meyer, Jacob, and Zimmerman, and Ms. LaScala which
provides for restricted stock grants in the amounts of 83,500 shares, 21,500
shares, 20,000 shares, and 8,000 shares, respectively. In consideration of these
restricted stock grants, all previously-issued stock options were terminated.
The restricted shares vest as follows: 1/3 during fiscal 2002, 1/3 during fiscal
2003, and 1/3 during fiscal 2004. Mr. Meyer, pursuant to the terms of this
restricted stock agreement, has no beneficial ownership of the restricted shares
granted to him until all of his shares have vested or until his employment with
us is terminated.
In June 2002, we entered into an employment agreement with Mr. Meyer
with a term expiring on June 30, 2005. The agreement provides for a base salary
of $300,000, subject to increases approved by our Board. Mr. Meyer is eligible
to receive an annual targeted bonus of 60% of his base salary upon the
achievement of performance goals set by our Board. If Mr. Meyer is terminated by
us for any reason other than for cause (as defined in the agreement) or by Mr.
Meyer for good reason (as defined in the agreement), we will pay Mr. Meyer: (i)
in a lump sum, an amount equal to the highest aggregate annual compensation
(including salary, bonuses and incentive payments) included in gross income paid
to Mr. Meyer during any one of the three taxable years proceeding the date of
termination; (ii) continue to pay Mr. Meyer's life insurance and medical benefit
premiums for the lesser of one year from date of termination or until Mr. Meyer
accepts subsequent employment; and (iii) outplacement services expenses of up to
$25,000 for up to one year from termination. If Mr. Meyer's employment with us
is terminated by either Mr. Meyer for good reason (as defined in the agreement)
or by us for any reason other than for cause (as defined in the agreement),
within either (i) 90 days prior to a change of control or (ii) two years after a
change of control, in addition to the severance payments outlined above, we will
pay Mr. Meyer, in a lump sum, on the fifth day following the date of Mr. Meyer's
termination, an amount equal to two times the highest aggregate annual
compensation (which shall include salary, bonuses and cash incentive payments
only) included in gross income paid to Mr. Meyer during any one of the three
taxable years proceeding the date of Mr. Meyer's termination.
In June 2002, we entered into an employment agreement with Mr. Jacob
with a term expiring on June 30, 2005. The agreement provides for a base salary
of $225,000, subject to increases approved by our Board. Mr. Jacob is eligible
to receive an annual targeted bonus of 50% of his base salary upon the
achievement of performance goals set by our Board. If Mr. Jacob is terminated by
us for any reason other than for cause (as defined in the agreement) or by Mr.
Jacob for good reason (as defined in the agreement), we will pay Mr. Jacob: (i)
in a lump sum, an amount equal to the highest aggregate annual compensation
(including salary, bonuses and incentive payments) included in gross income paid
to Mr. Jacob during any one of the three taxable years proceeding the date of
termination; (ii) continue to pay Mr. Jacob's life insurance and medical benefit
premiums for the lesser of one year from date of termination or until Mr. Jacob
accepts subsequent employment; and (iii) outplacement services expenses of up to
$25,000 for up to one year from termination. If Mr. Jacob's employment with us
is terminated by either Mr. Jacob for good reason (as defined in the agreement)
or by us for any reason other than for cause (as defined in the agreement),
within either (i) 90 days prior to a change of control or (ii) two years after a
change of control, in addition to the severance payments outlined above, we will
pay Mr. Jacob, in a lump sum, on the fifth day following the date of Mr. Jacob's
termination, an amount equal to two times the highest aggregate annual
compensation (which shall include salary, bonuses and cash incentive payments
only) included in gross income paid to Mr. Jacob during any one of the three
taxable years proceeding the date of Mr. Jacob's termination.
In September 2000, we entered into a change in control agreement with
Mr. Zimmerman which provides that following termination for any reason other
than "just cause" within eighteen months of a change of control event (as
defined in such agreement), we will pay Mr. Zimmerman an amount equal to one
year's annual salary. This agreement was amended in June 2002 to provide that if
Mr. Zimmerman is terminated for any reason other
34
than "just cause" within eighteen months after a change of control event (as
defined in such agreement), we will pay Mr. Zimmerman an amount equal to three
year's annual salary.
In November 1999, we entered into a change of control agreement with
Ms. LaScala which provides that following termination for any reason other than
"just cause" within eighteen months of a change of control event (as defined in
such agreement), we will pay Ms. LaScala an amount equal to one year's annual
salary.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership of our common stock by each person known by us to beneficially own
more than 5% of the outstanding shares of our common stock, each of our
directors individually, each of our Named Executive Officers individually, and
all of our directors and executive officers as a group as of March 21, 2003:
Shares Beneficially Owned(1)(2)
----------------------------------
Number Percent
--------------- -------------
The TCW Group, Inc.(3) 2,478,366 49.5%
OCM Principal Opportunities Fund, L.P.(4) 1,890,441 37.7%
William W. Abbott(5) 58,510 1.2%
Vincent J. Cebula 0 *
John J. Kahl(6) 32,500 *
John L. Mariotti(7) 33,170 *
A. Corydon Meyer(8) 2,150 *
John G. Jacob(9) 21,500 *
Gary W. Zimmerman(10) 20,230 *
Carol B. LaScala(11) 8,000 *
--------------- -------------
All directors and executive officers as a group (8 persons)(12) 176,060 3.5%
- --------------
* Represents beneficial ownership of less than 1% of our outstanding common
stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those shares.
(2) The address for the TCW Group, Inc. is 865 South Figueroa St., Los Angeles,
California 90017. The address for OCM Principal Opportunities Fund, L.P.
(the "Oaktree Fund") is 333 South Grand Ave., 28th Floor, Los Angeles,
California 90071. The address for Mr. Abbott is 6923 Greentree Dr., Naples,
Florida 34108. The address for Mr. Cebula is 1301 Avenue of the Americas,
34th Floor, New York, New York 10019. The address for Mr. Kahl is c/o Jack
Kahl & Associates, LLC, Logos Communications Bldg., 26100 First St.,
Westlake, Ohio 44145-1438. The address for Mr. Mariotti is 717 Brixworth
Blvd., Knoxville, Tennessee 37922-4775. The address for Messrs. Meyer,
Jacob, and Zimmerman, and Ms. LaScala is c/o Acorn Products, Inc., 390 W.
Nationwide Blvd., Columbus, Ohio 43215.
(3) The TCW Group, Inc. is the parent corporation of TCW Asset Management
Company ("TAMCO"). TAMCO is the managing general partner of TCW Special
Credits, a general partnership among TAMCO and certain individual general
partners (the "Individual Partners"). TCW Special Credits is (i) the
general partner of four limited partnerships that hold shares of common
stock (the "TCW Limited Partnerships") and (ii) the investment advisor for
two third party accounts that hold shares of common stock (the "TCW
Accounts"). The TCW Limited Partnerships and the TCW Accounts in the
aggregate hold 1,648,295 shares of common stock. The TCW Group, Inc. also
is the parent corporation of Trust Company of the
35
West, which is the trustee of four trusts that hold shares of common stock
(the "TCW Trusts"). The TCW Trusts in the aggregate hold 830,071 shares of
common stock. The following TCW Limited Partnerships and TCW Trusts
individually beneficially own more than 5% of the outstanding shares of
common stock:
Shares Percent
Beneficially Beneficially
Name Owned Owned
----------------------------------------------------- --------------- --------------
TCW Special Credits Fund IIIb 364,425 7.3%
TCW Special Credits Fund IV 321,370 6.4%
TCW Special Credits Plus Fund 344,723 6.9%
Weyerhaeuser Company Master Retirement Trust 358,448 7.2%
TCW Special Credits Trust IIIb 259,471 5.2%
TCW Special Credits Trust IV 283,547 5.7%
Certain of the Individual Partners also are principals of Oaktree Capital
Management, LLC ("Oaktree"). The Individual Partners, in their capacity as
general partners of TCW Special Credits, have been designated to manage the
TCW Limited Partnerships, the TCW Accounts and the TCW Trusts. Although
Oaktree provides consulting, research and other investment management
support to the Individual Partners, Oaktree does not have voting or
dispositive power with respect to the TCW Limited Partnerships, the TCW
Accounts or the TCW Trusts. Based upon information contained in a Schedule
13D/A filed on February 24, 2003.
(4) Oaktree, as the general partner of OCM Principal Opportunities Fund, L.P.,
has voting and dispositive power over the shares held by OCM Principal
Opportunities Fund, L.P. and may be deemed a beneficial owner of such
shares. Based upon information contained in a Schedule 13D/A filed on
February 24, 2003.
