-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U5N7ZxYQyGJ9mSE07xsL2zINVpn1VxS1X7o6PICd+GytHHJAJFU5VzbN20k/q0B8 rTegqIgKF2yPBaVSRc1qGQ== 0000912057-99-005329.txt : 19991115 0000912057-99-005329.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005329 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990730 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACORN PRODUCTS INC CENTRAL INDEX KEY: 0001036713 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 223265462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22717 FILM NUMBER: 99750090 BUSINESS ADDRESS: STREET 1: 390 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43215*1930 BUSINESS PHONE: 6142224400 MAIL ADDRESS: STREET 1: 390 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43215*1930 10-K 1 10-K 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 July 30, 1999 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 DUBLIN AVENUE, 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 Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common stock, par value $.001 per share Nasdaq National Market
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 October 22, 1999, the aggregate market value of our shares of common stock (based on the last sale price of the common stock on the Nasdaq National Market on that date) held by non-affiliates of the registrant was approximately $2,621,605. As of October 22, 1999, 6,021,705 shares of our common stock, par value $.001 per share, were outstanding. TABLE OF CONTENTS
DESCRIPTION PAGE ----------- ---- Table of Contents Part I Item 1. Business............................................................................. 3 Item 2. Properties........................................................................... 10 Item 3. Legal Proceedings.................................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders.................................. 12 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 13 Item 6. Selected Financial Data ............................................................. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................... 24 Item 8. Financial Statements and Supplementary Data ......................................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................. 24 Part III Item 10. Directors and Executive Officers of the Registrant .................................. 25 Item 11. Executive Compensation .............................................................. 27 Item 12. Security Ownership and Certain Beneficial Owners and Management ..................... 31 Item 13. Certain Relationships and Related Transactions ...................................... 32 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 33 Signatures ..................................................................................... 37 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, "WE," "US," AND "OUR" MEANS ACORN PRODUCTS, INC. AND OUR SUBSIDIARIES UNIONTOOLS, INC., H.B. SHERMAN MANUFACTURING COMPANY, INC., AND UNIONTOOLS IRRIGATION, INC. REFERENCES TO OUR FISCAL YEAR MEAN THE FISCAL YEAR ENDED ON THE FRIDAY CLOSEST TO JULY 31 OF THE APPLICABLE YEAR (E.G., FISCAL 1999 MEANS THE FISCAL YEAR ENDED JULY 30, 1999). AS USED IN THIS ANNUAL REPORT ON FORM 10-K, "ACE HARDWARE" REFERS TO ACE HARDWARE CORP., "TRUSERV" REFERS TO TRUSERV CORPORATION, "FRED MEYER" REFERS TO FRED MEYER, INC., "FRANK'S NURSERY" REFERS TO FRANK'S NURSERY & CRAFTS INC., "HOMEBASE" REFERS TO HOMEBASE, INC., "KMART" REFERS TO KMART CORPORATION, "PAYLESS CASHWAYS" REFERS TO PAYLESS CASHWAYS, INC., "SEARS," REFERS TO SEARS, ROEBUCK & COMPANY, "MID-STATES" REFERS TO MID-STATES DISTRIBUTING COMPANY, INC., "QUALITY STORES" REFERS TO QUALITY STORES, INC., "WAL-MART" REFERS TO WAL-MART STORES, INC., "LOWE'S" REFERS TO LOWE'S COMPANIES, INC., "WHITE CAP" REFERS TO WHITE CAP PRO-CONTRACTOR SUPPLIER, "HUGHES" REFERS TO HUGHES SUPPLY, INC., "PRIME EQUIPMENT" REFERS TO PRIME SERVICES, INCORPORATED AND "HOME DEPOT" REFERS TO THE HOME DEPOT, INC. WE OWN THE FOLLOWING REGISTERED TRADEMARKS: Lady Gardener-Registered Trademark-(R), Perfect Cut-Registered Trademark-(R), Pro Force-Registered Trademark-(R), Razor-Back-Registered Trademark-(R), Union-Registered Trademark-(R), UnionPro-Registered Trademark-(R) AND Yard 'n Garden-Registered Trademark-(R). Green Thumb-Registered Trademark-(R) AND True Value-Registered Trademark-(R) ARE REGISTERED TRADEMARKS OF TRUSERV. Frank's-Registered Trademark-(R) IS A REGISTERED TRADEMARK OF FRANK'S NURSERY. Craftsman-Registered Trademark-(R) AND Sears-Registered Trademark-(R) ARE REGISTERED TRADEMARKS OF SEARS. Scotts-Registered Trademark-(R) IS A REGISTERED TRADEMARK OF THE SCOTTS COMPANY. FORWARD-LOOKING INFORMATION Our actual results could differ materially from those projected in our 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," as well as in our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 1997, as amended on October 28, 1998 and on November 12, 1999, and as the same may be amended from time to time. GENERAL Founded in 1890, we are a leading manufacturer and marketer of non-powered lawn and garden tools in the U.S. Our principal products include long handle tools (such as forks, hoes, rakes and shovels), snow tools, posthole diggers, wheelbarrows, striking tools, cutting tools, and watering products (such as sprinklers, hose nozzles and hose couplings). We sell our products under a variety of well-known brand names, including RAZOR-BACK, UNION, YARD 'N GARDEN, SHERMAN THOMPSON, PERFECT CUT and, pursuant to a license agreement, SCOTTS. In addition, we manufacture private label products for a variety of retailers, including products sold under Sears' CRAFTSMAN and TruServ's GREEN THUMB brand names. Our customers include mass merchants such as Sears, Wal-Mart, Kmart and Fred Meyer, home centers such as Home Depot, Lowe's, HomeBase and Payless Cashways, buying groups such as TruServ and Ace Hardware, farm distributors such as Mid-States and Quality Stores, and industrial distributors such as Prime Equipment and White Cap. BUSINESS STRATEGY Over the past eight years, we have implemented a business strategy designed to transform ourselves from a manufacturing-oriented industrial company into a marketing-oriented consumer products company. The central elements of our approach have included a market segmentation strategy based primarily on brand management and a merchandising strategy based on attractive and informative product displays and labeling. - MARKET SEGMENTATION STRATEGY. We have developed a family of brands, each targeted to one or more specific consumer segments and price-points. Our products and brands are differentiated by price, features and warranty, as well as by the materials and production processes used. - MERCHANDISING STRATEGY. We were the first in the long handle tool segment of the non-powered lawn and garden industry to successfully implement sophisticated merchandising and marketing programs. Our merchandising programs are designed to (i) create brand identification among goods historically treated as commodities and (ii) increase retail sales while reducing the 3 amount of sales support needed from the retailer's employees. We use innovative product labeling and point-of-sale signage and racking to highlight the comparative value and quality of products within our trademarked "GOOD/BETTER/BEST" format. Where adequate shelf-space is available, we also merchandise our brands together, from our opening price-point YARD 'N GARDEN brand to our best-quality RAZOR-BACK brand, using a similar value positioning technique. We believe that this merchandising strategy facilitates comparison shopping and encourages consumers to purchase higher price-point products. GROWTH STRATEGY We believe that we can leverage the success of our business strategy through the implementation of the following growth strategies: - INCREASE PENETRATION IN HIGH GROWTH DISTRIBUTION CHANNELS. We believe that certain distribution channels, such as home centers and mass merchants, are growing more rapidly than the overall industry. We believe that we can continue to increase our sales in these high growth distribution channels through our brand names, innovative merchandising techniques and high quality products. For example, in August 1996, after we demonstrated the effectiveness of our market segmentation and merchandising strategies in a select number of Home Depot stores, Home Depot selected us as the supplier of long handle tools for all new Home Depot stores in new markets and for 50 existing Home Depot stores. As of the end of fiscal 1999, we supplied long handle tools to 208 Home Depot stores. In addition, we have been a continuous supplier to Sears for over 80 years and the primary supplier of long handle tools to Sears for over 50 years. 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 the retailers will choose us to supply 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. - DEVELOP PRODUCT LINE EXTENSIONS. We believe that product line extensions allow us to increase sales with minimal incremental expenditures. We expanded our cutting tool and striking tool product lines with the introduction in August 1995 of PERFECT CUT pruning shears and loppers and RAZOR-BACK mattocks, picks, axes, hammers and bars. Outside manufacturers produce the striking and cutting tools. In August 1996, we introduced the LADY GARDENER line of tools, which are ergonomically designed for female gardeners. In August 1997, we introduced wheelbarrows manufactured by a third party. In August 1998, we introduced the RACK 'N ROLL-TM- Tool Caddy, a wheeled garden tool organizer and storage product designed and manufactured by us. INDUSTRY The non-powered lawn and garden tool industry is mature and, due in part to the low-cost nature of non-powered equipment, generally is non-cyclical. We believe that 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 the need of industrial and farm professionals to acquire and utilize high-quality tools that will aid them in efficiently completing their jobs. The following product categories comprise the non-powered lawn and garden tool market: long handle tools, garden hose, hose attachments, cutting tools, sprayers, wheelbarrows and spreaders. We believe that long handle tools comprise the largest segment of the non-powered lawn and garden tool market. PRODUCTS AND BRANDS PRODUCT LINES We sell over 3,000 SKUs of non-powered lawn and garden tools. We design, manufacture and market tools in the following product lines: 4 - Shovels and scoops - Other steel products, such as hoes, forks, scrapers and rakes - Garden hand tools and posthole diggers - Snow tools, such as shovels and pushers - Watering products such as sprinklers, hose nozzles and hose couplings - Other products such as garden tool organizers, repair handles, weeders, edging tools and brooms. In addition, we sell wheelbarrows, cutting tools and striking tools purchased from outside equipment manufacturers. We also manufacture proprietary custom molded products and component parts for other manufacturers and distributors, as well as plastic components used in our products. BRAND POSITIONING Under our market segmentation strategy, we have developed a family of brands, each targeted to one or more specific consumer segments and price-points. Our products and brands are differentiated by price, features and warranty (up to a lifetime warranty). Product grades also differ with respect to the materials and production processes used. For example, the steel components of our RAZOR-BACK line are heavy-gauge and forged in order to maximize the product's strength and durability, while our YARD 'N GARDEN products are made with lighter gauge components. We carefully monitor our products and search for growth opportunities that result from changes in market segments. For example, we repositioned the RAZOR-BACK brand to cater to the growing population of serious DIY consumers by updating the brand image, introducing product line extensions and developing new promotional campaigns. Our major brands are described below. - RAZOR-BACK. We sell a full line of best-quality, industrial duty tools for farm, industrial and professional users under the RAZOR-BACK name. The brand enjoys a strong franchise with agricultural and industrial professionals and is widely acknowledged as the quality and performance standard for the long handle tool industry. In 1995, we expanded the brand with a high-quality line of cutting and striking tools and, in 1998, also added wheelbarrows under the RAZOR-BACK name. The RAZOR-BACK line is sold primarily through home center, hardware store, industrial distributor and farm sector distribution channels. - UNION PRO. We sell a limited line of high-quality, industrial duty tools for farm, industrial and professional users under the UNION PRO name. The UNION PRO line is sold primarily through industrial distributor and farm sector distribution channels. - UNION. The UNION line generates our largest sales volume. Under the UNION name, we sell a full line of medium-quality, professional duty tools with a wide range of features, quality points and performance levels designed to match the needs of tradesmen and serious DIY consumers. The UNION line is sold through all distribution channels except warehouse clubs and is merchandised in a trademarked GOOD/BETTER/BEST quality configuration. - PERFECT CUT. We introduced the PERFECT CUT line in August 1995. We sell a limited line of consumer and professional duty cutting tools for tradesmen and serious DIY consumers under the PERFECT CUT name. The PERFECT CUT line is sold primarily through home centers, mass merchants and hardware store distribution channels and is merchandised in a trademarked GOOD/BETTER/BEST quality configuration. - SCOTTS. In July 1992, we obtained from The Scotts Company the exclusive right to manufacture, distribute and market in the U.S. and Canada an extensive line of lawn and garden tools under the SCOTTS name. We sought to benefit from The Scotts Company's national prime time advertising campaigns, to develop joint promotional programs with The Scotts Company and to leverage the SCOTTS brand reputation and recognition among retailers that support The Scotts Company bagged-goods program. Under the SCOTTS name, we sell a full line of high-quality, consumer-oriented tools for home gardeners who associate the SCOTTS name with value and quality. The SCOTTS line is sold primarily through mass merchant and home center distribution channels and is merchandised in a trademarked GOOD/BETTER/BEST quality configuration. 5 - PROFORCE. We introduced the PROFORCE line in August 1993. The ProForce line consists of a limited line of medium-quality, consumer-oriented tools for DIY consumers. The PROFORCE line is sold exclusively through the warehouse club distribution channel. - YARD 'N GARDEN. Under the YARD 'N GARDEN name, we sell a limited line of standard quality, promotional tools designed for occasional DIY consumers who demand value in basic tools for home use. The YARD 'N GARDEN line is sold through all of our primary distribution channels. - LADY GARDENER. We introduced the LADY GARDENER line in August 1996. Under the LADY GARDENER name, we sell a limited line of high-quality, consumer-oriented tools ergonomically designed for female gardeners. The LADY GARDENER line is sold primarily through mass merchant, home center and hardware store distribution channels. - SHERMAN THOMPSON. We developed the SHERMAN THOMPSON name in 1998 to capitalize on the long history of the recent Sherman and Thompson watering products acquisitions. We sell a high-quality line of sprinklers, hose nozzles and hose couplings under the SHERMAN THOMPSON name through all of the our primary distribution channels. PRIVATE LABEL PRODUCTS We also manufacture private label products for a variety of customers who sell the products under, among others, the following labels: - Sears under the CRAFTSMAN and SEARS label - TruServ under the GREEN THUMB label - Frank's Nursery under the FRANK'S label We have been a continuous supplier to Sears for over 80 years and the primary supplier of long handle tools to Sears for over 50 years. Private label products generated approximately $25.8 million, or 15.5%, of our gross sales in fiscal 1999. NEW PRODUCT DEVELOPMENT We believe that product line extensions allow us to increase sales with minimal incremental expenditures. We expanded our cutting tool and striking tool product lines with the introduction in August 1995 of PERFECT CUT pruning shears and loppers and RAZOR-BACK mattocks, picks, axes, hammers and bars. Outside manufacturers produce the striking and cutting tools. In August 1996, we introduced the LADY GARDENER line of tools, which are ergonomically designed for female gardeners. In August 1997, we introduced wheelbarrows manufactured by a third party. In August 1998, we introduced the RACK 'N ROLL-TM- Tool Caddy, a wheeled garden tool organizer and storage product designed and manufactured by us. CUSTOMERS Our largest customer, Sears, which includes Sears' Orchard Supply division, accounted for 10.9%, 13.6% and 13.4% of gross sales in fiscal 1997, fiscal 1998, and fiscal 1999, respectively. Our ten largest customers accounted for approximately 50.1%, 51.5% and 50.7% of gross sales during each such period. We sell our products through a variety of distribution channels including: - Mass merchants such as Sears, Kmart and Fred Meyer - Home centers such as Home Depot, Lowe's, HomeBase and Payless Cashways - Buying groups such as TruServ, Distribution America, and Ace Hardware - Farm distributors and stores such as Mid-States Distributing Co., Wheatbelt, Inc. and Tractor Supply Company, Inc. - Industrial distributors such as Prime Equipment, White Cap, Oklahoma Rig & Supply Company, Texas Mill Supply & Manufacturing, Inc. and Hughes Supply, Inc. 6 There can be no assurance that our sales to Sears or other major customers will continue at existing levels. A substantial reduction or cessation of sales to Sears 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 of our customers or result in a substantial reduction or cessation of purchases of our products by certain customers. In addition, we are facing increasing pressures from retailers with respect to pricing, co-operative 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. MERCHANDISING AND MARKETING We were the first in the long handle tool segment of the non-powered lawn and garden industry to successfully implement sophisticated merchandising and marketing programs. Our merchandising programs are designed to (i) create brand identification among goods historically treated as commodities and (ii) increase retail sales while reducing the amount of sales support needed from the retailer's employees. We use innovative product labeling and point-of-sale signage and racking to highlight the comparative value and quality of products within and among our brands. We merchandise products within our UNION, SCOTTS and PERFECT CUT lines using our trademarked "GOOD/BETTER/BEST" format. Where adequate shelf-space is available, we also merchandise our brands together, from our opening price-point YARD 'N GARDEN brand to our best-quality RAZOR-BACK brand, using a similar value positioning technique. We believe that our merchandising strategy facilitates comparison shopping and encourages consumers to purchase higher price-point products. Where applicable, we provide our customers with merchandising plan-o-grams. We also provide our customers with custom designed product displays complete with informative signs and other "wall-talkers" to answer consumer questions without the help of the retailer's sales staff. We primarily use cooperative advertising to promote our products to consumers. SALES Our sales force is divided into regions, each led by a regional manager. Some regional managers supervise a sales force consisting of direct sales professionals who we employ. In addition, we utilize over 20 manufacturers' representative agencies who also report to the regional managers. The manufacturers' representatives also sell lawn and garden products for other manufacturers, but not products that compete with our products. Our management and senior sales professionals regularly call on our significant customers, while the manufacturing representatives provide store level support. We generally compensate our sales professionals with a base salary and bonuses based upon performance oriented objectives. DISTRIBUTION AND LOGISTICS Customer orders arrive at our headquarters in Columbus, Ohio and are processed centrally. If we can fill the order from the current stock of finished goods, the order is forwarded to one of our three distribution centers for shipment based on proximity and availability. We currently maintain distribution centers in Chino, California, Columbus, Ohio and Frankfort, New York. As of July 30, 1999, we owned or leased a fleet of one tractor, one straight truck and eight trailers for transporting products between our manufacturing and distribution facilities. We use common carriers for shipping finished products from warehouses to customer delivery points. We use a computerized management information and control system that allows us to determine the status of customer orders and enables us to process orders quickly, respond to customer inquiries and adjust shipping schedules to meet customer requirements. Within this system, we use an electronic data interchange system that enables customers, through computerized telephone communications, to place orders directly with us. We believe that these systems enable efficient order processing, expedite shipments and improve customer service. We also provide our customers with the service of pre-ticketing and bar-coding our products in accordance with customer specifications. 7 MANUFACTURING 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, die-casting 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. At our Frankfort, New York manufacturing facility, steel components undergo hot and cold stamping and hot forging or welding, depending on the type of tool head being produced. We clean the metal by grinding and polishing the shaped steel heads. Next, we paint the steel components using various techniques depending on product type and product material. We operate our own water based paint manufacturing process that is used for all steel tool components. Some steel components undergo additional finishing steps such as anodization or immersion in special chemical baths. At our seven active saw mills, we cut ash logs into flitches, then into squares and finally into rounds. We then inspect the rounds, which have diameters of one to two inches depending on the finished product requirements, to remove defects. We ship the end product, a green ash dowel, to either our Frankfort, New York or Delaware, Ohio sawmill to be kiln dried, cut to length, shaped and turned into a handle. The kiln drying process takes approximately six days and removes enough moisture from the wood to reduce the weight of the original green dowel by approximately 35%. Wood handles undergo chucking, boring, sanding and a finishing process at our Frankfort, New York facility. The inventory of handles maintained at our Frankfort, New York facility is a function of both price and seasonal considerations. The assembly of the steel tool head to the handle and packaging take place in the final manufacturing stage. Manufacturing processes at our Chino, California watering products facility include machining of metal bar stock and metal castings on automatic screw machines, turret lathes, CNC turning centers and multiple spindle chuckers and mills to produce high-quality hose nozzles and couplings, as well as component parts for use in our sprinklers and other products. We also perform zinc die-casting and metal punch press operations at the facility. In March 1999, we announced that we were going to consolidate our Columbus, Ohio manufacturing facility into our primary manufacturing facility in Frankfort, New York. We operated the Columbus facility through August 1999. As of September 1999, we relocated all of the equipment from our Columbus, Ohio manufacturing facility to our Frankfort, New York manufacturing facility. We have implemented a seasonally adjusted production schedule in order to maximize our inventories of finished goods. We increase production from December through March, our busiest season, and lower production during the summer and fall seasons. RAW MATERIALS The primary raw materials used to produce our products are steel, plastics 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 regarding our steel purchases. We purchased approximately 74% of our steel requirements from Liberty Steel in fiscal 1999. - PLASTICS. We use specially formulated plastics and resins in our tools. Plastic tool heads historically have been produced by six outside injection molders, utilizing molds developed and owned by us. 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. We have not entered into any long-term contracts regarding our plastics purchases. - ASH WOOD. Ash is the ideal hardwood for handles because it is lightweight, flexible and splinters less than most hardwoods. We have wood specialists who maintain relationships with numerous log 8 suppliers and are responsible for sourcing our ash needs. We believe that we will continue to be able to obtain sufficient quantities of ash. We typically maintain a five to eight week inventory of ash at each of our sawmills to cover occasional short-term fluctuations in supply. We import ramin wood handles for some of our promotionally-priced YARD 'N GARDEN brand products, such as rakes and hoes. Ramin wood is less expensive than ash and is of sufficient quality for tools (other than shovels) designed for opening-price-point levels. We also use brass, zinc and aluminum in the production of watering products. We have not entered into any long-term contracts regarding our brass, zinc and aluminum purchases. 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. EMPLOYEES As of July 30, 1999, we employed approximately 700 people (including seasonal employees), approximately 500 of whom were paid on an hourly basis. Our staffing requirements fluctuate during the year as a result of the seasonality of the lawn and garden industry, adding approximately 100 to 200 additional seasonal employees in the third quarter. The average tenure of our hourly employees is in excess of 10 years. Hourly employees at our Columbus, Ohio distribution center and Delaware, Ohio sawmill are represented by the International Association of Machinists, or the "IAM". The International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers, or the "IBB", represents the hourly employees at our Frankfort, New York. The International Brotherhood of Teamsters, or the "IBT", represents hourly employees at our Portville, New York sawmill. The Glass, Molders, Pottery, Plastics & Allied Workers International Union AFL-CIO, or the "AGM" represents hourly employees at our Hebron, Ohio injection molding facility. Our contracts with the IAM, the IBB, the IBT and the AGM expire in April 2002, June 2001, August 2002 and March 2002, respectively. We have no other employees that are represented by unions. We have not been subject to a strike or work stoppage in over 20 years and we believe that our relationships with our employees, the IAM, the IBB, the IBT and the AGM 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. PATENTS AND TRADEMARKS Our success and ability to compete are dependent to a significant degree on our patents and trademarks. We register our patents and trademarks in the United States Patent and Trademark Office and the patent and trademark offices of certain other countries and intend to continue to do so as new patents and trademarks are developed or acquired. Our trademarks include: - LADY GARDENER - PERFECT CUT - PRO FORCE - RAZOR-BACK - UNION - UNION PRO - YARD 'N GARDEN In addition, we hold trademarks on various configurations of our GOOD/BETTER/BEST product labels and signage. In July 1992, we obtained the exclusive right to manufacture, distribute and market in the U.S. and Canada an extensive line of lawn and garden tools under the SCOTTS brand name. We pay certain royalties to The Scotts Company, the owner of the SCOTTS trademark, pursuant to a license agreement. The current term of the 9 license agreement expires in August 2001 and, subject to certain conditions, is automatically renewed for successive three year periods. COMPETITION 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 U.S. 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 U.S. market, will not 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 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 of our facilities. The amounts that we have expended for such compliance and remediation activities have not materially affected us. However, current conditions and future events, such as changes in existing laws and regulations, may 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 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. At July 30, 1999, we had a reserve for environmental remediation of approximately $157,000. The actual cost of remediating environmental conditions may be different than that accrued by us due to the difficulty in estimating such costs and due to potential changes in the status of legislation. We do not maintain an insurance policy for environmental matters. ITEM 2. PROPERTIES Our headquarters and executive offices, located in Columbus, Ohio, occupy approximately 33,000 square feet in a facility that we lease. As of July 30, 1999, we owned or leased the following other principal properties for use in our business as set forth below: DISTRIBUTION FACILITIES
