-----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, LSELNLmcGrotOLqMtP0iGzv1loIyzHhxVpEyfhs3nWAdDEfLhjFiZd5w8EdQBsu8 YpIikMChh+yBJgOUXTK/Zw== 0000950123-97-004639.txt : 19970528 0000950123-97-004639.hdr.sgml : 19970528 ACCESSION NUMBER: 0000950123-97-004639 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970523 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACORN PRODUCTS INC CENTRAL INDEX KEY: 0001036713 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-25325 FILM NUMBER: 97614025 BUSINESS ADDRESS: STREET 1: 500 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43216-1930 BUSINESS PHONE: 6142224400 MAIL ADDRESS: STREET 1: 500 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43216-1930 S-1/A 1 ACORN PRODUCTS 1 REGISTRATION NO. 333-25325 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ACORN PRODUCTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3423 22-3265462 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------ GAVRIL MIHALY PRESIDENT AND CHIEF EXECUTIVE OFFICER 500 DUBLIN AVENUE 500 DUBLIN AVENUE COLUMBUS, OHIO 43216-1930 COLUMBUS, OHIO 43216-1930 (614) 222-4400 (614) 222-4400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, ADDRESS, INCLUDING ZIP CODE, AND NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT PRINCIPAL EXECUTIVE OFFICES) FOR SERVICE) WITH COPIES TO: CONOR D. REILLY, ESQ. CHRISTOPHER M. KELLY, ESQ. GIBSON, DUNN & CRUTCHER LLP JONES, DAY, REAVIS & POGUE 200 PARK AVENUE 901 LAKESIDE AVENUE NEW YORK, NEW YORK 10166-0193 CLEVELAND, OHIO 44114 (212) 351-4000 (216) 586-3939
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practical after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE ================================================================================
PROPOSED AMOUNT MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE(2) - ---------------------------------------------------------------------------------------------------------------- Common Stock, $.001 par value......... 3,737,500 $15.00 $56,062,500 $17,000 ================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933. (2) A registration fee of $14,700 previously was paid in connection with the initial filing of the Registration Statement. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 23, 1997 PROSPECTUS 3,250,000 SHARES ACORN PRODUCTS, INC. COMMON STOCK ------------------------ All of the shares of common stock, par value $.001 per share (the "Common Stock"), of Acorn Products, Inc. ("Acorn") offered hereby (the "Offering"), are being issued and sold by Acorn. Of the 3,250,000 shares being offered hereby, 812,500 shares have been reserved for sale to the OCM Principal Opportunities Fund, L.P. (the "Oaktree Fund") and 66,500 shares have been reserved for sale to officers, directors and employees of Acorn and its subsidiaries. See "Underwriting". Prior to this Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $13.00 and $15.00 per share. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Common Stock has been submitted for approval for quotation on the Nasdaq National Market under the symbol "ACRN", subject to official notice of issuance. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT ACORN(1) - ------------------------------------------------------------------------------------------------- Per share......................... $ $ $ - ------------------------------------------------------------------------------------------------- Total(2).......................... $ $ $ =================================================================================================
(1) Before deducting expenses payable by Acorn, estimated at $1.5 million. Acorn has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Acorn has granted the Underwriters a 30-day option to purchase up to 487,500 additional shares of Common Stock at the Price to Public less the Underwriting Discount, solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount, and Proceeds to Acorn will be $ , $ and $ , respectively. See "Underwriting". ------------------------ The shares of Common Stock are offered by the Underwriters subject to receipt and acceptance of the shares by them. The Underwriters reserve the right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of shares of Common Stock will be made on or about , 1997. A.G. Edwards & Sons, Inc. The date of this Prospectus is , 1997. 3 [PHOTOGRAPHS OF THE COMPANY'S PRODUCTS] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements (including the Notes thereto) appearing elsewhere in this Prospectus. As used in this Prospectus and except as the context otherwise may require, the "Company" means Acorn and its subsidiaries, other than McGuire-Nicholas Company, Inc. ("McGuire-Nicholas") and VSI Fasteners, Inc. ("VSI"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Disposition of Lawn and Garden Business Operations and "Description of McGuire-Nicholas". References to the Company's fiscal year mean the fiscal year ended on the Friday closest to July 31 of the applicable year (e.g., fiscal 1996 means the fiscal year ended August 2, 1996). Unless the context otherwise requires, the information contained herein gives effect to a 1,446-for-1 split of the Common Stock effected on May 22, 1997 in the form of a stock dividend to all stockholders of record on May 21, 1997. In addition, unless the context otherwise requires, the information contained in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such statements as a result of various factors, including those set forth under the caption "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Founded in 1890, 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 and cutting tools. The Company sells its products under a variety of well-known brand names, including Razor-Back, Union, Yard 'n Garden, Perfect Cut and, pursuant to a license agreement, Scotts. In addition, the Company manufactures private label products for a variety of retailers, including products sold under Sears' Craftsman and Cotter & Company's True Value brand names. The Company's customers include mass merchants such as Sears, Kmart and Fred Meyer, home centers such as Home Depot, HomeBase, Builders Square and Payless Cashways, buying groups such as Cotter & Company and Ace Hardware and farm and industrial distributors. The Company believes that the lawn and garden industry is the beneficiary of several significant trends suggesting a growing demand for lawn and garden tools, including (i) the continuing popularity of gardening (industry sources estimate that approximately 80 million households in the U.S. participated in some form of gardening in 1994), (ii) the movement of the "baby boomer" generation into the 45 to 54 age group (estimated to increase by approximately 54% from 1998 to 2008), which industry sources estimate represents the largest age group of lawn and garden enthusiasts and (iii) a general increase in housing starts, representing a net addition of homeowners who are likely purchasers of lawn and garden tools. In addition, due to the comparative affordability of lawn and garden tools, the industry is relatively non-cyclical. The Company's net sales increased from $56.2 million in fiscal 1991 to $92.7 million in fiscal 1996, a compound annual growth rate ("CAGR") of 10.5%. The Company's net sales were $78.0 million for the nine months ended May 2, 1997, an increase of 12.3% from the same period in fiscal 1996. In addition, net sales of the Company's higher-margin, best-quality products increased to approximately 36% of total net sales in fiscal 1996, while net sales of the Company's lower-margin, opening-price-point products decreased to approximately 7% of total net sales in fiscal 1996. The Company generated approximately 92% of its revenues in both fiscal 1996 and the nine months ended May 2, 1997 from sales of long handle tools. The Company believes that it has gained the second largest market share in the long handle tools segment of the industry (with an estimated market share of approximately 28% in 1996) from the third largest market share in the early 1990s. BUSINESS STRATEGY Over the past six years the Company has successfully implemented a business strategy designed to transform it from a manufacturing-oriented industrial company into a marketing-oriented consumer products 3 5 company. The central elements of the Company's approach include 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. The Company has developed a family of brands, each targeted to one or more specific consumer segments and price-points. For example, shovels sold under the Company's opening-price-point Yard 'n Garden brand retail from $3.99 to $5.99, while shovels sold under the Company's best-quality Razor-Back brand retail from $19.99 to $21.99. The Company's products and brands are differentiated by price, features and warranty, as well as by the materials and production processes used. - Merchandising Strategy. The Company was the first in the long handle tool segment of the non-powered lawn and garden industry to successfully implement sophisticated merchandising and marketing programs. The Company's 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. The Company uses innovative product labeling and point-of-sale signage and racking to highlight the comparative value and quality of products within and among the Company's brands. Products within the Company's Union, Scotts and Perfect Cut lines are merchandised using the Company's trademarked "Good/Better/Best" format. Where adequate shelf-space is available, the Company also merchandises its brands together, from the Company's opening price-point Yard 'n Garden brand to its best-quality Razor-Back brand, using a similar value positioning technique. The Company believes that its merchandising strategy facilitates comparison shopping and encourages consumers to purchase higher price-point products. Over the past six years, the Company also has expanded its infrastructure to support future growth by recruiting an experienced management team, increasing manufacturing capacity and enhancing its management information systems. GROWTH STRATEGY The Company believes that it can leverage the success of its business strategy through the implementation of the following growth strategies: - Increase Penetration in High Growth Distribution Channels. The Company believes that certain distribution channels, such as home centers and mass merchants, are growing more rapidly than the overall industry. The Company believes that it can continue to increase its sales in these high growth distribution channels through its unique combination of brand names, innovative merchandising techniques and high quality products. For example, in August 1996, after the Company demonstrated the effectiveness of its market segmentation and merchandising strategies in a select number of Home Depot stores, Home Depot selected the Company as the supplier of long handle tools for all new Home Depot stores in new markets and for 50 existing Home Depot stores. Home Depot has indicated that it expects to open over 450 additional stores over the next five years, primarily in new markets. In addition, the Company has been a continuous supplier to Sears for over 80 years and the primary supplier of long handle tools to Sears for over 50 years. In five of the last six years the Company has received the prestigious "Partners in Progress" trophy awarded to approximately 80 of Sears' 10,000 suppliers. Sears has indicated that it expects to open or acquire over 500 additional non-mall hardware stores over the next five years. - Develop Product Line Extensions. The Company believes that product line extensions allow the Company to increase sales with minimal incremental expenditures. The Company recently expanded its cutting tool and striking tool product lines with the introduction of Perfect Cut pruning shears and loppers and Razor-Back mattocks, picks, axes, hammers and bars. The Company also recently introduced the Lady Gardener line of tools, which is ergonomically designed for female gardeners. The Company is actively developing additional product line extension opportunities. 4 6 - Complete Strategic Acquisitions. The Company intends to increase its presence in certain segments of the lawn and garden industry through selective acquisitions and to increase operating efficiencies through vertical integration. Consistent with this strategy, in February 1997 the Company acquired an injection molding facility from one of the Company's largest suppliers of plastic parts. The Company's Credit Facility contains a $35 million acquisition facility, approximately $28.7 million of which will be available following consummation of the Offering and the application of the net proceeds therefrom (as of May 2, 1997 and at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus). In addition, Oaktree Capital Management, LLC ("Oaktree"), the general partner of the Oaktree Fund, has indicated its willingness to consider providing financing from the Oaktree Fund for future acquisitions by the Company, however, there can be no assurance in this regard. The Company believes that continued application of its market segmentation and merchandising strategies, together with the implementation of the foregoing growth strategies, will enable the Company to continue its growth, increase its profitability and enhance its market share. The Company's executive offices are located at 500 Dublin Avenue, Columbus, Ohio 43216-1930, and its telephone number is (614) 222-4400. DISPOSITION OF NON-LAWN AND GARDEN BUSINESS OPERATIONS In December 1996, the Company sold substantially all of the assets of VSI, a distributor of packaged fasteners, for approximately $6.9 million, plus the assumption of approximately $2.3 million of related liabilities. The Company also intends to sell McGuire-Nicholas within the next 12 months. McGuire-Nicholas is a manufacturer and distributor of leather, canvas and synthetic fabric tool holders and work aprons. VSI's and McGuire-Nicholas' results of operations are shown as "Loss from discontinued operations" in the Summary Consolidated Financial Data, Selected Consolidated Financial Data and the Consolidated Financial Statements appearing elsewhere in this Prospectus. Net assets and net liabilities of the discontinued VSI and McGuire-Nicholas operations are shown as "Net assets of discontinued operations" and "Net liabilities of discontinued operations" in the Consolidated Financial Statements appearing elsewhere in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Disposition of Non-Lawn and Garden Business Operations" and "Description of McGuire-Nicholas". Following the intended sale of McGuire-Nicholas, UnionTools, Inc. ("UnionTools") will be the Company's only remaining operating subsidiary. FUND TRANSACTIONS Of the 3,250,000 shares being offered hereby, 812,500 shares have been reserved for sale to the Oaktree Fund. In December 1993 and in May 1994 Acorn issued certain subordinated promissory notes in the aggregate principal amount of approximately $31.4 million (the "Subordinated Notes") to several investment funds and accounts (the "TCW Funds") managed by affiliates of The TCW Group, Inc. (the "TCW Group"). In August 1996 Acorn issued 100 shares of Series A Preferred Stock with an aggregate stated value of approximately $8.6 million (the "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. As of May 2, 1997, the aggregate principal balance of the Subordinated Notes and accrued interest thereon was approximately $34.4 million and the aggregate liquidation value of the Series A Preferred Stock was approximately $9.4 million. See "Certain Transactions". The Company intends to use approximately $20.4 million of the estimated net proceeds of $40.8 million from the Offering to redeem the Series A Preferred Stock and pay accumulated dividends thereon and to repay a portion of the Subordinated Notes and accrued interest thereon. Concurrent with the consummation of the Offering, the TCW Funds will exchange the remainder of the Subordinated Notes for a number of shares of Common Stock equal to the remaining aggregate principal amount of the Subordinated Notes (approximately $23.4 million giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom as of May 2, 1997) divided by the per share Price to Public set 5 7 forth on the cover page of this Prospectus (the "Exchange"). As of May 2, 1997 and giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom, the TCW Funds would receive an aggregate of 1,674,116 shares of Common Stock pursuant to the Exchange. See "Risk Factors -- Control by Principal Stockholders", "Use of Proceeds" and "Certain Transactions". THE OFFERING Common Stock offered......................... 3,250,000 shares Common Stock outstanding after the 6,422,172 shares Offering(1)................................ Use of Proceeds.............................. The Company intends to use substantially all of the estimated net proceeds of $40.8 million to (i) repay indebtedness outstanding under the Company's senior credit facility (the "Credit Facility") and accrued interest thereon, (ii) redeem the Series A Preferred Stock and pay accumulated dividends thereon and (iii) repay indebtedness outstanding under the Subordinated Notes and accrued interest thereon. See "Use of Proceeds" and "Certain Transactions". Proposed Nasdaq National Market symbol....... ACRN
- --------------- (1) Based upon the number of shares of Common Stock outstanding on May 22, 1997, as adjusted to give effect to the issuance of 1,674,116 shares of Common Stock pursuant to the Exchange (giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom and giving effect to the Exchange, each as of May 2, 1997). Excludes (i) 39,042 shares of Common Stock issuable upon the exercise of outstanding stock options, (ii) 730,000 shares of Common Stock reserved for issuance under Acorn's 1997 Stock Incentive Plan (the "Incentive Plan"), pursuant to which options to purchase 308,800 shares of Common Stock will be outstanding upon consummation of the Offering and (iii) 73,000 shares of Common Stock reserved for issuance under Acorn's Deferred Equity Compensation Plan for Directors (the "Director Stock Plan"). See "Management -- 1997 Stock Incentive Plan", "Management -- Director Stock Plan" and Notes 10 and 13 to Consolidated Financial Statements. RISK FACTORS See "Risk Factors" beginning on page 10 for a description of certain risks relevant to an investment in the Common Stock. ------------------------ As used in this Prospectus, "Ace Hardware" refers to Ace Hardware Corp., "Agway" refers to Agway, Inc., "Builders Square" refers to Builders Square, Inc., "Cotter & Company" refers to Cotter & Company, "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, and "Home Depot" refers to The Home Depot, Inc. Lady Gardener(R), Perfect Cut(R), Pro Force(R), Razor-Back(R), Union(R), Union Pro(R) and Yard'n Garden(R) are registered trademarks of the Company. Agway(R) is a registered trademark of Agway. Green Thumb(R) and TrueValue(R) are registered trademarks of Cotter & Company. Frank's(R) is a registered trademark of Frank's Nursery. Craftsman(R) and Sears(R) are registered trademarks of Sears. Scotts(R) is a registered trademark of The Scotts Company. 6 8 SUMMARY CONSOLIDATED FINANCIAL DATA The Summary Consolidated Financial Data for fiscal 1992, fiscal 1993, the four months ended December 2, 1993, the eight months ended July 29, 1994, fiscal 1995 and fiscal 1996 have been derived from the audited Consolidated Financial Statements of the Company. The Summary Consolidated Financial Data for the nine months ended April 26, 1996 and the nine months ended May 2, 1997 have been derived from the unaudited Consolidated Financial Statements of the Company, which reflect, in the opinion of management of the Company, all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of financial data for such periods. The results of such interim periods are not necessarily indicative of the results that will be reported for the full fiscal year. The Summary 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 Prospectus.