(5) Includes 30,000 restricted shares of common stock which are owned subject
to a risk of forfeiture on termination of service with vesting over a
period of three years pursuant to the terms of a restricted stock agreement
with the Company. Does not include 762 shares of common stock issuable
pursuant to the Director Stock Plan.
(6) Includes 12,500 restricted shares of common stock which are owned subject
to a risk of forfeiture on termination of service with vesting over a
period of three years pursuant to the terms of a restricted stock agreement
with the Company. Does not include 3,252 shares of common stock issuable
pursuant to the Director Stock Plan.
(7) Includes 12,500 restricted shares of common stock which are owned subject
to a risk of forfeiture on termination of service with vesting over a
period of three years pursuant to the terms of a restricted stock agreement
with the Company. Does not include 3,252 shares of common stock issuable
pursuant to the Director Stock Plan.
(8) Does not include 83,500 restricted shares of common stock which were
granted to Mr. Meyer pursuant to a restricted stock agreement. Mr. Meyer
has no beneficial ownership in these shares until either they are 100%
vested or his employment with us is terminated.
(9) Includes 21,500 restricted shares of common stock which are owned subject
to a risk of forfeiture on termination of employment with vesting over a
period of three years pursuant to the terms of a restricted stock agreement
with the Company.
(10) Includes 20,000 restricted shares of common stock which are owned subject
to a risk of forfeiture on termination of employment with vesting over a
period of three years pursuant to the terms of a restricted stock agreement
with the Company.
(11) Includes 8,000 restricted shares of common stock which are owned subject to
a risk of forfeiture on termination of employment with vesting over a
period of three years pursuant to the terms of a restricted stock agreement
with the Company.
(12) See notes (5) through (11) above.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Abbott, Cebula, Kahl, and Mariotti, who are not employees, are
members of the Management Development and Compensation Committee.
TRANSACTIONS BETWEEN DIRECTORS, EXECUTIVE OFFICERS AND THE COMPANY
In June 2002, the Principal Holders purchased for cash from us
$10,000,000 principal amount of the Convertible Notes. Upon the closing of the
Rights Offering, the Convertible Notes (together with accrued interest thereon)
were converted into shares of our common stock at the Rights Offering price of
$5.00 per share.
In June 2002, the Principal Holders received 822.6696 shares of
newly-issued Preferred Stock in exchange for all of their previously existing
and outstanding interests in the Junior Participation Notes of UnionTools, our
subsidiary, which represented the total amount of principal and accrued interest
on the Junior Participation Notes.
The Preferred Stock had an initial aggregate liquidation preference
equal to $8,226,696 and accrued dividends at a 12% annual rate. The Preferred
Stock was converted into common stock at the Rights Offering price upon the
closing of the Rights Offering based on the liquidation preference and accrued
dividends owing thereon as of the closing date of the Rights Offering.
In December 2002 and upon completion of the Rights Offering, we issued
to the Principal Holders an aggregate of 3,937,657 shares of common stock and
paid to the Principal Holders an aggregate of $54.93 for fractional shares.
Included in the issuance of the shares of common stock were 79,684 shares issued
to Oaktree Capital Management in exchange for the termination of all
previously-issued stock options and deferred equity compensation owing to
current and past directors of our Company employed by the Principal Holders.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our
Chief Executive Officer along with our Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
CHANGES IN INTERNAL CONTROLS
Since the date of our evaluation to the filing date of this Annual
Report, there have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
37
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are filed with
this Annual Report on Form 10-K pursuant to Item 8:
- Report of Independent Auditors
- Consolidated Balance Sheets as of December 31, 2001 and December
31, 2002
- Consolidated Statements of Operations for fiscal 2000, fiscal
2001, and fiscal 2002
- Consolidated Statements of Stockholders' Equity for fiscal 2000,
fiscal 2001, and fiscal 2002
- Consolidated Statements of Cash Flows for fiscal 2000, fiscal
2001, and fiscal 2002
- Notes to Consolidated Financial Statements
(a)(2) The following financial statement schedules are filed with this
Annual Report on Form 10-K pursuant to Item 15(d) and appear immediately
preceding the exhibit index:
I. Condensed Financial Information of Registrant
II. Valuation and Qualifying Accounts
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.
(a)(3) The following items are filed as exhibits to this Annual Report
on Form 10-K:
Exhibit Number Description
-------------- -----------
2.1 Purchase Agreement, dated as of June 26, 2002, by and among
Acorn Products, Inc. and UnionTools, Inc. as issuers and TCW
Special Credits and OCM Principal Opportunities Fund, L.P. as
purchasers (reference is made to Exhibit 10.2 to Form 8-K,
dated June 28, 2002, filed with the Securities and Exchange
Commission on July 2, 2002)
3.1 Third Amended and Restated Certificate of Incorporation of
Acorn Products, Inc. (reference is made to Exhibit 3.1 to Form
8-K, dated November 21, 2002, filed with the Securities and
Exchange Commission on November 22, 2002)
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 and Exchange Commission on July 2, 2002)
4.1 Specimen Stock Certificate for common stock***
10.1.1* Employment Severance Agreement, dated as of August 31, 1999,
among the Company, UnionTools, Inc., and A. Corydon Meyer
(reference is made to Exhibit 10.1.2 to Form 10-K for the year
ended July 30, 1999, filed with the Securities and Exchange
Commission on November 12, 1999)
10.1.2* Employment Agreement, dated as of June 11, 2002, among the
Company, UnionTools, Inc., and A. Corydon Meyer**
38
10.1.3* Employment Agreement, dated as of June 11, 2002, among the
Company, UnionTools, Inc., and John G. Jacob**
10.1.4* 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 year
ended July 30, 1999, filed with the Securities and Exchange
Commission on November 12, 1999)
10.2* Compensation Agreement, dated as of October 28, 1999, between
the Company and William W. Abbott (reference is made to
Exhibit 10.2 to Form 10-K for the year ended July 30, 1999,
filed with the Securities and Exchange Commission on November
12, 1999)
10.3* Acorn Products, Inc. Amended and Restated Deferred Equity
Compensation Plan for Directors (reference is made to Appendix
B to the Proxy dated April 30, 2001, filed with the Securities
and Exchange Commission on April 30, 2001)
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 Amendment Number 1 to License Agreement, dated as of December
12, 2001, between UnionTools, Inc. and The Scotts Company
(reference is made to Exhibit 10.10 to Form 10-K/A for the
year ended December 31, 2001, filed with the Securities and
Exchange Commission on October 17, 2002)
10.10 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
and Exchange Commission on July 2, 2002)
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 and Exchange Commission on July 2, 2002)
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 and Exchange Commission on July 2, 2002)
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 and Exchange Commission on
July 2, 2002)
10.14* Acorn Products, Inc. Third Amended and Restated 1997
Nonemployee Director Stock Option Plan (reference is made to
Exhibit 4(c) on a Registration Statement on Form S-8
(Registration Number 333-101403), filed with the Securities
and Exchange Commission on November 22, 2002)
10.15* Acorn Products, Inc. Second Amended and Restated 1997 Stock
Incentive Plan (reference is made to Exhibit 4(c) on a
Registration Statement on Form S-8 (Registration Number
333-101402), filed with the Securities and Exchange Commission
on November 22, 2002)
39
10.16* Acorn Products, Inc. Long-Term Incentive Plan (reference is
made to Appendix C to the Proxy dated October 21, 2002, filed
with the Securities and Exchange Commission on October 21,
2002)
10.17* Acorn Products, Inc. 1997 Nonemployee Director Stock Incentive
Plan (reference is made to Exhibit 4(a) on a Registration
Statement on Form S-8 (Registration Number 333-58807) filed
with the Securities and Exchange Commission on July 9, 1998)
21.1 Subsidiaries of the Company**
23.1 Consent of Ernst & Young LLP**
24.1 Power of Attorney**
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
the Chief Executive Officer**
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
the Chief Financial Officer**
- -------------------
* Management contracts and compensatory plans.
** Filed herewith.
*** Previously filed with the same exhibit number on a Registration
Statement on Form S-1 (Registration Number 333-25325) filed with the
Securities and Exchange Commission on April 17, 1997, as amended.
Copies of exhibits may be obtained by writing to Investor Relations, Acorn
Products, Inc., P.O. Box 1930, Columbus, Ohio 43216-1930.