OWNED SQUARE LOCATION OR LEASED FEET -------- --------- ----- Chino, California................................ Leased 64,200 Columbus, Ohio .................................. Leased 179,200 Columbus, Ohio .................................. Leased 105,000 Frankfort, New York(l) .......................... Owned 62,500 La Mirada, California(2)......................... Leased 19,100
MANUFACTURING FACILITIES
OWNED SQUARE LOCATION OR LEASED FEET -------- --------- ----- Columbus, Ohio(3) ............................... Owned 160,900 Frankfort, New York(l) .......................... Owned 201,210 Hebron, Ohio..................................... Owned 107,200 10 Chino, California................................ Leased 40,000
SAWMILLS
OWNED SQUARE LOCATION OR LEASED FEET -------- --------- ----- Beverly, West Virginia (Inactive)................ Owned 10,000 Cookeville, Tennessee............................ Owned 12,100 Delaware, Ohio .................................. Owned 51,100 Frankfort, New York(l) .......................... Owned 59,490 Huntington, Indiana ............................. Owned 7,600 Lebanon, Kentucky................................ Owned 13,500 Portville, New York ............................. Owned 9,000 Shippenburg, Pennsylvania ....................... Owned 15,000
(1) Our 351,000 square foot Frankfort, New York facility is comprised of a distribution center, a manufacturing facility and a sawmill. We also maintain approximately 27,800 square feet of office space in this facility. (2) The lease for our La Mirada, California distribution facility ended on September 30, 1999. The La Mirada distribution facility was replaced by our new Chino, California distribution facility. (3) In September 1999, operations in our Columbus, Ohio manufacturing facility were consolidated into our Frankfort, New York manufacturing facility. We are currently in contract to sell the Columbus, Ohio facility, which includes approximately 31,000 square feet of office space, and expect to complete the sale by November 30, 1999. We believe that our existing manufacturing facilities, distribution centers 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. We believe that our current sawmill capacity is sufficient to accommodate up to a 30% increase in the current level of output. 11 ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in routine litigation incidental to the conduct of business. Management believes 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. In April 1999, our subsidiary, V.H.G. Tools, Inc. and predecessor companies, were joined by Midwest Products, Inc., the defendant, in a product liability lawsuit filed in New Jersey Superior Court, Burlington County, New Jersey. The case is in its early stages, at least as to VHG. Plaintiff's and Midwest's allegations do not appear to be supported by evidence, but if plaintiff's and Midwest's allegations against VHG are proven, liability could be substantial. We believe that any compensatory damages, if awarded, would be covered by insurance. Subsequent to our fiscal year end, we received written notification that Huffy Corporation, True Temper Company and Huffco Company withdrew their October 1998 complaint against us alleging, among other things, breach of contract, unfair competition, misappropriation of trade secrets and fraud in connection with discussions regarding a possible merger. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our 1999 annual meeting of stockholders on June 22, 1999. Holders of 5,946,772 shares of our common stock were present representing 98.7% of all shares entitled to vote at the meeting. The following persons were elected as members of our Board of Directors to serve until the 2000 annual meeting or until their successors are duly elected and qualified: Conor D. Reilly, Gabe Mihaly, William W. Abbott, Matthew S. Barrett, Stephen A. Kaplan, and John I. Leahy. Each nominee received a vote of 5,922,589 shares FOR, with 24,183 shares withholding approval. The proposal to increase the number of shares of the Registrant's common stock issuable upon exercise of stock options under the 1997 Non-Employee Director Stock Option Plan from 25,000 to 200,000 shares was approved with 5,166,347 votes for, 774,921 votes against, and 5,504 votes abstaining. The ratification of the appointment of Ernst & Young LLP as our independent auditors for fiscal year 2000, was approved with 5,922,589 votes for, 11,100 votes against, and 354 votes abstaining. 12 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". The following table sets forth the high and low sales prices of the common stock on the Nasdaq National Market during the periods indicated:
MARKET PRICE ------------------ FISCAL PERIOD HIGH LOW - ------------- ----------- ---------- 1998: First Quarter...................................... $17.25 $13.25 Second Quarter..................................... $15.25 $9.00 Third Quarter...................................... $10.625 $7.875 Fourth Quarter..................................... $9.75 $5.00 1999: First Quarter...................................... $10.00 $5.13 Second Quarter..................................... $9.50 $6.25 Third Quarter...................................... $7.25 $5.00 Fourth Quarter..................................... $6.25 $4.31 2000: First Quarter (through October 22, 1999)........... $4.81 $2.50
As of October 22, 1999, the approximate number of record holders of the common stock was 20. The closing sales price of the common stock on October 22, 1999 was $2.63 per share. During the latter part of fiscal 1999, we repurchased 442,400 shares of Acorn common stock at a cost of approximately $2.5 million. 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 senior credit facility contains restrictions on UnionTools' ability to pay dividends or make payments or other distributions to us. On July 1, 1999, we issued 10,000 unregistered shares of our common stock to A. Corydon Meyer. The shares are subject to forfeiture and vest one year from the date of grant. Mr. Meyer's continued employment with us and his performance of services for us is the consideration for the grant of restricted stock. The grant of the restricted stock is exempt from registration under the Securities Act of 1933 by virtue of the exemption listed in Section 4(1) of that Act. We also repurchased a total of 442,400 shares of our common stock in open market transactions from March to May of 1999 in reliance on the exemption from registration contained in Section 4(1) of the Securities Act of 1933 as follows:
NUMBER OF PRICE PER DATE TOTAL COST SHARES SHARE March 11, 1999 $537,500 100,000 $5.38 March 19, 1999 $645,000 120,000 5.38 March 19, 1999 53,750 10,000 5.38 March 24, 1999 265,625 50,000 5.32 April 9, 1999 31,875 6,000 5.32 April 12, 1999 31,875 6,000 5.32 April 13, 1999 18,594 3,500 5.32 April 16, 1999 326,250 58,000 5.63 April 27, 1999 227,500 35,000 6.50 April 30, 1999 25,350 3,900 6.50 April 30, 1999 162,500 25,000 6.50 May 3, 1999 162,500 25,000 6.50
ITEM 6. SELECTED FINANCIAL DATA 13 We have derived the selected consolidated financial data for fiscal 1995, fiscal 1996, fiscal 1997, fiscal 1998, and fiscal 1999 from our audited consolidated financial statements. Certain accounts from prior years have been reclassified to conform to the fiscal 1999 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.
FISCAL YEAR ENDED ---------------------------------------------------------------------------- July 28, August 2, August 1, July 31, July 30, 1995 1996 1997 1998 1999 ---------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: (In thousands, except per share data) ---------------------------------------------------------------------------- Net sales........................ $ 86,543 $ 92,652 $ 101,011 $ 107,758 $ 111,414 Cost of goods sold............... 63,411 67,496 73,982 82,480 91,149 ----------- ------------ ------------ ----------- ------------- Gross profit..................... 23,132 25,156 27,029 25,278 20,265 Selling, general and administrative expenses...... 15,531 16,815 18,293 20,033 23,319 Interest expense ................ 6,485 6,732 7,176 2,560 3,401 Amortization of intangibles ..... 1,061 1,173 837 917 1,087 Other expenses, net(1)........... 694 1,522 1,548 259 2,653 ----------- ------------ ------------ ----------- ------------- Income (loss) from continuing operations before income taxes and cumulative effect adjustment .................. (639) (1,086) (825) 1,509 (10,195) Income taxes..................... -- 582 134 230 145 ----------- ------------ ------------ ----------- ------------- Income (loss) from continuing operations before cumulative effect adjustment ........... (639) (1,668) (959) 1,279 (10,340) Income (loss) from discontinued operations(2) ............... (1,800) (6,480) (9,920) -- (936) Cumulative effect of change in accounting for post-retirement benefits .... -- 869 -- -- -- ----------- ------------ ------------ ----------- ------------- Net income (loss)................ $ (2,439) $ (7,279) $ (10,879) $ (1,279) $ (11,276) =========== ============ ============ =========== ============= Net income (loss) applicable to common stock........... $ (2,439) $ (7,279) $ (11,897) $ (1,279) $ (11,276) =========== ============ ============ =========== ============= Loss from continuing operations per share (basic and diluted) $ (1.10) $ (0.48) $ 0.20 $ (1.64) Weighted average number of shares outstanding........... 1,520,066 1,985,758 6,464,105 6,313,527 OTHER DATA: Gross margin .................... 26.7% 27.2% 26.8% 23.5% 18.2% EBITDA(3)(4) .................... $ 8,876 $ 9,238 $ 9,840 $ 7,938 $ (1,189)
14
July 28, August 2, August 1, July 31, July 30, 1995 1996 1997 1998 1999 ------------ ------------ ----------- ----------- ------------- BALANCE SHEET DATA: (In thousands) Working capital from continuing operations.................. $ 5,989 $ 8,543 $ 26,909 $ 30,645 $ 15,118 Total assets..................... 112,280 98,895 98,890 112,633 108,867 Total debt....................... 72,104 61,891 18,935 32,317 38,363 Stockholders equity.............. 17,323 18,530 63,224 64,351 50,190
(1) In fiscal 1996, we recognized other expense of $563,000 in connection with the resignation of our prior Chairman of the Board and other expense of $750,000 in connection with self-insured life insurance accruals related to the death of a former director. In fiscal 1997, we recognized other expense of $950,000 from the write-off of certain capitalized bank fees incurred in connection with our previous bank credit facility. 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. (2) Represents the loss from the discontinued VSI and McGuire-Nicholas operations, as well as (i) a loss in fiscal 1996 of $665,000 incurred upon the sale of substantially all of the assets of VSI and (ii) a loss of $8.4 million in fiscal 1997 incurred in connection with the sale of substantially all of the assets of McGuire-Nicholas. In fiscal 1999, the Company incurred a loss from discontinued operations primarily due to a worker's compensation adjustment of $758,000 related to divested operations and sales tax obligation of $128,000 related to the sale of McGuire-Nicholas. (3) EBITDA represents earnings from continuing operations before interest expense, income taxes, depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to income from continuing operations as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. (4) Fiscal 1999 EBITDA would have been approximately $6.5 million excluding the effect of the following unusual charges: manufacturing consolidation ($1.3 million), strategic transaction costs ($1.0 million), senior management restructuring charges ($0.7 million), bad debt expense ($0.7 million), inventory obsolescence ($2.2 million), worker's compensation ($0.4 million) and expenses related to the temporary loss of logistical control ($1.2 million). 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 Information" 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 its own. Our only material asset is all of the outstanding capital stock of UnionTools. 15 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 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. The price of raw materials used in our products remained relatively stable during each of the periods discussed below. Implementation of our market segmentation and merchandising strategies has resulted in increased selling, general and administrative expenses as we have increased our marketing focus through the development of merchandising displays, point-of-sale signage and product labeling, as well as additional cooperative advertising. We also incurred an increase in selling, general and administrative expenses due to increased staffing and upgrades of management information systems. An increase in competitive pressures could result in additional increases in selling, general and administrative expenses, as well as increases in volume rebates and other discounts and allowances that reduce net sales and adversely effect profitability. During the latter part of fiscal 1999, we experienced difficulties in manufacturing and logistical control that resulted in a significant deterioration in customer service. Product shortages resulting from the consolidation of our Columbus, Ohio manufacturing facility into our primary manufacturing facility located in Frankfort, New York contributed to the problems encountered. Additional problems arose in connection with a computer upgrade required for our computer systems to meet Year 2000 compliance, followed by the loss of the Distribution Center Manager in charge of our primary distribution center located in Columbus, Ohio in the third quarter of fiscal 1999. Difficulties were further compounded by the absence of formal processes and procedures at the distribution center; and by the complexity added to our operations by our decision to distribute watering products from Columbus without an adequate increment in resources. We were not fully aware of the ramifications and financial consequences of these issues, particularly the customer deductions, freight costs and inventory loss discovered upon taking a physical inventory count, until the fourth quarter of fiscal 1999. At year end, we made significant adjustments to properly reflect appropriate value in accounts receivable, inventories, product tooling and accrued liabilities. Control issues contributed to an inventory loss discovered upon taking physical inventory. Worker's compensation reserves were reviewed for all plan years as a result of an estimated settlement of certain open years with our insurance carrier and adjusted to proper levels. We wrote off product tooling and obsolete inventory related to a discontinued product offering. Excess and obsolete inventory was evaluated and reserves were provided to reflect anticipated value recovery below cost. Accounts receivable in bankruptcy and other aged accounts were reserved. The effect of these adjustments, combined with the deterioration in financial performance due to problems in manufacturing and logistical control, resulted in our reporting a net loss of $11.4 million in the fourth quarter of fiscal 1999, $11.3 million for the full year of fiscal 1999. We have taken several actions aimed at preventing a recurrence of these matters. The distribution center has been staffed with a professional facility manager, and we have implemented upgrades in or new positions of warehouse manager, traffic manager and inventory control manager. We have also increased our capacity by leasing a larger facility in Chino, California and have leased a warehouse in Frankfort, New York, enabling us to ship directly from the primary manufacturing facility, when preferable. Outgoing shipment audits have also been initiated. We expect customer service level performance and related customer deductions to return to historical levels by the end of December 1999. There have been several key changes in senior management to strengthen and focus the Company. A new president and chief executive was promoted internally in September 1999 to lead the Company, following the resignation of his predecessor. Similarly, the senior vice president of operations resigned in September 1999 and was replaced by an executive of the Company. The chief financial officer resigned in June 1999 and the director of marketing resigned in September 1999. A new chief financial officer was hired in June 1999 and vice presidents of marketing and sales were hired in September and November 1999, respectively. A director of human resources was hired in November 1999. We believe that these changes will provide the leadership and experience necessary to restore and enhance profitability. 16 The magnitude of the losses, combined with the costs to execute a manufacturing consolidation and a share repurchase program, required us to address our liquidity needs after year end. As a result, we have entered into a sixth amendment to the Company's credit facility, including a $6 million capital infusion by our majority stockholder, discussed further in Liquidity and Capital Resources. RESULTS OF OPERATIONS The following table sets forth certain components of our consolidated statement of operations data expressed as a percentage of net sales:
YEAR ENDED --------------------------------------------------- AUGUST 1, JULY 31, JULY 30, 1997 1998 1999 ------------- ------------ ------------ Net sales...................................... 100.0% 100.0% 100.0% Cost of goods sold............................. 73.2 76.5 81.8 ------------- ------------ ------------ Gross profit................................... 26.8 23.5 18.2 Selling, general and administrative expenses... 18.1 18.6 20.9 Interest expense............................... 7.1 2.4 3.0 Amortization of intangibles.................... 0.8 0.9 1.0 Other expenses, net............................ 1.6 0.2 2.5 ------------- ------------ ------------ Income (loss) from continuing operations before income taxes......................... (0.8) 1.4 (9.2) Income taxes................................... 0.1 0.2 0.1 ------------- ------------ ------------ Income (loss) from continuing operations.... (0.9) 1.2 (9.3) Gain (loss) from discontinued operations....... (9.9) -- (0.8) ------------- ------------ ------------ Net income (loss).............................. (10.8%) 1.2% (10.1)% ============= ============ ============
FISCAL 1999 COMPARED TO FISCAL 1998 NET SALES. Our net sales increased $3.6 million or 3.4% to $111.4 million in fiscal 1999 compared to $107.8 million in fiscal 1998. The increase in net sales for fiscal 1999 reflected an aggregate $4.8 million of net sales arising from a full year of offering watering products, partially offset by operational inefficiencies in our core business. GROSS PROFIT. Fiscal 1999 gross profit declined $5.0 million to $20.3 million compared to $25.3 million in fiscal 1998. Gross profit as a percentage of sales decreased to 18.2% in fiscal 1999 compared to 23.5% in fiscal 1998. The decline in gross profit was driven primarily by several factors. Logistical and manufacturing control issues during 1999 negatively affected customer service levels and drove higher customer deductions, distribution and freight costs associated with the revenue for that period. Control issues also contributed to an inventory loss that was discovered by taking a physical inventory count. At year end, worker's compensation reserves were reviewed for all plan years as a result of an estimated settlement of certain open years with our insurance carrier and adjusted to proper levels. We wrote off product tooling and obsolete inventory related to a discontinued product offering. Excess and obsolete inventory was evaluated and reserves were provided to reflect anticipated value recovery below cost. Accounts receivable in bankruptcy and other aged accounts were reserved. The decrease in gross profit was partially offset by benefits from our cost reduction program. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 16.4% or $3.3 million, to $23.3 million in fiscal 1999 compared to fiscal 1998. As a percentage of sales, selling, general and administrative expenses increased to 20.9% in fiscal 1999 from 18.6% in fiscal 1998. The increase in selling, general and administrative expenses is primarily due to having a full year of costs related to the watering products business. Senior management restructuring charges, including severance, recruiting and relocation costs, and the write off of uncollectible accounts contributed to the increase in selling, general and administrative costs. 17 OTHER EXPENSES, NET. Other expenses increased $2.4 million to approximately $2.7 million in fiscal 1999 from $.3 million in fiscal 1998. Approximately $1.4 million of the increase related to plant consolidation costs incurred in connection with (1) the consolidation of our Columbus, Ohio manufacturing facility into our primary facility located in Frankfort, New York, and (2) consolidation of the manufacturing operations of our watering products. We also incurred approximately $1.0 million in fiscal 1999 related to accounting, legal, consulting and other expenses related to the exploration of strategic transactions. LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Loss from continuing operations before income taxes was $10.2 million in fiscal 1999, an $11.7 million decline from a profit of $1.5 million in fiscal 1998. Interest expense increased $.8 million, to $3.4 million in fiscal 1999 from $2.6 million in fiscal 1998. NET LOSS. We incurred a net loss of $11.3 million in fiscal 1999, a $12.6 million deterioration compared to a profit of $1.3 million in fiscal 1998. The loss from discontinued operations of $.9 million primarily reflects a worker's compensation accrual adjustment of $.8 million for businesses previously sold. FISCAL 1998 COMPARED TO FISCAL 1997 NET SALES. Our net sales increased 6.7%, or $6.7 million, to $107.8 million in fiscal 1998 compared to $101.0 million in fiscal 1997. The increase in net sales reflected an aggregate of $10.1 million of additional net sales arising from a full year of operation of our injection molding division, from sales by our watering products division and from sales of new products, partially offset by a decline in net sales of long handle tools and snow tools of approximately $3.3 million. Net sales of long handle tools in the second and third quarters were negatively impacted by unfavorable winter and spring weather conditions. GROSS PROFIT. Gross profit decreased 6.5%, or $1.8 million, to $25.3 million in fiscal 1998 compared to $27.0 million in fiscal 1997. Gross margin decreased to 23.5% in fiscal 1998 compared to 26.8% in fiscal 1997. The decrease in gross margin was primarily due to lower net sales of long handle tools and lower overhead absorption rates realized as we decreased production in response to sluggish demand, as well as competitive pricing pressures. Gross margin also was adversely affected by increased manufacturing costs related to new product development and lower gross margins realized by our injection molding division. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 9.5%, or $1.7 million, to $20.0 million in fiscal 1998 compared to $18.3 million in fiscal 1997. As a percentage of net sales, selling, general and administrative expenses increased to 18.6% in fiscal 1998 from 18.1% in fiscal 1997. Selling, general and administrative expenses were negatively impacted by increased administrative expenses resulting from public company requirements and pursuit of our acquisition strategy. OTHER EXPENSES, NET. Other expenses decreased $1.3 million to approximately $300,000 in fiscal 1998 from $1.6 million in fiscal 1997. Other expenses in fiscal 1997 included the write-off of $950,000 of capitalized bank fees incurred in connection with our previous bank credit facility. INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from continuing operations before income taxes increased to $1.5 million in fiscal 1998 from a loss of approximately $825,000 in fiscal 1997. Interest expense decreased $4.6 million to $2.6 million in fiscal 1998 from $7.2 million in fiscal 1997. Interest expense was partially reduced by the retirement in July 1997 of approximately $51.4 million aggregate principal amount of indebtedness in connection with our initial public offering. NET INCOME. Net income increased to $1.3 million in fiscal 1998 from a loss of $10.9 million in fiscal 1997, primarily as a result of a loss of $9.9 million in fiscal 1997 from discontinued operations. 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 the third and fourth fiscal quarters. 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 18 sales, during our first and second fiscal quarters. 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. The following table sets forth certain unaudited data of the Company for each of the quarters in fiscal 1998 and fiscal 1999. The financial data for each of these quarters is unaudited but includes all adjustments which the Company believes to be necessary for a fair presentation. All quarters include normal recurring adjustments except for the fourth quarter of 1999 which includes certain adjustments of $7.4 million related to the write-off of obsolete inventory, write-off of tooling associated with a discontinued product, increases in the reserve for uncollectible accounts receivable, and increases in the reserve for worker's compensation and other miscellaneous adjustments. These operating results, however are not necessarily indicative of results for any future period.