SUCCESSOR COMPANY PREDECESSOR COMPANY --------------------------------------------------------------- ---------------------------------- FOUR EIGHT MONTHS MONTHS YEAR ENDED ENDED ENDED YEAR ENDED NINE MONTHS ENDED ------------------- ----------- -------- --------------------- --------------------------- JULY 31, JULY 31, DECEMBER 2, JULY 29, JULY 28, AUGUST 2, APRIL 26, MAY 2, 1992 1993 1993(1) 1994 1995 1996 1996 1997 -------- -------- ----------- -------- -------- ---------- --------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales.................. $ 60,699 $ 70,051 $ 20,331 $ 72,370 $ 86,543 $ 92,652 $ 69,407 $ 77,967 Cost of goods sold......... 43,856 50,548 14,185 52,271 63,411 67,496 51,036 57,077 ------- -------- -------- ------- ------- ------- ------- -------- Gross profit............... 16,843 19,503 6,146 20,099 23,132 25,156 18,371 20,890 Selling, general and administrative expenses... 11,380 12,648 5,482 9,955 15,531 16,815 11,820 13,448 Interest expense........... 4,924 4,939 2,773 3,525 6,485 6,732 5,569 5,743 Amortization of intangibles............... 2,525 2,520 124 601 1,061 1,173 603 703 Other expenses, net........ -- 34,409(2) -- 11 694 1,522(3) 546 1,123(4) ------- -------- -------- ------- ------- ------- ------- -------- Income (loss) from continuing operations before income taxes....... (1,986) (35,013) (2,233) 6,007 (639) (1,086) (167) (127) Income taxes............... -- -- -- 290 -- 582 -- 52 ------- -------- -------- ------- ------- ------- ------- -------- Net income (loss) from continuing operations..... (1,986) (35,013) (2,233) 5,717 (639) (1,668) (167) (179) ------- -------- -------- ------- ------- ------- ------- -------- Loss from discontinued operations(5)............. (5,684) (33,560)(2) (8,373) (614) (1,800) (6,480) (766) (9,575) ------- -------- -------- ------- ------- ------- ------- -------- Cumulative effect of change in accounting for post-retirement benefits.................. -- -- -- -- -- 869 869 -- ------- -------- -------- ------- ------- ------- ------- -------- Net income (loss).......... $ (7,670) $(68,573) $ (10,606) $ 5,103 $ (2,439) $ (7,279) $ (64) $ (9,754) ======= ======== ======== ======= ======= ======= ======= ======== Pro forma net income from continuing operations(6)............. $ 2,887 $ 4,012 Pro forma net income from continuing operations per share(6)(7)............... $ 0.45 $ 0.62 Pro forma weighted average number of shares outstanding(6)(7)......... 6,444,182 6,450,431 OTHER DATA: Gross margin............... 27.7% 27.8% 30.2% 27.8% 26.7% 27.2% 26.5% 26.8% EBIT(8).................... $ 2,938 $ 4,335 $ 540 $ 9,543 $ 6,540 $ 7,168 $ 5,945 $ 6,739 EBITDA(9).................. 6,466 8,343 1,168 11,148 9,570 10,760 8,384 9,141
PREDECESSOR COMPANY SUCCESSOR COMPANY ---------------------------------- ---------------------------------------------------------------- JULY 31, JULY 31, DECEMBER 2, JULY 29, JULY 28, AUGUST 2, MAY 2, 1997 1992 1993 1993 1994 1995 1996 ACTUAL AS ADJUSTED(10) -------- -------- ----------- -------- -------- ---------- --------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Working capital........... $(20,250) $(17,255) $ (17,902) $ 21,081 $ 5,989 $ 8,543 $ 21,771 $ 27,828 Total assets.............. 141,404 68,154 79,439 101,833 112,280 98,895 113,224 113,224 Total debt................ 132,382 127,458 137,437 58,854 72,104 61,891 78,641 27,287 Stockholders' equity...... 269 (68,304) (126,528) 19,422 17,323 18,530 8,984 63,803
7 9 - --------------- (1) Pursuant to the acquisition of the Company by the TCW Funds, the Company made certain purchase accounting adjustments on December 3, 1993. The following purchase accounting adjustments impacted the Company's net income (loss) from continuing operations: (i) the basis of certain manufacturing equipment was increased by an aggregate of approximately $4.5 million; and (ii) goodwill was restated to approximately $40.0 million. The increased basis of the equipment resulted in an annual increase in depreciation expense of approximately $747,000, which is reflected in cost of goods sold. The restatement of goodwill resulted in an annual increase in amortization of intangibles of approximately $430,000. On a pro forma basis, giving effect to the purchase accounting adjustments described above, cost of goods sold and amortization of intangibles for the four months ended December 2, 1993 would have increased by approximately $249,000 and $77,000, respectively. See Note 1 to Consolidated Financial Statements. (2) In fiscal 1993 the Company reduced goodwill from continuing operations by $35,826 and goodwill from discontinued operations by $29,659. (3) In fiscal 1996 the Company recognized other expense of $563,000 in connection with the resignation of Acorn's previous 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 of the Company. (4) In the nine months ended May 2, 1997 the Company recognized other expense of $950,000 from the write-off of certain capitalized bank fees incurred in connection with the Company's previous bank credit facility. (5) Represents the loss from the discontinued VSI and McGuire-Nicholas operations, as well as (i) a loss of $1,015,000 incurred upon the sale of substantially all of the assets of VSI, reflecting a loss of $665,000 recorded in fiscal 1996 and a loss of $101,000 recorded in the nine months ended May 2, 1997 and (ii) a loss of $8.8 million in the nine months ended May 2, 1997 incurred in connection with the intended disposition of McGuire-Nicholas. See Note 3 to Consolidated Financial Statements. In addition, the four months ended December 2, 1993 include restructuring costs of approximately $7.6 million. (6) Gives effect to (i) the Offering (at an assumed initial public offering price of $14.00, the midpoint of the range of initial public offering prices set forth on the cover page of this Prospectus) and the application of the net proceeds therefrom to repay indebtedness outstanding under the Credit Facility (reducing interest expense by approximately $1.2 million and $1.1 million in fiscal 1996 and the nine months ended May 2, 1997, respectively) and repay indebtedness outstanding under the Subordinated Notes and accrued interest thereon (reducing interest expense by approximately $1.1 million and $1.0 million in fiscal 1996 and the nine months ended May 2, 1997, respectively) and (ii) the Exchange (reducing interest expense on the Subordinated Notes by approximately $2.3 million and $2.1 million in fiscal 1996 and the nine months ended May 2, 1997, respectively). The proposed redemption of the Series A Preferred Stock has no affect on the Company's pro forma net income from continuing operations. Pro forma net income from continuing operations in the nine months ended May 2, 1997 includes a $950,000 write-off of certain capitalized bank fees incurred in connection with the Company's previous bank credit facility. (7) Based upon the number of shares of Common Stock outstanding on August 2, 1996 and May 2, 1997, as adjusted to give effect to (i) the issuance of 3,250,000 shares of Common Stock pursuant to the Offering, (ii) the issuance of 1,674,116 shares of Common Stock pursuant to the Exchange (giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom and giving effect to the Exchange as of May 2, 1997) and (iii) the issuance of 29,240 and 28,259 shares of Common Stock at August 2, 1996 and May 2, 1997, respectively, upon the exercise of outstanding stock options pursuant to the treasury stock method. (8) EBIT represents earnings from continuing operations before interest expense, income taxes and other expenses. EBIT is presented because it is a financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBIT is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income 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. 8 10 (9) EBITDA represents earnings from continuing operations before interest expense, income taxes, depreciation, amortization and other expenses. 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 operating income 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. (10) Gives effect to (i) the Offering (at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus) and the application of the net proceeds therefrom to repay indebtedness outstanding under the Credit Facility and accrued interest thereon, redeem the Series A Preferred Stock and pay accumulated dividends thereon and repay indebtedness outstanding under the Subordinated Notes and accrued interest thereon and (ii) the Exchange. 9 11 RISK FACTORS Prospective purchasers of the Common Stock should consider carefully the following risk factors relating to the Offering and the business of the Company, together with the information and financial data set forth elsewhere in this Prospectus, prior to making an investment decision. IMPACT OF WEATHER ON RESULTS OF OPERATIONS Weather is the most significant factor in determining market demand for the Company's 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 the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonal and Quarterly Fluctuations; Impact of Weather". SEASONALITY The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. Accordingly, the Company's sales tend to be greater during its third and fourth fiscal quarters. As a result, the Company's operating results depend significantly on the spring selling season. To support this sales peak, the Company must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, 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. These factors increase variations in the Company's quarterly results of operations and potentially expose the Company to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for the Company's products may vary substantially from the anticipated demand, leaving the Company with either excess inventory or insufficient inventory to satisfy customer orders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonal and Quarterly Fluctuations; Impact of Weather". RECENT LOSSES The Company incurred net losses of $7.7 million, $68.6 million, $5.5 million, $2.4 million and $7.3 million, respectively, in fiscal 1992, fiscal 1993, the twelve months ended July 29, 1994, fiscal 1995 and fiscal 1996 and a net loss of $9.8 million during the nine months ended May 2, 1997. The Company also incurred net losses from continuing operations of $2.0 million, $35.0 million, $639,000, $1.7 million and 179,000, respectively, in fiscal 1992, fiscal 1993, fiscal 1995, fiscal 1996 and the nine months ended May 2, 1997. As a result of a high degree of financial leverage incurred in buyout transactions effectuated in 1986 and 1989, the Company restructured certain of its debt obligations in December 1993. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and Note 1 to Consolidated Financial Statements. There can be no assurance that the Company will attain profitability or achieve continued growth in operating performance. DEPENDENCE ON SIGNIFICANT CUSTOMERS The Company's largest customer, Sears, accounted for 8.9%, 12.5% and 11.5% of gross sales in fiscal 1995, fiscal 1996 and the nine months ended May 2, 1997, respectively. There can be no assurance that the Company's sales to Sears 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 the Company's business, financial condition and results of operations. See "Business -- Customers". A key element of the Company's growth strategy is to increase sales in certain distribution channels, such as home centers and mass merchants through retailers such as Home Depot and Sears. Although Home Depot has indicated that it expects to open approximately 450 additional stores over the next five years and Sears has indicated that it expects to open or acquire over 500 additional non-mall hardware stores over the next five years, there can be no assurance that such stores will be opened or, if opened, that the Company will be chosen to supply its 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 the Company or that such stores will not result in a reduction of sales to the Company's other customers, whether through consolidation or otherwise. 10 12 DEPENDENCE ON KEY PERSONNEL The recent growth and development of the Company largely has been dependent upon the services of Gabe Mihaly, President and Chief Executive Officer of Acorn and UnionTools. The loss of Mr. Mihaly's services could have a material adverse effect on the Company. The Company does not maintain any key-person or similar insurance policies. See "Management". UNCERTAINTY OF FUTURE ACQUISITIONS A key element of the Company's strategy is the acquisition of businesses and assets in the lawn and garden industry. There can be no assurance, however, that the Company will be able to identify attractive acquisition opportunities, obtain sufficient financing for acquisitions on satisfactory terms or successfully acquire identified targets. In addition, there can be no assurance that the Company will be successful in integrating acquired businesses into its existing operations or that such integration will not result in unforeseen operational difficulties or require a disproportionate amount of management's attention. Such acquisitions may result in the incurrence of additional indebtedness by the Company or the issuance of preferred stock or additional Common Stock. Furthermore, there can be no assurance that competition for acquisition opportunities in the industry will not escalate, thereby increasing the cost to the Company of making acquisitions or causing the Company to refrain from making further acquisitions. See "Business -- Growth Strategy". AVAILABILITY AND PRICE OF RAW MATERIALS 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. There can be no assurance, however, that the Company will not experience shortages of raw materials or components essential to its 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 the Company's business, financial condition and results of operations. See "Business -- Raw Materials". COMPETITION All aspects of the lawn and garden industry, including attracting and retaining customers and pricing, are highly competitive. The Company competes 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 the Company. There can be no assurance that increased competition in the lawn and garden industry will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition". SUBSTANTIAL AMOUNT OF COMMON STOCK ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, approximately 6,422,172 shares of Common Stock will be outstanding (giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom and giving effect to the Exchange, each as of May 2, 1997). The 3,250,000 shares of Common Stock sold in the Offering will be available for resale in the public market without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except for shares purchased by "affiliates" of the Company (in general, any person who has a control relationship with the Company), which shares will be subject to the resale limitations of Rule 144 promulgated under the Securities Act. The remaining 3,172,172 outstanding shares of Common Stock are deemed to be "restricted securities" as that term is defined in Rule 144, all of which are eligible for sale in the public market in compliance with Rule 144. The TCW Funds, the executive officers and directors of the Company (who in the aggregate hold approximately 98.8% of the Common Stock outstanding prior to the Offering) and the Oaktree Fund have agreed, subject to certain exceptions, that they will not offer, sell or otherwise dispose of any of the shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. Additionally, the Company has agreed that, during the period of 180 days from the date of this Prospectus, subject to certain exceptions, that it will not issue, sell, 11 13 offer or agree to sell, grant any options for the sale of (other than employee stock options) or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable for Common Stock, other than pursuant to the Offering. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year, such as the TCW Funds, is entitled to sell, within any three-month period, a number of shares of Common Stock which does not exceed the greater of 1% of the number of then-outstanding shares of the Common Stock or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales under Rule 144 also may be subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Any person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned shares within the definition of "restricted securities" under Rule 144 for at least two years, is entitled to sell such shares under Rule 144(k) without regard to the volume limitation, manner of sale provisions, public information requirements or notice requirements. Acorn intends to file a registration statement on Form S-8 under the Securities Act to register the sale of the 730,000 shares of Common Stock reserved for issuance under the Incentive Plan. Acorn also intends to file a registration statement on Form S-8 under the Securities Act to register the sale of the 73,000 shares of Common Stock reserved for issuance under the Director Stock Plan. As a result, any shares of Common Stock issued pursuant to awards granted under such plans will be available, subject to special rules for affiliates, for resale in the public market after the effective date of such registration statement, subject to applicable lock-up arrangements. See "Management -- 1997 Stock Incentive Plan" and "Management -- Director Stock Plan". The TCW Funds and the Oaktree Fund have, subject to certain conditions and restrictions, the right to include the shares of Common Stock owned by them in registered public offerings of Common Stock (or securities exchangeable for or convertible into Common Stock) undertaken by Acorn for its own account, as well as to require Acorn to register the sale of such shares, subject to certain conditions, upon demand. The TCW Group has informed the Company that the TCW Funds currently are in their respective liquidation periods, requiring such funds to liquidate their investments in an orderly manner. Pursuant to their organizational documents, the TCW Funds terminate over the period from November 2001 to June 2003. As a result, it is likely that the shares of Common Stock held by the TCW Funds either will be sold prior to such time (whether as a block, pursuant to a registered public offering or otherwise) or distributed to investors in the TCW Funds. Upon any such distribution to investors in the TCW Funds, all such shares, except those acquired by affiliates of the Company, will be immediately eligible for resale under Rule 144(k). No prediction can be made as to the effect, if any, that market sales of shares of Common Stock that are restricted securities, or the availability of such shares, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock and could impair the Company's future ability to raise capital through an offering of equity or equity linked securities. See "Shares Available for Future Sale" and "Underwriting". IMPACT OF HOLDING COMPANY STRUCTURE Acorn is a holding company with no business operations of its own. Following the intended sale of McGuire-Nicholas, Acorn's only material asset will be all of the outstanding capital stock of UnionTools. Accordingly, Acorn is dependent upon the earnings and cash flows of, and dividends and distributions from, UnionTools to pay its expenses and meet its obligations and to pay any cash dividends or distributions on the Common Stock that may be authorized by the Board of Directors of Acorn. There can be no assurance that UnionTools will generate sufficient earnings and cash flows to pay dividends or distribute funds to Acorn to enable Acorn to pay its expenses and meet its obligations or that applicable state law and contractual restrictions, including negative covenants contained in the debt instruments of UnionTools then in effect, will permit such dividends or distributions. See " -- Restrictions Imposed by the Terms of the Company's Indebtedness" and " -- No Dividends". 12 14 ABSENCE OF PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock. There can be no assurance that an active public market for the Common Stock will develop or be sustained after the Offering. The initial public offering price has been determined by negotiations between the Company and the representatives of the Underwriters and may bear no relationship to the market price of the Common Stock after the Offering. See "Underwriting". Subsequent to the Offering, prices for the Common Stock will be determined by the market and may be influenced by a number of factors, including the depth and liquidity of the market for the Common Stock, investor perceptions of the Company and other participants in the lawn and garden industry, weather and general economic and other conditions. RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS The terms and conditions of the Credit Facility impose, and the terms and conditions of future debt instruments of the Company may impose, restrictions on the Company that affect, among other things, its ability to incur debt, pay dividends or make distributions, make acquisitions, create liens, sell assets and make certain investments. The terms of the Credit Facility require UnionTools to maintain specified financial ratios and satisfy certain tests, including minimum interest coverage ratios, and place limits on future capital expenditures of UnionTools. In addition, the Credit Facility restricts UnionTools' ability to pay dividends and make distributions. As of May 2, 1997, after giving effect to the Offering and the application of the net proceeds therefrom (at an assumed initial public offering price of $14.00 per share, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus) there would have been approximately $27.3 million outstanding under the Credit Facility, approximately $9.0 million available under the revolving portion of the Credit Facility and approximately $28.7 million available under the acquisition line of the Credit Facility. See " -- No Dividends" and "Description of Certain Indebtedness". The ability of the Company to comply with the terms of its debt instruments can be affected by events beyond its control, including events and changes in the competitive environment, which could impair the Company's operating performance. There can be no assurance that the Company will be able to comply with the provisions of its debt instruments, including compliance by UnionTools with the financial ratios and tests contained in the Credit Facility. Breach of any of these covenants or the failure to fulfill the obligations thereunder and the lapse of any applicable grace periods could result in an event of default pursuant to which holders of such indebtedness could declare all amounts outstanding under such debt instruments to be due and payable immediately. Any such declaration under a debt instrument is likely to result in an event of default under one of the other debt instruments of the Company, if any, then outstanding. There can be no assurance that the assets or cash flows of the Company would be sufficient to repay in full borrowings under its outstanding debt instruments, whether upon maturity or in the event of acceleration upon an event of default, or that the Company would be able to refinance or restructure the payments of such indebtedness. See "-- Impact of Holding Company Structure" and "Description of Certain Indebtedness". NO DIVIDENDS Acorn currently does not intend to pay any cash dividends on the Common Stock. Acorn is a holding company with no business operations of its own. Acorn therefore is dependent upon payments, dividends and distributions from UnionTools, its principal operating subsidiary, for funds to pay its expenses and to pay future cash dividends or distributions, if any, to holders of the Common Stock. UnionTools currently intends to retain any earnings for support of its working capital, repayment of indebtedness, capital expenditures and general corporate purposes. UnionTools has no current intention of paying dividends or making other distributions to Acorn in excess of amounts necessary to pay Acorn's operating expenses and taxes. The Credit Facility contains restrictions on UnionTools' ability to pay dividends or make other distributions to Acorn. The Credit Facility provides that, unless UnionTools meets certain financial tests, it may not declare any dividends or make any other payments or distributions to Acorn except for amounts necessary to pay Acorn's operating expense up to $125,000 per month and to pay Acorn's federal and state income taxes. See "Dividend Policy" and "Description of Certain Indebtedness". 13 15 CONTROL BY PRINCIPAL STOCKHOLDERS After giving effect to the Offering and the application of the net proceeds therefrom and the Exchange (each as of May 2, 1997 and at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus), the TCW Group and the TCW Funds may be deemed to be the beneficial owners of approximately 48.6% of the outstanding shares of Common Stock. Upon consummation of the Offering, Oaktree and the Oaktree Fund may be deemed to be the beneficial owner of approximately 12.7% of the outstanding shares of Common Stock. In addition, Oaktree, the general partner of the Oaktree Fund, has indicated its willingness to consider providing financing (which may include equity financing) from the Oaktree Fund for future acquisitions by the Company, however, there can be no assurance in this regard. Certain individuals designated by the TCW Group to manage the TCW Funds also are principals of Oaktree. However, Oaktree does not have voting or dispositive power with respect to the shares of Common Stock owned by the TCW Funds. Until such time, if ever, that there is a significant decrease in the number of shares of Common Stock held by the TCW Funds and the Oaktree Fund, the TCW Group and Oaktree will be able to control the Company through their ability to determine the outcome of votes of stockholders regarding, among other things, election of directors and approval of significant transactions. In addition, upon consummation of the Offering officers and directors of Acorn will beneficially own an aggregate of approximately 14.3% of the outstanding shares of the Common Stock. See "-- Substantial Amount of Common Stock Eligible for Future Sale", "Management", "Principal Stockholders" and "Certain Transactions". EFFECT OF CERTAIN CHARTER, CHANGE OF CONTROL AND STATUTORY PROVISIONS Acorn's Board of Directors is authorized, subject to certain limitations prescribed by law, to issue up to 1,000 shares of preferred stock in one or more classes or series and to fix the designations, powers, preferences, rights, qualifications, limitations or restrictions, including voting rights, of those shares without any further vote or action by stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of Acorn. Acorn has no current plans to issue additional shares of preferred stock. See "Description of Capital Stock -- Preferred Stock". The Credit Facility contains provisions that, under certain circumstances, will cause such indebtedness to become due upon the occurrence of a change of control of the Company. See "Description of Certain Indebtedness". These provisions could have the effect of making it more difficult for a third party to acquire control of the Company. The Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"). In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. See "Description of Capital Stock -- Certain Provisions of Delaware Law". LABOR RELATIONS Most of the Company's hourly employees are covered by collective bargaining or similar labor agreements. The Company currently is a party to four such agreements, one of which expires in 1998 and three of which expire in 1999. 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. See "Business -- Employees". ENVIRONMENTAL MATTERS The Company is 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. The Company has made, 14 16 and will continue to make, expenditures to comply with these environmental requirements and regularly reviews its procedures and policies for compliance with environmental laws. The Company also has been involved in remediation actions with respect to certain of its facilities. Amounts expended by the Company in such compliance and remediation activities have not been material to the Company. 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 the Company's 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 the Company's properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of the Company's properties, the Company may be held liable and the amount of such liability could be material. See "Business -- Environmental Matters". IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in the net tangible book value of their Common Stock. As of May 2, 1997, the net tangible book value per share was $(14.89). At an assumed initial public offering price of $14.00 per share, the mid-point of the range of the initial public offering prices set forth on the cover page of this Prospectus, current stockholders would experience an increase in net tangible book value per share of $19.95 and purchasers of shares of Common Stock in the Offering would experience dilution in net tangible book value of $8.94 per share. See "Dilution". USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,250,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $14.00 per share, the midpoint of the range of initial public offering prices set forth on the cover page of this Prospectus, and after deducting the underwriting discount and estimated expenses of the Offering) are estimated to be $40.8 million. The Company intends to use the net proceeds from the Offering as follows: (i) approximately $20.4 million of the net proceeds to repay the term loan portion of the Credit Facility and accrued interest thereon; (ii) approximately $9.4 million of the net proceeds to redeem the Series A Preferred Stock and pay accumulated dividends thereon; and (iii) approximately $11.0 million of the net proceeds to repay indebtedness outstanding under the Subordinated Notes and accrued interest thereon. Pursuant to the Exchange, the remainder of the Subordinated Notes will be exchanged for shares of Common Stock. See "Certain Transactions". Although application of the net proceeds from the Offering will result in a permanent reduction of the principal amount of the term loan under the Credit Facility, it will not reduce the amounts available to the Company under either the revolving facility or the acquisition line of the Credit Facility. Pursuant to its growth strategy, the Company is actively considering acquisitions, although it currently does not have any understandings or agreements with respect to potential acquisitions. See "Business -- Growth Strategy". The Series A Preferred Stock accrues cumulative dividends at a rate of 13% per year. The Subordinated Notes bear interest at a rate of 13% per year and mature in July 2003. Indebtedness outstanding under the Credit Facility bears interest at variable rates (8.75% per year at May 2, 1997) and matures in December 2003. See "Description of Certain Indebtedness". Indebtedness under the Subordinated Notes and the term loan portion of the Credit Facility originally was incurred in connection with the acquisition of the Company by the TCW Funds or refinancing of such indebtedness. Indebtedness under the acquisition line of the Credit Facility was incurred in connection with the Company's recent acquisition of an injection molding facility. 15 17 DIVIDEND POLICY Acorn has never paid, and currently does not intend to pay, any cash dividends on the Common Stock. Acorn is a holding company with no business operations of its own. Acorn therefore is dependent upon payments, dividends and distributions from UnionTools for funds to pay dividends to stockholders of Acorn. 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 Acorn in excess of amounts necessary to pay Acorn's operating expenses and taxes. The Credit Facility contains restrictions on UnionTools' ability to pay dividends or make payments or other distributions to Acorn. The Credit Facility provides that, unless UnionTools meets certain financial tests, it may not declare any dividends or make any other payments or distributions to Acorn except for amounts necessary to pay Acorn's operating expenses up to $125,000 per month and to pay Acorn's federal and state income taxes. See "Risk Factors -- Impact of Holding Company Structure", "Risk Factors -- No Dividends" and "Description of Certain Indebtedness". 16 18 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at May 2, 1997 and as adjusted as of such date to give effect to (i) the issuance and sale of the 3,250,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $14.00 per share, the midpoint of the range of initial public offering prices set forth on the cover page of this Prospectus, and after deducting the underwriting discount and estimated expenses of the Offering) and the application of the net proceeds therefrom and (ii) the Exchange. This table should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