(b) Reports on Form 8-K:
- We filed the following Current Reports on Form 8-K since
September 29, 2002:
Current Report on Form 8-K, dated October 11, 2002, filed
with the Securities Exchange Commission on October 16,
2002 (Items 5 and 7)
Current Report on Form 8-K, dated November 21, 2002, filed
with the Securities Exchange Commission on November 22,
2002 (Items 5 and 7)
Current Report on Form 8-K, dated November 29, 2002, filed
with the Securities Exchange Commission on December 6,
2002 (Items 5 and 7)
Current Report on Form 8-K, dated January 7, 2003, filed
with the Securities Exchange Commission on January 13,
2003 (Items 5 and 7)
Current Report on Form 8-K, dated February 21, 2003, filed
with the Securities Exchange Commission on February 21,
2003 (Items 5 and 7)
(c) Exhibits:
- The exhibits to this report follow the signature page
(d) Financial Statement Schedules:
- The response to this portion of Item 15 is submitted as a
separate section of this report (see Item 15(a)(2) above)
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ACORN PRODUCTS, INC.
By: /s/ John G. Jacob
-----------------------------------
Name: John G. Jacob
Title: Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer:
By: * A. Corydon Meyer
-----------------------------------
Name: A. Corydon Meyer
Title: Chairman, President, and Chief Executive Officer
Principal Financial and Accounting Officer:
By: /s/ John G. Jacob
-----------------------------------
Name: John G. Jacob
Title: Vice President and Chief Financial Officer
Directors:
By: * William W. Abbott
-----------------------------------
William W. Abbott, Director
By: * Vincent J. Cebula
-----------------------------------
Vincent J. Cebula, Director
By:
-----------------------------------
John J. Kahl, Jr., Director
By: * John L. Mariotti
-----------------------------------
John L. Mariotti, Director
* By: /s/ John G. Jacob
-------------------------------------
John G. Jacob, attorney-in-fact
Dated: March 27, 2003
41
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, A. Corydon Meyer, certify that:
1. I have reviewed this annual report on Form 10-K of Acorn
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ A. Corydon Meyer
-----------------------------------------
A. Corydon Meyer, Chairman, President, and
Chief Executive Officer
42
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John G. Jacob, certify that:
1. I have reviewed this annual report on Form 10-K of Acorn
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ John G. Jacob
--------------------------------------------
John G. Jacob, Vice President and
Chief Financial Officer
43
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
ACORN PRODUCTS, INC.
We have audited the accompanying consolidated balance sheets of Acorn
Products, Inc. and Subsidiaries as of December 31, 2001 and 2002, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedules listed in the index at
Item 15(a)(2). These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Acorn Products, Inc. and Subsidiaries at December 31, 2001 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 2, in 2002 the Company changed its method of
accounting for goodwill in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
February 21, 2003
F-1
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
2001 2002
----------- ------------
ASSETS (In thousands)
Current assets:
Cash $ 1,391 $ 1,181
Accounts receivable, less reserves for doubtful accounts, sales discounts, 10,831 11,155
and other allowances ($1,290 and $673, respectively)
Inventories, less reserves for excess and obsolete inventory 24,642 21,034
($1,042 and $1,219, respectively)
Prepaids and other current assets 358 597
----------- ------------
Total current assets 37,222 33,967
Property, plant and equipment, net of accumulated depreciation 11,568 11,159
Goodwill, net of accumulated amortization (see Note 2) 11,808 7,567
Deferred financing fees 0 2,370
Prepaid pension asset 3,889 0
Other intangible assets 554 404
----------- ------------
Total assets $ 65,041 $ 55,467
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (average interest rate of 8.56% and 7.88%, respectively) $ 18,132 $ 9,342
(See Note 3)
Acquisition facility (average interest rate of 8.30%) (See Note 3) 14,630 0
Junior participation term loan note (average interest rate of 12.00%) (See Note 3) 7,718 0
Term loan (short-term portion) (average interest rate of 10.00%) (See Note 3) 0 625
Accounts payable 5,890 5,109
Accrued expenses 10,424 9,058
----------- ------------
Total current liabilities 56,794 24,134
Term loan (long-term portion) (average interest rate of 10.00%) (See Note 3) 0 11,875
Accrued pension liability 1,509 3,212
Other long-term liabilities 676 1,079
----------- ------------
Total liabilities 58,979 40,300
Contingency (see Note 7)
Redeemable common stock, 233,355 shares issued and outstanding at 0 1,167
December 31, 2002
STOCKHOLDERS' EQUITY
Common stock, par value of $0.01 per share, 20,000,000 shares authorized; 78,262 98,404
646,411 and 4,815,363 shares issued at December 31, 2001 and
December 31, 2002, respectively; and 606,236 and 4,776,779 shares
outstanding at December 31, 2001 and December 31, 2002, respectively
Contributed capital stock options 460 452
Accumulated other comprehensive loss - minimum pension liability (2,120) (8,211)
Retained earnings (deficit) (68,279) (74,474)
----------- ------------
8,323 16,171
Common stock in treasury, 40,175 and 38,584 shares at (2,261) (2,171)
----------- ------------
December 31, 2001 and December 31, 2002, respectively
Total stockholders' equity 6,062 14,000
----------- ------------
Total liabilities, redeemable common stock, and stockholders' equity $ 65,041 $ 55,467
=========== ============
See accompanying notes.
F-2
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended
---------------------------------------------------------------
12/31/2000 12/31/2001 12/31/2002
----------------- ----------------- -----------------
(In thousands, except per share data)
Net sales $112,946 $ 91,304 $91,203
Cost of goods sold 94,464 70,404 70,088
----------------- ----------------- -----------------
Gross profit 18,482 20,900 21,115
Selling, general and administrative expenses 18,407 15,151 15,566
Interest expense 6,947 5,895 4,068
Amortization of intangibles 974 876 0
Asset impairment 4,402 14,130 4,241
Other expenses, net:
Plant consolidation and 408 0 1,987
management restructuring
Strategic transactions 0 545 1,004
Loss on sale of assets 1,238 0 32
Miscellaneous (6) (102) (19)
----------------- ----------------- -----------------
Loss before income taxes (13,888) (15,595) (5,764)
Income tax expense (benefit) 80 84 (51)
----------------- ----------------- -----------------
Net loss (13,968) (15,679) (5,713)
Preferred stock dividends 0 0 480
----------------- ----------------- -----------------
Net loss attributable to common stockholders $(13,968) $(15,679) $(6,193)
================= ================= =================
Net loss attributable to common stockholders $ (23.06) $ (25.86) $ (8.61)
per share (basic and diluted) ================= ================= =================
Weighted average number of shares outstanding 605,736 606,222 718,987
(basic and diluted) ================= ================= =================
See accompanying notes.
F-3
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Contributed Accumulated
------------------------ Capital Other Retained
Number of Stock Comprehensive Earnings Treasury
Shares Amount Options Loss (Deficit) Stock Total
------------- ---------- ------------- ------------- ----------- -------- ---------
(In thousands)
Balances at December 31, 1999 604,668 $78,262 $460 $ (778) $(38,632) $(2,348) $ 36,964
Net loss 0 0 0 0 (13,968) 0 (13,968)
Adjustment to minimum 0 0 0 (773) 0 0 (773)
pension liability
-----------
Comprehensive loss 0 0 0 0 0 0 (14,741)
-----------
Issuance of treasury stock 1,548 0 0 0 0 87 87
------------- ---------- ---------- -------------- ------------- ----------- -----------
Balances at December 31, 2000 606,216 78,262 460 (1,551) (52,600) (2,261) 22,310
Net loss 0 0 0 0 (15,679) 0 (15,679)
Adjustment to minimum 0 0 0 (569) 0 0 (569)
pension liability
-----------
Comprehensive loss 0 0 0 0 0 0 (16,248)
-----------
Issuance of treasury stock 20 0 0 0 0 0 0
------------- ---------- ---------- -------------- ------------- ----------- -----------
Balances at December 31, 2001 606,236 78,262 460 (2,120) (68,279) (2,261) 6,062
Net loss 0 0 0 0 (5,713) 0 (5,713)
Preferred stock dividends 0 0 0 0 (480) 0 (480)
-----------
Net loss attributable to common 0 0 0 0 0 0 (6,193)
stockholders
Adjustment to minimum 0 0 0 (6,091) 0 0 (6,091)
pension liability
-----------
Comprehensive loss 0 0 0 0 0 0 (12,284)
-----------
Issuance of common stock 4,168,952 20,142 0 0 0 0 20,142
Issuance of treasury stock 1,591 0 (8) 0 (2) 90 80
------------- ---------- ---------- -------------- ------------- ----------- -----------
Balances at December 31, 2002 4,776,779 $98,404 $452 $(8,211) $(74,474) $(2,171) $ 14,000
============= ========== ========== ============== ============= =========== ===========
See accompanying notes.