FISCAL 1998 FISCAL 1999 -------------------------------------------------- -------------------------------------------------- QUARTER ENDED ------------------------------------------------------------------------------------------------------ OCTOBER JANUARY MAY 1, JULY 31, OCTOBER JANUARY APRIL 30, JULY 30, 31, 1997 30, 1998 1998 1998 30, 1998 29, 1999 1999 1999 ----------- --------- ----------- ----------- ----------- ----------- ----------- ----------- (In thousands-unaudited) Net sales........... $ 20,416 $21,143 $ 37,911 $ 28,288 $ 22,172 $ 22,449 $ 40,434 $ 26,359 Cost of goods sold... 15,277 16,340 29,440 21,423 16,814 16,965 29,964 27,406 ----------- --------- ----------- ----------- ----------- ----------- ----------- ----------- Gross profit......... 5,139 4,803 8,471 6,865 5,358 5,484 10,470 (1,047) Selling, general and administrative expenses (SG&A)... 4,819 4,411 5,526 5,277 4,948 4,981 5,962 7,428 ----------- --------- ----------- ----------- ----------- ----------- ----------- ----------- Gross profit less SG&A(1)(2)........ $ 320 $ 392 $ 2,945 $ 1,588 $ 410 $ 503 $ 4,508 $ (8,475) =========== ========= =========== =========== =========== =========== =========== =========== Net sales as a percentage of full year net sales............. 18.9% 19.6% 35.2% 26.3% 19.9% 20.1% 36.3% 23.7% Gross profit as a percentage of full year gross profit............ 20.3 19.0 33.5 27.2 26.4 27.1 51.7 (5.2) Gross profit less SG&A(1) as a percentage of full year operating profit(loss)...... 6.1 7.5 56.1 30.3 13.4 16.5 147.6 (277.5)
(1) Does not include amortization of intangibles and other expenses, each of which generally are non-seasonal in nature. (2) Fourth Quarter 1999 Gross Margin less SG&A would have been a $1.1 million loss if you exclude the $7.4 million effect of the unusual year end charges described above. Weather is the single most important factor in determining market demand for our products and also is the least predictable. For example, while floods in the Midwest adversely affected the sale of most types of lawn and garden equipment in 1992, the severe winter of 1994 resulted in a surge in demand for snow shovels. In addition, bad weather during the spring gardening season, such as that experienced throughout most of the U.S. in the spring of 1995 and 1998, can adversely affect overall annual sales. LIQUIDITY AND CAPITAL RESOURCES 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 the Company's senior credit facility (the "Credit Facility"). Net cash provided by continuing operations was $1.4 million in fiscal 1999 compared to net cash used in operations of $0.2 million in fiscal 1998. The improvement in use of cash was due to a decrease in accounts receivable and an increase in liabilities. Accounts receivable declined as a result of lower fourth quarter net sales levels and improved collection efforts at year end. Accounts payable and accrued liabilities increased due to adjustments in worker's compensation and employee medical accruals at year end, as well as accrued severance 19 and other expenses related to the manufacturing consolidation. Costs were also accrued related to the restructuring of senior management as discussed in the Overview. The payables outstanding were higher than prior year due to greater manufacturing activity near year end and more effective cash management. Depreciation and amortization increased $1.7 million in fiscal 1999, to $5.6 million compared to $3.9 million in fiscal 1998. This is primarily due to a $1.2 million charge to fully depreciate tooling related to a discontinued product line. These items were partially offset by the deterioration in net income, to a net loss of $11.3 million. Net cash used in continuing operations was $0.2 million in fiscal 1998 compared to net cash used in continuing operations of $7.6 million in fiscal 1997. The decrease in use of cash was principally the result of net income of $1.3 million compared to a net loss of $10.9 million in fiscal 1997, partially offset by an increase in accounts receivable of $4.4 million due to increased sales volume. We made capital expenditures of approximately $2.4 million, $2.9 million and $4.9 million during fiscal 1997, fiscal 1998 and fiscal 1999, respectively. The capital expenditures relate primarily to ongoing improvements of property, plant and equipment, manufacturing process improvements and increased manufacturing capacity. In fiscal 1999, capital was also spent on the consolidation of the Columbus, Ohio manufacturing facility into the primary facility in Frankfort, New York. We intend to make capital expenditures of approximately $3.5 million in the next twelve months primarily related to the purchase of new equipment and equipment and facility maintenance. In July 1997, we used approximately $9.6 million of the net proceeds from our initial public offering to redeem preferred stock and approximately $11.0 million of the net proceeds from our initial public offering to repay a portion of our subordinated debt. The remaining $24.0 million aggregate principal amount of the subordinated debt associated with a 1988 leveraged buyout was exchanged for 1,716,049 shares of Common Stock. We entered into the Credit Facility to finance capital expenditures, including future acquisitions, and to fund working capital and other general business purposes. In July 1997, we used approximately $20.6 million of the net proceeds from our initial public offering to repay a portion of the debt outstanding under the Credit Facility and accrued interest thereon. As of July 30, 1999, approximately $6.5 million was available under the revolving portion of the Credit Facility and approximately $19.0 million was available under the acquisition line of the Credit Facility. Indebtedness outstanding under the Credit Facility bears interest at variable rates (8.3% per annum at July 30, 1999). We recognized that the net losses and share repurchase that occurred in fiscal 1999, as well as the costs required to improve the profitability of the business (including the senior management restructuring) and complete the manufacturing consolidation in the near term, would require more liquidity than was available to us at year end. As a result of the fourth quarter of fiscal 1999 operating performance, we were not in compliance with our Credit Facility covenants. Therefore, on October 28, 1999 we entered into an amendment of the Credit Facility to support operational, capital expenditure and working capital needs through April 30, 2001, the revised term of the facility. First, all covenant defaults were waived and new covenants were set to reflect the current profitability of the business. The interest rate with respect to the credit facility was reset to LIBOR plus 3.5%, up from LIBOR plus 1.5%. The revolving portion of the facility increased to $35 million, then $40 million during peak working capital months, reducing back down to $30 million in conjunction with anticipated working capital levels. A success fee in favor of the lenders was added, the amount of which fluctuates according to the date of satisfaction of our obligations under the Credit Facility, with a maximum 3% fee on the outstanding facility commitment toward the end of the eighteen month term. The acquisition line was fixed at its current balance of approximately $16 million. Stock repurchases are now prohibited, though we did repurchase approximately $2.5 million of common stock during fiscal 1999. Our majority stockholder infused $6 million of capital, in the form of junior, participating debt in the Credit Facility. This debt is evidenced by a subordinated note which carries a 12.0% paid in kind interest option and is exchangeable for shares of our common stock at a price of $3.50 per share. We are in the process of evaluating all non-strategic assets for purposes of sale, including the anticipated sale of the Columbus manufacturing facility in November 1999. We are working to reduce the days sales outstanding in accounts receivable, including the offer of discount terms where appropriate. The action steps we have taken to resolve the logistical and manufacturing control issues that negatively impacted the fourth quarter of fiscal 1999 should serve to reduce customer deductions, distribution and freight costs. Capital and other 20 expenditures are being scrutinized and potentially deferred if not considered critical. It is our belief that these actions, together with the revised facility commitment and the capital infusion by our majority stockholder, will provide sufficient liquidity for the business to operate over the term of the facility. 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. IMPACT OF THE YEAR 2000 ON COMPUTER SYSTEMS STATE OF READINESS. We have reviewed our Year 2000 issues in regards to both our information-technology and its non-information-technology. Our operating system software as well as some of our older software applications were written using two digits rather than four to define the applicable year. As a result, those software applications have time-sensitive software that recognize a date using "00" as the year 1900 rather than the Year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions, send invoices or engage in similar normal business activities. We have modified or replaced portions of our software applications and hardware so that our computer systems will function properly with respect to dates in the Year 2000 and thereafter. We believe that our information-technology is Year 2000-ready. We do not believe that there are any material Year 2000 issues with regard to non-information-technology (e.g. machinery used in manufacturing, forklifts, general office equipment, and other equipment that may contain embedded chips or date sensitive processors). In addition, we have initiated communications with our significant customers and suppliers to determine the extent to which our interface systems are vulnerable to the failure of such customers and suppliers to remediate their own Year 2000 issues. Based on such communications, we are not currently aware of any third-party issue applicable to the Year 2000 that is likely to have a material impact on our conduct of the business, our results of operations or our financial condition. COSTS TO ADDRESS OUR YEAR 2000 ISSUES. Although we are currently updating our computer systems, such updating was not accelerated due to Year 2000 issues. We do not anticipate any further material expenditures related specifically to Year 2000 compliance. The following chart reflects our estimated Year 2000-specific costs, including the estimated cost to update our current computer systems. ESTIMATED CONVERSION COST
Expense Capital ------- ------ Hardware -- $ 200,000 Project Management $ 125,000 75,000 Software and Custom Coding 165,000 -- ---------- --------- $ 290,000 $ 275,000 ========== =========
RISKS OF OUR YEAR 2000 ISSUES. We do not believe that any Year 2000 issues will impact our manufacturing. However, it is possible that Year 2000 issues may have an impact on our administration. We believe that our greatest Year 2000 risk is the risk that our customers and suppliers are not Year 2000-ready. Failure by us, or our customers or suppliers to adequately address the Year 2000 issues in a timely manner could have a material impact on our conduct of the business, our results of operations and our financial condition. Accordingly, we plan to address all Year 2000 issues before problems materialize. We believe that the associated costs are adequately budgeted for in our business plans. However, should efforts on our part, our customers and suppliers fail to adequately address their relevant Year 2000 issues, the most likely worst case scenario would be a total loss of revenue to us. OUR CONTINGENCY PLANS. We will produce contingency plans on a case by case basis. 21 RISKS. There can be no assurance that we will not experience cost overruns or delays in the completion of our year 2000 project. Factors that could cause such cost overruns or delays include, among other things, an unavailability of properly trained personnel, unforeseen difficulty locating and correcting relevant computer codes and similar uncertainties. FORWARD-LOOKING STATEMENTS Statements in the foregoing discussion that indicate our company's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that our actual results could differ materially from those projected in such forward-looking statements due to, among other risks and uncertainties inherent in our business, the following important factors: - 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 its third and fourth fiscal quarters. 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 our first and second fiscal quarters. 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 50.7% of gross sales in fiscal 1999. 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, co-operative 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, Lowe's and Sears. 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 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. 22 - 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. - 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 U.S. 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 U.S. market, will not have a material adverse effect on our business, financial condition and results of operations. - Most of our hourly employees are covered by collective bargaining or similar labor agreements. We currently are a party to four such agreements, one of which expires in 2001 and three of which expire in 2002. 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. However, current conditions and future events, such as changes in existing laws and regulations, may 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 handled tools. A decline in housing starts or government spending on construction projects could result in a decrease in demand for our products and, accordingly, could have a material adverse effect on our business, financial condition and results of operations. - 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 23 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 unanticipated events. New factors emerge from time to time and it is not possible for our management to predict all of such factors, nor can they 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. 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. In October, 1999 we entered into an amendment of our existing credit facility (the Amended Facility). The Amended Facility provides for a $40 million revolving credit facility from January 1 through June 30 of each year; $35 million from July 31 through October 31; and $35 million from November 1 through December 31. In connection with the Amended Facility, the interest rate charges on outstanding borrowings was increased from LIBOR plus 1.5% to LIBOR plus 3.5%. 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-20 hereof (see Item 14 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. 24 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 ---- --- -------- A. Corydon Meyer 45 President and Chief Executive Officer William W. Abbott 68 Chairman Matthew S. Barrett 40 Director Stephen A. Kaplan 41 Director John I. Leahy 69 Director
A. CORYDON MEYER became the President and Chief Executive Officer of the Registrant and UnionTools on September 2, 1999. Mr. Meyer joined the Registrant and UnionTools 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. Prior to that, Mr. Meyer served as Corporate Vice President (1995-1998) and Vice President (1990-1995) of Lamson & Sessions Co. WILLIAM W. ABBOTT became a director in January 1997 and our Chairman in October 1999. 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 and other operations. He currently serves as a member of the Boards of Directors of Horace Mann Educators Corporation and Fifth Third Bank of Naples, Florida, a member of the Advisory Board of Deloitte & Touche LLP, a member of the Advisory Board of Manco, a member of the Board of Overseers of the Duke Cancer Center and an Executive in Residence of Appalachian State University. MATTHEW S. BARRETT became a director in December 1993. Mr. Barrett is a managing director of Oaktree Capital Management, LLC. Prior to joining Oaktree, from 1991 to April 1995, Mr. Barrett was Senior Vice President of TCW Asset Management Company. STEPHEN A. KAPLAN became a director in December 1993. Mr. Kaplan is a principal of Oaktree, where he runs the Principal Activities Group. Prior to joining Oaktree, from November 1993 to April 1995, Mr. Kaplan was a managing director of TCW Asset Management Company. Mr. Kaplan currently serves as a member of the Board of Directors of KinderCare Learning Centers, Inc., CollaGenex Pharmaceuticals, Inc., Biopure, Inc., and GeoLogistics Corporation. JOHN I. LEAHY became a director in August 1994. Mr. Leahy has been the President of Management and Marketing Associates, a management consulting firm owned by Mr. Leahy, since 1987. In 1987, Mr. Leahy retired after 34 years of service at the Black & Decker Corporation, where he was President and Group Executive, Western Hemisphere. Mr. Leahy currently serves as a director of Allied Capital Corporation and several privately held companies. Mr. Leahy is a Trustee of The Sellinger School of Business and Management and St. Mary's University. MEETINGS, COMMITTEES, AND COMPENSATION OF THE BOARD OF DIRECTORS Our board of directors had a total of 5 meetings during fiscal 1999. During fiscal 1999, 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. Directors who are our employees receive no compensation for serving as directors. Non-employee directors receive the following annual compensation: (i) $20,000 paid, at the director's election, either in shares of common stock pursuant to our Deferred Equity Compensation Plan for Directors (the "Director Stock Plan") or one-half in cash and one-half in shares of common stock pursuant to the Director Stock Plan; (ii) stock options with an exercise price equal to the fair market value of our common stock on the date of 25 grant, a Black-Scholes valuation of $25,000 and a ten year term; and (iii) reimbursement of reasonable out-of-pocket expenses. In March 1997, we created a Management Development and Compensation Committee and an 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 (ii) review and monitor key employee compensation policies and administer our management compensation plans. The 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. Messrs. Abbott (Chairman) and Kaplan are the current members of the Compensation Committee and Messrs. Leahy (Chairman) and Barrett are the current members of the Audit Committee. On October 28, 1999, we entered into two agreements with Mr. Abbott in recognition of his appointment as Chairman of Acorn and UnionTools. The agreements provide, in addition to any compensation owing to Mr. Abbott as a result of his being a director of Acorn and UnionTools, annual compensation of $40,000 during his term as Chairman plus a one-time grant of 100,000 stock options, with a two year vesting period and an exercise price of $3.00. EXECUTIVE OFFICERS In addition to Mr. Meyer and Mr. Abbott, the following persons are our executive officers: J. MITCHELL DOLLOFF, age 33, was named our Senior Vice President, Operations, in September 1999. Mr. Dolloff served as our Senior Vice President, Finance and Administration from May 1999 until September, 1999. Mr. Dolloff joined the Registrant and UnionTools in June 1997 as Vice President, General Counsel and Director of Investor Relations and in February 1998 was named Vice President of Corporate Development. From October 1991 to June 1997, Mr. Dolloff was an associate attorney at Gibson, Dunn & Crutcher LLP. JOHN G. JACOB, age 39, was named our 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. W. DOUGLAS COPLEY, age 38, was named Vice President of Sales of UnionTools in October 1999. From January 1995 to October 1999, Mr. Copley served as Vice President of Sales and Marketing-North America for Fort Wayne Plastics, Inc. From January 1993 to January 1995, Mr. Copley served in various positions with VSI Fasteners, Inc., including Director of Marketing and Director of Sales. JOHN MACKIN, age 42, was named Vice President of Marketing of UnionTools in October 1999. Mr. Mackin was Vice President, Sales and Marketing -Watering Products for UnionTools from March 1999 to October 1999. From January 1997 until March 1999, Mr. Mackin served as Director of Sales, Marketing and China Operations of Flexrake Corporation. Mr. Mackin served as General Manager, Lawn and Garden Division, of Olympia Industrial, Inc. from July 1993 to January 1997. L.B. DOVE, II, age 53, was named Corporate Controller of UnionTools in August 1995 and Acorn's Chief Accounting Officer in September 1999. From September 1994 to July 1995, Mr. Dove served as Corporate Controller of Scriptel Holding, Inc. From August 1990 to June 1994, Mr. Dove served as Senior Manager, Business Planning and Fiscal (Controller) for the McDonnell Douglas Corporation's Columbus, Ohio manufacturing facility. 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 26 Exchange Commission. 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 year ended July 30, 1999, except for a late filing of Form 4 for the month of February 1999 for Mr. Abbott, and a late filing of Form 5 for fiscal 1999 for Mr. Mihaly. 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 whose annual salary and bonus during fiscal 1999 exceeded $100,000 (the "Named Executive Officers"). Mr. Mihaly's, Mr. Kasprisin's, and Mr. Dolloff's cash compensation was paid by Acorn. Mr. Hyrb's cash compensation was paid by UnionTools. Non-cash compensation, other than options to purchase common stock, was paid by UnionTools. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION -------------------------- ----------------- AWARDS ----------------- SECURITIES UNDERLYING ALL OTHER SALARY BONUS OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)(2)(3)(4) - ---------------------------------- ----------- ------------- ----------- ----------------- ------------------ GABE MIHALY(5) 1999 $309,145 $260,000 20,325 $ 8,103 President and Chief Executive 1998 $309,145 -- 20,325 $ 11,284 Officer 1997 $299,269 $198,890 20,325 $ 93,628 J. MITCHELL DOLLOFF 1999 $194,072 $ -- 8,125 $ 5,846 Senior Vice President Operations 1998 $155,000 -- 8,125 $ 15,845 and President of Watering 1997 $14,307 $ 20,000 8,125 -- Products Division THOMAS A. HYRB(6) 1999 $173,736 $ -- 10,150 $ 5,550 Senior Vice President of 1998 $173,677 -- 10,150 $ 9,943 Operations of UnionTools 1997 $169,830 $ 25,475 10,150 $ 9,850 STEPHEN M. KASPRISIN(7) 1999 $162,490 $ -- 10,150 $ 217,824 Chief Financial Officer and Vice 1998 $173,085 -- 10,150 $ 9,924 President of the Company and 1997 $169,252 $ 25,388 10,150 $ 10,623 UnionTools
- ---------------------- (1) 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 or Supplemental Pension Plan. See "Pension Plans." (2) Amounts shown for fiscal 1997 include the following: (a) $5,683, $5,642 and $5,639 of matching benefits paid under our defined contribution 401(k) plan for Messrs. Mihaly, Hyrb and Kasprisin, respectively; (b) $80,976 for Mr. Mihaly with respect to accelerated vesting of in-the-money stock options; and (c) $2,553 paid by us with respect to supplementary life insurance for the benefit of Mr. Mihaly. (3) Amounts shown for fiscal 1998 include the following: (a) $5,724, $3,130, $5,736 and $5,736 of matching benefits paid under our defined contribution 401(k) plan for Messrs. Mihaly, Dolloff, Hyrb and Kasprisin, respectively; (b) $2,553 paid by us with respect to supplementary life insurance for the benefit of Mr. Mihaly; and (c) $11,119 paid by us with respect to relocation expenses of Mr. Dolloff. 27 (4) Amounts shown for fiscal 1999 include the following: (a) $5,550, $5,846, $5,550 and $4,873 of matching benefits paid under our defined contribution 401(k) plan for Messrs. Mihaly, Dolloff, Hyrb and Kasprisin, respectively; and (b) $2,553 paid by us with respect to supplementary life insurance for the benefit of Mr. Mihaly. (5) Mr. Mihaly's employment with the Registrant and UnionTools ended upon his resignation on September 2, 1999. (6) Mr. Hyrb's employment with UnionTools ended upon his resignation on September 2, 1999. (7) Mr. Kasprisin's employment with the Registrant and UnionTools ended upon his resignation in June 1999. Severance payments totaling $212,951 were paid by us to Mr. Kasprisin. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE The following table provides certain information regarding the number and value of stock options held by our Named Executive Officers at July 30, 1999.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT (#) FISCAL YEAR-END ($)(2) ----------------------------- ------------------------------ SHARES ACQUIRED ON VALUE EXERCISE REALIZED NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------- ---------- ----------- ------------ -------------- ------------- --------------- Gabe Mihaly 0 0 92,252 44,748 80,340 0 J. Mitchell Dolloff 0 0 28,273 19,819 0 0 Thomas A. Hyrb 0 0 34,110 21,131 0 0 Stephen M. Kasprisin 0 0 30,450 10,150 0 0
- -------------------- (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 which 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 ($4.63 based on the average of the high and low sale prices on July 30, 1999). An option is in-the-money if the fair market value of the underlying shares exceeds the exercise price of the option. PENSION PLANS UnionTools maintains seven noncontributory defined benefit pension plans covering substantially all of our hourly employees. UnionTools also maintains a noncontributory defined benefit pension plan covering our salaried, administrative and supervisory employees (the "Salaried Employee Pension Plan") and a supplemental noncontributory defined benefit pension plan covering certain of our senior executive officers (the "Supplemental Pension Plan"). 28 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 1999 covered compensation.