MAY 2, 1997 ------------------------ ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) Short-term debt: Revolving portion of Credit Facility................................ $ 21,019 $ 21,019 Current portion of long-term debt................................... 3,000 0 -------- -------- Total short-term debt....................................... $ 24,019 $ 21,019 ======== ======== Long-term debt: Term loan portion of Credit Facility(1)............................. $ 17,000 $ 0 Acquisition line portion of Credit Facility(1)...................... 6,268 6,268 Subordinated Notes(1)............................................... 31,354 0 -------- -------- Total long-term debt........................................ $ 54,622 $ 6,268 ======== ======== Stockholders' equity: Preferred stock, par value $.001 per share; 1,000 shares authorized, 100 shares issued and outstanding (no shares outstanding as adjusted)(2)..................................................... $ 8,596 $ 0 Common Stock, par value $.001 per share; 20 million shares authorized, 1,498,056 shares issued and outstanding (6,422,172 shares outstanding as adjusted)(3)............................... 14,494 77,909 Contributed capital-stock options(4)................................ 460 460 Minimum pension liability(5)........................................ (197) (197) Retained earnings (deficit)......................................... (14,369) (14,369) -------- -------- Total stockholders' equity....................................... 8,984 63,803 -------- -------- Total capitalization........................................ $ 87,625 $ 91,090 ======== ========
- --------------- (1) See Note 4 to Consolidated Financial Statements. (2) See Note 5 to Consolidated Financial Statements. (3) Excludes (i) 39,042 shares of Common Stock issuable upon the exercise of outstanding stock options, (ii) 730,000 shares of Common Stock reserved for issuance under the Incentive Plan, pursuant to which options to purchase 308,800 shares of Common Stock will be outstanding upon consummation of the Offering and (iii) 73,000 shares of Common Stock reserved for issuance under the Director Stock Plan. See "Management -- 1997 Stock Incentive Plan", "Management -- Director Stock Plan" and Notes 10 and 13 to Consolidated Financial Statements. (4) See Note 10 to Consolidated Financial Statements. (5) See Note 7 to Consolidated Financial Statements. 17 19 DILUTION The net tangible book value of the Company at May 2, 1997 was $(22.3) million, or $(14.89) per share of Common Stock. Net tangible book value per share represents the amount of tangible assets of the Company, less total liabilities, divided by the number of outstanding shares of Common Stock. Without taking into account any other changes in net tangible book value after May 2, 1997, other than to give effect to (i) the sale by the Company of the 3,250,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $14.00 per share, the midpoint of the range of initial public offering prices set forth on the cover page of this Prospectus, and after deducting the underwriting discount and estimated expenses of the Offering), and the application of the estimated net proceeds therefrom and (ii) the Exchange, the pro forma net tangible book value of the Company at May 2, 1997 would have been $32.5 million, or $5.06 per share. This represents an immediate increase in net tangible book value of $19.95 per share of Common Stock to existing stockholders and an immediate dilution of approximately $8.94 per share to new investors purchasing shares in the Offering. The following table illustrates the per share book value dilution to new investors: Assumed initial public offering price per share........................... $14.00 Net tangible book value per share before the Offering................... $(14.89) Increase per share attributable to the Offering......................... 19.95(1) ------ Pro forma net tangible book value per share after the Offering............ 5.06 ------ Net tangible book value dilution per share to new investors(2)............ $ 8.94 ======
- --------------- (1) Of such increase, $7.86 is attributable to the Exchange. (2) Dilution is determined by subtracting pro forma net tangible book value per share after the Offering from the assumed initial public offering price per share of Common Stock. The following table sets forth as of May 2, 1997 the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing holders of Common Stock and the new investors (at an assumed initial public offering price of $14.00 per share, the midpoint of the range of initial public offering prices set forth on the cover page of this Prospectus) before deducting the underwriting discount and estimated offering expenses payable by the Company.
SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE ---------------------- ------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ----------- ------- ------------- ------- --------- (IN MILLIONS) Existing stockholders.................. 1,498,056 23.3% $ 14.5 17.4% $ 9.68 New investors.......................... 3,250,000 50.6 45.5 54.6 $ 14.00 Shares issued pursuant to the Exchange............................. 1,674,116 26.1 23.4 28.0 $ 14.00 ---------- --- ------ --- Total........................ 6,422,172 100.0% $ 83.4 100.0% ========== === ====== ===
As of May 2, 1997, there were vested options outstanding to purchase a total of 33,258 shares of Common Stock at a weighted average exercise price of $2.10 per share. To the extent that any of these options are exercised, there will be further dilution to new investors. See "Capitalization" and Note 10 to Consolidated Financial Statements. 18 20 SELECTED CONSOLIDATED FINANCIAL DATA The Selected Consolidated Financial Data for fiscal 1992, fiscal 1993, the four months ended December 2, 1993, the eight months ended July 29, 1994, fiscal 1995 and fiscal 1996 have been derived from the audited Consolidated Financial Statements of the Company. The Selected Consolidated Financial Data for the nine months ended April 26, 1996 and the nine months ended May 2, 1997 have been derived from the unaudited Consolidated Financial Statements of the Company, which reflect, in the opinion of management of the Company, all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of financial data for such periods. The results of such interim periods are not necessarily indicative of the results that will be reported for the full fiscal year. 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 Prospectus.
SUCCESSOR COMPANY PREDECESSOR COMPANY ------------------------------------------------------------ ---------------------------------- FOUR EIGHT MONTHS MONTHS YEAR ENDED ENDED ENDED YEAR ENDED NINE MONTHS ENDED ------------------- ----------- -------- --------------------- ------------------------- JULY 31, JULY 31, DECEMBER 2, JULY 29, JULY 28, AUGUST 2, APRIL 26, MAY 2, 1992 1993 1993(1) 1994 1995 1996 1996 1997 -------- -------- ----------- -------- -------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales.................. $ 60,699 $ 70,051 $ 20,331 $ 72,370 $ 86,543 $ 92,652 $ 69,407 $ 77,967 Cost of goods sold......... 43,856 50,548 14,185 52,271 63,411 67,496 51,036 57,077 --------- --------- --------- --------- --------- --------- --------- --------- Gross profit............... 16,843 19,503 6,146 20,099 23,132 25,156 18,371 20,890 Selling, general and administrative expenses................. 11,380 12,648 5,482 9,955 15,531 16,815 11,820 13,448 Interest expense........... 4,924 4,939 2,773 3,525 6,485 6,732 5,569 5,743 Amortization of intangibles.............. 2,525 2,520 124 601 1,061 1,173 603 703 Other expense, net......... -- 34,409(2) -- 11 694 1,522 (3) 546 1,123 (4) --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes...... (1,986) (35,013) (2,233) 6,007 (639) (1,086) (167) (127) Income taxes............... -- -- -- 290 -- 582 -- 52 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) from continuing operations.... (1,986) (35,013) (2,233) 5,717 (639) (1,668) (167) (179) --------- --------- --------- --------- --------- --------- --------- --------- Loss from discontinued operations(5)............ (5,684) (33,560)(2) (8,373) (614) (1,800) (6,480) (766) (9,575) --------- --------- --------- --------- --------- --------- --------- --------- Cumulative effect of change in accounting for post- retirement benefits...... -- -- -- -- -- 869 869 -- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss).......... $ (7,670) $(68,573) $ (10,606) $ 5,103 $ (2,439) $ (7,279) $ (64) $ (9,824) ========= ========= ========= ========= ========= ========= ========= ========= Pro forma net income from continuing operations(6)............ $ 2,887 $ 4,012 Pro forma net income from continuing operations per share(6)(7).............. $ 0.45 $ 0.62 Pro forma weighted average number of shares outstanding(6)(7)........ 6,444,182 6,450,431 OTHER DATA: Gross margin............... 27.7% 27.8% 30.2% 27.8% 26.7% 27.2% 26.5% 26.8% EBIT(8).................... $ 2,938 $ 4,355 $ 540 $ 9,543 $ 6,540 $ 7,168 $ 5,945 $ 6,739 EBITDA(9).................. 6,466 8,343 1,168 11,148 9,570 10,760 8,384 9,141
PREDECESSOR COMPANY SUCCESSOR COMPANY ---------------------------------- ------------------------------------------------------------ JULY 31, JULY 31, DECEMBER 2, JULY 29, JULY 28, AUGUST 2, APRIL 26, MAY 2, 1992 1993 1993 1994 1995 1996 1996 1997 -------- -------- ----------- -------- -------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Working capital............ $(20,250) $(17,255) $ (17,902) $ 21,081 $ 5,989 $ 8,543 $ 4,663 $ 21,771 Total assets............... 141,404 68,154 79,439 101,833 112,280 98,895 120,545 113,224 Total debt................. 132,382 127,458 137,437 58,854 72,104 61,891 76,221 78,641 Stockholders' equity....... 269 (68,304) (126,528) 19,422 17,323 18,530 17,346 8,984
19 21 - --------------- (1) Pursuant to the acquisition of the Company by the TCW Funds, the Company made certain purchase accounting adjustments on December 3, 1993. The following purchase accounting adjustments impacted the Company's net income (loss) from continuing operations: (i) the basis of certain manufacturing equipment was increased by an aggregate of approximately $4.5 million; and (ii) goodwill was restated to approximately $40.0 million. The increased basis of the equipment resulted in an annual increase in depreciation expense of approximately $747,000, which is reflected in cost of goods sold. The restatement of goodwill resulted in an annual increase in amortization of intangibles of approximately $430,000. On a pro forma basis, giving effect to the purchase accounting adjustments described above, cost of goods sold and amortization of intangibles for the four months ended December 2, 1993 would have increased by approximately $249,000 and $77,000, respectively. See Note 1 to Consolidated Financial Statements. (2) In fiscal 1993 the Company reduced goodwill from continuing operations by $35,826 and goodwill from discontinued operations by $29,659. (3) In fiscal 1996 the Company recognized other expense of $563,000 in connection with the resignation of Acorn's previous 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 of the Company. (4) In the nine months ended May 2, 1997 the Company recognized other expense of $950,000 from the write-off of certain capitalized bank fees incurred in connection with the Company's previous bank credit facility. (5) Represents the loss from the discontinued VSI and McGuire-Nicholas operations, as well as (i) a loss of $1,015,000 incurred upon the sale of substantially all of the assets of VSI, reflecting a loss of $665,000 recorded in fiscal 1996 and a loss of $101,000 recorded in the nine months ended May 2, 1997 and (ii) a loss of $8.3 million in the nine months ended May 2, 1997 incurred in connection with the intended disposition of McGuire-Nicholas. See Note 3 to Consolidated Financial Statements. In addition, the four months ended December 2, 1993 include restructuring costs of approximately $7.6 million. (6) Gives effect to (i) the Offering (at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus) and the application of the net proceeds therefrom to repay indebtedness outstanding under the Credit Facility (reducing interest expense by approximately $1.2 million and $1.1 million in fiscal 1996 and the nine months ended May 2, 1997, respectively) and repay indebtedness outstanding under the Subordinated Notes and accrued interest thereon (reducing interest expense by approximately $1.1 million and $1.0 million in fiscal 1996 and the nine months ended May 2, 1997, respectively) and (ii) the Exchange (reducing interest expense on the Subordinated Notes by approximately $2.3 million and $2.1 million in fiscal 1996 and the nine months ended May 2, 1997, respectively). The proposed redemption of the of Series A Preferred Stock has no affect on the Company's pro forma net income from continuing operations. Pro forma net income from continuing operations in the nine months ended May 2, 1997 includes a $950,000 write-off of certain capitalized bank fees incurred in connection with the Company's previous bank credit facility. (7) Based upon the number of shares of Common Stock outstanding on August 2, 1996 and May 2, 1997, as adjusted to give effect to (i) the issuance of 3,250,000 shares of Common Stock pursuant to the Offering, (ii) the issuance of 1,674,116 shares of Common Stock pursuant to the Exchange (giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom and giving effect to the Exchange as of May 2, 1997) and (iii) the issuance of 29,240 and 28,259 shares of Common Stock at August 2, 1996 and May 2, 1997, respectively, upon the exercise of outstanding stock options pursuant to the treasury stock method . (8) EBIT represents earnings from continuing operations before interest expense, income taxes and other expenses. EBIT is presented because it is a financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBIT is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income 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. (9) EBITDA represents earnings from continuing operations before interest expense, income taxes, depreciation, amortization and other expenses. 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 operating income 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. 