F-4
ACORN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
-------------------------------------------------
12/31/2000 12/31/2001 12/31/2002
------------- ------------- -------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,968) $(15,679) $(5,713)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on sale of assets 1,238 0 32
Depreciation and amortization 5,253 4,614 2,649
Asset impairment 4,402 14,130 4,241
Reserves for doubtful accounts, sales discounts, (15) (835) (617)
and other allowances
Interest expense paid through issuance of 0 0 1,127
common stock
Financial advisory fees paid through issuance of 0 0 600
common stock
Changes in operating assets and liabilities:
Accounts receivable 3,327 4,545 293
Inventories 5,441 (154) 3,608
Prepaids and other current assets 1,096 435 (239)
Deferred financing fees, excluding fees paid through 0 0 (1,203)
issuance of redeemable common stock
Accounts payable and accrued expenses (1,009) (695) (2,147)
Other liabilities (1,709) (2,999) 54
------------- ------------- -------------
Net cash provided by operating activities 4,056 3,362 2,685
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (1,504) (1,246) (2,372)
Proceeds from sale of assets 4,032 35 100
------------- ------------- -------------
Net cash provided by (used in) investing activities 2,528 (1,211) (2,272)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on acquisition facility (667) (712) (14,630)
Borrowings on term loan 707 1,011 12,500
Proceeds from issuance of 12% convertible notes 0 0 10,000
Net activity on revolving loan (7,441) (1,655) (8,790)
Proceeds from issuance of treasury stock 87 0 80
Proceeds from issuance of common stock 0 0 217
------------- ------------- -------------
Net cash used in financing activities (7,314) (1,356) (623)
------------- ------------- -------------
Net increase (decrease) in cash (730) 795 (210)
Cash at beginning of period 1,326 596 1,391
------------- ------------- -------------
Cash at end of period $ 596 $ 1,391 $ 1,181
============= ============= =============
Interest paid $ 4,904 $ 3,917 $ 4,629
============= ============= =============
See accompanying notes.
F-5
ACORN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
Founded in 1890, Acorn Products, Inc. ("Acorn"), through its
wholly-owned subsidiary UnionTools, Inc. ("UnionTools" and together with Acorn
collectively "we", "us", "our", "Company") is a leading designer, manufacturer,
and marketer of branded non-powered lawn and garden tools in the United States.
Our principal products include long handle tools (such as shovels, forks, rakes,
and hoes), snow tools, posthole diggers, wheeled goods (such as wheelbarrows and
hand carts), striking tools, cutting tools, hand tools, and repair handles. We
sell our products under a variety of well-known brand names and through a
variety of distribution channels. In addition, we manufacture private label
products for a variety of retailers. Acorn is a holding company with no business
operations of its own.
The lawn and garden industry is seasonal in nature, with a high
proportion of sales and operating income generated in January through May. As a
result, our operating results depend significantly on the spring selling season.
To support this sales peak, we must build inventories of finished goods
throughout the fall and winter. Accordingly, our levels of raw materials and
finished goods inventories tend to be at their highest, relative to sales,
during the fall and winter.
Weather is the most significant factor in determining market demand for
our products and is inherently unpredictable. Fluctuations in weather can be
favorable or unfavorable for the sale of lawn and garden equipment.
Our top two customers are Home Depot and Sears. Together both of these
customers accounted for 32% of gross sales during fiscal 2002. In addition,
together these customers accounted for over 20% of gross sales during fiscal
2000 and fiscal 2001. There were no other customers that individually accounted
for more than 10% of gross sales during fiscal 2000, fiscal 2001, and fiscal
2002. Our ten largest customers accounted for approximately 53% of gross sales
during fiscal 2000, 57% of gross sales during fiscal 2001, and 65% of gross
sales during fiscal 2002.
Our products require the supply of raw materials consisting primarily
of steel, plastics, and ash wood. We have several suppliers for most of our raw
materials.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Acorn and its subsidiaries. All inter-company accounts and transactions have
been eliminated.
REVENUES
Revenue Recognition: We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB
101), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectibility is reasonably assured.
With regard to criterion (2), we recognize revenue when our customer
takes title to the goods. If the customer relationship is such that we arrange
and pay for the shipping and delivery (FOB-destination), the revenue is not
recognized until the customer takes title and physical possession of the goods
at their location. If the responsibility for shipping and delivery rests with
the customer, revenue is recognized when the goods and title are transferred to
their carrier.
F-6
SHIPPING AND HANDLING COSTS
Amounts for shipping and handling billed to customers are reported as a
component of sales while the related costs are reported as cost of goods sold.
ACCOUNTS RECEIVABLE
We perform periodic credit evaluations of our customers' financial
condition and generally do not require collateral. We establish an allowance for
doubtful accounts based upon factors surrounding the credit risks of specific
customers, historical trends and other information.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Inventories consist of
the following:
12/31/2001 12/31/2002
-------------- -------------
(In thousands)
Finished goods $14,401 $13,361
Work in process 5,653 3,901
Raw materials and supplies 4,588 3,772
-------------- -------------
Total inventories $24,642 $21,034
============== =============
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and is depreciated
using the straight-line method over the following estimated useful lives:
Machinery and equipment 3 to 12 years
Buildings and improvements 5 to 40 years
Furniture and fixtures 3 to 10 years
Property, plant and equipment consists of the following:
12/31/2001 12/31/2002
------------- -------------
(In thousands)
Land $ 1,412 $ 1,436
Buildings and improvements 6,563 6,780
Machinery and equipment 22,209 23,364
Furniture and fixtures 3,784 4,380
------------- -------------
33,968 35,960
Accumulated depreciation and amortization (23,213) (25,736)
------------- -------------
Property, plant and equipment, net 10,755 10,224
Construction in process 813 935
------------- -------------
$ 11,568 $ 11,159
============= =============
Depreciation expense was approximately $4.3 million in fiscal 2000,
$3.7 million in fiscal 2001, and $2.6 million in fiscal 2002.
F-7
GOODWILL
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". Statement 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. Statement 142 requires that
these assets be reviewed for impairment at least annually. Intangible assets
with finite lives will continue to be amortized over their estimated useful
lives.
We adopted the new rules on accounting for goodwill in the first
quarter of fiscal 2002. Prior to the adoption of SFAS 142, our goodwill was
amortized by the straight-line method over 40 years. Since goodwill is no longer
amortized, our reported results for 2002 are not comparable with previous years.
The following table presents pro forma information assuming that we adopted SFAS
142 as of January 1, 2000:
Fiscal Year Ended
----------------------------------------------------------------
12/31/2000 12/31/2001 12/31/2002
----------------- ----------------- -----------------
(In thousands, except per share data)
Reported net loss attributable $(13,968) $(15,679) $(6,193)
to common stockholders
Goodwill amortization 974 876 0
----------------- ----------------- -----------------
Adjusted net loss attributable $(12,994) $(14,803) $(6,193)
================= ================= =================
to common stockholders
Basic and diluted earnings per share:
Reported net loss attributable $ (23.06) $ (25.86) $ (8.61)
to common stockholders
Goodwill amortization 1.61 1.44 0.00
----------------- ----------------- -----------------
Adjusted net loss attributable $ (21.45) $ (24.42) $ (8.61)
================= ================= =================
to common stockholders
In accordance with SFAS 142, we performed the required transitional
impairment tests of goodwill as of January 1, 2002 and concluded that goodwill
at that date was not impaired. However, market conditions arising during fiscal
2002 indicated that goodwill impairment may have occurred during fiscal 2002.
Accordingly, pursuant to Statement No. 142, we performed the next phase of the
impairment evaluation and concluded that goodwill was impaired which resulted in
a $4.2 million goodwill impairment charge in the third quarter of fiscal 2002.
The outcome of the evaluation was influenced by the valuation of individual
assets and liabilities as required under Statement No. 142, particularly with
regard to deferred financing fees, fixed assets, pension obligations,
trademarks, and employment agreements. In addition, the enterprise value used
for purposes of determining the implied fair value of goodwill was derived from
the value ascribed to us under the Recapitalization Transaction discussed in
Note 3. Following is a progression of goodwill for the year ended December 31,
2002 (in thousands):
Balance at January 1, 2002 $11,808
Goodwill acquired 0
Impairment losses (4,241)
----------------
Balance at December 31, 2002 $ 7,567
================
F-8
Prior to the adoption of SFAS 142, we periodically assessed the
recoverability of our goodwill and other long-lived assets based upon an
evaluation of a number of factors such as a significant adverse event or a
change in which the business operates. We used a market value approach for
assessing the recoverability of enterprise level goodwill. During 2001 and 2000,
we recognized goodwill impairment charges of approximately $14.1 million and
$4.4 million, respectively.
INCOME TAXES
We account for income taxes under the liability method pursuant to
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
FINANCIAL INSTRUMENTS
The fair value of our financial instruments approximated their carrying
value at December 31, 2002 and 2001.