YEARS OF SERVICE ---------------- REMUNERATION(1) 15 20 25 30 35 - ------------ -- -- -- -- -- $125,000 $42,187 $56,250 $70,313 $70,313 $70,313 160,000 and above $54,000 $72,000 $90,000 $90,000 $90,000
- --------------------------- (1) Based on final earnings. For each of our Named Executive Officers, the Salaried Employee Pension Plan covers total compensation as listed in the summary compensation table, but limited to $160,000 as required by the Employee Retirement Income Security Act of 1974. Messrs. Mihaly, Dolloff, Hyrb, and Kasprisin have credited service of approximately 8, 2, 7 and 10 years, respectively, under the Salaried Employee Pension Plan. Benefits under the Salaried Employee Pension Plan are 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 benefits are paid under the Salaried Employee Pension Plan in an amount equal to 2.25% of the employees' final earnings multiplied by the lesser of 25 years or the total number of years of credited service. Benefits under the Salaried Employee Pension Plan for credited years of service prior to 1993 were determined pursuant to a formula that yielded slightly lower benefits. Accordingly, actual benefits for each of the Named Executive Officers are slightly lower than the amounts indicated in the foregoing table. Benefits under the Salaried Employee Pension Plan are not subject to any offset. The following table sets forth the estimated annual benefits payable upon retirement under the Supplemental Pension Plan based on retirement at age 65 and fiscal 1999 covered compensation.
YEARS OF SERVICE ---------------- REMUNERATION(1) 15 20 25 30 35 - ------------ -- -- -- -- -- $175,000 $ 5,062 $ 6,750 $ 8,437 $ 8,437 $ 8,437 200,000 13,500 18,000 22,500 22,500 22,500 225,000 21,938 29,250 36,563 36,563 36,563 250,000 30,375 40,500 50,625 50,625 50,625 300,000 47,250 63,000 78,7570 78,750 78,750 400,000 81,000 108,000 135,000 135,000 135,000
- --------------------------- (1) Based on final earnings. For Mr. Mihaly, the Supplemental Pension Plan covers compensation as listed in the summary compensation table above $160,000. Mr. Mihaly has credited service of approximately 8 years under the Supplemental Pension Plan. Benefits under the Supplemental Pension Plan are 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 benefits are paid under the Supplemental Pension Plan in an amount equal to 2.25% of the employees' final earnings (as described above) multiplied by the lesser of 25 years or the total number of years of credited service. Benefits under the Supplemental Pension Plan are not subject to any offset. AGREEMENTS WITH KEY EMPLOYEES In May 1997, we entered into an employment agreement with Mr. Mihaly which provides for his employment as our President and the President and Chief Executive Officer of UnionTools. This employment agreement terminated upon Mr. Mihaly's resignation on September 2, 1999. In May 1999, we entered into a separation agreement with Mr. Kasprisin. The agreement included severance payments equal to the highest aggregate annual compensation (including salary, bonuses and incentive payments) includible in gross income paid during any one of the last three years preceding his termination. This resulted in a lump sum payment of $212,951. The agreement also included the continuation of employee benefits for one year from the date of termination. 29 In June 1999, we entered into agreements with Messrs. Meyer, Dolloff and Jacob which provide that following termination of such officers' employment with us, we will pay to such employee an amount equal to the highest aggregate annual compensation (including salary, bonuses and incentive payments) includable in gross income paid to such employee during any one of the three taxable years preceding the date of his termination. If such termination occurs within two years following a change in control (as defined in such agreement), we also are required to pay to such employee an amount equal to two times the amount described in the preceding sentence. In September, 1999, we entered into Separation Agreements with Mr. Mihaly and Mr. Hyrb. Mr. Mihaly's agreement included severance payments totaling $500,000 and the continuation of employment benefits for one year from the effective date of the agreement. Mr. Hyrb's agreement included severance payments totaling approximately $215,000 (equal to the highest one year salary and bonus for the last three years) and the continuation of employment benefits for one year from the effective date of the agreement. On September 2, 1999, upon Mr. Meyer's promotion to President and Chief Executive Officer and in accordance with the 1997 Stock Incentive Plan, we entered into a stock option agreement with Mr. Meyer pursuant to which Mr. Meyer was granted an option to acquire a total of 400,000 shares of our common stock which vest as follows: (i) 100,000 option shares as of September 1, 1999 (the "Initial Vesting Date") and (ii) 100,000 option shares per year for three years thereafter provided that Mr. Meyer continues to serve as President and Chief Executive Officer. The exercise prices of the options are determined as of the applicable vesting dates and are equal to the Fair Market Value of the Common Stock on such dates. Each will expire on the tenth anniversary of its date of grant. On October 12, 1999, in consideration for the cancellation of 32,500 options granted to him in 1997 at an exercise price of $14.00 per share, we granted Mr. Dolloff, our Senior Vice President of Operations, options to purchase 16,250 shares of our common stock, all of which were vested immediately, at an exercise price of $3.00 per share. Additionally, on October 12, 1999, we granted Mr. Jacob, our Vice President and Chief Financial Officer, options to purchase 16,250 shares of our common stock, all of which were vested immediately, at a exercise price of $3.00 per share. 30 ITEM 12. SECURITY OWNERSHIP AND 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, each of our Named Executive Officers, and all of our directors and executive officers as a group as of October 22, 1999:
SHARES BENEFICIALLY OWNED (1)(2) STOCKHOLDER NUMBER PERCENT The TCW Group, Inc.(3) 3,162,049 52.5% Oaktree Capital Management, LLC(4) 1,149,500 19.1% OCM Principal Opportunities Fund, L.P. 1,149,500 19.1% J. & W. Seligman & Co. Incorporated(5) 721,715 12.0% A. Corydon Meyer(6) 110,000 1.8% Gabe Mihaly(7) 110,177 1.8% J. Mitchell Dolloff(8) 20,148 * Thomas A. Hyrb(9) 34,110 * Stephen M. Kasprisin(10) 33,950 * William W. Abbott(11) 28,086 * Matthew S. Barrett(12) 1,149,500 19.1% Stephen A. Kaplan(13) 1,149,500 19.1% John I. Leahy(14) 23,946 * All directors and executive officers as a group (10 persons) (15) 1,315,080 22.0%
* 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 of the TCW Group, Inc. is 865 South Figueroa Street, Los Angeles, California 90017. The address of Oaktree, the OCM Principal Opportunities Fund, L.P. (the "Oaktree Fund"), Mr. Barrett and Mr. Kaplan is 333 South Grand Avenue, 28th Floor, Los Angeles, California 90071. The address of J. & W. Seligman & Co. Incorporated ("JWS") is 100 Park Avenue, New York, New York 10017. The address for Messrs. Meyer, Mihaly, Dolloff, Hyrb and Kasprisin is c/o Acorn Products, Inc., 390 Dublin Avenue, Columbus, Ohio 43215. The address of Mr. Abbott is 6923 Greentree Drive, Naples, Florida 33963. The address of Mr. Leahy is c/o Management & Marketing Associates, 30 East Padonia Road, Timonium, Maryland 21093. (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 three third party accounts that hold shares of common stock (the "TCW Accounts"). The TCW Limited Partnerships and the TCW Accounts in the aggregate hold 2,148,576 shares of common stock. The TCW Group, Inc. also is the parent corporation of Trust Company of the West, which is the trustee of four trusts that hold shares of common stock (the "TCW Trusts"). The TCW Trusts in the aggregate hold 1,013,473 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: TCW Special Credits Fund III (660,036 shares or 11.0%); TCW Special Credits Fund IIIb (625,988 shares or 10.4%); and TCW Special Credits Trust IIIb (447,124 shares or 7.4%). Certain of the Individual Partners also are principals of 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 31 not have voting or dispositive power with respect to the TCW Limited Partnerships, the TCW Accounts or the TCW Trusts. (4) All of such shares of common stock are owned by the Oaktree Fund. (5) JWS directly owns 277,720 shares, or 4.6%, of the common stock. JWS, as an investment adviser for Seligman Value Fund Series, Inc. - Seligman Small Cap Value Fund (the "Fund"), may be deemed to beneficially own the shares of the Fund. The Fund owns 430,000 shares, or 7.1%, of the common stock. William C. Morris, as the owner of a majority of the outstanding voting securities of JWS, may be deemed to beneficially own the shares reported by JWS. The information in this note is taken from a Schedule 13G filed with the Securities and Exchange Commission on February 9, 1999 by the persons named herein. (6) Includes vested option of 100,000 shares of common stock issued in accordance with the 1997 Stock Incentive Plan and 10,000 shares of common stock which are subject to a restricted stock agreement between Mr. Meyer and us. Excludes 300,000 shares of common stock issuable pursuant to options not exercisable within 60 days. (7) Includes 17,925 shares of common stock which are owned jointly by Mr. Mihaly and his spouse. (8) Reflects 20,148 shares of common stock issuable pursuant to options exercisable within 60 days. Excludes 11,692 shares of common stock issuable pursuant to options not exercisable within 60 days. (9) Reflects 34,110 shares of common stock issuable pursuant to options exercisable within 60 days. Excludes 21,131 shares of common stock issuable pursuant to options not exercisable within 60 days. (10) Includes 3,500 shares of common stock which are owned jointly by Mr. Kasprisin and his spouse. (11) Includes 9,486 shares of common stock issuable pursuant to stock options exercisable within 60 days. Does not include 6,085 shares of common stock issuable pursuant to the Director Stock Plan. Excludes 100,000 shares of common stock issuable pursuant to options not exercisable within 60 days. (12) Reflects shares of common stock owned by the Oaktree Fund and also shown as beneficially owned by Oaktree. To the extent that Mr. Barrett, as a managing director of Oaktree, participates in the process to vote or dispose of any such shares, he may be deemed under such circumstances for the purpose of Section 13 of the Exchange Act to be the beneficial owner of such shares of common stock. Mr. Barrett disclaims beneficial ownership of such shares of common stock. Does not include 9,486 shares of common stock issuable pursuant to options exercisable within 60 days and 6,085 shares of common stock issuable pursuant to the Director Stock Plan. Pursuant to TCW's policy, all compensation paid to Mr. Barrett is donated to charity. (13) Reflects shares of common stock owned by the Oaktree Fund and also shown as beneficially owned by Oaktree. To the extent that Mr. Kaplan, as a principal of Oaktree, participates in the process to vote or dispose of any such shares, he may be deemed under such circumstances for the purpose of Section 13 of the Exchange Act to be the beneficial owner of such shares of common stock. Mr. Kaplan disclaims beneficial ownership of such shares of common stock. Does not include 9,486 shares of common stock issuable pursuant to options exercisable within 60 days and 6,085 shares of common stock issuable pursuant to the Director Stock Plan. Pursuant to Oaktree's policy, all compensation paid to Mr. Kaplan is contributed to the Oaktree Fund. (14) Includes 9,486 shares of common stock issuable pursuant to options exercisable within 60 days. Does not include 3,042 shares of common stock issuable pursuant to the Director Stock Plan. (15) See notes (6) through (14) above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION 32 None of our executive officers served on the Board of Directors or on the Compensation Committee of any other entity, any of whose officers served either on our Board of Directors or on our Compensation Committee. TRANSACTIONS BETWEEN DIRECTORS, EXECUTIVE OFFICERS AND THE REGISTRANT In December 1993 and May 1994, we issued subordinated notes in the aggregate principal amount of approximately $31.4 million to the TCW Funds. In August 1996, we issued 100 shares of Series A Preferred Stock to the TCW Funds as payment in full of accrued interest on the subordinated notes for fiscal 1995 and fiscal 1996. In July 1997, we used $9.6 million of the proceeds from its initial public offering to redeem the Series A Preferred Stock and pay accumulated dividends thereon and $11.0 million of the proceeds from our initial public offering to repay a portion of the subordinated notes and accrued interest thereon. The remaining $24.0 million aggregated principal amount of the subordinated notes was exchanged for 1,716,049 shares of common stock. In December 1996, we issued a subordinated promissory note to the TCW Funds in the aggregate principal amount of $6.0 million and bearing interest at a rate of 13% per year as bridge financing. In December 1996, we paid $6.3 million to the TCW Funds in prepayment of the subordinated promissory note, accrued interest thereon and a $180,000 facility fee. Conor D. Reilly, the Chairman of the Board of the Registrant and of UnionTools until October 12, 1999, is a partner in the law firm of Gibson, Dunn & Crutcher LLP. We paid fees of approximately $762,000 to Gibson, Dunn & Crutcher LLP in fiscal 1999. In January 1994, Mr. Mihaly, the President, Chief Executive Officer and a director of the Registrant and UnionTools, received a loan from UnionTools in the aggregate principal amount of $245,000. The loan was originally intended to mature in January 1998, but the loan was subsequently extended to and paid in October 1998 to coincide with the payment of Mr. Mihaly's one-time cash bonus to be paid in connection with his employment agreement. The loan bore interest at an annual rate of 5.34% and was secured by a pledge of common stock. In October 1999, UnionTools entered into a Sixth Amendment to the existing Credit Agreement with Heller Financial, Inc. Pursuant to the amendment, the Oaktree Fund and certain of the TCW Funds, which collectively own a majority of our outstanding common stock, made a capital infusion of $6.0 million into UnionTools. The loan bears interest at an annual rate of 12% and is payable quarterly in additional promissory notes or, following repayment of all borrowings under the Credit Agreement other than the $6.0 million note, in cash. The principal balance of the $6.0 million loan, together with all accrued but unpaid interest thereon, is due and payable in full in August 2001 and can be exchanged for common stock of the Registrant prior to repayment at the election of the TCW Funds and Oaktree Funds. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of Acorn are filed with this Annual Report on Form 10-K pursuant to Item 8: - Report of Independent Auditors - Consolidated Balance Sheets as of July 31, 1998 and July 30, 1999 - Consolidated Statements of Operations for fiscal 1997, fiscal 1998 and fiscal 1999 - Consolidated Statements of Stockholders' Equity for fiscal 1997, fiscal 1998, and fiscal 1999 - Consolidated Statements of Cash Flows for fiscal 1997, fiscal 1998 and fiscal 1999 - Notes to Consolidated Financial Statements 33 (a)(2) The following financial statement schedules of Acorn are filed with this Annual Report on Form 10-K pursuant to Item 14(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 (management contracts and compensatory plans are indicated by an asterisk (*)):
Exhibit Number Description ------- ----------- 3.1 Amended and Restated Certificate of Incorporation of Acorn Products, Inc.*** 3.2 Amended and Restated Bylaws of Acorn Products, Inc.*** 4.1 Specimen Stock Certificate for common stock.*** 10.1* Employment Agreement, dated as of May 29, 1997, among the Company, UnionTools, Inc. and Gabe Mihaly.*** 10.2.1* Employment Severance Agreement, dated as of May 29, 1997, among the Company, UnionTools and Thomas A. Hyrb.*** 10.2.2* Employment Severance Agreement, dated as of May 29, 1997, among the Company, UnionTools and Stephen M. Kasprisin.*** 10.2.3* Employment Severance Agreement, dated as of August 31, 1999, among the Company, UnionTools and J. Mitchell Dolloff.** 10.2.4* Employment Severance Agreement, dated as of August 31, 1999, among the Company, UnionTools and A. Corydon Meyer.** 10.2.5* Employment Severance Agreement, dated as of August 31, 1999 among the Company, UnionTools and John Jacob.** 10.3* Acorn Products, Inc. Deferred Equity Compensation Plan for Directors.*** 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.*** 34 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 Amended and Restated Credit Agreement, dated as of May 20, 1997, between UnionTools, Inc., and Heller Financial, Inc.*** 10.10 License Agreement, dated as of August 1, 1992, between UnionTools, Inc. and The Scott Company.*** 10.11 Registration Rights Agreement, dated as of June 18, 1997, between Acorn Products, Inc. and various funds and accounts managed by TCW Special Credits.*** 10.12 Registration Rights Agreement, dated as of June 18, 1997, between Acorn Products, Inc. and OCM Principal Opportunities Fund, L.P.*** 10.13 Master Lease Agreement, dated as of June 4, 1998, between BancBoston Leasing, Inc., and UnionTools. (Reference is made to Exhibit 10.13 to Form 10-K for the year ended July 31, 1998, filed with the Securities and Exchange Commission on October 29, 1998). 10.14 Rider No. 1 to Master Lease Agreement, dated as of June 4, 1998, between BancBoston Leasing, Inc., and UnionTools. (Reference is made to Exhibit 10.14 to Form 10-K for the year ended July 31, 1998, filed with the Securities and Exchange Commission on October 29, 1998). 10.15 Amendment No.1 to Credit Agreement, dated as of November 24, 1997, between UnionTools, Inc., and Heller Financial, Inc. (Reference is made to Exhibit 10 to Form 10-Q for the quarter ended October 31, 1997, filed with the Securities and Exchange Commission on December 15, 1997). 10.16 Amendment No. 2 to Credit Agreement, dated as of May 22, 1998, between UnionTools, Inc., and Heller Financial, Inc. (Reference is made to Exhibit 10.16 to Form 10-K for the year ended July 31, 1998, filed with the Securities and Exchange Commission on October 29, 1998). 10.17 Amendment No. 3 to Credit Agreement, dated as of October 29, 1998, between UnionTools, Inc., and Heller Financial, Inc. (Reference is made to Exhibit 10.1 to Form 10-Q for the quarter ended October 30, 1998, filed with the Securities and Exchange Commission on December 8, 1998). 10.18 Amendment No. 4 to Credit Agreement, dated as of February 26, 1999, between UnionTools, Inc., and Heller Financial, Inc. (Reference is made to Exhibit 10.1 to Form 10-Q for the quarter ended January 29, 1999, filed with the Securities and Exchange Commission on March 15, 1999). 10.19 Amendment No. 5 to Credit Agreement, dated as of June 10, 1999, between UnionTools, Inc., and Heller Financial, Inc. (Reference is made to Exhibit 10.1 to Form 10-Q for the quarter ended April 30, 1999, filed with the Securities and Exchange Commission on June 14, 1999). 10.20 Amendment No. 6 to Credit Agreement, dated as of October 28, 1999, between UnionTools, Inc., and Heller Financial, Inc. (Reference is made to Exhibit 99.2 to the Current Report on Form 8-K dated October 27, 1999, and filed with the Securities and Exchange Commission on October 29, 1999). 10.21* 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.) 35 10.22* Compensation Agreement, dated as of October 28, 1999, between the company and W. Wallace Abbott.** 21.1 Subsidiaries of the Company.** 23.1 Consent of Ernst & Young LLP.** 24.1 Power of Attorney.** 27.1 Financial Data Schedule.**