20 22 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, the Consolidated Financial Statements of the Company and the Notes thereto and the other financial information included elsewhere in this Prospectus. Certain statements under this caption constitute forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such forward-looking statements as a result of various factors, including those set forth under the caption "Risk Factors" and elsewhere in this Prospectus. OVERVIEW The Company is a leading manufacturer and distributor of non-powered lawn and garden tools. Acorn is a holding company with no business operations of its own. Following the intended sale of McGuire-Nicholas, Acorn's only material asset will be all of the outstanding capital stock of UnionTools. See "-- Disposition of Non-Lawn and Garden Business Operations". Founded in 1890, the Company was operated as a family owned business until its sale in 1986 pursuant to a leveraged buyout transaction. The Company was sold in a second highly leveraged transaction in 1989. Primarily as a result of these transactions, the Company had approximately $132.4 million and $127.5 million of total indebtedness at July 31, 1992 and July 31, 1993, respectively, with approximately $60.7 million and $70.1 million of net sales in fiscal 1992 and fiscal 1993, respectively. The Company's results of operations from 1989 through December 1993 were adversely affected by a high degree of financial leverage and a lack of liquidity, despite the implementation of successful operating strategies by new senior management recruited in 1991. In December 1993, the Company restructured certain of its debt obligations in connection with the acquisition of the Company by the TCW Funds, thereby significantly reducing the Company's debt burden. Following the acquisition, the Company revalued certain assets, reduced goodwill and recognized a gain on the forgiveness of certain indebtedness. See "-- Results of Operations -- Fiscal 1995 Compared to Twelve Months Ended July 29, 1994". Over the past six years the Company has successfully implemented a business strategy designed to transform it from a manufacturing-oriented industrial company into a marketing-oriented consumer products company. The central elements of the Company's approach include a market segmentation strategy based primarily on brand management and a merchandising strategy based on attractive and informative product displays and labeling. Over the same period the Company also has expanded its infrastructure to support future growth by recruiting an experienced management team, increasing manufacturing capacity and enhancing management information systems. Reflecting the success of these operating strategies, the Company's net sales from continuing operations increased from $56.2 million in fiscal 1991 to $92.7 million in fiscal 1996, a CAGR of 10.5%. The Company's net sales from continuing operations were $78.0 million for the nine months ended May 2, 1997, an increase of 12.3% from the same period in fiscal 1996. In addition, net sales of the Company's higher-margin, best-quality products increased to approximately 36% of total net sales in fiscal 1996, while net sales of the Company's lower-margin, opening-price-point products decreased to approximately 7% of total net sales in fiscal 1996. The price of raw materials used in the Company's products remained relatively stable during each of the periods discussed below. Implementation of the Company's market segmentation and merchandising strategies has resulted in increased selling, general and administrative expenses as the Company has increased its marketing focus through the development of merchandising displays, point-of-sale signage and product labeling, as well as additional cooperative advertising. The Company also incurred an increase in selling, general and administrative expenses due to increased staffing and upgrades of management information systems. The Company believes that its current level of selling, general and administrative expenses as a percentage of net sales is now consistent with its marketing-oriented focus. 21 23 DISPOSITION OF NON-LAWN AND GARDEN BUSINESS OPERATIONS In December 1996, the Company sold substantially all of the assets of VSI, a distributor of packaged fasteners, for approximately $6.9 million, plus the assumption of approximately $2.3 million of related liabilities. The Company also intends to sell McGuire-Nicholas within the next 12 months. McGuire-Nicholas is a manufacturer and distributor of leather, canvas and synthetic fabric tool holders and work aprons. See "Description of McGuire-Nicholas". VSI's and McGuire-Nicholas' results of operations are shown as "Loss from discontinued operations" in the Summary Consolidated Financial Data, Selected Consolidated Financial Data and the Consolidated Financial Statements appearing elsewhere in this Prospectus. Net assets and net liabilities of the discontinued VSI and McGuire-Nicholas operations are shown as "Net assets of discontinued operations" and "Net liabilities of discontinued operations" in the Consolidated Financial Statements appearing elsewhere in this Prospectus. RESULTS OF OPERATIONS The following table sets forth certain components of the Company's consolidated statement of operations data expressed as a percentage of net sales:
YEAR ENDED NINE MONTHS ENDED ---------------------- ----------------------- TWELVE MONTHS ENDED JULY 28, AUGUST 2, APRIL 26, MAY 2, JULY 29, 1994(1) 1995 1996 1996 1997 ------------------- -------- --------- --------- --------- Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold............... 72.0 73.3 72.8 73.5 73.2 ----- ----- ----- ----- ----- Gross profit..................... 28.0 26.7 27.2 26.5 26.8 Selling, general and administrative expenses........ 16.7 17.9 18.1 17.0 17.3 Interest expense................. 6.8 7.5 7.3 8.0 7.4 Amortization of intangibles...... 0.9 1.2 1.3 0.9 0.9 Other expenses, net.............. 0.0 0.8 1.6 0.8 1.4 ----- ----- ----- ----- ----- Income (loss) from continuing operations before income taxes.......................... 3.6 (0.7) (1.1) (0.2) (0.2) Income taxes..................... 0.3 -- 0.6 -- 0.0 ----- ----- ----- ----- ----- Net income (loss) from continuing operations..................... 3.3 (0.7) (1.7) (0.2) (0.2) ----- ----- ----- ----- ----- Loss from discontinued operations..................... (9.7) (2.1) (7.0) (1.1) (12.3) ----- ----- ----- ----- ----- Cumulative effect of change in accounting for postretirement benefits....................... -- -- 0.9 1.3 -- ----- ----- ----- ----- ----- Net loss......................... (6.4)% (2.8)% (7.8)% (0.0)% (12.5)% ===== ===== ===== ===== =====
- --------------- (1) Pursuant to the acquisition of the Company by the TCW Funds, the Company made certain purchase accounting adjustments on December 3, 1993. The following purchase accounting adjustments impacted the Company's net income (loss) from continuing operations: (i) the basis of certain manufacturing equipment was increased by an aggregate of approximately $4.5 million; and (ii) goodwill was restated to approximately $40.0 million. The increased basis of the equipment resulted in an annual increase in depreciation expense of approximately $747,000, which is reflected in cost of goods sold. The restatement of goodwill resulted in an annual increase in amortization of intangibles of approximately $430,000. On a pro forma basis, giving effect to the purchase accounting adjustments described above, cost of goods sold and amortization of intangibles for the four months ended December 2, 1993 would have increased by approximately $249,000 and $77,000, respectively. The percentage of net sales data for the 12 months ended July 29, 1994 has been adjusted to give effect to the foregoing purchase accounting adjustments throughout the period. 22 24 NINE MONTHS ENDED MAY 2, 1997 COMPARED TO NINE MONTHS ENDED APRIL 26, 1996 Net Sales. Net sales increased 12.3%, or $8.6 million, to $78.0 million in the nine months ended May 2, 1997 compared to $69.4 million in the same period in the prior year. The increase in net sales principally reflected increased unit sales of the Company's better- and best-quality products, which are sold at higher wholesale prices than the Company's opening-price-point products, and increased unit sales across all product lines due to a relatively strong fall lawn and garden season as a result of favorable weather conditions, as well as increased market penetration. Gross Profit. Gross profit increased 13.7%, or $2.5 million, to $20.9 million in the nine months ended May 2, 1997 compared to $18.4 million in the same period in the prior year. Gross margin increased to 26.8% in the nine months ended May 2, 1997 from 26.5% in the nine months ended April 26, 1996. The increase in gross margin reflected improved product mix due to increased sales of the Company's higher-margin, better-and best-quality products partially offset by the impact of certain new store openings and lower gross margin levels realized on sales by the Company's recently acquired injection molding division. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 13.8%, or $1.6 million, to $13.4 million in the nine months ended May 2, 1997 compared to $11.8 million in the same period in the prior year. As a percentage of net sales, selling, general and administrative expenses increased to 17.2% in the nine months ended May 2, 1997 from 17.0% in the first nine months of fiscal 1996. The increase principally is due to merchandising costs related to the conversion of customer stores previously serviced by the Company's competitors, as well as merchandising costs associated with opening new customer stores. Other Expense, Net. Other expense increased to $1,123,000 in the nine months ended May 2, 1997 from $546,000 in the same period in the prior year primarily due to the write-off of $950,000 of capitalized bank fees incurred in connection with the Company's previous bank credit facility. Net Income (Loss) From Continuing Operations Before Income Taxes. Net loss from continuing operations before income taxes increased $12,000, to a net loss of $179,000 in the nine months ended May 2, 1997 compared to a net loss from continuing operations before income taxes of $167,000 in the same period in the prior year. Interest expense increased to $5.7 million in the nine months ended May 2, 1997 from $5.6 million in the nine months ended April 26, 1996. Net Loss. Net loss increased to $9.8 million in the nine months ended May 2, 1997 compared to $64,000 in the same period in the prior year, primarily as a result of a loss of $8.8 million incurred in connection with the intended disposition of McGuire-Nicholas and a $101,000 loss in connection with the disposition of VSI, partially offset by income of $869,000 realized in connection with the cumulative effect of a change in accounting for postretirement benefits. FISCAL 1996 COMPARED TO FISCAL 1995 Net Sales. Net sales increased 7.1%, or $6.1 million, to $92.7 million in fiscal 1996 compared to $86.5 million in fiscal 1995. The increase in net sales principally reflected increased unit sales across all product lines in fiscal 1996 due to the addition of new customers and favorable weather conditions, as well as lower net sales in fiscal 1995 due to inventory reduction efforts by key mass merchant customers and poor spring weather conditions. Gross Profit. Gross profit increased 8.7%, or $2.0 million, to $25.2 million in fiscal 1996 compared to $23.1 million in fiscal 1995. Gross margin increased to 27.2% in fiscal 1996 from 26.7% in fiscal 1995. The increase in gross margin primarily resulted from increased manufacturing efficiencies related to higher production levels, as well as improved product mix due to increased sales of the Company's higher-margin, better- and best-quality products. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 8.3%, or $1.3 million, to $16.8 million in fiscal 1996 compared to $15.5 million in fiscal 1995. As a percentage of net sales, selling, general and administrative expenses increased to 18.1% in fiscal 1996 from 17.9% in fiscal 1995. The increase primarily results from an increase in cooperative advertising expenditures and staffing costs. 23 25 Other Expense, Net. Other expense increased $828,000 to $1.5 million in fiscal 1996 compared to $694,000 in fiscal 1995. In fiscal 1996 the Company recognized other expense of $563,000 in connection with the resignation of Acorn's previous 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 of the Company. Net Loss From Continuing Operations Before Income Taxes. Net loss from continuing operations before income taxes increased 70.0%, or $447,000, to $1.1 million in fiscal 1996 compared to $639,000 in fiscal 1995. Net Loss. Net loss increased $4.8 million to $7.3 million in fiscal 1996 compared to $2.4 million in fiscal 1995, primarily as a result of increased losses from discontinued operations in 1996. FISCAL 1995 COMPARED TO THE TWELVE MONTHS ENDED JULY 29, 1994 Pursuant to the acquisition of the Company by the TCW Funds, the Company made certain purchase accounting adjustments on December 3, 1993. The following purchase accounting adjustments impacted the Company's net income (loss) from continuing operations: (i) the basis of certain manufacturing equipment was increased by an aggregate of approximately $4.5 million; and (ii) goodwill was restated to approximately $40.0 million. The increased basis of the equipment resulted in an annual increase in depreciation expense of approximately $747,000, which is reflected in cost of goods sold. The restatement of goodwill resulted in an annual increase in amortization of intangibles of approximately $430,000. On a pro forma basis, giving effect to the purchase accounting adjustments described above, cost of goods sold and amortization of intangibles for the four months ended December 2, 1993 would have increased by approximately $249,000 and $77,000, respectively. The following discussion compares the Company's results of operations for fiscal 1995 to the Company's results of operations for the 12 months ended July 29, 1994, as adjusted to give effect to the foregoing purchase accounting adjustments throughout the period. Net Sales. Net sales decreased 6.6%, or $6.2 million, to $86.5 million in fiscal 1995 compared to $92.7 million in the twelve months ended July 29, 1994. Net sales for the twelve months ended July 29, 1994 reflected record levels due to significant initial inventory purchases by a key mass merchant customer and favorable weather conditions. The decrease in net sales in fiscal 1995 principally reflected decreased unit sales across all product lines due to poor spring weather conditions, as well as inventory reduction efforts by key mass merchant customers which more than offset increased sales to other customers. Gross Profit. Gross profit decreased 11.0%, or $2.9 million, to $23.1 million in fiscal 1995 compared to $26.0 million in the twelve months ended July 29, 1994. Gross margin decreased to 26.7% in fiscal 1995 from 28.0% in the twelve months ended July 29, 1994. The decrease in gross margin primarily resulted from manufacturing inefficiencies related to lower production levels due to lower net sales. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 0.6%, or $100,000, to $15.5 million in fiscal 1995 compared to $15.4 million in the twelve months ended July 29, 1994. As a percentage of net sales, selling, general and administrative expenses increased to 17.9% in fiscal 1995 from 16.7% in the twelve months ended July 29, 1994. The increase principally reflects an increase of approximately $1.1 million in cooperative advertising expenditures and approximately $1.3 million in purchase accounting charges, partially offset by reductions in other variable costs related to lower net sales levels. Selling, general and administrative expenses increased in fiscal 1995 and the twelve months ended July 29, 1994 compared to prior periods as a result of management information system improvements. Other Expense, Net. Other expense increased to $694,000 in fiscal 1995 compared to $11,000 in the twelve months ended July 29, 1994. Other expense in fiscal 1995 resulted from compensation expense of $340,000 related to the vesting of executive stock options, as well as banking fees. Net Loss From Continuing Operations Before Income Taxes. Net loss from continuing operations before income taxes increased to $639,000 in fiscal 1995 compared to net income from continuing operations of $3.7 million in the twelve months ended July 29, 1994. Net Loss. Net loss decreased to $2.4 million in fiscal 1995 compared to net loss of $5.8 million in the twelve months ended July 29, 1994. 24 26 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, the Company's sales tend to be greater during its third and fourth fiscal quarters. As a result, the Company's operating results depend significantly on the spring selling season. To support this sales peak, the Company must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, 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. These factors increase variations in the Company's quarterly results of operations and potentially expose the Company to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for the Company's products may vary substantially from the anticipated demand, leaving the Company with excess inventory or insufficient inventory to satisfy customer orders. The following table sets forth certain unaudited data related to net sales for the fiscal quarters in fiscal 1995 and fiscal 1996. The unaudited quarterly information has been prepared on the same basis as the annual financial information and, in the opinion of management of the Company, includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information for the quarters presented.