STOCK-BASED COMPENSATION
We maintain several stock-based compensation plans, which are described
more fully in Note 4. We account for the plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income for options that are granted with an exercise
price equal to or greater than the market value of the underlying common stock
on the date of grant. Compensation cost is recognized on a straight-line basis
over the vesting period for options granted with an exercise price less than the
market value of the underlying common stock on the date of grant. Pro forma
information regarding net income and earnings per share is required by SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure, and
has been determined as if we had accounted for our employee stock options under
the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Year Ended December 31
----------------------------------------------
2000 2001 2002
--------------- -------------- -------------
Risk free interest rate 6.20% 5.02% 4.61%
Volatility factor of expected market price 0.803 0.977 1.067
of our common shares
Weighted average expected life 10 10 10
of options (years)
Dividend yield None None None
The weighted average fair value of options granted during 2002 ranged
in value from $0.32 to $0.61 based on date of grant, exercise price, and current
market price.
The following table illustrates the effect on net loss applicable to
common stock and the related per share amounts if we had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation (in thousands except per share amounts).
F-9
Year Ended December 31
-----------------------------------------
2000 2001 2002
---- ---- ----
(In thousands, except per share data)
Net loss applicable to common stockholders, as $(13,968) $(15,679) $(6,193)
reported
Deduct: Total stock-based employee compensation (474) (188) (34)
expense determined under fair value based method for ----- -------- -------
all awards, net of related tax effects
Pro forma net loss applicable to common stockholders $(14,442) $(15,867) $(6,227)
========= ========= ========
Net loss applicable to common stockholders per
common share - basic and diluted:
As reported $ (23.06) $ (25.86) $ (8.61)
========= ========= ========
Pro forma $ (23.84) $ (26.17) $ (8.66)
========= ========= ========
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number
of shares of common stock outstanding during each period. Diluted earnings per
share is computed using the weighted average number of shares of common stock
outstanding during each period plus dilutive common stock equivalents using the
treasury stock method. See Note 8 for the computation of basic and diluted
earnings per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
fiscal 2002 presentation.
DERIVATIVES
We have no derivative financial instruments as defined by Statement of
Financial Accounting Standards No. 133.
SEGMENT REPORTING
In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", we
operate in one reportable segment.
EFFECT OF NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", and the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations for a disposal of a segment of a business.
Statement 144 is effective for fiscal years beginning after December 15, 2001,
with earlier application encouraged. We adopted the provisions of Statement 144
beginning in the first quarter of fiscal 2002. The adoption of the Statement did
not have a significant impact on our financial position and results of
operations.
F-10
The FASB's Emerging Issues Task Force (EITF) issued EITF 00-14,
"Accounting for Certain Sales Incentives", which was subsequently codified in
EITF 01-09, "Accounting for Consideration given by a Vendor to a Customer",
effective for years beginning after December 15, 2001. We adopted the provisions
of the EITF beginning in the first quarter of fiscal 2002. The adoption of the
EITF did not have a significant impact on our financial position and results of
operations.
The FASB's EITF issued EITF 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products",
which was subsequently codified in EITF 01-09, "Accounting for Consideration
given by a Vendor to a Customer", effective for years beginning after December
15, 2001. We adopted the EITF in the first quarter of fiscal 2002. In accordance
with the provisions of this EITF, we have reclassified co-op advertising
expenses from selling, general and administrative expenses to net sales for all
reporting periods.
3. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
We are substantially dependent upon borrowings under our credit
facility.
UnionTools entered into a credit facility (the "Credit Facility") with
Heller Financial, Inc. in December 1996 which, as amended and restated through
July 2001, provided for a $40 million revolving credit facility and $16 million
of term loans that collectively had an expiry date of April 30, 2002. On July
13, 2001, we entered into an amendment (the "Amendment") to the Credit Facility,
that provided for a $25 million revolving credit facility from July 31 through
October 31, 2001 ($30 million from November 1 through December 31, 2001; $25
million from January 1, 2002 through April 30, 2002). During May 2002, the
expiration date of the Credit Facility was extended to June 30, 2002. Borrowings
under the Credit Facility were secured by substantially all of the assets of
UnionTools and were guaranteed by Acorn. The Acorn guarantee was secured by a
pledge of all the capital stock of UnionTools.
In connection with an amendment to the Credit Facility in October 1999,
UnionTools issued a $6.0 million junior participation term loan note (the
"Junior Participation Note") bearing interest at 12% per annum. Interest thereon
was paid quarterly in arrears on each February 1, May 1, August 1, and November
1 through the issuance of additional term notes. The proceeds of the Junior
Participation Note were funded through a subordinated participation agreement
between the lender and our majority stockholders. The Junior Participation Note
was by its terms incorporated into the Credit Facility and was secured by the
collateral in accordance with the terms of such facility.
Pursuant to the terms of the Amendment, borrowings under the Credit
Facility bore interest at either the bank prime rate plus a margin of 3% or, at
our option, the LIBOR rate plus a margin of 4%. Interest was due and payable
monthly in arrears. In addition, we were required to pay a fee of 0.5% per year
on the unused portion of the Revolving Facility.
On June 28, 2002, we entered into a Recapitalization Transaction
("Recapitalization Transaction"), obtaining a new $10.0 million investment from
our majority stockholders representing funds and accounts managed by TCW Special
Credits and Oaktree Capital Management, LLC (the "Principal Holders"). We also
entered into a new $45.0 million credit facility, agented by CapitalSource
Finance, LLC (the "Lender"), consisting of a $12.5 million term loan and a $32.5
million revolving credit component. The term loan bears interest at prime plus
5.0% and the revolving credit component bears interest at prime plus 3.0%. The
term loan has a $250,000 commitment fee and the revolver has a $650,000
commitment fee. In addition, there is a 1.0% annual unused line fee and a 0.5%
annual collateral management fee. The facility expires in June 2007. The
majority of the proceeds from this transaction were applied to our previous
credit facility ($33.7 million was borrowed as of June 27, 2002), that otherwise
expired on June 30, 2002. Relative to the extension and termination of our
previous credit facility, we paid $2.0 million in success fees during the second
quarter of fiscal 2002. Draws on the revolving credit facility are limited to
amounts computed as a percentage of eligible accounts receivable and inventory.
At December 31, 2002, we had $7.5 million available to borrow under our new
credit facility.
F-11
The term loan requires quarterly payments as follows:
Quarterly Payment: Beginning:
$625,000 October 2003
$750,000 October 2004
$812,000 October 2005
$938,000 October 2006
4. STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
In connection with the Recapitalization Transaction, holders of common
stock received rights (at the rate of 1,000 rights per 100 shares of common
stock) to purchase one share of newly-issued common stock at $5.00 per share
(post-split) for each right received (the "Rights Offering"). Participation in
the Rights Offering resulted in the issuance of two hundred shares of common
stock.
In conjunction with the new credit facility, we issued to the Lender
233,355 shares of our common stock during 2002, the value of which has been
included in deferred financing fees and redeemable common stock on the balance
sheet. In connection with a future termination in full of this new credit
facility, the Lender has the right to require us to repurchase all the shares
issued to the Lender at a price per share that is dependent on certain measures
of cash flow, debt, and cash at a future date. As of December 31, 2002, our
potential repurchase obligation does not exceed the carrying value of the
redeemable common stock.
As part of the Recapitalization Transaction, the Principal Holders
purchased for cash from us $10.0 million principal amount of 12% Convertible
Notes due June 15, 2005 (the "Convertible Notes"). Upon the closing of the
Rights Offering, the Convertible Notes (together with accrued interest thereon)
were converted into 2,116,661 shares of our common stock at the Rights Offering
price of $5.00 per share.
The Recapitalization Transaction also caused the Principal Holders to
receive 822.6696 shares of newly-issued Series A Preferred Stock, $10,000 per
share liquidation preference (the "Preferred Stock"), in exchange for all of
their previously existing and outstanding interests in the Junior Participation
Notes, which represented the total amount of principal and accrued interest
owing thereon. The Preferred Stock had an initial aggregate liquidation
preference equal to $8.2 million and accrued dividends at a 12% annual rate. The
Preferred Stock and related accrued dividends were converted into 1,741,312
shares of our common stock at the Rights Offering price of $5.00 per share.
The Rights Offering, the conversion of the Preferred Stock, and the
conversion of the Convertible Notes were conditioned on the receipt of
stockholder approval of the transactions which were approved at our Annual
Meeting of Stockholders on November 20, 2002.
Upon receipt of stockholder approval and before consummation of the
Rights Offering, we effected a 1-for-10 reverse stock split. Prior year share
and per share balances included in the accompanying financial statements have
been adjusted to reflect the impact of the reverse stock split.