- ------------------ ** 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., 390 Dublin Avenue, P.O. Box 1930, Columbus, Ohio 43216. Persons requesting copies will be charged a reasonable fee to cover reproduction and mailing expenses. (b) Reports on Form 8-k. We filed the following Current Reports on Form 8-K since April 30, 1999: (i) Current Report on Form 8-K, dated October 27, 1999, filed with the Securities Exchange Commission on October 29, 1999 (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 14 is submitted as a separate section of this report. See Item 14(a)(2) above. 36 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 dates indicated. Principal Executive Officer: By: * A. Corydon Meyer ---------------------------------------- Name: A. Corydon Meyer Title: President and Chief Executive Officer Principal Financial Officer: By: /s/ John G. Jacob ---------------------------------------- Name: John G. Jacob Title: Vice President and Chief Financial Officer Principle Accounting Officer: By: * L.B. Dove, II ---------------------------------------- Name: L.B. Dove, II Title: Chief Accounting Officer Directors: *William W. Abbott -------------------------------------------- William W. Abbott, Chairman *Matthew S. Barrett -------------------------------------------- Matthew S. Barrett, Director *Stephen A. Kaplan -------------------------------------------- Stephen A. Kaplan, Director *John I. Leahy -------------------------------------------- John I. Leahy, Director *By: /s/ John G. Jacob ------------------------------- John G. Jacob, attorney-in-fact Dated: November 11, 1999 37 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 July 31, 1998 and July 30, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the fiscal years ended August 1, 1997, July 31, 1998 and July 30, 1999. Our audits also include the financial statement schedules listed in the index at Item 14(a). 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 generally accepted auditing standards. 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 July 31, 1998 and July 30, 1999 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended July 30, 1999, in conformity with generally accepted accounting principles. 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. /S/ ERNST & YOUNG LLP Columbus, Ohio September 15, 1999 except for Notes 4 and 13, as to which the date is October 28, 1999 F-1 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JULY 31, JULY 30, 1998 1999 ---- ---- ASSETS Current assets: Cash $ 1,240 $ 1,222 Accounts receivable, less reserves for doubtful accounts, sales discounts, and other allowances (1998-$894; 1999-$2,244) 24,553 20,212 Inventories 30,123 30,891 Prepaids and other current assets 2,948 2,193 ----------- ----------- Total current assets 58,864 54,518 Property, plant and equipment, net of accumulated depreciation 16,205 16,622 Goodwill, net of accumulated amortization 35,271 35,793 Other intangible assets 2,293 1,934 ----------- ----------- Total assets $ 112,633 $ 108,867 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility (average interest rate of 8.32% - 1998 and 8.01% - 1999) $ 16,308 $ 22,354 Accounts payable 7,010 10,294 Accrued expenses 4,413 6,472 Income taxes payable 43 123 Other current liabilities 445 157 ----------- ----------- Total current liabilities 28,219 39,400 Acquisition term loan (average interest rate of 8.19% - 1998 and 8.60% - 1999) 16,009 16,009 Other long-term liabilities 4,054 3,268 ----------- ----------- Total liabilities 48,282 58,677 Contingency - Note 8 Stockholders' equity: Common stock, par value of $.001 per share, 20,000,000 shares authorized, 6,464,105 shares issued, 6,464,105 and 6,021,705 shares outstanding at July 31, 1998 and July 30, 1999, respectively 78,391 78,391 Contributed capital-stock options 460 460 Accumulated other comprehensive loss (285) (682) Retained earnings (deficit) (14,215) (25,491) ----------- ----------- 64,351 52,678 Common stock in treasury, 442,400 shares - (2,488) ----------- ----------- Total stockholders' equity 64,351 50,190 ----------- ----------- Total liabilities and stockholders' equity $ 112,633 $ 108,867 =========== ===========
See accompanying notes. F-2 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FISCAL YEAR ENDED AUGUST 1, JULY 31, JULY 30, 1997 1998 1999 ------------ ----------- ------------ Net sales $ 101,011 $ 107,758 $ 111,414 Cost of goods sold 73,982 82,480 91,149 --------- --------- --------- Gross profit 27,029 25,278 20,265 Selling, general and administrative expenses 18,293 20,033 23,319 Interest expense 7,176 2,560 3,401 Amortization of intangibles 837 917 1,087 Other expenses, net: Watering products consolidation - - 355 Plant consolidation - - 993 Strategic transactions - - 994 Miscellaneous 1,548 259 311 --------- --------- --------- Income (loss) from continuing operations before income taxes (825) 1,509 (10,195) Income taxes 134 230 145 --------- --------- --------- Income (loss) from continuing operations (959) 1,279 (10,340) Discontinued operations: Loss from operations (1,499) - - Loss on disposal (8,421) - (936) --------- --------- --------- Loss from discontinued operations (9,920) - (936) --------- --------- --------- Net income (loss) (10,879) 1,279 $ (11,276) Preferred stock dividend (1,018) - - --------- --------- --------- Net income (loss) applicable to common stock $ (11,897) $ 1,279 $ (11,276) ========= ========= ========= BASIC AND DILUTED EARNINGS PER SHARE DATA: Loss from continuing operations $ (.48) $ 0.20 $ (1.64) Loss from discontinued operations (5.00) - (0.15) Preferred stock dividend (.51) - - --------- --------- --------- Net income (loss) per share $ (5.99) $ 0.20 $ (1.79) ========= ========= =========
See accompanying notes. F-3 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK PREFERRED STOCK ------------ --------------- NUMBER OF NUMBER OF SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ Balances at August 2, 1996 1,490,826 $ 14,406 100 $ 8,596 Net loss for the period August 3, 1996 through August 1, 1997 - - - - Adjustment to minimum pension liability - - - - Comprehensive loss - - - - Redemption of preferred stock - - (100) (8,596) Preferred stock dividend - (1,018) - - Conversion of debt to equity 1,716,049 24,025 - - Stock issued in public offering 3,250,000 40,890 - - Stock options issued - - - - Stock issued 7,230 88 - - ---------- ----------- -------- ----------- Balances at August 1, 1997 6,464,105 78,391 - - Net loss for the period August 2, 1997 through July 31, 1998 - - - - Adjustment to minimum pension liability - - - - Comprehensive income - - - - ---------- ----------- -------- ----------- Balances at July 31, 1998 6,464,105 78,391 - - Net loss for the period August 1, 1998 through July 30, 1999 - - - - Adjustment to minimum pension liability - - - - Comprehensive loss - - - - Purchase of treasury stock (442,400) - - - ---------- ----------- -------- ----------- Balances at July 30, 1999 6,021,705 $ 78,391 $ - $ - ========== =========== ======== ===========
CONTRIBUTED ACCUMULATED CAPITAL OTHER RETAINED STOCK COMPREHENSIVE EARNINGS TREASURY OPTIONS LOSS (DEFICIT) STOCK TOTAL ----------- -------------- ------------- ---------- ----------- Balances at August 2, 1996 $ 340 $ (197) $ (4,615) $ - $ 18,530 Net loss for the period August 3, 1996 through August 1, 1997 - - (10,879) - (10,879) Adjustment to minimum pension liability - 64 - - 64 ----------- Comprehensive loss - - - - (10,815) Redemption of preferred stock - - - - (8,596) Preferred stock dividend - - - - (1,018) Conversion of debt to equity - - - - 24,025 Stock issued in public offering - - - - 40,890 Stock options issued 120 - - - 120 Stock issued - - - - 88 ----------- -------------- ------------- ---------- ----------- Balances at August 1, 1997 460 (133) (15,494) - 63,224 Net loss for the period August 2, 1997 through July 31, 1998 - - 1,279 - 1,279 Adjustment to minimum pension liability - (152) - - (152) ----------- Comprehensive income - - - - 1,127 ----------- -------------- ------------- ---------- ----------- Balances at July 31, 1998 460 (285) (14,215) - 64,351 Net loss for the period August 1, 1998 through July 30, 1999 - - (11,276) - (11,276) Adjustment to minimum pension liability - (397) - - (397) ----------- Comprehensive loss - - - - (11,673) Purchase of treasury stock - - - (2,488) (2,488) ----------- -------------- ------------- ---------- ----------- Balances at July 30, 1999 $ 460 $ (682) $ (25,491) $ (2,488) $ 50,190 =========== ============== ============= ========== ===========
See accompanying notes. F-4 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE FISCAL YEAR ENDED AUGUST 1, JULY 31, JULY 30, 1997 1998 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (10,879) $ 1,279 $(11,276) Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Loss from discontinued operations 9,920 - 936 Depreciation and amortization 3,489 3,870 5,605 Reserves for doubtful accounts, sales discounts and other allowances 156 181 1,350 Conversion of accrued interest to common stock 3,714 - - Financing fees, net (1,218) - - Issuance of stock options 120 - - Changes in operating assets and liabilities: Accounts receivable (6,551) (4,572) 2,991 Inventories (3,141) 151 (768) Other assets (886) 682 (495) Accounts payable and accrued expenses (773) (445) 4,449 Income taxes payable (750) (307) 80 Other liabilities (751) (1,072) (1,471) ------------ ------------ ------------ Net cash provided by (used in) continuing operations (7,550) (233) 1,401 Net cash provided by (used in) discontinued operations 2,430 - (42) ------------ ------------ ------------ Net cash provided by (used in) operating activities (5,120) (233) 1,359 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of net assets from acquisition, net of cash acquired (6,499) (9,911) - Investment in joint venture (520) - - Purchases of property, plant and equipment, net (2,436) (2,882) (4,935) Proceeds from disposal of discontinued operations 6,863 (625) - ------------ ------------ ------------ Net cash used in investing activities (2,592) (13,418) (4,935) CASH FLOWS FROM FINANCING ACTIVITIES: Subordinated debt retired (7,329) - - Acquisition line borrowings 6,098 9,911 - Net activity on term loan (18,000) - - Net activity on revolving loan 300 3,471 6,046 Redemption of preferred stock and accrued dividends (9,614) - - Net proceeds from Initial Public Offering 37,176 - - Issuance of stock 88 - - Purchase of treasury stock - - (2,488) ------------ ------------ ------------ Net cash provided by financing activities 8,719 13,382 3,558 ------------ ------------ ------------ Net increase (decrease) in cash 1,007 (269) (18) Cash at beginning of period 502 1,509 1,240 ------------ ------------ ------------ Cash at end of period $ 1,509 $ 1,240 $ 1,222 ============ ============ ============ Interest paid $ 7,175 $ 2,338 $ 3,292 ============ ============ ============
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 the "Company") is a leading manufacturer and marketer of non-powered lawn and garden tools in the U.S. The Company's principal products include long handle tools (such as forks, hoes, rakes and shovels), snow tools, posthole diggers, wheelbarrows, striking tools, cutting tools and watering products (such as sprinklers, hose nozzles and hose couplings). The Company sells its products under a variety of well-known brand names. In addition, the Company manufactures private label products for a variety of retailers. The Company sells its products through a variety of distribution channels. Acorn is a holding company with no business operations of its own. (See Note 3 for a discussion of the Company's disposition of its non-lawn and garden operations.) 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, the Company's operating results depend significantly on the spring selling season. To support this sales peak, the Company must build inventories of finished goods throughout the fall and winter. Accordingly, the Company's levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the Company's first and second fiscal quarters. (See Note 12). Weather is the most significant factor in determining market demand for the Company's products and is inherently unpredictable. Fluctuations in weather can be favorable or unfavorable for the sale of lawn and garden equipment. The Company's largest customer, Sears, accounted for 10.9%, 13.6% and 13.4% of gross sales in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. Home Depot accounted for 11.0% of gross sales in fiscal 1999. No other customers accounted for 10% or more of the Company's gross sales in fiscal 1997, fiscal 1998 or fiscal 1999. The Company's products require the supply of raw materials consisting primarily of steel, plastics and ash wood. The Company has several suppliers for most of its raw materials. In July 1997, Acorn completed an initial public offering of 3,250,000 shares of Common Stock at a price to the public of $14.00 per share. The net proceeds from the offering were approximately $41.3 million. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Acorn and its subsidiaries, McGuire-Nicholas Company, Inc. ("McGuire-Nicholas"), VSI Fasteners, Inc. ("VSI") and UnionTools, Inc. (and its subsidiaries H.B. Sherman Company, Inc. and Union Tools Watering Products, Inc.). All intercompany accounts and transactions have been eliminated. (See Note 3 -- Discontinued Operations regarding the disposal of VSI and McGuire-Nicholas). REVENUES The Company recognizes revenue from product sales upon shipment. 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:
JULY 31, JULY 30, 1998 1999 ---- ---- (IN THOUSANDS) Finished goods $ 15,202 $ 17,099 Work in process 5,709 5,895 Raw materials and supplies 9,212 7,897 ---------- --------- Total inventories $ 30,123 $ 30,891 ========== =========
F-6 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 7 years Buildings and improvements 7 to 40 years Furniture and fixtures 3 to 7 years
Property, plant and equipment consists of the following:
JULY 31, JULY 30, 1998 1999 ---- ---- (IN THOUSANDS) Land $ 1,626 $ 1,626 Buildings and improvements 5,033 5,193 Machinery and equipment 18,032 21,820 Furniture and fixtures 2,177 3,164 -------- -------- 26,868 31,803 Accumulated depreciation and amortization (10,663) (15,181) -------- -------- Property, plant and equipment, net $16,205 $16,622 ======== ========
Depreciation expense was approximately $2.9 million and $4.5 million for fiscal 1998 and fiscal 1999, respectively. In fiscal 1999, the Company recorded approximately $1.2 million in additional depreciation related to the equipment and tooling of the discontinued product. The net book value of this equipment and tooling at July 30, 1999 approximates its net realizable value. GOODWILL Goodwill, resulting from the cost of assets acquired exceeding the underlying net asset value, is amortized on the straight-line method over a forty-year period. Accumulated amortization was $4.0 million at July 31, 1998 and $5.0 million at July 30, 1999. Amortization expense was approximately $1 million in fiscal 1998 and fiscal 1999. The Company periodically assesses the recoverability of its goodwill. INCOME TAXES The Company files a consolidated federal income tax return. Federal income taxes are apportioned among Acorn and its subsidiaries based on each corporation's taxes as determined on a separate return basis. State tax returns are filed on a separate-company basis. The liability method is used in 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. 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 10 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 management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-7 FISCAL YEAR The Company's fiscal year is comprised of the 52 or 53 weeks ending on the Friday closest to July 31 of each year. Unless otherwise stated, references to fiscal 1997, fiscal 1998 and fiscal 1999 relate to the fiscal years ended August 1, 1997, July 31, 1998 and July 30, 1999, respectively, and were comprised of 52 weeks. The Company's interim reporting periods for quarterly periods end on the Friday closest to the last day of each fiscal quarter. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the fiscal 1999 presentation. SEGMENT REPORTING In 1997, the Financial Accounting Standards Board issued Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes standards for the way that companies report information about operating segments, geographic areas and major customers. The company has evaluated the statement and determined that it has one reportable segment. 3. DISCONTINUED OPERATIONS VSI In March 1996, the Company adopted a formal plan to sell VSI. Accordingly, VSI was accounted for as a discontinued operation in the financial statements for fiscal 1996. During fiscal 1996, the Company provided for estimated losses of $665,000 on the disposal of VSI, which represented the write-down of inventory and other assets to estimated net realizable value and the estimated loss through the disposal date. The Company completed the sale of substantially all of the assets of VSI on December 4, 1996 for approximately $6.9 million, plus the assumption of approximately $2.3 million of related liabilities. MCGUIRE-NICHOLAS In January 1997, the Company adopted a formal plan to sell McGuire-Nicholas. Accordingly, McGuire-Nicholas is accounted for as a discontinued operation and classified as such in the accompanying consolidated financial statements. During fiscal 1997, the Company provided for an estimated loss on the disposal of McGuire-Nicholas of $9.9 million, consisting of an estimated loss on disposal of $8.4 million and a provision of $1.5 million of operating losses for fiscal 1997 and anticipated operating losses through the date of closing. The loss on disposal represented the write-off of $7.3 million of goodwill relating to McGuire-Nicholas and the write-down of inventory and other assets to estimated net realizable value. On August 8, 1997, the Company sold substantially all of the assets of McGuire-Nicholas for approximately $4.7 million, plus the assumption of approximately $4.0 million of related liabilities. During fiscal 1999, the Company recognized an additional charge of approximately $0.9 million relating to the settlement of certain tax and worker's compensation claims. RESULTS OF OPERATIONS AND NET ASSETS OF DISCONTINUED OPERATIONS The following represents the combined results of operations of the Company's discontinued operations (in thousands):
FISCAL 1997 ------ Revenues $29,643 Costs and expenses 30,731 Interest expense (411) Loss from operations (1,499)
Interest expense has been allocated to discontinued operations for all applicable periods based on the ratio of net assets of discontinued operations to consolidated net assets plus debt. F-8 4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY UnionTools entered into a credit facility (the "Credit Facility") in December 1996 which, as amended and restated in May 1997, November 1997, October 1998, February 1999, and June 1999 provides for a $40 million revolving credit facility (the "Revolving Facility") from January 1 through June 30 ($30 million from July 1 through December 31) and a $35 million acquisition facility (the "Acquisition Line"). Available borrowings under the Revolving Facility are based on specified percentages of accounts receivable and inventory. The Credit Facility originally also provided for a $20 million term loan, which was repaid in June 1997 with a portion of the proceeds from Acorn's initial public offering. The Credit Facility contains certain covenants, which, among other things, require UnionTools to maintain specified financial ratios and satisfy certain tests, including minimum interest coverage ratios, and places limits on future capital expenditures by UnionTools. The Credit Facility also includes negative covenants including limitations on indebtedness, liens, guarantees, obligations, mergers, consolidations, liquidations and dissolutions, sales of assets, leases, dividends and other payments in respect of capital stock, capital expenditures, investments, loans and advances, optional payments and modifications and other debt instruments, transactions with affiliates, changes in fiscal year, negative pledge clauses and changes in line of business. At July 31, 1999, UnionTools was not in compliance with certain of these debt covenants. On October 28, 1999 UnionTools entered into a sixth amendment to the amended and restated Credit Facility (the "Amended Facility") to support operational, capital expenditure, and working capital needs through April 30, 2001, the revised term of the facility. In connection with the Amended Facility, the lenders waived the July 30, 1999 covenant defaults and established revised covenant requirements. The Amended Facility provides for a $40 million revolving credit facility from January 1 through June 30 of each year, $30 million from July 31 through October 31, and $35 million from November 1 through December 31. In addition, the Amended Facility limits the Acquisition Line to the existing outstanding balance of approximately $16 million and extends the repayment terms as follows:
DATE PAYMENT ---- ------- September 30, 2000 2.083% of outstanding balance December 31, 2000 2.083% of outstanding balance March 31, 2001 2.083% of outstanding balance April 30, 2001 93.751% of outstanding balance