FISCAL 1995 FISCAL 1996 --------------------------------------------- ----------------------------------------------- QUARTER ENDED ---------------------------------------------------------------------------------------------- OCTOBER 28, JANUARY 27, APRIL 28, JULY 28, OCTOBER 27, JANUARY 26, APRIL 26, AUGUST 2, 1994 1995 1995 1995 1995 1996 1996 1996 ----------- ----------- --------- -------- ----------- ----------- --------- ---------- Net sales..................... $19,150 $18,011 $ 32,609 $ 16,773 $16,486 $19,357 $ 33,564 $ 23,245 Cost of goods sold............ 13,623 13,416 23,995 12,377 12,544 14,731 23,738 16,483 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit.................. 5,527 4,595 8,614 4,396 3,942 4,626 9,826 6,762 Selling, general and administrative expenses (SG&A)...................... 3,886 3,681 4,490 3,474 3,635 3,721 4,464 4,995 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit less SG&A(1)..... $ 1,641 $ 914 $ 4,124 $ 922 $ 307 $ 905 $ 5,362 $ 1,767 ======= ======= ======= ======= ======= ======= ======= ======= Net sales as a percentage of full year net sales......... 22.1% 20.8% 37.7% 19.4% 17.8% 20.9% 36.2% 25.1% Gross profit as a percentage of full year gross profit... 23.9 19.9 37.2 19.0 15.7 18.4 39.1 26.9 Gross profit less SG&A(1) as a percentage of full year operating profit....... 21.6 12.0 54.3 12.1 3.7 10.9 64.3 21.2 NINE MONTHS ENDED MAY 2, 1997 ---------------------------------- NOVEMBER 1, JANUARY 31, MAY 2, 1996 1997 1997 ------------ ----------- ------- Net sales..................... $ 19,679 $21,018 $37,270 Cost of goods sold............ 14,507 15,635 26,935 ------- ------- ------- Gross profit.................. 5,172 5,383 10,335 Selling, general and administrative expenses (SG&A)...................... 4,403 4,236 4,809 ------- ------- ------- Gross profit less SG&A(1)..... $ 769 $ 1,147 $ 5,526 ======= ======= ======= Net sales as a percentage of full year net sales......... Gross profit as a percentage of full year gross profit... Gross profit less SG&A(1) as a percentage of full year operating profit.......
- --------------- (1) Does not include amortization of intangibles and other expenses, each of which generally are non-seasonal in nature. Weather is the single most important factor in determining market demand for the Company's 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, can adversely affect overall annual sales. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash needs are for working capital, capital expenditures and debt service. The Company has financed its working capital, capital expenditures and debt service requirements primarily through internally generated cash flow and funds borrowed under the Credit Facility and the Subordinated Notes. See "Use of Proceeds", "Certain Transactions" and "Description of Certain Indebtedness". Net cash used in continuing operations was $19.0 million in the nine months ended May 2, 1997 compared to net cash used in continuing operations of $2.0 million in the comparable period in the prior fiscal year. This increase principally reflects a seasonal increase of inventories of $7.3 million required to meet anticipated sales demand, a seasonal increase in accounts receivables of $20.9 million and an increase in financing fees of $681,000 related to new bank financing. A corresponding seasonal build of inventories was not required in fiscal 1996 due to higher inventory levels at July 28, 1995, resulting in a reduction of inventories in the nine months ended April 26, 1996 of $5.6 million. The seasonal build in accounts receivable combined with increased revenues in the nine months ended May 2, 1997 resulted in an additional use of cash 25 27 of $5.3 million for the nine months ended May 2, 1997. Net cash provided by continuing operations was $14.0 million in fiscal 1996 compared to net cash used in continuing operations of $504,000 in fiscal 1995. This increase resulted from a reduction of inventory levels from July 28, 1995, which were unusually high as a result of poor spring weather conditions in 1995, as well as inventory reduction efforts by key mass merchant customers. Net cash used in continuing operations was $504,000 in fiscal 1995 from net cash provided by continuing operations of $1.8 million in the eight months ended July 29, 1994. This increase primarily reflects the unusually high inventory levels at July 28, 1995. The Company made capital expenditures of approximately $2.3 million, $2.9 million, $1.5 million and $1.6 million during fiscal 1994, fiscal 1995, fiscal 1996 and the nine months ended May 2, 1997, respectively. The capital expenditures relate primarily to on-going maintenance of property, plant and equipment, manufacturing process improvements and increased manufacturing capacity. The Company intends to make capital expenditures of approximately $900,000 in the remainder of fiscal 1997 and capital expenditures of approximately $3.4 million in fiscal 1998 primarily related to the purchase of new equipment and equipment and facility maintenance. In December 1993 and May 1994 Acorn issued the Subordinated Notes in the aggregate principal amount of approximately $31.4 million. In August 1996 the Company issued 100 shares of Series A Preferred Stock as payment in full of accrued interest on the Subordinated Notes for fiscal 1995 and fiscal 1996. As of May 2, 1997, the aggregate principal balance of the Subordinated Notes and accrued interest thereon was approximately $34.4 million and the aggregate liquidation value of the Series A Preferred Stock was approximately $9.4 million. The Company intends to use a portion of the net proceeds from the Offering to redeem the Series A Preferred Stock and pay accumulated dividends thereon and to repay a portion of the Subordinated Notes and accrued interest thereon. Pursuant to the Exchange, the remainder of the Subordinated Notes will be exchanged for shares of Common Stock upon consummation of the Offering. See "Use of Proceeds" and "Certain Transactions". In December 1996, the Company entered into the Credit Facility to finance capital expenditures, including future acquisitions, if any, and to fund working capital and other general business requirements. As of May 2, 1997, after giving effect to the Offering and the use of proceeds therefrom (at an assumed initial public offering price of $14.00 per share, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus), there would have been approximately $9.0 million available under the revolving portion of the Credit Facility and approximately $28.7 million available under the acquisition line of the Credit Facility. Indebtedness outstanding under the Credit Facility bears interest at variable rates (8.75% per year at May 2, 1997). The Company believes that cash generated from operations, together with amounts available under the Credit Facility, will be adequate to meet its debt service requirements, capital expenditures and working capital needs for the foreseeable future, although no assurance can be given in this regard. In addition, actual capital requirements may change, particularly as a result of acquisitions, if any, that the Company may make in the future. Depending on the nature, size and timing of future acquisitions, the Company may be required to raise additional financing. There can be no assurance that such additional financing will be available to the Company on acceptable terms. EFFECTS OF INFLATION The Company is affected by inflation primarily through the purchase of raw materials, increased operating costs and expenses and higher interest rates. The Company believes that the effects of inflation on the Company's operations have not been material in recent years. 26 28 BUSINESS GENERAL Founded in 1890, 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 and cutting tools. The Company sells its products under a variety of well-known brand names, including Razor-Back, Union, Yard 'n Garden, Perfect Cut and, pursuant to a license agreement, Scotts. In addition, the Company manufactures private label products for a variety of retailers, including products sold under Sears' Craftsman and Cotter & Company's True Value brand names. The Company's customers include mass merchants such as Sears, Kmart and Fred Meyer, home centers such as Home Depot, HomeBase, Builders Square and Payless Cashways, buying groups such as Cotter & Company and Ace Hardware and farm and industrial distributors. The Company's net sales increased from $56.2 million in fiscal 1991 to $92.7 million in fiscal 1996, a CAGR of 10.5%. The Company's net sales were $78.0 million for the nine months ended May 2, 1997, an increase of 12.3% from the same period in fiscal 1996. In addition, net sales of the Company's higher-margin, best-quality products increased to approximately 36% of total net sales in fiscal 1996, while net sales of the Company's lower-margin, opening-price-point products decreased to approximately 7% of total net sales in fiscal 1996. The Company generated approximately 92% of its revenues in both fiscal 1996 and the nine months ended May 2, 1997 from sales of long handle tools. The Company believes that it has gained the second largest market share in the long handle tools segment of the industry (with an estimated market share of approximately 28% in 1996) from the third largest market share in the early 1990s. BUSINESS STRATEGY Over the past six years the Company has successfully implemented a business strategy designed to transform it from a manufacturing-oriented industrial company into a marketing-oriented consumer products company. The central elements of the Company's approach include 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. The Company has developed a family of brands, each targeted to one or more specific consumer segments and price-points. For example, shovels sold under the Company's opening-price-point Yard'n Garden brand retail from $3.99 to $5.99, while shovels sold under the Company's best-quality Razor-Back brand retail from $19.99 to $21.99. The Company's products and brands are differentiated by price, features and warranty, as well as by the materials and production processes used. - Merchandising Strategy. The Company was the first in the long handle tool segment of the non-powered lawn and garden industry to successfully implement sophisticated merchandising and marketing programs. The Company's 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. The Company uses innovative product labeling and point-of-sale signage and racking to highlight the comparative value and quality of products within and among the Company's brands. Products within the Company's Union, Scotts and Perfect Cut lines are merchandised using the Company's trademarked "Good/Better/Best" format. Where adequate shelf-space is available, the Company also merchandises its brands together, from the Company's opening price-point Yard'n Garden brand to its best-quality Razor-Back brand, using a similar value positioning technique. The Company believes that its merchandising strategy facilitates comparison shopping and encourages consumers to purchase higher price-point products. Over the past six years, the Company also has expanded its infrastructure to support future growth by recruiting an experienced management team, increasing manufacturing capacity and enhancing its management information systems. 27 29 GROWTH STRATEGY The Company believes that it can leverage the success of its business strategy through the implementation of the following growth strategies: - Increase Penetration in High Growth Distribution Channels. The Company believes that certain distribution channels, such as home centers and mass merchants, are growing more rapidly than the overall industry. The Company believes that it can continue to increase its sales in these high growth distribution channels through its unique combination of brand names, innovative merchandising techniques and high quality products. For example, in August 1996, after the Company demonstrated the effectiveness of its market segmentation and merchandising strategies in a select number of Home Depot stores, Home Depot selected the Company as the supplier of long handle tools for all new Home Depot stores in new markets and for 50 existing Home Depot stores. Home Depot has indicated that it expects to open over 450 additional stores over the next five years, primarily in new markets. In addition, the Company has been a continuous supplier to Sears for over 80 years and the primary supplier of long handle tools to Sears for over 50 years. In five of the last six years the Company has received the prestigious "Partners in Progress" trophy awarded to approximately 80 of Sears' 10,000 suppliers. Sears has indicated that it expects to open or acquire over 500 additional non-mall hardware stores over the next five years. - Develop Product Line Extensions. The Company believes that product line extensions allow the Company to increase sales with minimal incremental expenditures. The Company recently expanded its cutting tool and striking tool product lines with the introduction of Perfect Cut pruning shears and loppers and Razor-Back mattocks, picks, axes, hammers and bars. The Company also recently introduced the Lady Gardener line of tools, which is ergonomically designed for female gardeners. The Company is actively developing additional product line extension opportunities. - Complete Strategic Acquisitions. The Company intends to increase its presence in certain segments of the lawn and garden industry through selective acquisitions and to increase operating efficiencies through vertical integration. Consistent with this strategy, in February 1997 the Company acquired an injection molding facility from one of the Company's largest suppliers of plastics parts. The Company's Credit Facility contains a $35 million acquisition facility, approximately $28.7 million of which will be available following consummation of the Offering and the application of the net proceeds therefrom (as of May 2, 1997 and at an assumed initial public offering price of $14, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus). In addition, Oaktree, the general partner of the Oaktree Fund, has indicated its willingness to consider providing financing from the Oaktree Fund for future acquisitions by the Company, however, there can be no assurance in this regard. The Company believes that continued application of its market segmentation and merchandising strategies, together with the implementation of the foregoing growth strategies, will enable the Company to continue its growth, increase its profitability and enhance its market share. INDUSTRY The non-powered lawn and garden tool industry is mature and, due in part to the low-cost nature of non-powered equipment, relatively non-cyclical. The Company believes that demand for non-powered lawn and garden tools generally is driven by the desire of do-it-yourself ("DIY") consumers to maintain and landscape residential properties and the need of industrial and farm professionals to acquire and utilize high-quality equipment that will aid them in efficiently completing their jobs. Industry sources estimate that the consumer market for lawn and garden tools (which excludes the professional and industrial markets) generated approximately $550 million in revenues in 1994, an increase of approximately 5% over 1993 estimates. Industry sources also estimate that the non-powered lawn and garden tool market will grow at a CAGR of 5.6% through 2001. The non-powered lawn and garden tool market is comprised of the following product categories: long handle tools, garden hose, hose attachments, cutting tools, hose reels, sprayers, wheelbarrows 28 30 and spreaders. The Company believes that long handle tools comprise the largest segment of the non-powered lawn and garden tool market. The Company believes that the lawn and garden industry is the beneficiary of several trends suggesting a growing demand for lawn and garden tools, including the following: - Demographic Trends. According to industry sources, consumers age 45 to 54 represent the largest age group of lawn and garden enthusiasts. Industry sources estimate that this group will increase by approximately 54% from 1998 to 2000 as "baby boomers" age. - Lifestyle Trends. Industry sources estimate that approximately 80 million households in the U.S. participated in some form of gardening in 1994. The Company believes that increased environmental awareness, greater interest in healthy lifestyles and heightened concerns regarding the maintenance of property values will continue to increase the popularity of lawn and garden activities, particularly among young adults. In addition, the success of several new gardening publications has contributed to the increased popularity of gardening and the greater sophistication of lawn and garden consumers. - Housing Starts and Sales of Existing Homes. 