Additionally in December 2002 and upon completion of the Rights
Offering, we issued to Houlihan Lokey Howard & Zukin ("HLHZ") Investments LLC (a
subsidiary of HLHZ Capital, Inc.) 126,800 shares of common stock and paid $1,000
representing payment in full of a promissory note issued in June 2002 on account
of financial advisory services that HLHZ rendered to us. In connection
therewith, HLHZ delivered a written opinion that the Recapitalization
Transaction was fair from a financial point of view to us and our stockholders.
In December 2002 and upon completion of the Rights Offering, we issued
to the Principal Holders an aggregate of 3,937,657 shares of common stock and
paid to the Principal Holders an aggregate of $54.93 for fractional shares.
Included in the issuance of the shares of common stock were 79,684 shares issued
to one of the Principal Holders in exchange for deferred equity compensation
owing to our current and past directors employed by an affiliate of the
Principal Holders.
F-12
In April 1997, we adopted the 1997 Stock Incentive Plan (the "Incentive
Plan") for our executives and certain other associates. The purpose of the
Incentive Plan is to provide incentives to associates by granting awards tied to
the performance of our common stock. Awards to associates may take the form of
options, stock appreciation rights, or sales or grants of restricted stock. We
have reserved an aggregate of 250,000 shares of common stock for issuance under
the Incentive Plan. At December 31, 2002, there were options outstanding to
purchase 5,090 shares of common stock at a weighted average exercise price of
$99.14 per share. We have also issued 49,500 shares of restricted stock under
the Incentive Plan. In addition, 83,500 shares of restricted stock have been
granted but had not been issued as of December 31, 2002.
In January 1998, we adopted the 1997 Nonemployee Director Stock
Incentive Plan (the "Nonemployee Director Incentive Plan") for nonemployee
directors of Acorn. The purpose of the Nonemployee Director Incentive Plan is to
enable us to attract and retain nonemployee directors by granting awards tied to
the performance of the common stock. Awards to directors may take the form of
options, stock appreciation rights, or sales or grants of restricted stock. We
have reserved an aggregate of 300,000 shares of common stock for issuance under
the Nonemployee Director Incentive Plan. At December 31, 2002, there were
options outstanding to purchase 3,564 shares of common stock at a weighted
average exercise price of $50.10 per share. We have also issued 55,000 shares of
restricted stock under the Nonemployee Director Incentive Plan.
In December 2002 and upon completion of the Rights Offering, we granted
to each of the non-employee directors (other than the directors affiliated with
the Principal Holders) options to purchase 20,000 shares of our common stock at
an exercise price of $5.00 per share. In connection with an amendment to the
restricted stock agreements of these non-employee directors, all of these
options were terminated on December 31, 2002.
F-13
The following table summarizes the stock option activity:
Number Weighted Average
of Shares Exercise Price
------------ -------------------
1997 STOCK INCENTIVE PLAN
Outstanding at December 31, 1999 34,930 $57.62
Granted 64,219 15.67
Exercised 0
Expired/terminated (26,204) 41.88
------------
Outstanding at December 31, 2000 72,945 26.34
Granted 24,020 8.91
Exercised 0
Expired/terminated (24,335) 27.53
------------
Outstanding at December 31, 2001 72,630 20.18
Granted 10,250 3.50
Exercised 0
Expired/terminated (77,790) 12.82
------------
Outstanding at December 31, 2002 5,090 $99.14
============
1997 NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
Outstanding at December 31, 1999 4,743 $80.94
Granted 10,000 15.00
Exercised 0
Expired/terminated 0
------------
Outstanding at December 31, 2000 14,743 36.21
Granted 9,306 15.00
Exercised 0
Expired/terminated 0
------------
Outstanding at December 31, 2001 24,049 28.01
Granted 80,000 5.00
Exercised 0
Expired/terminated (100,485) 8.91
------------
Outstanding at December 31, 2002 3,564 $50.10
============
F-14
Number Weighted Average
of Shares Exercise Price
---------- -----------------
OTHER STOCK OPTIONS
Outstanding at December 31, 1999 2,169 $32.34
Granted 0
Exercised 0
Expired/terminated 0
----------
Outstanding at December 31, 2000 2,169 32.34
Granted 0
Exercised 0
Expired/terminated 0
----------
Outstanding at December 31, 2001 2,169 32.34
Granted 0
Exercised (1,591) 0.10
Expired/terminated 0
----------
Outstanding at December 31, 2002 578 $121.00
==========
The following table summarizes information regarding stock options
outstanding at December 31, 2002.
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/2002 Contractual Life Exercise Price at 12/31/2002 Exercise Price
- -------------------- ------------- ---------------- -------------- ------------- --------------
$0.01 to $59.99 3,507 6.83 $ 21.28 3,507 $ 21.28
$60.00 to $89.99 1,152 6.08 $ 67.00 1,152 $ 67.00
$90.00 to $120.99 745 5.08 $102.50 745 $102.50
$121.00 to $140.00 3,828 3.97 $137.13 3,828 $137.13
In April 1997, we adopted the Deferred Equity Compensation Plan for
Directors (the "Director Stock Plan"). The purpose of the Director Stock Plan is
to increase the proprietary interest of nonemployee members of our Board of
Directors, thereby increasing their incentive to contribute to our success. Only
nonemployee directors are eligible to participate in the Director Stock Plan.
The number of shares of common stock reserved for issuance pursuant to the
Director Stock Plan is 200,000. In lieu of cash, directors could elect to
receive all or one-half of their fees in the form of shares of common stock. The
number of shares of common stock issued was determined by dividing (i) an amount
equal to the dollar amount of the fees to be received in the form of shares of
common stock by (ii) the average of the high and low sale prices of the common
stock on the Nasdaq SmallCap Market on the last business day preceding the date
of payment. Any cash or stock dividends payable on shares of common stock accrue
for the benefit of the directors in the form of additional shares of common
stock. Shares of common stock are distributed in the form of common stock
following the director's resignation from the Board of Directors. In addition,
shares of common stock are distributed to directors in the form of common stock
following the death of the director or a change in control of Acorn as defined
in the Director Stock Plan. In July 2002, the Director Stock Plan was frozen and
director compensation was revised to a cash payment of $20,000 annually. As of
December 31, 2001, 17,665 shares of common stock had been awarded and as of
December 31, 2002, 7,266 shares of common stock had been awarded under the
Director Stock Plan representing an equal number of shares of common stock to be
issued in the future.
F-15
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities are as follows:
12/31/2001 12/31/2002
--------------- ---------------
(In thousands)
Deferred tax assets:
Inventory $ 540 $ 870
Accrued expenses and other 2,108 2,301
Goodwill 1,087 1,943
Net operating loss carryforwards 32,055 31,462
Capital loss carryforward 2,584 1,710
--------------- ---------------
Total deferred tax assets 38,374 38,286
Valuation allowance for deferred tax assets (37,801) (37,853)
--------------- ---------------
Deferred tax assets 573 433
Deferred tax liabilities:
Depreciation and other 573 433
--------------- ---------------
Total deferred tax liabilities 573 433
--------------- ---------------
Net deferred tax assets $ 0 $ 0
=============== ===============
Based on our history of operating losses and in accordance with SFAS No. 109, we
record a 100% valuation allowance resulting in no net deferred tax asset being
recognized.