Borrowings under the Amended Facility bear interest at either the bank prime rate plus a margin of 1.5% (prime rate at October 28, 1999 was 8.25%) or, at UnionTools' option, the LIBOR rate plus a margin of 3.5% (LIBOR rate at October 28, 1999 was 5.82%). In addition, UnionTools is required to pay a fee of 0.5% per year on the unused portion of the Revolving Facility. The Amended Facility also includes a "success fee" that is established based upon the date of repayment of the facility. The "success fee" increases from a minimum of 0.5% of the outstanding facility commitment (if repayment occurs on or before April 30, 2000) to a maximum of 3.0% (if repayment occurs after January 31, 2001). Borrowings under the Amended Facility are secured by substantially all of the assets of UnionTools and are guaranteed by Acorn. The Acorn guarantee is secured by a pledge of all the capital stock of UnionTools. In addition, UnionTools is required to make certain mandatory prepayments under the Amended Facility based upon cash flow and certain other events described in the Amended Facility. UnionTools may elect to prepay all or a portion of the Amended Facility at any time. At October 28, 1999 UnionTools had $6.8 million in available borrowings under the Amended Facility. On October 28, 1999, in connection with the amendment to the Amended Facility, UnionTools also issued a $6.0 million junior participation term loan note (the "Note") bearing interest at 12.0% per annum. Interest is payable quarterly in arrears on each February 1, May 1, August 1 and November 1 through the issuance of additional term notes or, following repayment of all borrowings under the Amended Facility other than the Notes through the payment of cash. Under the provisions of the Note the lender has the right, at any time during which any unpaid principal amount remains, to exchange the Note for shares of common stock of the Company. The number of shares received will be equal to the sum of the unpaid principal and unpaid interest through date of exchange divided by $3.50. If not previously exchanged for common stock, the Note matures on the latter of August 1, 2001 or ninety-one days after the Expiry Date, as defined in the Amended Facility. The proceeds of the Note were funded through a subordinated participation agreement between the lender and the majority stockholder of the Company. The Note is by its terms incorporated into the Amended Facility and is secured by the collateral in accordance with the terms of the Amended Facility. The fair value of the Company's long-term debt approximates the carrying amount at July 30, 1999. F-9 5. STOCKHOLDERS' EQUITY AND DERIVATIVE SECURITIES INCREASE IN AUTHORIZED CAPITAL STOCK AND STOCK SPLIT In May 1997, Acorn increased the number of authorized shares of Common Stock to 20 million and effected a 1,446-for-1 split of the Common Stock in the form of a common stock dividend (the "Stock Split"). All share and per share information has been restated to reflect the Stock Split. TREASURY STOCK During fiscal 1999, Acorn repurchased 442,400 shares of common stock at a cost of $2,488,000. PREFERRED STOCK At August 2, 1996, Acorn had 100 shares of non-voting, non-convertible, Series A Preferred Stock issued and outstanding. Holders of the Series A Preferred Stock were entitled to a cumulative 13% dividend, payable quarterly in additional Series A Preferred Stock at a value of $85,962 per share. The Series A Preferred Stock was redeemable at the option of Acorn at any time, in whole or in part, at a price of $85,962 per share, plus accrued dividends. In July 1997, Acorn used $9.6 million of the proceeds from its initial public offering to redeem the Series A Preferred Stock and pay accumulated dividends thereon. STOCK OPTIONS During fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance with the provisions of SFAS 123, the Company has elected to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its employee and nonemployee director stock options and, accordingly, does not recognize compensation costs when the exercise price of such employee stock options is equal to the fair market value of the stock at the grant date. Pursuant to employment agreements, certain executive officers of the Company were granted options to purchase shares of Common Stock. Vesting of the options and the related exercise price were contingent upon the attainment of certain profitability targets, and portions of the options that failed to vest expired. The Company recognized compensation expense of $120,000 in fiscal 1997 related to the vesting of these options. Vested options to purchase 39,042 shares of Common Stock . (with an exercise price of $0 and $12.10 per share relating to 33,258 and 5,784 shares, respectively) were outstanding at July 30, 1999 and July 30, 1998. These vested options expire in December 2003. In April 1997, Acorn adopted the 1997 Stock Incentive Plan (the "Incentive Plan") for members of senior management and certain other officers and employees of the Company. The purpose of the Incentive Plan is to provide incentives to employees of the Company by granting awards tied to the performance of the Common Stock. Awards to employees may take the form of options, stock appreciation rights or sales or grants of restricted stock. The Company has reserved an aggregate of 730,000 shares of Common Stock for issuance under the Incentive Plan. At July 30, 1999, Acorn has granted options to purchase an aggregate of 371,595 options under the Incentive Plan, at a weighted-average exercise price of $12.61 per share. 242,224 shares were vested (with an exercise price of $14.00 and $5.75 per share relating to 226,525 and 15,699 shares, respectively) at July 30, 1999. 164,550 shares were vested (with an exercise price of $14.00 per share) at July 31, 1998. These vested options expire in June 2004. In January 1998, Acorn adopted the 1997 Nonemployee Director Stock Incentive Plan (the "Nonemployee Director Incentive Plan") for non-employee directors of the Company. The purpose of the Nonemployee Director Incentive Plan is to enable the Company to attract and retain nonemployee directors by granting awards tied to the performance of the Common Stock. Awards to nonemployee directors may take the form of options, stock appreciation rights or sales or grants of restricted stock. The Company has reserved an aggregate of 200,000 shares of Common Stock for issuance under the Nonemployee Director Incentive Plan. Acorn has granted options to purchase an aggregate of 47,430 shares of stock under the Nonemployee Director Incentive Plan, at a weighted average exercise of $8.09 per share. 47,430 shares were vested (with an exercise price of $10.25 and $6.70 per share relating to 18,630 and 28,800 shares, respectively) at July 30, 1999. 18,630 shares were vested (with an exercise price of $10.25 per share relating) at July 30, 1998. The 18,630 and 28,800 vested options expire in December 2008 and 2009, respectively. F-10 Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its incentive stock options granted subsequent to December 31, 1994 under the fair value method of SFAS No. 123. The fair value of the options at the date of grant for the Incentive Plan was $7.80 and $3.56 per share at July 31, 1998 and July 30, 1999, respectively. The fair value of these options at the date of grant for the Nonemployee Director Incentive Plan was $6.71 and $4.34 per share at July 31, 1998 and July 30, 1999, respectively. The valuation of the options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for fiscal 1999: (i) a risk-free interest rate of 6.35%; (ii) no dividend yield; (iii) a volatility factor of the expected market price of the Company's Common Stock of .397; and (iv) a weighted-average expected life of each option of 10 years. If the Company had elected to recognize compensation expense based upon the fair value of options at the grant date as prescribed by SFAS No. 123, reported net income (loss) applicable to common stock and per share amounts would have been as follows:
FISCAL FISCAL FISCAL 1997 1998 1999 ---- ---- ---- Net income (loss) applicable to common stock (in thousands) $(12,660) $ 43 $(11,974) Net income (loss) applicable to common stock per share (6.37) .01 (1.90)
The pro forma financial effects of applying SFAS No. 123 may not be representative of the pro forma effects on reported results of operations for future years. F-11 The following table summarizes the stock option activity:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE -------- ---------- 1997 STOCK INCENTIVE PLAN: Outstanding at August 3, 1996 - $ - Granted 329,100 14.00 Exercised - - Expired/terminated - - ------------- Outstanding at August 1, 1997 329,100 14.00 Granted - - Exercised - - Expired/terminated - - ------------- Outstanding at July 31, 1998 329,100 14.00 Granted 62,795 5.75 Exercised - - Expired/terminated (20,300) 14.00 ------------- Outstanding at July 30, 1999 371,595 12.61 ============= 1997 NONEMPOYEE DIRECTOR STOCK INCENTIVE PLAN: Outstanding at August 1, 1997 - $ - Granted 18,630 10.25 Exercised - - Expired/terminated - - ------------- Outstanding at July 31, 1998 18,630 10.25 Granted 28,800 6.70 Exercised - - Expired/terminated - - ------------- Outstanding at July 30, 1999 47,430 8.09 ============= OTHER STOCK OPTIONS: Outstanding at August 2, 1996 70,854 $ 6.42 Granted - - Exercised (7,230) 12.10 Expired/terminated (24,582) 12.10 ------------- Outstanding at August 1, 1997 39,042 1.79 Granted - - Exercised - - Expired/terminated - - ------------- Outstanding at July 31, 1998 39,042 1.79 Granted - - Exercised - - Expired/terminated - - ------------- Outstanding at July 30, 1999 39,042 1.79 =============
F-12 DIRECTOR STOCK PLAN In April 1997, Acorn 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 in the Company of non-employee members of the Board of Directors thereby increasing their incentive to contribute to the success of the Company. Only non-employee 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 73,000. In lieu of cash, non-employee directors can elect to receive all or one-half of their fees in the form of common stock units. The number of common stock units issued is determined by dividing (i) an amount equal to the dollar amount of the fees to be received in the form of common stock units by (ii) the average of the high and low sale prices of the Common Stock on the Nasdaq National 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 common stock units. Common stock units are distributed to non-employee directors in the form of Common Stock following the director's resignation from the Board of Directors. In addition, common stock units 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. As of July 31, 1999, 22,856 common stock units had been awarded under the Director Stock Plan representing an equal number of shares of Common Stock to be issued in the future. F-13 6. 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 the Company's deferred tax assets and liabilities are as follows:
JULY 31, JULY 30, 1998 1999 ---- ---- (IN THOUSANDS) Deferred tax assets: Inventory $ 785 $ 1,420 Accrued expenses and other 2,425 2,783 Net operating loss carryforwards 13,094 18,886 Capital loss carryforward 2,585 2,585 ----------- ------------ Total deferred tax assets 18,889 25,674 Valuation allowance for deferred tax assets (17,323) (21,542) ----------- ------------ Deferred tax assets 1,566 4,132 Deferred tax liabilities: Goodwill 1,376 3,029 Depreciation and other 190 1,103 ----------- ------------ Total deferred tax liabilities 1,566 4,132 ----------- ------------ Net deferred tax assets $ - $ - =========== ============
Based upon the Company's history of operating losses and in accordance with SFAS No. 109, management recorded a 100% valuation allowance resulting in no deferred tax assets being recognized. At July 31, 1999, the Company has net operating loss carryforwards of $45.3 million for income tax purposes that expire in the years 2009 through 2019 and capital loss carryforwards of $6.2 million for income tax purposes that expire in 2002 through 2003. The provision for income taxes is comprised of the following:
YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 1, JULY 31, JULY 30, 1997 1998 1999 ---- ---- ---- (IN THOUSANDS) Current--Federal $ - $ 40 $ - Current--State 134 190 145 ---------- --------- --------- $ 134 $ 230 $ 145 ========== ========= =========
For financial reporting purposes, the federal tax provision for fiscal 1998 represents tax due under the Alternative Minimum Tax (AMT) System as fully reserved operating loss carryforwards eliminate book taxable income. However, in fiscal 1998 the Company generated a loss for federal income tax purposes. Therefore, the federal income tax provision for fiscal 1998 was recorded based on the AMT system. AMT is calculated separately from the regular U.S. federal income tax and is based on a flat rate applied to a broader tax base. The higher of the two taxes is paid. The excess of the AMT paid over regular tax can be carried forward indefinitely to reduce regular tax liabilities in future years. F-14 7. PENSION AND POST RETIRMENT BENEFIT PLANS Union Tools maintains multiple defined benefit pension plans which cover substantially all employees. Benefits paid under the defined benefit plans are generally based either on years of service and the employee's compensation in recent years of employment or years of service multiplied by contractual amounts. The Company's funding policy for all plans is to fund at least the minimum amount required by ERISA. Also, the Company sponsors an unfunded defined benefit health care plan that provides post-retirement medical and life insurance benefits to employees 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.
PENSION BENEFITS POST RETIREMENT BENEFITS ---------------- ------------------------ 1998 1999 1998 1999 (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATIONS Benefit obligations at beginning of year $ 14,045 $ 15,798 $ 3,783 $ 2,902 Service cost 662 689 17 19 Interest cost 1,149 1,200 197 185 Participant contributions - - - 85 Actuarial losses / (gains) 1,156 3 (406) - Plan amendments - 63 - - Benefits paid (1,214) (1,065) (689) (787) ---------------- ---------------- ----------------- ---------------- Benefit obligations at end of year 15,798 16,688 2,902 2,404 ================ ================ ================= ================ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 13,471 14,624 - - Actual return on plan assets 1,254 1,345 - - Company contributions 1,113 2,198 689 702 Participant contributions - - - 85 Benefits paid (1,214) (1,065) (689) (787) ---------------- ---------------- ----------------- ---------------- Fair value of plan assets at end of year 14,624 17,102 - - ================ ================ ================= ================ Funded status of the plans (under-funded) (1,174) 414 (2,902) (2,404) Unrecognized net actuarial losses / (gains) 1,884 1,817 (940) (864) Minimum pension liability (1,202) (1,614) - - Unamortized prior service cost 577 618 - - ---------------- ---------------- ----------------- ---------------- Prepaid (accrued) benefit cost $ 85 $ 1,235 $ (3,842) $ (3,268) ================ ================ ================= ================ WEIGHTED-AVERAGE ASSUMPTIONS Discount rate 8.00% 8.00% 7.5% 6.75% Expected return on plan assets 8.75% 8.75% - - Rate of compensation increase 4.00% 4.00% - - COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 662 $ 689 $ 17 $ 19 Interest cost 1,149 1,200 197 185 Actual return on plan assets (1,254) (1,345) - - Amortization of prior service cost 16 21 - - Recognized net actuarial (gains) / losses 77 71 (178) (76) ---------------- ---------------- ----------------- ---------------- Net periodic benefit cost $ 650 $ 636 $ 36 $ 128 ================ ================ ================= ================
F-15 7. PENSION AND POST RETIRMENT BENEFIT PLANS (CONTINUED) The following is a summary of aggregate prepaid benefit costs and aggregate accrued benefit costs:
JULY 31, JULY 30, 1998 1999 ----------------- ----------------- (IN THOUSANDS) Aggregate prepaid benefit cost $ 1,771 $ 2,572 Aggregate accrued benefit cost (1,686) (1,337) ----------------- ----------------- Net prepaid (accrued) benefit cost $ 85 $ 1,235 ================= =================
The company has individual defined benefit pension plans which 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:
JULY 31, JULY 30, 1998 1999 ----------------- ----------------- (IN THOUSANDS) Aggregate accumulated benefit obligations $ 6,147 $6,907 Aggregate projected benefit obligations $ 6,147 $6,911 Aggregate fair value of plan assets 4,460 5,570
HEALTH CARE COST TREND RATE The weighted average health care cost trend rate for fiscal 2000 is 5.5% and is assumed to decline to 5% in fiscal 2001 and remain at that level thereafter. The weighted average health care cost trend rate for fiscal 1999 was 6%. The assumed health care cost trend rate has a significant effect on the amount reported. A one-percentage point change in the assumed health care cost trend rate would have the following effects on post-retirement benefit obligations:
1 PERCENTAGE POINT INCREASE 1 PERCENTAGE POINT DECREASE --------------------------- --------------------------- (IN THOUSANDS) Effect on total of service and interest cost components in fiscal 1999 $ 16 $ (14) Effect on total of post-retirement benefit obligation in fiscal 1999 $199 $(175)
DEFINED CONTRIBUTION 401(K) PLAN The company also sponsors defined contribution 401(k) plans covering all employees. The Company's matching contribution varies by plan and amounted to $242,555, $293,273 and $310,740 in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. 8. 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 U.S. and Canada an extensive line of lawn and garden tools under the Scotts-Registered Trademark- brand name. Under the agreement, UnionTools must pay certain minimum royalty amounts annually. Rent expense under operating leases was $1.2 million in fiscal 1997, $1.2 million in fiscal 1998 and $1.6 million in fiscal 1999. F-16 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) The minimum annual payments for leases under non-cancelable operating leases and the Scotts license agreement at July 30, 1999 are as follows (in thousands): 2000 $1,963 2001 1,900 2002 1,360 2003 843 2004 757 Thereafter 726
LITIGATION From time to time, the Company is a party to personal injury litigation arising out of incidents involving the use of Company products purchased by consumers from retailers to whom the Company distributes. The Company generally is covered by insurance for these product liability claims. In April 1999, a subsidiary, V.H.G. Tools, Inc. (VHG) and predecessor companies, were joined by Midwest Products, Inc., the defendant, in a product liability lawsuit filed in New Jersey Superior Court, Burlington County, New Jersey. The case is in its early stages, at least as to VHG. Plaintiff's and Midwest allegations do not appear to be supported by evidence, but if plaintiff's and Midwest allegations against VHG are proven, liability could be substantial. The Company believes that any compensatory damages, if awarded, would be covered by insurance. COLLECTIVE BARGAINING AGREEMENTS The majority of the Company's hourly employees are covered by collective bargaining agreements, including those at the primary manufacturing facility in Frankfurt, New York as well as those at the Frankfurt and Columbus, Ohio distributions centers. The collective bargaining agreements covering the Frankfurt and Columbus hourly employees expire in 2001 and 2002, respectively. The Company has not been subject to a strike or work stoppage in over 20 years and believes that its relationships with its employees and applicable unions are good. However, there can be no assurance that the Company will be successful in negotiating new labor contracts on terms satisfactory to the Company or without work stoppages or strikes. A prolonged work stoppage or strike at any of the Company's facilities could have a material adverse effect on the Company's business, financial condition and results of operations. AGREEMENTS WITH KEY EMPLOYEES The Company entered into agreements with certain of its executive officers providing for, under certain circumstances, payments from the Company following the termination of such officers' employment with the Company or following a change in control of the Company (as defined therein). F-17 9. ACQUISITION OF BUSINESSES On February 19, 1997, the Company acquired for approximately $6.3 million in cash certain assets of an injection molding company. The Company accounted for the acquisition as a purchase and the results of the injection molding company's operations are included in the accompanying financial statements beginning with the date of acquisition. The Company is amortizing the non-compete agreement over a seven year period. In February 1998, the Company acquired for approximately $3.5 million in cash, the stock of H.B. Sherman Manufacturing Company, Inc. ("Sherman") The Company accounted for the acquisition as a purchase and the results of Sherman's operations are included in the accompanying financial statements beginning with the date of acquisition. The Company is amortizing the goodwill over a forty-year period. In June 1998, the Company acquired for approximately $6.5 million in cash certain assets of the Thompson Manufacturing Company, Inc. ("Thompson"). The Company accounted for the acquisition as a purchase and the results of Thompson's operations are included in the accompanying financial statements beginning with the date of acquisition. The Company is amortizing the goodwill over a forty-year period. Pro forma results including the acquired companies since the beginning of the earliest period presented would not be materially different from actual results. 10. EARNINGS PER SHARE The following table sets forth the computation of basic and dilutive earnings per share:
1997 1998 1999 ---- ---- ---- Numerator: Net income (loss) $ (10,879,000) $ 1,279,000 $ (11,276,000) Preferred stock dividend (1,018,000) -- -- ---------------- ------------- --------------- Numerator for basic and dilutive earnings per share - Net income (loss) applicable to common stock $ (11,897,000) $ 1,279,000 $ (11,276,000) Denominator: Denominator for basic earnings per share - weighted-average shares 1,985,758 6,464,105 6,313,527 Effect of dilutive securities: 1997 Stock Incentive Plan -- -- -- 1997 Nonemployee Director Stock Incentive Plan -- 1,132 -- Deferred Equity Compensation Plan for Directors -- 12,263 -- Other stock options -- 33,258 -- ---------------- ------------- --------------- Dilutive potential common shares -- 46,653 -- Denominator for diluted earnings per share - weighted-average shares and assumed conversions 1,985,758 6,510,758 6,313,527 Basic earnings per share $ (5.99) $ 0.20 $ (1.79) ================ ============= =============== Diluted earnings per share $ (5.99) $ 0.20 $ (1.79) ================ ============= ===============
For additional disclosure regarding outstanding stock options and the Deferred Equity Compensation Plan for Directors, see Note 5 - Stockholders' Equity and Derivative Securities. At July 31, 1998, options to purchase 329,100 shares of Common Stock at $14.00 per share and options to purchase 5,784 shares of Common Stock at $12.10 per share were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the Common Stock and, therefore, the effect would be anti-dilutive. F-18 11. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain financial data of the Company for each quarter of fiscal 1998 and 1999. The financial data for each of these quarters is unaudited but includes all adjustments which the Company believes to be necessary for a fair presentation. All quarters include normal recurring adjustments except for the fourth quarter of 1999 which includes certain adjustments of $8.2 million related to the write-off of obsolete inventory, the write-off of tooling and inventory associated with a discontinued product, increases in the reserve for uncollectible accounts receivable, and increases in the reserve for workers compensation and other miscellaneous adjustments. These operating results, however, are not necessarily indicative of results for any future period.