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. Consumers moving into new homes often spend substantially on landscaping, including the purchase of lawn and garden equipment. PRODUCTS AND BRANDS Product Lines The Company sells over 1,000 stock keeping units of non-powered lawn and garden tools. The Company designs, manufactures and markets tools in the following product lines: (i) shovels and scoops; (ii) other steel products, such as hoes, forks, scrapers and rakes; (iii) garden hand tools and posthole diggers; (iv) snow tools, such as shovels and pushers; and (v) other products such as repair handles, weeders, edging tools and brooms. In addition, the Company sells wheelbarrows and cutting and striking tools purchased from outside equipment manufacturers. As a result of its recent acquisition of an injection molding facility, the Company also manufactures proprietary custom molded products and component parts for other manufacturers and distributors, as well as plastic components used in the Company's products. Brand Positioning Pursuant to its market segmentation strategy, the Company has developed a family of brands, each targeted to one or more specific consumer segments and price-points. For example, shovels sold under the Company's opening-price-point Yard 'n Garden brand retail from $3.99 to $5.99, while products sold under the Company's best-quality Razor-Back brand retail from $19.99 to $21.99. The Company's 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 the Company's Razor-Back line are heavy-gauge and forged in order to maximize the product's strength and durability, while the Company's Yard 'n Garden products are made with lighter gauge components. The Company carefully monitors its products and searches for growth opportunities that result from changes in market segments. For example, the Company 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. See "-- Merchandising and Marketing". The Company's major brands are described below. Razor-Back. The Company sells 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 the Company expanded the brand with a high quality line of cutting and striking tools. The Razor-Back line is sold primarily through home center, hardware store, industrial distributor and farm sector distribution channels. 29 31 UnionPro. The Company sells a limited line of high quality, industrial duty tools for farm, industrial and professional users under the UnionPro name. The UnionPro line is sold primarily through industrial distributor and farm sector distribution channels. Union. The Union line generates the largest sales volume for the Company. Under the Union name, the Company sells 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. The Perfect Cut line was introduced in August 1995. The Company sells 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, the Company 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. The Company has 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, the Company sells 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 though mass merchant and home center distribution channels and is merchandised in a trademarked Good/Better/ Best quality configuration. ProForce. The ProForce line was introduced in August 1993 and is comprised 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, the Company sells 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 distribution channels. Lady Gardener. The Lady Gardener line was introduced in August 1996. Under the Lady Gardener name, the Company sells 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. Private Label Products In addition to its own brands, the Company also manufactures private label products for a variety of customers including Sears, Cotter & Company, Frank's Nursery and Agway, which are sold under the Craftsman and Sears, Green Thumb and TrueValue, Frank's and Agway brand names, respectively. The Company has 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 $17.1 million, or 15.9%, of the Company's net sales in fiscal 1996 and approximately $11.1 million, or 13.1%, of the Company's net sales in the nine months ended May 2, 1997. As a result of its recent acquisition of an injection molding facility, the Company also manufactures proprietary custom molded products and component parts for other manufacturers and distributors, as well as plastic components used in the Company's products. New Product Development The Company believes that internally developed products, which often extend existing product lines, allow it to increase sales with relatively modest expenditures. For example, the Company recently introduced striking tools, such as mattocks, picks, axes, hammers and bars, to extend the Razor-Back line. The Company 30 32 also introduced cutting tools, such as pruners, loppers, shears and bow and pruning saws marketed under the Perfect Cut line. The striking and cutting tools are made for the Company by outside manufacturers. The Company also has recently introduced redesigned posthole diggers with superior functionality and lower production costs. As part of its product development effort, the Company tests different materials in order to enhance product features, reduce tool weight and facilitate usage. For example, the Company's recently introduced Lady Gardener line, ergonomically designed for female gardeners, employs plastic or plastic and steel tool heads in order to make the equipment lighter and easier to handle. CUSTOMERS The Company has well-established customer relationships with most major retailers in the lawn and garden industry. The Company's largest customer, Sears, accounted for 8.9%, 12.5% and 11.5% of gross sales in fiscal 1995, fiscal 1996 and the nine months ended May 2, 1997, respectively. The Company's ten largest customers accounted for approximately 44.0%, 51.4% and 50.5% of gross sales during each such period. The Company sells its products through a variety of distribution channels, including (i) mass merchants such as Sears, Kmart and Fred Meyer, (ii) home centers such as Home Depot, HomeBase, Builders Square and Payless Cashways, (iii) buying groups such as Cotter & Company and Ace Hardware, (iv) farm distributors and stores such as Mid-States Distributing Co., Agway, Wheatbelt, Inc. and Tractor Supply Company, Inc. and (v) industrial distributors such as Oklahoma Rig & Supply Company, Texas Mill Supply & Manufacturing, Inc., Hughes Supply, Inc. and McMaster-Carr Supply Company. The Company believes that it provides value to its customers by offering a wide selection of products at a variety of price-points and by reliably servicing customer needs. MERCHANDISING AND MARKETING The Company was the first in the long handle tool segment of the non-powered lawn and garden industry to successfully implement sophisticated merchandising and marketing programs. The Company's 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. The Company uses innovative product labeling and point-of-sale signage and racking to highlight the comparative value and quality of products within and among the Company's brands. Products within the Company's Union, Scotts and Perfect Cut lines are merchandised using the Company's trademarked "Good/Better/Best" format. Where adequate shelf-space is available, the Company also merchandises its brands together, from the Company's opening price-point Yard 'n Garden brand to its best-quality Razor-Back brand, utilizing a similar value positioning technique. The Company believes that its merchandising strategy facilitates comparison shopping and encourages consumers to purchase higher price-point products. Where applicable, the Company provides its customers with merchandising plan-o-grams. The Company also provides its 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. The Company primarily uses cooperative advertising to promote its products to consumers. SALES The Company's sales force is divided into five regions, each led by a regional manager. The regional manager supervises a sales force consisting of 14 direct sales professionals who are employed by the Company. In addition, the Company utilizes 23 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 the Company's products. Company management and senior sales professionals regularly call on the Company's significant customers, while the manufacturing representatives provide store level support. The Company's sales professionals are compensated with a base salary and bonuses based upon a formula that rewards them for individual performance against an established quota, as well as Company-wide sales and earnings targets. 31 33 DISTRIBUTION AND LOGISTICS Customer orders arrive at the Company's headquarters in Columbus, Ohio and are processed centrally. If the Company can fill the order from the current stock of finished goods, the order is forwarded to one of the Company's three distribution centers for shipment based on proximity and availability. The Company maintains distribution centers in La Mirada, California, Columbus, Ohio and Frankfort, New York. The Company owns or leases a fleet of three tractors and 15 trailers for transporting products between its manufacturing and distribution facilities. Common carriers are used for shipping finished products from warehouses to customer delivery points. The Company uses a computerized management information and control system which allows the Company to determine the status of customer orders and enables the Company to process the orders quickly, respond to customer inquiries and adjust shipping schedules to meet customer requirements. Within this system, the Company uses an electronic data interchange system that enables customers, through computerized telephone communications, to place orders directly with the Company. The Company believes that these systems enable efficient order processing, expedite shipments and improve customer service. The Company also provides its customers with the service of pre-ticketing and bar-coding its products in accordance with customer specifications. 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 and metal painting. The complexity of certain tasks and the coordination of the various steps of the manufacturing process have been developed by the Company over the last 100 years. At the Company's Columbus, Ohio and Frankfort, New York manufacturing facilities, steel components undergo hot and cold stamping and hot forging or welding, depending on the type of tool head being produced. The metal is then cleaned by grinding and polishing the shaped steel heads. The steel components then are painted using various techniques depending on product type and product material. The Company operates its own water based paint manufacturing process which is used for all steel tool components. Some steel components undergo additional finishing steps such as anodization or immersion in special chemical baths. At the Company's eight saw mills, ash logs are cut into flitches, then into squares and finally into rounds. The rounds, which have diameters of one to two inches depending on the finished product requirements, then are inspected to remove defects. The end product of this process is a green ash dowel that is then shipped to either the Company's 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 the Company's Columbus and Frankfort facilities. The inventory of handles maintained at these facilities 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. The Company has implemented a seasonally adjusted production schedule in order to maximize its inventories of finished goods. Production is increased during December through March, the Company's busiest season, and lowered during the summer and fall seasons. RAW MATERIALS The primary raw materials used to produce the Company's products are steel, plastics and ash wood. Steel. The Company purchases its steel requirements from several domestic suppliers. The primary considerations in specialty steel sourcing are metallurgy, price and width. The Company has strong and long established relationships with its steel suppliers and has never experienced sourcing problems. The Company does not enter into long-term contracts with regard to any of its steel purchases. The Company purchased approximately 75% and 17% of its steel requirements from Worthington Steel and Acme Steel Corporation, 32 34 respectively, in fiscal 1996 and approximately 65% and 19%, respectively, from such suppliers in the nine months ended May 2, 1997. The Company has had relationships with these suppliers in excess of 15 and 7 years, respectively. Plastics. The Company has selected specially formulated plastics and resins for use in its tools. Plastic tool heads historically have been produced by six outside injection molders (including the former owner of the injection molding facility that the Company recently acquired), utilizing molds developed and owned by the Company. The Company intends to use its new facility to manufacture proprietary custom molded products and component parts for other manufacturers and distributors, as well as to manufacture plastic components used in the Company's products. The Company does not enter into any long-term contracts with regard to its plastics purchases. Ash Wood. Ash is the ideal hardwood for handles because it is lightweight, flexible and splinters less than most hardwoods. The Company has wood specialists who maintain relationships with numerous log suppliers and are responsible for sourcing the Company's ash needs. The Company believes that it will continue to be able to obtain sufficient quantities of ash. The Company typically maintains a six to eight week inventory of ash at each of its sawmills to cover occasional short-term fluctuations in supply. The Company imports ramin wood handles for some of its 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. FACILITIES The Company's headquarters and executive offices, located in Columbus, Ohio, occupy approximately 31,000 square feet in a facility owned by the Company. As of May 2, 1997, the other principal properties owned or leased by the Company for use in its business are set forth below. DISTRIBUTION FACILITIES
OWNED SQUARE LOCATION OR LEASED FEET ------------------------------------------------------- --------- ------- Columbus, Ohio......................................... Leased 170,000 Frankfort, New York(1)................................. Owned 31,000 La Mirada, California.................................. Leased 19,000
MANUFACTURING FACILITIES
OWNED SQUARE LOCATION OR LEASED FEET ------------------------------------------------------- --------- ------- Columbus, Ohio(2)...................................... Owned 165,000 Frankfort, New York(1)................................. Owned 351,000 Hebron, Ohio........................................... Owned 170,000
33 35 SAWMILLS
OWNED SQUARE LOCATION OR LEASED FEET ------------------------------------------------------- --------- ------- Beverly, West Virginia................................. Owned 5,100 Cookeville, Tennessee.................................. Owned 12,000 Delaware, Ohio......................................... Owned 56,000 Frankfort, New York(1)................................. Owned 39,000 Huntington, Indiana.................................... Owned 7,500 Lebanon, Kentucky...................................... Owned 13,500 Portville, New York.................................... Owned 15,000 Shippenburg, Pennsylvania.............................. Owned 15,000