At December 31, 2002, we had net operating loss (NOL) carryforwards of
approximately $78.7 million for income tax purposes that expire in varying
amounts in the years 2008 through 2022. 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 $50.1
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, 2002, we have approximately $7.3 million of Code Section
382 limited net operating losses that are available to offset taxable income in
2003 (in addition to the $50.1 million of net operating loss carryforwards that
are not limited). We also have capital loss carryforwards of approximately $4.3
million for income tax purposes that expire in 2003. A table of available net
operating loss carryforwards is as follows:
F-16
NOL Generated
Period During the Year Expiration Year
- ------------------------------------------------ ------------------- ------------------
(In thousands)
NOLs Limited by Code Section 382
Fiscal year ended July 1994 $ 2,369 2008
Fiscal year ended July 1995 5,579 2009
Fiscal year ended 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
Fiscal year ended July 1998 7,284 2012
Fiscal year ended July 1999 6,645 2018
Fiscal year ended December 1999 12,022 2019
Fiscal year ended December 2000 14,593 2020
Fiscal year ended December 2001 6,369 2021
Fiscal year ended December 2002 2,012 2022
-------------------
50,077 Post-IPO NOLs
-------------------
$78,654 Total NOLs at December 31, 2002
===================
The provision for income taxes (benefit) is comprised of the following:
Year Ended December 31,
--------------------------------------------------
2000 2001 2002
-------------- -------------- --------------
(In thousands)
Current - Federal $ 0 $ 0 $ 0
Current - State 80 84 (51)
-------------- -------------- --------------
$80 $84 $(51)
============== ============== ==============
6. PENSION AND POST-RETIREMENT BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS
UnionTools maintains multiple defined benefit pension plans that cover
substantially all associates. Benefits paid under the defined benefit plans are
generally based either on years of service and the associate's compensation in
recent years of employment or years of service multiplied by contractual
amounts. Our funding policy for all plans is to fund at least the minimum amount
required by ERISA. Activity related to the pension plans is as follows:
F-17
Fiscal Year
--------------------------------------------
2000 2001 2002
------------ ------------ ------------
(In thousands)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning of year $17,109 $18,620 $19,548
Service cost 311 142 172
Interest cost 1,323 1,332 1,458
Actuarial losses / (gains) 1,330 650 1,929
Plan amendments (192) 101 0
Curtailment loss / (gain) 0 0 (14)
Benefits paid (1,261) (1,297) (1,417)
------------ ------------ ------------
Benefit obligations at end of period $18,620 $19,548 $21,676
============ ============ ============
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period $17,482 $19,940 $19,614
Actual return on plan assets 1,859 507 (581)
Company contributions 1,860 464 847
Benefits paid (1,261) (1,297) (1,417)
------------ ------------ ------------
Fair value of plan assets at end of period $19,940 $19,614 $18,463
============ ============ ============
Funded status of the plans $1,549 $67 $(3,212)
Unrecognized net actuarial losses / (gains) 2,867 4,706 8,530
Minimum pension liability (2,386) (2,966) (8,934)
Unamortized prior service cost 523 573 404
------------ ------------ ------------
Prepaid (accrued) benefit cost $2,553 $2,380 $(3,212)
============ ============ ============
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate 7.50% 7.25% 7.00%
Expected return on plan assets 8.75% 8.75% 8.75%
Rate of compensation increase 4.00% 4.00% 4.00%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $311 $142 $172
Interest cost 1,323 1,332 1,458
Expected return on plan assets (1,859) (507) (1,686)
Amortization of prior service cost 44 51 51
Recognized net actuarial losses / (gains) 367 (1,152) 358
Effects of changes in assumption 0 0 0
------------ ------------ ------------
Net periodic benefit cost (income) $186 $(134) $353
============ ============ ============
F-18
The following is a summary of aggregate prepaid benefit costs and
aggregate accrued benefit costs:
12/31/2001 12/31/2002
-------------- --------------
(In thousands)
Aggregate prepaid benefit cost $ 3,889 $0
Aggregate accrued benefit cost (1,509) (3,212)
-------------- --------------
Net prepaid (accrued) benefit cost $ 2,380 $(3,212)
============== ==============
We have individual defined benefit pension plans that have accumulated
benefit obligations that are in excess of plan assets. These same plans have
projected benefit obligations that are in excess of plan assets. The aggregate
accumulated benefit obligations, projected benefit obligations, and fair value
of plan assets of these plans are as follows:
12/31/2001 12/31/2002
--------------- ---------------
(In thousands)
Aggregate accumulated benefit obligations $8,641 $21,676
Aggregate projected benefit obligations 8,644 21,676
Aggregate fair value of plan assets 7,137 18,463
POST-RETIREMENT BENEFIT PLANS
We also sponsor an unfunded defined benefit health care plan that
provides post-retirement medical and life insurance benefits to associates who
had attained age 50 and 10 years of service by August 1, 1996 and to current
participants receiving benefits. Lifetime benefits under the plan are capped at
$25,000 per participant. Activity related to the plan is as follows:
F-19
Fiscal Year
----------------------------------------------
2000 2001 2002
------------ ----------- -----------
(In thousands)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning of year $ 2,292 $ 2,712 $ 629
Service cost 2 8 12
Interest cost 188 109 46
Participant contributions 230 188 8
Curtailment 0 (2,082) (191)
Actuarial losses 815 38 80
Benefits paid (815) (344) (40)
------------ ----------- -----------
Benefit obligations at end of period $ 2,712 $ 629 $ 544
============ =========== ===========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period $0 $0 $0
Company contributions 585 156 32
Participant contributions 230 188 8
Benefits paid (815) (344) (40)
------------ ----------- -----------
Fair value of plan assets at end of period $0 $0 $0
============ =========== ===========
Funded status of the plans (under-funded) $(2,712) $ (628) $(544)
Unrecognized net actuarial losses / (gains) 4 38 (73)
------------ ----------- -----------
Accrued benefit cost $(2,708) $ (590) $(617)
============ =========== ===========
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate 7.50% 7.38% 6.75%
Expected return on plan assets N/A N/A N/A
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $2 $8 $ 12
Interest cost 188 109 46
Expected return on plan assets 0 0 0
Amortization of prior service cost 0 0 0
Recognized net actuarial gains (22) 0 0
Recognized settlement gains 0 (2,077) 0
Effects of changes in assumption 0 0 0
------------ ----------- -----------
Net periodic benefit cost $ 168 $(1,960) $ 58
============ =========== ===========
The weighted average health care cost trend rate for fiscal 2003 is
10.0% and is trending toward 5.0% in 2008. The weighted average health care cost
trend rate for fiscal 2002 was 5.0%. A one percentage point change in the
assumed health care cost trend rate would have the following effects on
post-retirement benefit obligations:
F-20
One Percentage One Percentage
Point Increase Point Decrease
----------------- ------------------
(In thousands)
Effect on total of service and interest cost components in fiscal 2002 $ 7 $ (6)
Effect on total of post-retirement benefit obligation in fiscal 2002 $51 $(44)
In February 2001, UnionTools, acting in its capacity as the plan
sponsor and policy holder, notified certain of its associates, retirees, and
collective bargaining units of its intention to eliminate retiree medical and
life benefits. The elimination of these benefits resulted in a settlement gain
of approximately $2.1 million which is reflected as a component of net periodic
pension benefit cost.
DEFINED CONTRIBUTION 401(k) PLAN
We sponsor defined contribution 401(k) plans covering all associates.
Our matching contribution varies by plan and amounted to approximately $320,000
in fiscal 2002, $309,000 in fiscal 2001, and $362,000 in fiscal 2000.
7. COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENT AND OPERATING LEASES
UnionTools entered into a royalty agreement with The Scotts Company,
pursuant to which UnionTools obtained the exclusive right to manufacture,
distribute, and market in the United States and Canada an extensive line of lawn
and garden tools under the Scotts(R) brand name. Under the agreement, UnionTools
must pay certain minimum royalty amounts annually.
Rent expense under operating leases was $1.5 million in fiscal 2002,
$1.6 million in fiscal 2001, and $2.3 million in fiscal 2000.
The minimum annual payments under non-cancelable operating leases and
the Scotts license agreement at December 31, 2002 are as follows:
Year Amount
------------- ----------------
2003 $1,839,000
2004 1,148,000
2005 961,000
2006 1,062,000
2007 1,057,000
Thereafter 1,929,000
LITIGATION
From time to time, we are a party to personal injury litigation arising
out of incidents involving the use of our products purchased by consumers from
retailers to whom we distribute. We are generally covered by insurance for these
product liability claims.
F-21
COLLECTIVE BARGAINING AGREEMENTS
The majority of our hourly associates are covered by collective
bargaining agreements, including those at the primary manufacturing facility in
Frankfort, New York. The collective bargaining agreement covering the Frankfort
hourly associates expires in 2004. We have not been subject to a strike or work
stoppage in over 20 years and believe that our relationships with our associates
and applicable unions are good. However, there can be no assurance that we will
be successful in negotiating new labor contracts on terms satisfactory to us or
without work stoppages or strikes. A prolonged work stoppage or strike at any of
our facilities could have a material adverse effect on our business, financial
condition, and results of operations.
AGREEMENTS WITH KEY EXECUTIVES
We have entered into agreements with certain of our executive officers
providing for, under certain circumstances, payments from us following the
termination of such executives' employment with us or following a change in
control of the Company (as defined therein).
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and dilutive
earnings per share:
Fiscal Year
----------------------------------------------------
2000 2001 2002
---------------- ---------------- ----------------
NUMERATOR
Net loss attributable to common stockholders $(13,968,000) $(15,679,000) $(6,193,000)
================ ================ ================
DENOMINATOR
Denominator for basic earnings per share 605,736 606,222 718,987
- weighted average shares
Effect of dilutive securities:
1997 Stock Incentive Plan 0 0 0
1997 Nonemployee Director Stock 0 0 0
Incentive Plan
Deferred Equity Compensation 0 0 0
Plan for Directors
Other stock options 0 0 0
---------------- ---------------- ----------------
Dilutive potential common shares 0 0 0
---------------- ---------------- ----------------
Denominator for diluted earnings per share 605,736 606,222 718,987
================ ================ ================
- weighted average shares and assumed
conversions
Basic loss attributable to common $(23.06) $(25.86) $(8.61)
================ ================ ================
stockholders per share
Diluted loss attributable to common $(23.06) $(25.86) $(8.61)
stockholders per share ================ ================ ================
For additional disclosure regarding outstanding stock options and the
Deferred Equity Compensation Plan for Directors, see Note 4 - Stockholders'
Equity.