INCOME (LOSS) INCOME FROM (LOSS) CONTINUING FROM OPERATIONS LOSS FROM CONTINUING PER SHARE DISCONTINUED NET INCOME NET SALES GROSS PROFIT OPERATIONS (DILUTED) OPERATIONS (LOSS) ----------- ------------- ------------ ------------- ------------- ------------ (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 1998 First quarter $ 20,416 $ 5,139 $ (324) $ (.05) $ - $ (324) Second quarter 21,143 4,803 (275) (.04) - (275) Third quarter 37,911 8,471 1,343 .21 - 1,343 Fourth quarter 28,288 6,865 535 .08 - 535 ----------- --------- ------------ ------------- ------------ $ 107,758 $25,278 $ (1,279) $ .20 $ - $ (1,279) =========== ========= ============ ============= ============ 1999 First quarter $ 22,172 $ 5,358 $ (508) $ (.08) $ (166) $ (674) Second quarter 22,449 5,484 (1,490) (.23) - (1,490) Third quarter 40,434 10,470 2,324 .37 - 2,324 Fourth quarter 26,359 (1,047) (10,666) (1.77) (770) (11,436) ----------- --------- ------------ ------------- ------------ $ 111,414 $20,265 $(10,340) $ (1.79) $ (936) $(11,276) =========== ========= ============ ============= ============
12. OTHER EXPENSES In January 1999, the Company incurred expenses of $355,000 in consolidating its watering products division into a single facility. The company incurred expenses for legal, accounting, consulting and other expenses of $994,000 in fiscal 1999 related to certain strategic transactions. In March 1999, the Company announced that it would consolidate its Columbus, Ohio manufacturing facility into its primary manufacturing facility in Frankfort, New York. The Columbus manufacturing facility continued to operate through August 1999, at which time operations ceased. The company expects the total net cost of the consolidation to be under $3 million, of which less than $1 million is related to net capital expenditures. Cost incurred in fiscal 1999 related to the consolidation totaled $993,000. F-19 13. COMPANY OPERATIONS The Company's consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred a net loss of $11,276,000 in fiscal 1999 and was in violation of the covenants under its Credit Facility (see note 4). The Company has been substantially dependent upon borrowings under the Credit Facility to finance its working capital needs during the peak sales period, to finance acquisitions, and to finance the repurchase of $2,488,000 of common stock during fiscal 1999. Through the third quarter of fiscal 1999, the Company had reported net income of $160,000. The fourth quarter, however, resulted in the recognition of a loss totaling $11,436,000. Management believes this fourth quarter loss was largely due to operational control issues and several large year end adjustments. The Company's primary cash needs are for working capital, capital expenditures and debt service. The Company has historically financed these needs through internally generated cash flow and funds borrowed under the Credit Facility. The Company recognized that the net losses and share repurchase that occurred in fiscal 1999, as well as the costs required to improve the profitability of the business (including the senior management restructuring) and complete the manufacturing consolidation in the near term would require more liquidity than was available under the existing Credit Facility. In addition, as a result of the poor fourth quarter performance, the Company was not in compliance with the Credit Facility covenants. The Company has addressed its liquidity needs and the covenant violations by entering into an amendment to the Credit Facility and obtaining a cash infusion from the majority shareholder. Note 4 discloses the revisions to the Credit Facility and the $6 million cash infusion from the Company's majority shareholder (in the form of junior, participating debt) that occurred in late October 1999. The Company will take actions to generate cash from sources other than operations and the amended Credit Facility. The Company is in the process of evaluating all non-strategic assets for purposes of sale, including the sale of the Columbus manufacturing facility, which is expected to occur in November 1999. The Company is working to reduce the days sales outstanding in accounts receivable, and will, where appropriate offer discount terms. Capital and other expenditures are being scrutinized and potentially deferred if not considered critical. It is the belief of management that these actions, together with the revised facility commitment and the capital infusion by its majority stockholder, will provide the Company with sufficient liquidity for the business to return to profitable operations. However, if future financial results do not meet management's expectations, management will reduce discretionary expenditures. 14. RELATED PARTY TRANSACTIONS The Company received certain professional services from the firm in which the Company's former Chairman is a Partner. In fiscal 1999, the Company paid approximately $762,000 for these services and at July 30, 1999 the Company had a payable of approximately $73,000 related to these services. F-20 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS UNIONTOOLS, INC. JULY 30, 1999
ADDITIONS --------- BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ----------- ----------- ----------- ---------- ----------- ---------- Fiscal Year Ended July 30, 1999: Deducted from asset accounts: Allowance for doubtful accounts $ 259,378 $ 701,103 $ 0 $ 19,717 $ 940,764 Reserve for sales discounts and other allowances 634,401 668,844 0 0 1,303,245 ----------- ----------- ---------- ----------- ---------- Total $ 893,779 $1,369,947 $ 0 $ 19,717 $2,244,009 Fiscal Year Ended July 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts $ 175,391 $ 198,649 $ 0 $ 114,662 $ 259,378 Reserve for sales, discounts and allowances 537,949 96,452 0 0 634,401 ----------- ----------- ---------- ----------- ---------- Total $ 713,340 $ 295,101 $ 0 $ 114,662 $ 893,779 Fiscal Year Ended August 1, 1997: Deducted from asset accounts: Allowance for doubtful accounts $ 140,000 $ 100,782 $ 4,000 $ 69,391 $ 175,391 Reserve for sales, discounts and allowances 416,673 121,276 0 0 537,949 ----------- ----------- ---------- ----------- ---------- Total $ 556,673 $ 222,058 $ 4,000 $ 69,391 $ 713,340
S-1 ACORN PRODUCTS, INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) CONDENSED BALANCE SHEETS
JULY 31, JULY 30, 1998 1999 ---- ---- (IN THOUSANDS) ASSETS Cash $ 76 $ 76 Accounts receivable 265 -- Prepaid and other assets 1,021 772 ---------- --------- Total current assets 1,362 848 Property, plant and equipment, net -- -- Goodwill 6,446 6,263 Other assets (principally investment in and amounts due from wholly-owned subsidiaries) 58,196 44,563 ---------- --------- Total assets $ 66,004 $ 51,674 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 1,292 $ 1,407 Income taxes payable 101 27 Other current liabilities 260 50 ---------- --------- Total current liabilities 1,653 1,484 ---------- --------- Total liabilities 1,653 1,484 ---------- --------- Stockholders' equity Common stock 78,391 78,391 Contributed capital - stock options 460 460 Minimum pension liability (285) (683) Retained earnings (deficit) (14,215) (25,490) ---------- --------- 64,351 52,678 Less: Common stock in treasury - (2,488) ---------- --------- Total stockholders' equity 64,351 50,190 ---------- --------- Total liabilities and stockholders' equity $ 66,004 $ 51,674 ========== =========
S-2 ACORN PRODUCTS, INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED (PARENT COMPANY) CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED ------------------------------------------- 1997 1998 1999 ---- ---- ---- (IN THOUSANDS) Selling and administrative expenses $ 1,785 $ 2,625 $ 3,973 Interest expense 4,539 83 16 Amortization of goodwill 183 183 183 Other expenses 739 (54) 1,075 ---------- ----------- --------- Loss before equity in earnings and losses of subsidiaries (7,246) (2,837) (5,247) Equity in earnings (loss) of wholly-owned subsidiaries (3,633) 4,346 (6,029) Income taxes -- (230) -- ---------- ----------- --------- Net income (loss) $(10,879) $ 1,279 $(11,276) ========== =========== =========
S-3 ACORN PRODUCTS, INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED (PARENT COMPANY) CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED ------------------------------------------- AUGUST 1, JULY 31, JULY 30, 1997 1998 1999 ---- ---- ---- (IN THOUSANDS) Net cash from operating activities $ (11,405) $ 390 $ 2,488 INVESTING ACTIVITIES: Property and equipment -- -- -- FINANCING ACTIVITIES: Net activity on revolving loan (12,537) -- -- Redemption of subordinated debt (31,354) -- -- Issuance of common stock 64,105 -- -- Purchase of treasury stock -- -- (2,488) Retirement of preferred stock (8,596) -- -- ---------- ----------- --------- 11,618 -- (2,488) ---------- ----------- --------- Increase in cash $ 213 $ 390 $ -- ========== =========== =========
S-4 ACORN PRODUCTS, INC SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In the parent company-only financial statements, the Company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries. The Company'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 the Company's consolidated financial statements. 2. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY The Company is a guarantor of the Credit Facility of UnionTools, a wholly-owned subsidiary. Cash utilized by the Company is provided through inter-company borrowings and is subject to certain restrictions. See Note 4 to the Company's Consolidated Financial Statements. S-5 EX-10.2-3 2 EX-10.2-3 EXHIBIT 10.2.3 EMPLOYEE SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into as of August 31, 1999 among Acorn Products, Inc., a Delaware corporation ("Acorn"), UnionTools, Inc., a Delaware corporation ("UnionTools" and together with Acorn, the "Company") and J. Mitchell Dolloff (the "Executive"). R E C I T A L S As an inducement to the Executive to remain in the employ of the Company, the Company has agreed to provide certain severance benefits and, under certain circumstances, to make certain bonus payments to the Executive as specifically set forth herein. Notwithstanding anything in this Agreement to the contrary, the Executive shall remain an employee-at-will hereafter. Accordingly, the Executive may be discharged or may resign for any or no reason, and the rights of the Executive and the Company upon any such termination of the Executive's employment shall be as set forth herein. NOW THEREFORE, the parties hereby agree as follows: 1. SEVERANCE. a. SEVERANCE EVENTS. The Executive shall be entitled to the Severance Payment set forth in Section 1(c) upon the termination of the Executive's employment with the Company by either the Executive or the Company in the following circumstances: (1) resignation by the Executive for Good Reason; or (2) termination of the Executive's employment by the Company other than for Cause. The date of the termination of the Executive's employment in such instances shall be fifteen (15) business days after the date written notice of resignation is tendered by the Executive to the Company or written notice of termination is tendered by the Company to the Executive, as applicable. Any such notice shall specify with reasonable particularity the basis for resignation or termination hereunder. b. CAUSE; GOOD REASON. As used in this agreement, the following terms shall have the meanings set forth below: (i) "Cause" shall mean (x) the Executive's criminal conviction for fraud, embezzlement, misappropriation of assets or any other felony (excluding traffic violations) or (y) the continuance of willful and repeated failures by the Executive to perform the duties assigned to him as an employee of the Company, which failures have not been cured by the Executive within thirty (30) days following receipt of written notice from the Board of Directors of Acorn or UnionTools, as applicable, specifying such failure and the action required by the Executive to cure such breach of his obligations. (ii) "Good Reason" shall mean, without the written consent of the Executive, (A) a material adverse change or diminution in the Executive's duties or responsibilities, offices, reporting responsibilities, facilities, staff assistance, fringe benefits or other indicia of the Executive's position substantially as set forth on Annex A hereto (as the same may from time to time be modified with the written consent of the Company and the Executive) or (B) material breach by the Company of its duties to the Executive, including timely payment of compensation, provision of benefits and reimbursement of expenses, in keeping with past practice. "Good Reason" shall not include relocation of the Executive's personal residence or office pursuant to the relocation of the Company's executive offices from Columbus, Ohio. c. SEVERANCE PAYMENTS. If the Executive is entitled to a payment pursuant to this Section 1, then the Company shall pay to the Executive as a Severance Payment; (i) In a lump sum, on the fifth day following the date of termination of the Executive's employment, an amount equal to the highest aggregate annual compensation (including salary, bonuses and incentive payments) includible in gross income paid to the Executive during any one of the three taxable years preceding the date of the Executive's termination, such amount to be subject to adjustment pursuant to Section 3(c); provided; however, if the Executive has not been employed with the Company for a full calendar year, then the Company shall pay to the Executive an amount equal to the greater of (a) the amount determined pursuant to the foregoing formula or (b) the Executive's then current base salary); (ii) Continue to pay Executive's life insurance and medical benefits premiums for the lessor of one year from the date of termination of the Executive's employment with the Company or until the Executive accepts subsequent employment; and (iii) Outplacement services expenses of up to $25,000 for up to one year from the date of termination of the Executive's employment with the Company. 2. CHANGE OF CONTROL. a. CHANGE OF CONTROL EVENTS. If the Executive's employment with the Company is terminated by either the Executive or the Company in accordance with Section 1(a) of this 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 payment provided in Section 1(c), the Executive also shall be entitled to the Change of Control Payment provided in Section 2(c). b. CHANGE OF CONTROL. A "Change of Control" occurs upon any of the following events: -2- (i) the acquisition by any Person (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than TCW or Oaktree, of beneficial ownership (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except such Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) of securities of Acorn (a) having 25% or more of the total voting power of the then outstanding voting securities of Acorn and (b) having more voting power than the securities of Acorn beneficially owned by Oaktree; (ii) during any twelve month period, a change in the Board of Directors of Acorn occurs such that Incumbent Members do not constitute a majority of the Board of Directors of Acorn; (iii) a sale of all or substantially all of the assets of Acorn or UnionTools; or (iv) the consummation of a merger or consolidation of Acorn with any other Person, provided, however, that no Change of Control shall have occurred pursuant to this clause (iv) if (A) after such merger or consolidation the voting securities of Acorn prior to such merger or consolidation continue to represent more than 50% of the combined voting power of such Person or (B) if such merger or consolidation does not result in a material change in the beneficial ownership of Acorn's voting securities. For purposes of this Section 2, the following terms shall have the following meanings: "Affiliate" of any specified Person (as defined in Section 13(d) of the Exchange Act) shall mean (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any Person who is a director or officer (a) of such Person, (b) of any subsidiary of such Person or (c) of any Person described in clause (i) above. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meaning correlative to the foregoing. "Incumbent Members" shall mean the members of the Board of Directors of Acorn on the date immediately preceding the commencement of a twelve-month period, provided that any person becoming a Director during such twelve-month period whose election or nomination for election was approved by a majority of the Directors who, on the date of such election or nomination for election, comprised the Incumbent Members shall be considered one of the Incumbent Members in respect of such twelve-month period. -3- "Oaktree" shall mean Oaktree Capital Management, LLC and its Affiliates, including any partnerships, separate accounts or other entities managed by Oaktree. "TCW" shall mean: TCW Special Credits Plus Fund; TCW Special Credits Fund III; TCW Special Credits Fund IIIb; TCW Special Credits Fund IV; TCW Special Credits Trust; TCW Special Credits Trust IIIb; TCW Special Credits Trust IV; TCW Special Credits Trust IVa; TCW Special Credits, as investment manager of Delaware State Employees' Retirement Fund, Weyerhaeuser Company Pension Trust and The Common Fund for Bond Investments; and any of their respective Affiliates. c. CHANGE OF CONTROL PAYMENT. If the Executive is entitled to a payment pursuant to this Section 2, then the Company shall pay to the Executive as a Change of Control Payment, in a lump sum, on the fifth day following the date of termination of the Executive's employment, an amount equal to two times the highest aggregate annual compensation (which includes salary, bonuses and cash incentive payments only) includible in gross income paid to the Executive during any one of the three taxable years preceding the date of the Executive's termination, such amount to be subject to adjustment pursuant to Subsection 3(c). 3. ADDITIONAL PAYMENT TERMS. a. NO REDUCTION. The Executive shall not be required to mitigate damages or the amount of any payment provided for under Section 1(c) or Section 2(c) by seeking other employment or otherwise, nor shall the amount of any payment provided for under Section 1(c) or Section 2(c) be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination or otherwise. b. INDEMNIFICATION. The Company shall indemnify the Executive for all costs, including reasonable attorneys' fees, incurred by the Executive in connection with any successful action by the Executive to enforce or otherwise determine or ensure compliance by the Company with the terms of this Agreement. c. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, collectively, the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (the "Excise Tax Payment") in an amount equal to the Excise Tax imposed upon the Payment and any additional payments made pursuant to this Section 3(c). -4- 4. MISCELLANEOUS. a. ASSIGNABILITY; BINDING NATURE. (i) This Agreement shall inure to the benefit of the Company and the Executive and their respective successors, heirs (in the case of the Executive) and assigns. For purposes of this Agreement, the term "successor" of the Company shall include any person or entity, whether direct or indirect, whether by purchase, merger, consolidation, operation of law, assignment or otherwise who acquires or controls all or substantially all of the assets of Acorn or UnionTools. (ii) The Company shall require any successor of the Company, by an agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to be bound by the terms of this Agreement in the same manner and to the same extent that the Company would be required to perform if no succession had occurred. The Company shall be in material breach of this Agreement if any such successor fails to expressly assume or otherwise agree to guaranty performance of this Agreement to the extent the Company was obligated prior to any succession. (iii) Except as expressly stated in Section 4(a) above, this Agreement shall be non-assignable by either the Company or the Executive without the prior written consent of all parties hereto. b. NOTICES. Any notice hereunder shall be properly given if by personal delivery or registered or certified mail, return receipt requested, as follows: If to the Executive, at his address as it appears on the payroll records of the Company. If to the Company, to: Acorn Products, Inc. 500 Dublin Ave. Columbus, OH 43216-1930 Attention: President or to such other addresses as the parties may designate in writing. c. INTEGRATION; MODIFICATION. This Agreement shall supersede all previous negotiations, commitments and writings with respect to the employment of the Executive. This Agreement may not be released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the parties hereto. The failure of either party hereto to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provisions, nor in any way to affect the validity of this Agreement or the right of either party thereafter to enforce each and every such -5- provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach. d. SEVERABILITY. If any term or provision of this Agreement is declared invalid by a court of competent jurisdiction, the remaining terms and provisions of this Agreement shall remain unimpaired. e. CAPTIONS. The captions appearing in this Agreement are inserted only as a matter of convenience and as a reference and in no way define, limit or describe the scope or intent of this Agreement or any of other provisions hereof. f. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of New York without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. g. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of the date first above written. EXECUTIVE /s/ J. Mitchell Doloff ------------------------------------- J. Mitchell Dolloff ACORN PRODUCTS, INC. /s/ Gabe Mihaly ------------------------------------- Name: Gabe Mihaly Title: President UNIONTOOLS, INC. /s/ Gabe Mihaly ------------------------------------- Name: Gabe Mihaly Title: President -6- EX-10.2-4 3 EX-10.2-4 EXHIBIT 10.2.4 EMPLOYEE SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into as of August 31, 1999 among Acorn Products, Inc., a Delaware corporation ("Acorn"), UnionTools, Inc., a Delaware corporation ("UnionTools" and together with Acorn, the "Company") and A. Corydon Meyer (the "Executive"). R E C I T A L S As an inducement to the Executive to remain in the employ of the Company, the Company has agreed to provide certain severance benefits and, under certain circumstances, to make certain bonus payments to the Executive as specifically set forth herein. Notwithstanding anything in this Agreement to the contrary, the Executive shall remain an employee-at-will hereafter. Accordingly, the Executive may be discharged or may resign for any or no reason, and the rights of the Executive and the Company upon any such termination of the Executive's employment shall be as set forth herein. NOW THEREFORE, the parties hereby agree as follows: 1. SEVERANCE. a. SEVERANCE EVENTS. The Executive shall be entitled to the Severance Payment set forth in Section 1(c) upon the termination of the Executive's employment with the Company by either the Executive or the Company in the following circumstances: (1) resignation by the Executive for Good Reason; or (2) termination of the Executive's employment by the Company other than for Cause. The date of the termination of the Executive's employment in such instances shall be fifteen (15) business days after the date written notice of resignation is tendered by the Executive to the Company or written notice of termination is tendered by the Company to the Executive, as applicable. Any such notice shall specify with reasonable particularity the basis for resignation or termination hereunder. b. CAUSE; GOOD REASON. As used in this agreement, the following terms shall have the meanings set forth below: (i) "Cause" shall mean (x) the Executive's criminal conviction for fraud, embezzlement, misappropriation of assets or any other felony (excluding traffic violations) or (y) the continuance of willful and repeated failures by the Executive to perform the duties assigned to him as an employee of the Company, which failures have not been cured by the Executive within thirty (30) days following receipt of written notice from the Board of Directors of Acorn or UnionTools, as applicable, specifying such failure and the action required by the Executive to cure such breach of his obligations. (ii) "Good Reason" shall mean, without the written consent of the Executive, (A) a material adverse change or diminution in the Executive's duties or responsibilities, offices, reporting responsibilities, facilities, staff assistance, fringe benefits or other indicia of the Executive's position substantially as set forth on Annex A hereto (as the same may from time to time be modified with the written consent of the Company and the Executive) or (B) material breach by the Company of its duties to the Executive, including timely payment of compensation, provision of benefits and reimbursement of expenses, in keeping with past practice. "Good Reason" shall not include relocation of the Executive's personal residence or office pursuant to the relocation of the Company's executive offices from Columbus, Ohio. c. SEVERANCE PAYMENTS. If the Executive is entitled to a payment pursuant to this Section 1, then the Company shall pay to the Executive as a Severance Payment; (i) In a lump sum, on the fifth day following the date of termination of the Executive's employment, an amount equal to the highest aggregate annual compensation (including salary, bonuses and incentive payments) includible in gross income paid to the Executive during any one of the three taxable years preceding the date of the Executive's termination, such amount to be subject to adjustment pursuant to Section 3(c); provided; however, if the Executive has not been employed with the Company for a full calendar year, then the Company shall pay to the Executive an amount equal to the greater of (a) the amount determined pursuant to the foregoing formula or (b) the Executive's then current base salary); (ii) Continue to pay Executive's life insurance and medical benefits premiums for the lessor of one year from the date of termination of the Executive's employment with the Company or until the Executive accepts subsequent employment; and (iii) Outplacement services expenses of up to $25,000 for up to one year from the date of termination of the Executive's employment with the Company. 2. CHANGE OF CONTROL. a. CHANGE OF CONTROL EVENTS. If the Executive's employment with the Company is terminated by either the Executive or the Company in accordance with Section 1(a) of this 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 payment provided in Section 1(c), the Executive also shall be entitled to the Change of Control Payment provided in Section 2(c). b. CHANGE OF CONTROL. A "Change of Control" occurs upon any of the following events: -2- (i) the acquisition by any Person (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than TCW or Oaktree, of beneficial ownership (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except such Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) of securities of Acorn (a) having 25% or more of the total voting power of the then outstanding voting securities of Acorn and (b) having more voting power than the securities of Acorn beneficially owned by Oaktree; (ii) during any twelve month period, a change in the Board of Directors of Acorn occurs such that Incumbent Members do not constitute a majority of the Board of Directors of Acorn; (iii) a sale of all or substantially all of the assets of Acorn or UnionTools; or (iv) the consummation of a merger or consolidation of Acorn with any other Person, provided, however, that no Change of Control shall have occurred pursuant to this clause (iv) if (A) after such merger or consolidation the voting securities of Acorn prior to such merger or consolidation continue to represent more than 50% of the combined voting power of such Person or (B) if such merger or consolidation does not result in a material change in the beneficial ownership of Acorn's voting securities. For purposes of this Section 2, the following terms shall have the following meanings: "Affiliate" of any specified Person (as defined in Section 13(d) of the Exchange Act) shall mean (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any Person who is a director or officer (a) of such Person, (b) of any subsidiary of such Person or (c) of any Person described in clause (i) above. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meaning correlative to the foregoing. "Incumbent Members" shall mean the members of the Board of Directors of Acorn on the date immediately preceding the commencement of a twelve-month period, provided that any person becoming a Director during such twelve-month period whose election or nomination for election was approved by a majority of the Directors who, on the date of such election or nomination for election, comprised the Incumbent Members shall be considered one of the Incumbent Members in respect of such twelve-month period. -3- "Oaktree" shall mean Oaktree Capital Management, LLC and its Affiliates, including any partnerships, separate accounts or other entities managed by Oaktree. "TCW" shall mean: TCW Special Credits Plus Fund; TCW Special Credits Fund III; TCW Special Credits Fund IIIb; TCW Special Credits Fund IV; TCW Special Credits Trust; TCW Special Credits Trust IIIb; TCW Special Credits Trust IV; TCW Special Credits Trust IVa; TCW Special Credits, as investment manager of Delaware State Employees' Retirement Fund, Weyerhaeuser Company Pension Trust and The Common Fund for Bond Investments; and any of their respective Affiliates. c. CHANGE OF CONTROL PAYMENT. If the Executive is entitled to a payment pursuant to this Section 2, then the Company shall pay to the Executive as a Change of Control Payment, in a lump sum, on the fifth day following the date of termination of the Executive's employment, an amount equal to two times the highest aggregate annual compensation (which includes salary, bonuses and cash incentive payments only) includible in gross income paid to the Executive during any one of the three taxable years preceding the date of the Executive's termination, such amount to be subject to adjustment pursuant to Subsection 3(c). 3. ADDITIONAL PAYMENT TERMS. a. NO REDUCTION. The Executive shall not be required to mitigate damages or the amount of any payment provided for under Section 1(c) or Section 2(c) by seeking other employment or otherwise, nor shall the amount of any payment provided for under Section 1(c) or Section 2(c) be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination or otherwise. b. INDEMNIFICATION. The Company shall indemnify the Executive for all costs, including reasonable attorneys' fees, incurred by the Executive in connection with any successful action by the Executive to enforce or otherwise determine or ensure compliance by the Company with the terms of this Agreement. c. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, collectively, the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (the "Excise Tax Payment") in an amount equal to the Excise Tax imposed upon the Payment and any additional payments made pursuant to this Section 3(c). -4- 4. MISCELLANEOUS. a. ASSIGNABILITY; BINDING NATURE. (i) This Agreement shall inure to the benefit of the Company and the Executive and their respective successors, heirs (in the case of the Executive) and assigns. For purposes of this Agreement, the term "successor" of the Company shall include any person or entity, whether direct or indirect, whether by purchase, merger, consolidation, operation of law, assignment or otherwise who acquires or controls all or substantially all of the assets of Acorn or UnionTools. (ii) The Company shall require any successor of the Company, by an agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to be bound by the terms of this Agreement in the same manner and to the same extent that the Company would be required to perform if no succession had occurred. The Company shall be in material breach of this Agreement if any such successor fails to expressly assume or otherwise agree to guaranty performance of this Agreement to the extent the Company was obligated prior to any succession. (iii) Except as expressly stated in Section 4(a) above, this Agreement shall be non-assignable by either the Company or the Executive without the prior written consent of all parties hereto. b. NOTICES. Any notice hereunder shall be properly given if by personal delivery or registered or certified mail, return receipt requested, as follows: If to the Executive, at his address as it appears on the payroll records of the Company. If to the Company, to: Acorn Products, Inc. 500 Dublin Ave. Columbus, OH 43216-1930 Attention: President or to such other addresses as the parties may designate in writing. c. INTEGRATION; MODIFICATION. This Agreement shall supersede all previous negotiations, commitments and writings with respect to the employment of the Executive. This Agreement may not be released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the parties hereto. The failure of either party hereto to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provisions, nor in any way to affect the validity of this Agreement or the right of either party thereafter to enforce each and every such -5- provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach. d. SEVERABILITY. If any term or provision of this Agreement is declared invalid by a court of competent jurisdiction, the remaining terms and provisions of this Agreement shall remain unimpaired. e. CAPTIONS. The captions appearing in this Agreement are inserted only as a matter of convenience and as a reference and in no way define, limit or describe the scope or intent of this Agreement or any of other provisions hereof. f. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of New York without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. g. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of the date first above written. EXECUTIVE /s/ A. Corydon Meyer ------------------------------------- A. Corydon Meyer ACORN PRODUCTS, INC. /s/ Gabe Mihaly ------------------------------------- Name: Gabe Mihaly Title: President UNIONTOOLS, INC. /s/ Gabe Mihaly ------------------------------------- Name: Gabe Mihaly Title: President -6- EX-10.2-5 4 EX-10.2-5 EXHIBIT 10.2.5 EMPLOYEE SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into as of August 31, 1999 among Acorn Products, Inc., a Delaware corporation ("Acorn"), UnionTools, Inc., a Delaware corporation ("UnionTools" and together with Acorn, the "Company") and John G. Jacob (the "Executive"). R E C I T A L S As an inducement to the Executive to remain in the employ of the Company, the Company has agreed to provide certain severance benefits and, under certain circumstances, to make certain bonus payments to the Executive as specifically set forth herein. Notwithstanding anything in this Agreement to the contrary, the Executive shall remain an employee-at-will hereafter. Accordingly, the Executive may be discharged or may resign for any or no reason, and the rights of the Executive and the Company upon any such termination of the Executive's employment shall be as set forth herein. NOW THEREFORE, the parties hereby agree as follows: 1. SEVERANCE. a. SEVERANCE EVENTS. The Executive shall be entitled to the Severance Payment set forth in Section 1(c) upon the termination of the Executive's employment with the Company by either the Executive or the Company in the following circumstances: (1) resignation by the Executive for Good Reason; or (2) termination of the Executive's employment by the Company other than for Cause. The date of the termination of the Executive's employment in such instances shall be fifteen (15) business days after the date written notice of resignation is tendered by the Executive to the Company or written notice of termination is tendered by the Company to the Executive, as applicable. Any such notice shall specify with reasonable particularity the basis for resignation or termination hereunder. b. CAUSE; GOOD REASON. As used in this agreement, the following terms shall have the meanings set forth below: (i) "Cause" shall mean (x) the Executive's criminal conviction for fraud, embezzlement, misappropriation of assets or any other felony (excluding traffic violations) or (y) the continuance of willful and repeated failures by the Executive to perform the duties assigned to him as an employee of the Company, which failures have not been cured by the Executive within thirty (30) days following receipt of written notice from the Board of Directors of Acorn or UnionTools, as applicable, specifying such failure and the action required by the Executive to cure such breach of his obligations. (ii) "Good Reason" shall mean, without the written consent of the Executive, (A) a material adverse change or diminution in the Executive's duties or responsibilities, offices, reporting responsibilities, facilities, staff assistance, fringe benefits or other indicia of the Executive's position substantially as set forth on Annex A hereto (as the same may from time to time be modified with the written consent of the Company and the Executive) or (B) material breach by the Company of its duties to the Executive, including timely payment of compensation, provision of benefits and reimbursement of expenses, in keeping with past practice. "Good Reason" shall not include relocation of the Executive's personal residence or office pursuant to the relocation of the Company's executive offices from Columbus, Ohio. c. SEVERANCE PAYMENTS. If the Executive is entitled to a payment pursuant to this Section 1, then the Company shall pay to the Executive as a Severance Payment; (i) In a lump sum, on the fifth day following the date of termination of the Executive's employment, an amount equal to the highest aggregate annual compensation (including salary, bonuses and incentive payments) includible in gross income paid to the Executive during any one of the three taxable years preceding the date of the Executive's termination, such amount to be subject to adjustment pursuant to Section 3(c); provided; however, if the Executive has not been employed with the Company for a full calendar year, then the Company shall pay to the Executive an amount equal to the greater of (a) the amount determined pursuant to the foregoing formula or (b) the Executive's then current base salary); (ii) Continue to pay Executive's life insurance and medical benefits premiums for the lessor of one year from the date of termination of the Executive's employment with the Company or until the Executive accepts subsequent employment; and (iii) Outplacement services expenses of up to $25,000 for up to one year from the date of termination of the Executive's employment with the Company. 2. CHANGE OF CONTROL. a. CHANGE OF CONTROL EVENTS. If the Executive's employment with the Company is terminated by either the Executive or the Company in accordance with Section 1(a) of this 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 payment provided in Section 1(c), the Executive also shall be entitled to the Change of Control Payment provided in Section 2(c). b. CHANGE OF CONTROL. A "Change of Control" occurs upon any of the following events: -2- (i) the acquisition by any Person (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than TCW or Oaktree, of beneficial ownership (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except such Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) of securities of Acorn (a) having 25% or more of the total voting power of the then outstanding voting securities of Acorn and (b) having more voting power than the securities of Acorn beneficially owned by Oaktree; (ii) during any twelve month period, a change in the Board of Directors of Acorn occurs such that Incumbent Members do not constitute a majority of the Board of Directors of Acorn; (iii) a sale of all or substantially all of the assets of Acorn or UnionTools; or (iv) the consummation of a merger or consolidation of Acorn with any other Person, provided, however, that no Change of Control shall have occurred pursuant to this clause (iv) if (A) after such merger or consolidation the voting securities of Acorn prior to such merger or consolidation continue to represent more than 50% of the combined voting power of such Person or (B) if such merger or consolidation does not result in a material change in the beneficial ownership of Acorn's voting securities. For purposes of this Section 2, the following terms shall have the following meanings: "Affiliate" of any specified Person (as defined in Section 13(d) of the Exchange Act) shall mean (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any Person who is a director or officer (a) of such Person, (b) of any subsidiary of such Person or (c) of any Person described in clause (i) above. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meaning correlative to the foregoing. "Incumbent Members" shall mean the members of the Board of Directors of Acorn on the date immediately preceding the commencement of a twelve-month period, provided that any person becoming a Director during such twelve-month period whose election or nomination for election was approved by a majority of the Directors who, on the date of such election or nomination for election, comprised the Incumbent Members shall be considered one of the Incumbent Members in respect of such twelve-month period. "Oaktree" shall mean Oaktree Capital Management, LLC and its Affiliates, including any partnerships, separate accounts or other entities managed by Oaktree. -3- "TCW" shall mean: TCW Special Credits Plus Fund; TCW Special Credits Fund III; TCW Special Credits Fund IIIb; TCW Special Credits Fund IV; TCW Special Credits Trust; TCW Special Credits Trust IIIb; TCW Special Credits Trust IV; TCW Special Credits Trust IVa; TCW Special Credits, as investment manager of Delaware State Employees' Retirement Fund, Weyerhaeuser Company Pension Trust and The Common Fund for Bond Investments; and any of their respective Affiliates. c. CHANGE OF CONTROL PAYMENT. If the Executive is entitled to a payment pursuant to this Section 2, then the Company shall pay to the Executive as a Change of Control Payment, in a lump sum, on the fifth day following the date of termination of the Executive's employment, an amount equal to two times the highest aggregate annual compensation (which includes salary, bonuses and cash incentive payments only) includible in gross income paid to the Executive during any one of the three taxable years preceding the date of the Executive's termination, such amount to be subject to adjustment pursuant to Subsection 3(c). 3. ADDITIONAL PAYMENT TERMS. a. NO REDUCTION. The Executive shall not be required to mitigate damages or the amount of any payment provided for under Section 1(c) or Section 2(c) by seeking other employment or otherwise, nor shall the amount of any payment provided for under Section 1(c) or Section 2(c) be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination or otherwise. b. INDEMNIFICATION. The Company shall indemnify the Executive for all costs, including reasonable attorneys' fees, incurred by the Executive in connection with any successful action by the Executive to enforce or otherwise determine or ensure compliance by the Company with the terms of this Agreement. c. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, collectively, the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (the "Excise Tax Payment") in an amount equal to the Excise Tax imposed upon the Payment and any additional payments made pursuant to this Section 3(c). -4- 4. MISCELLANEOUS. a. ASSIGNABILITY; BINDING NATURE. (i) This Agreement shall inure to the benefit of the Company and the Executive and their respective successors, heirs (in the case of the Executive) and assigns. For purposes of this Agreement, the term "successor" of the Company shall include any person or entity, whether direct or indirect, whether by purchase, merger, consolidation, operation of law, assignment or otherwise who acquires or controls all or substantially all of the assets of Acorn or UnionTools. (ii) The Company shall require any successor of the Company, by an agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to be bound by the terms of this Agreement in the same manner and to the same extent that the Company would be required to perform if no succession had occurred. The Company shall be in material breach of this Agreement if any such successor fails to expressly assume or otherwise agree to guaranty performance of this Agreement to the extent the Company was obligated prior to any succession. (iii) Except as expressly stated in Section 4(a) above, this Agreement shall be non-assignable by either the Company or the Executive without the prior written consent of all parties hereto. b. NOTICES. Any notice hereunder shall be properly given if by personal delivery or registered or certified mail, return receipt requested, as follows: If to the Executive, at his address as it appears on the payroll records of the Company. If to the Company, to: Acorn Products, Inc. 500 Dublin Ave. Columbus, OH 43216-1930 Attention: President or to such other addresses as the parties may designate in writing. c. INTEGRATION; MODIFICATION. This Agreement shall supersede all previous negotiations, commitments and writings with respect to the employment of the Executive. This Agreement may not be released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the parties hereto. The failure of either party hereto to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provisions, nor in any way to affect the validity of this Agreement or the right of either party thereafter to enforce each and every such -5- provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach. d. SEVERABILITY. If any term or provision of this Agreement is declared invalid by a court of competent jurisdiction, the remaining terms and provisions of this Agreement shall remain unimpaired. e. CAPTIONS. The captions appearing in this Agreement are inserted only as a matter of convenience and as a reference and in no way define, limit or describe the scope or intent of this Agreement or any of other provisions hereof. f. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of New York without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. g. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of the date first above written. EXECUTIVE /s/ John G. Jacob ------------------------------------- John G. Jacob ACORN PRODUCTS, INC. /s/ Gabe Mihaly ------------------------------------- Name: Gabe Mihaly Title: President UNIONTOOLS, INC. /s/ Gabe Mihaly ------------------------------------- Name: Gabe Mihaly Title: President -6- EX-10.22 5 EX-10.22 COMPENSATION AGREEMENT This Compensation Agreement (this "Agreement") is entered into by and between Acorn Products, Inc., a Delaware corporation (the "Company") and W. Wallace Abbott (the "Chairman") as of the 28th day of October, 1999. WHEREAS, on this 28th day of October, 1999, the Chairman was elected Chairman of the Board of Directors of the Company (the "Board of Directors") in accordance with the procedures set forth in the Company's Bylaws (the "Bylaws"); and WHEREAS, the Company and the Chairman have agreed that in addition to the compensation that will otherwise be provided to the Chairman as a member of the Board of Directors in accordance with the Company's policies of Director compensation, the Chairman shall be entitled to supplemental compensation in recognition of his efforts on behalf of the Company as Chairman of the Board of Directors; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby confirmed, the Company and the Chairman hereby agree as follows: 1. CONFIRMATION OF POSITION. The Company hereby confirms that the Chairman has been elected to serve as Chairman of the Board of Directors, effective as of October 28, 1999, pursuant to an election by the Board of Directors in accordance with the Bylaws. 2. COMPENSATION. In addition to (i) any compensation generally provided to Directors of the Company and (ii) a one-time grant of options to purchase up to 100,000 shares of Common Stock of the Company made to the Chairman pursuant to an option agreement dated as of the 28th day of October, 1999, by and between the Chairman and the Company, the Chairman shall be entitled, during his term as Chairman of the Board of Directors (the "Term"), to compensation in the amount of Forty Thousand Dollars ($40,000) per annum, payable semiannually in arrears on each May 1 and November 1 during the Term (each, a "Payment Date"), commencing May 1, 2000. If the Term ends on a day other than May 1 or November 1, the Chairman shall, on the date of such termination, be entitled to receive a pro-rata portion of such amount for the period commencing on the immediately preceding Payment Date and ending on the date of termination. 3. NO EMPLOYMENT. Nothing contained herein shall confer upon the Chairman any right to continued employment by the Company as Chairman of the Board of Directors or to continue to hold his position as a Director of the Company. The rights set forth in the Bylaws authorizing the stockholders of the Company and the Board of Directors to remove the Chairman from his position as Chairman of the Board of Directors, and as a Director of the Company, shall not be limited or otherwise affected by the terms of this Agreement. 4. MISCELLANEOUS. a. GOVERNING LAW. All terms of, and rights under, this Agreement shall be governed by and construed in accordance with the internal law of the State of New York, without giving effect to principles of conflicts of law. b. NOTICES. Any notices, requests, demands or other communications pursuant to this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered, telexed or telecopied to, or, if mailed, when received by, the other party at the following addresses (or at such other address as shall be given in writing by either party to the other): If to the Company to: Acorn Products, Inc. 390 Dublin Avenue Columbus, Ohio 43216-1930 Attention: Secretary If to the Chairman to: c. AMENDMENT. This Agreement may be amended, and any provision hereof may be waived, only by a writing signed by both parties hereto. d. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and supersedes all prior oral and written and all contemporaneous oral discussions, agreements and understandings of any kind or nature. e. COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and date first above written. ACORN PRODUCTS, INC. By: /s/ A. Corydon Meyer ------------------------ Name: A. Corydon Meyer Title: President /s/ W. Wallace Abbott --------------------------- W. Wallace Abbott EX-21.1 6 EX-21.1 EXHIBIT 21.1 Subsidiaries of the Company: UnionTools, Inc., a Delaware corporation; H.B. Sherman Manufacturing Company, Inc., a Missouri corporation; UnionTools Imagation, Inc., a Delaware corporation; VSI Fasteners, Inc., a California corporation; McGuire-Nicholas Company, Inc., a California corporation; VHG Tools, Inc., a Missouri corporation; and UnionTools.com, Inc., a Delaware corporation. EX-23.1 7 EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-58807); (Form S-8 No. 333-32087) and (Form S-8 No. 333-32089) of Acorn Products, Inc. of our report dated September 15, 1999, except for Notes 4 and 13, as to which the date is October 28, 1999, with respect to the consolidated financial statements and schedules of Acorn Products, Inc. included in this Annual Report (Form 10-K) for the year ended July 30, 1999. /s/ Ernst & Young LLP ---------------------------- ERNST & YOUNG LLP Columbus, Ohio November 12, 1999 EX-24.1 8 EX-24.1 EXHIBIT 24.1 POWER OF ATTORNEY Each director and/or officer of Acorn Products, Inc. (the "Corporation") whose signature appears below hereby appoints A. Corydon Meyer and John Jacob as the undersigned's attorneys or either of them individually as the undersigned's attorney, to sign, in the undersigned's name and behalf and in any and all capacities stated below, and to cause to be filed with the Securities and Exchange Commission (the "Commission"), the Corporation's Annual Report on Form 10-K (the "Form 10-K") for the fiscal year ended July 30, 1999, and likewise to sign and file with the Commission any and all amendments to the Form 10-K, and the Corporation hereby also appoints such persons as its attorneys-in-fact and each of them as its attorney-in-fact with like authority to sign and file the Form 10-K and any amendments thereto granting to each such attorney-in-fact full power of substitution and revocation, and hereby ratifying all that any such attorney-in-fact or the undersigned's substitute may do by virtue hereof. IN WITNESS WHEREOF, we have hereunto set our hands this 1st day of November, 1999.
SIGNATURE TITLE /s/ A. Corydon Meyer President, Chief Executive Officer, and Director -------------------------------- (Principal Executive Officer) A. Corydon Meyer /s/ John Jacob Vice President and Chief Financial Officer -------------------------------- (Principal Financial Officer) John Jacob /s/ L.B. Dove, II Chief Accounting Officer -------------------------------- (Principal Accounting Officer) L.B. Dove, II /s/ William W. Abbott Chairman -------------------------------- William W. Abbott /s/ Matthew S. Barrett Director -------------------------------- Matthew S. Barrett /s/ Stephen A. Kaplan Director -------------------------------- Stephen A. Kaplan /s/ John I. Leahy Director -------------------------------- John I. Leahy
EX-27.1 9 EX-27.1
5 1,000 YEAR JUL-30-1999 AUG-01-1999 JUL-30-1999 1,222 0 20,212 0 30,891 54,518 16,622 0 108,867 39,400 0 0 0 78,391 (28,201) 108,867 111,414 111,414 91,149 91,149 24,717 0 3,401 (10,195) 145 (10,340) 936 2,342 0 (11,276) (1.79) (1.79)
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