F-22
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain financial data for each quarter
of fiscal 2001 and 2002. The financial data for each of these quarters is
unaudited but includes all adjustments which we believe to be necessary for a
fair presentation. All quarters include normal recurring adjustments. These
operating results, however, are not necessarily indicative of results for any
future period.
Net
Income Net
(Loss) Income
Attributable (Loss)
Net Gross to Common Per Share
Sales Profit Stockholders (Diluted)
------------ ----------- ------------- ------------
(In thousands, except for per share data)
2001
First quarter $27,842 $ 7,216 $ 1,358 $ 2.24
Second quarter 28,752 5,461 (479) (0.79)
Third quarter 17,414 4,306 (1,278) (2.11)
Fourth quarter 17,296 3,917 (15,280) (25.20)
------------ ----------- ------------ ------------
$91,304 $20,900 $(15,679) $ (25.86)
============ =========== ============ ============
2002
First quarter $26,835 $ 6,752 $ 1,980 $ 3.26
Second quarter 26,655 6,419 427 0.70
Third quarter 19,306 4,624 (4,822) (7.54)
Fourth quarter 18,407 3,320 (3,778) (5.03)
------------ ----------- ------------ ------------
$91,203 $21,115 $ (6,193) $ (8.61)
============ =========== ============ ============
10. OTHER EXPENSES
In fiscal 2000, we sold certain assets related to our watering products
operations. Total proceeds received in connection with the sale of these assets
were approximately $4 million and we recognized a loss on disposal of
approximately $1.2 million.
In fiscal 2001, we incurred $0.5 million primarily in financial
advisory, consulting and legal fees to evaluate strategic alternatives.
In fiscal 2002, we incurred approximately $1.0 million of expense for
financial advisory, consulting and legal fees associated with our
recapitalization and refinancing. In fiscal 2002, we also incurred approximately
$2.0 million of expense related to the relocation of our distribution facility
from Columbus, Ohio to Louisville, Kentucky.
11. RESTRUCTURING PLAN
During the second quarter of fiscal 2002, we implemented a
restructuring plan to relocate our primary distribution facility from Columbus,
Ohio to Louisville, Kentucky. As a result, in fiscal 2002 we incurred $1.987
million of costs related to this relocation, of which $533,000 was accrued in
the second quarter of fiscal 2002 as a restructuring charge. In connection with
the project, we incurred approximately $437,000 of employee separation
F-23
costs. In addition, exit costs of approximately $197,000 were incurred related
to duplicative leases. The remaining $1.355 million of costs related to the
transition and start-up phases of the move to the Louisville location, including
professional services, freight and handling, and employee and hiring costs. We
expect payments associated with employee separation costs and lease termination
and other costs to be substantially paid by the end of the first quarter of
fiscal 2003. The amounts charged against the restructuring reserve during the
period ended December 31, 2002 are as follows (in thousands):
Balance at Balance at
1/01/2002 Additions (1) Payments 12/31/2002
--------- ------------- -------- ----------
Employee separation costs $ - $ 437 $ (371) $ 66
Other exit costs - 1,550 (1,444) 106
------ --------- ---------- ------
$ - $ 1,987 $ (1,815) $ 172
====== ======== ========== ======
(1) Amounts represent items that have been either expensed as incurred or
accrued.
12. SUBSEQUENT EVENTS
On February 21, 2003, Acorn Merger Corporation ("AMC"), The TCW Group,
Inc., Trust Company of the West, TCW Asset Management Company, TCW Special
Credits, Oaktree Capital Management, LLC, OCM Principal Opportunities Fund,
L.P., A. Corydon Meyer, John G. Jacob, Gary W. Zimmerman, and Carol B. LaScala
(collectively, the "Filing Persons") filed with the Securities and Exchange
Commission a Schedule 13E-3 that announced that Acorn Merger Corporation
("AMC"), a newly formed affiliate of investment funds controlled by Oaktree
Capital Management, LLC ("OCM"), has entered into agreements with parties owning
92.5% of our common stock providing for the "short form" merger of AMC into the
Company. Under the terms of the proposed merger, our stockholders who are not
stockholders of AMC will receive $3.50 per share in cash after delivering their
shares to a designated paying agent.
F-24
ACORN PRODUCTS, INC.
(PARENT COMPANY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
December 31,
-----------------------------------
2001 2002
--------------- --------------
(In thousands)
ASSETS
Cash $ 664 $ 0
Prepaid and other assets 0 24
--------------- --------------
Total current assets 664 24
Other assets (principally investment in and 6,455 17,338
--------------- --------------
amounts due from wholly-owned subsidiaries)
Total assets $ 7,119 $ 17,362
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,007 $ 2,195
Other current liabilities 50 0
--------------- --------------
Total current liabilities 1,057 2,195
Redeemable common stock 0 1,167
Stockholders' equity:
Common stock 78,262 98,404
Contributed capital - stock options 460 452
Minimum pension liability (2,121) (8,211)
Retained earnings (deficit) (68,278) (74,474)
--------------- --------------
8,323 16,171
Common stock in treasury (2,261) (2,171)
--------------- --------------
Total stockholders' equity 6,062 14,000
--------------- --------------
Total liabilities, redeemable common stock, $ 7,119 $ 17,362
and stockholders' equity =============== ==============
See accompanying notes.
S-1
ACORN PRODUCTS, INC.
(PARENT COMPANY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year
-----------------------------------------------
2000 2001 2002
----------- ----------- -----------
(In thousands)
Selling and administrative expenses $ 2,756 $ 1,532 $ 3,836
Interest expense 194 410 0
Amortization of goodwill 175 183 0
Asset impairment 0 5,820 0
Other expenses 80 629 2,953
----------- ----------- -----------
Loss before equity in losses of subsidiaries (3,205) (8,574) (6,789)
and preferred stock dividends
Equity in income (losses) of subsidiaries (10,763) (7,105) 116
Preferred stock dividends 0 0 480
----------- ----------- -----------
Net loss attributable to common stockholders $(13,968) $(15,679) $(6,193)
=========== =========== ===========
See accompanying notes.
S-2
ACORN PRODUCTS, INC.
(PARENT COMPANY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Fiscal Year
------------------------------------------------
2000 2001 2002
------------ ------------ -----------
(In thousands)
OPERATING ACTIVITIES:
Net cash from operating activities $ 15 $562 $ 0
INVESTING ACTIVITIES:
Property and equipment 0 0 0
FINANCING ACTIVITIES:
Net activity on revolving loan 0 0 (664)
Issuance of treasury stock 87 0 0
------------ ------------ -----------
87 0 (664)
------------ ------------ -----------
Increase (decrease) in cash $102 $562 $(664)
============ ============ ===========
See accompanying notes.
S-3
ACORN PRODUCTS, INC.
(PARENT COMPANY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the parent company-only financial statements, Acorn's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries. Acorn's share of net income (loss) of its unconsolidated
subsidiaries is included in consolidated income using the equity method. Parent
company-only financial statements should be read in conjunction with our
consolidated financial statements.
2. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Acorn is a guarantor of the credit facility of UnionTools, a
wholly-owned subsidiary. Cash utilized by Acorn is provided through
inter-company borrowings and is subject to certain restrictions. See Note 3 to
our consolidated financial statements.
S-4
UNIONTOOLS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2002
Additions
------------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
- ---------------------------------------- --------------- -------------- ------------- --------------- --------------
PERIOD ENDED DECEMBER 31, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts $ 663,184 $ 99,713 $(175,952) $ 289,362 $ 297,583
Reserve for sales, discounts, and 627,057 720,629 0 971,962 375,724
--------------- -------------- ------------- --------------- --------------
other allowances
Total $1,290,241 $ 820,342 $(175,952) $1,261,324 $ 673,307
PERIOD ENDED DECEMBER 31, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts $ 820,460 $ 474,393 $(50,272) $ 581,397 $ 663,184
Reserve for sales, discounts, and 1,303,595 1,714,147 0 2,390,685 627,057
--------------- -------------- ------------- --------------- --------------
other allowances
Total $2,124,055 $2,188,540 $(50,272) $2,972,082 $1,290,241
PERIOD ENDED DECEMBER 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $ 642,000 $1,192,332 $ 0 $1,013,872 $ 820,460
Reserve for sales, discounts, and 1,498,446 3,495,906 0 3,690,757 1,303,595
--------------- -------------- ------------- --------------- --------------
other allowances
Total $2,140,446 $4,688,238 $ 0 $4,704,629 $2,124,055
S-5