- --------------- (1) The Company's 421,000 square foot Frankfort, New York facility is comprised of a distribution center, a manufacturing facility and a sawmill. The Company also maintains approximately 20,000 square feet of office space in this facility. (2) The Company's 196,000 square foot Columbus, Ohio headquarters consists of the Company's executive offices and a manufacturing facility. The Company believes that its existing manufacturing facilities, distribution centers and sawmills are adequate for the current level of the Company's operations. The Company believes that its manufacturing facilities have sufficient excess capacity to accommodate a 35% to 50% increase in current levels of output. The Company believes that its current sawmill capacity is sufficient to accommodate up to a 30% increase in current levels of output. EMPLOYEES As of May 2, 1997, the Company employed approximately 670 people (including seasonal employees), approximately 570 of whom were paid on an hourly basis. The Company's 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 the Company's hourly employees is in excess of 15 years. Hourly employees at the Company's Columbus, Ohio manufacturing facility and distribution center and Delaware, Ohio sawmill are represented by the International Association of Machinists (the "IAM"). Hourly employees at the Company's Frankfort, New York facilities are represented by the International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers (the "IBB"). Hourly employees at the Company's Portville, New York sawmill are represented by the International Brotherhood of Teamsters (the "IBT"). Hourly employees at the Company's Hebron, Ohio injection molding facility are represented by the Glass, Molders, Pottery, Plastics & Allied Workers International Union AFL-CIO (the "AGM"). The Company's contracts with the IAM, the IBB, the IBT and the AGM expire in March 1999, May 1998, August 1999 and February 1999, respectively. No other employees of the Company are represented by unions. The Company has not been subject to a strike or work stoppage in over 20 years and believes that its relationships with its employees, the IAM, the IBB, the IBT and the AGM are good. PATENTS AND TRADEMARKS The Company's success and ability to compete are dependent to a significant degree on its patents and trademarks. The Company registers its patents and trademarks in the United States Patent and Trademark Office and the patent and trademark offices of certain other countries and intends to continue to do so as new patents and trademarks are developed or acquired. The Company's trademarks include the Lady Gardener, Perfect Cut, Pro Force, Razor-Back, Union, Union Pro and Yard 'n Garden brand names. In addition, the Company holds trademarks on various configurations of its Good/Better/Best product labels and signage. In July 1992, the Company 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. The Company pays certain 34 36 royalties to The Scotts Company, the owner of the Scotts trademark, pursuant to a license agreement. The current term of the license agreement expires in August 1998 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. The Company competes for customers in this industry 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 the Company. In the long handle tool segment of the industry, the Company competes primarily with Ames Company, Inc. ("Ames") and True Temper Hardware Company, Inc. ("True Temper"). The Company believes that it currently has the second largest market share in the long handle tools segment of the industry. The Company believes that Ames currently has the largest market share in the long handle tools segment of the industry and that True Temper currently has the third largest in this segment of the industry. ENVIRONMENTAL MATTERS The Company is 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. The Company has made, and will continue to make, expenditures to comply with these environmental requirements and regularly reviews its procedures and policies for compliance with environmental laws. The Company also has been involved in remediation actions with respect to certain of its facilities. Amounts expended by the Company in such compliance and remediation activities have not been material to the Company. 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 the Company's 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 the Company's properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of the Company's properties, the Company may be held liable and the amount of such liability could be material. At May 2, 1997 the Company had a reserve for environmental remediation of $451,000. The actual cost of remediating environmental conditions may be different than that accrued by the Company due to the difficulty in estimating such costs and due to potential changes in the status of legislation. The Company does not maintain an insurance policy for environmental matters. LITIGATION The Company from time to time is involved in routine litigation incidental to the conduct of its business. Management believes that no currently pending litigation to which the Company is a party will have a material adverse effect on its financial position or results of operations. 35 37 DESCRIPTION OF MCGUIRE-NICHOLAS Founded in 1932, McGuire-Nicholas is a leader in the leather, canvas and manmade fabric tool holder and work apron market. McGuire-Nicholas designs, manufactures and markets construction aprons, nail and tool bags, tool pouches, tool holders, work and support belts and knee pads. The Company believes that the McGuire-Nicholas brand enjoys a reputation for superior design and quality, as well as high name recognition among professional and serious DIY consumers. McGuire-Nicholas sells its products through market leaders in all hardware distribution channels, including mass merchants, home centers, buying groups, distributors, industrial retailers and club stores. McGuire-Nicholas' merchandising and marketing strategy is focused on brand management, increased penetration of certain specified distribution channels and satisfying customer needs. McGuire-Nicholas has developed innovative new products, packaging and customer specific merchandising programs and provides retail service and support through plan-o-gram services, custom flyers and circulars. McGuire-Nicholas participates in distribution channel and customer specific advertising and promotional events, including "best buy" and "item-of-the-month" specials and special promotions using custom packaging. McGuire-Nicholas' manufacturing process largely is comprised of cutting, sewing and riveting. Leather or canvas is transported from an adjacent warehouse to the cutting floor, where workers cut the raw material to size and shape. After cutting, the material is sewn and riveted to form the finished product. Finished items are packaged on the premises. The principal raw materials used in McGuire-Nicholas' products consist of tanned leather, Cordura, canvas, nylon webbing for belts, rivets and other hardware. McGuire-Nicholas does not engage in leather tanning. McGuire-Nicholas manufactures and distributes its products worldwide out of a 72,000 square foot leased facility in Los Angeles, California. It currently is in the process of moving a portion of its manufacturing facilities to Tecate, Mexico. As of May 2, 1997, McGuire-Nicholas employed approximately 355 non-union employees with an average tenure in excess of 10 years. In December 1996 McGuire-Nicholas entered into a Loan and Credit Facility (the "Loan Facility"). The Loan Facility is comprised of (i) a $9.25 million revolving facility, (ii) a $250,000 term loan and (iii) a $500,000 non-revolving capital expenditure facility to purchase new equipment. All borrowings made under the Loan Facility bear interest at the rate of 1% over the Prime Rate (as defined in the Loan Facility). The Loan Facility is secured by, among other things, all of McGuire-Nicholas' accounts, general intangibles, securities, inventory and equipment. Neither Acorn nor UnionTools is a party to the Loan Agreement, either as principal or guarantor. 36 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and position of each of the directors of Acorn and the executive officers of the Company. Each director of Acorn will hold office until the next annual meeting of stockholders of Acorn or until his successor has been elected and qualified.
NAME AGE POSITION - ------------------------------------------- ---- ------------------------------------------- Gabe Mihaly................................ 49 President, Chief Executive Officer and Director of Acorn and UnionTools James B. Farland........................... 58 Vice President -- Sales and Marketing of UnionTools Thomas A. Hyrb............................. 53 Vice President -- Operations of UnionTools Stephen M. Kasprisin....................... 43 Chief Financial Officer and Vice President of Acorn and Union Tools Conor D. Reilly............................ 45 Chairman of the Board and Director of Acorn and UnionTools William W. Abbott.......................... 65 Director of Acorn Matthew S. Barrett......................... 37 Director of Acorn Stephen A. Kaplan.......................... 38 Director of Acorn John I. Leahy.............................. 66 Director of Acorn
Gabe Mihaly became President and Chief Executive Officer of UnionTools in May 1991 and President, Chief Executive Officer and a director of Acorn in August 1996. From October 1986 to May 1991, Mr. Mihaly was a partner at Ernst & Young, where he provided consulting services to senior executives in the areas of strategy, cost and operations management, performance and competitive analysis and turnaround management. James B. Farland became Vice President Sales and Marketing of UnionTools in March 1992. From October 1990 to March 1992, Mr. Farland was Vice President National Accounts of Poulan/Weedeater. From March 1988 to October 1990, Mr. Farland was Vice President Sales and Marketing of Allegratti Co. until its acquisition by Poulan/Weedeater. Thomas A. Hyrb became Vice President Operations of UnionTools in August 1991. From September 1982 to July 1991, Mr. Hyrb was Director of Quality Assurance and Plant Manager of True Temper. From May 1966 to August 1982, Mr. Hyrb held various manufacturing and engineering management positions with Clarke (a division of McGraw Edison), Roper Corporation and Allis Chalmers. Stephen M. Kasprisin became Chief Financial Officer and Vice President of Acorn in February 1989 and Chief Financial Officer and Vice President of UnionTools in January 1994. From January 1981 to February 1989, Mr. Kasprisin held various financial positions with certain private enterprises. From June 1976 to January 1981 Mr. Kasprisin was employed by Coopers & Lybrand, certified public accountants. Conor D. Reilly became Chairman and a director of Acorn and UnionTools in August 1996. Mr. Reilly has been a partner at Gibson, Dunn & Crutcher LLP since January 1988. Mr. Reilly served as Vice Chairman of Memorex-Telex N.V. in 1992 and 1993 and has been a director of John Deere Insurance Group, Inc. since August 1992. William W. Abbott became a director of Acorn in January 1997. 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. From April 1982 to April 1994 Mr. Abbot served as a member of the Board of Directors of Armstrong World Industries. He currently serves as a member of the Board of Directors of Horace Mann Educators Corporation, Fifth Third Bank of Naples, 37 39 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 of the Company in December 1993. Mr. Barrett is a managing director of Oaktree. 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 of Acorn 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 Trust Company of the West and was portfolio manager of The Principal Fund. From January 1991 to October 1993, Mr. Kaplan was a partner at Gibson, Dunn & Crutcher LLP. Mr. Kaplan currently serves as a member of the Board of Directors of Chief Auto Parts, Inc., Stratagene Holding Corporation, Decorative Home Accents, Inc. and KinderCare Learning Centers, Inc. John I. Leahy became a director of the Company in August 1994. Mr. Leahy has been the President of Management & 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 II, Motorvac Technologies, Inc. and several privately held companies. Mr. Leahy is a Trustee of Loyola College of Maryland and St. Mary's University. COMMITTEES OF THE BOARD OF DIRECTORS In March 1997 Acorn created a Management Development and Compensation Committee (the "Compensation Committee") and an Audit Committee (the "Audit Committee"). Messrs. Abbott (Chairman), Kaplan and Reilly were appointed to the Compensation Committee and Messrs. Leahy (Chairman) and Barrett were appointed to the Audit Committee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to March 1997, Acorn did not have a compensation committee. The full Board of Directors of Acorn participated in deliberations concerning compensation of executive officers of the Company during fiscal 1996. None of the executive officers of Acorn served on the board of directors or on the compensation committee of any other entity, any of whose officers served either on the Board of Directors or on the compensation committee of Acorn. DIRECTOR COMPENSATION Directors who are employees of the Company receive no compensation for serving as directors. Non-employee directors receive annual compensation of $30,000, plus reimbursement of reasonable out-of-pocket expenses. Non-employee directors can elect to have all of their annual compensation paid in shares of Common Stock pursuant to the Director Stock Plan or one-half paid in cash and one-half paid in shares of Common Stock pursuant to the Director Stock Plan. 38 40 EXECUTIVE COMPENSATION The following summary compensation table sets forth information concerning the annual and long-term compensation earned by Acorn's chief executive officer and each of the four other most highly compensated executive officers of the Company whose annual salary and bonus during fiscal 1996 exceeded $100,000 (the "Named Officers"). Mr. Mihaly's cash compensation was paid by Acorn. All other compensation was paid by UnionTools.
ANNUAL COMPENSATION -------------------- FISCAL ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) - ------------------------------------------------ ------ -------- ------- --------------- Gabe Mihaly(2).................................. 1996 $296,181 $14,000 $12,986 President and Chief Executive Officer of Acorn and UnionTools James B. Farland................................ 1996 181,482 49,450 9,470 Vice President Sales and Marketing of UnionTools Thomas A. Hyrb.................................. 1996 159,966 46,500 51,752 Vice President Operations of UnionTools Stephen M. Kasprisin............................ 1996 164,642 46,359 11,887 Chief Financial Officer and Vice President of Acorn and UnionTools Joseph J. Duffy(2).............................. 1996 405,233 -- 583,852 President and Chief Executive Officer of Acorn
- --------------- (1) Amounts shown include $4,500 of matching benefits paid under the Company's defined contribution 401(k) plan and other miscellaneous cash benefits, but do not include retirement benefits under the Company's Salaried Employee Pension Plan or Supplemental Pension Plan. See "-- Pension Plans". The amounts shown for Messrs. Duffy and Mihaly include $4,200 and $2,553, respectively, paid by the Company with respect to supplementary life insurance for the benefit of Messrs. Duffy and Mihaly. The amount shown for Mr. Duffy also includes $6,850 paid by the Company with respect to disability income insurance for the benefit of Mr. Duffy, as well as $563,000 payable in connection with Mr. Duffy's resignation from the Company. See note 2 below and "Certain Transactions". The amount shown for Mr. Hyrb includes $43,454 paid by the Company with respect to relocation expenses. (2) Mr. Duffy was Chairman of the Board, President and Chief Executive Officer of Acorn until August 1, 1996. Mr. Mihaly became President and Chief Executive Officer, and Mr. Reilly became Chairman of the Board of Acorn, immediately thereafter. The following table contains certain information regarding options to purchase Common Stock held as of August 2, 1996 by each of the Named Officers. None of such Named Officers exercised any options during fiscal 1996.
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END(1) ----------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------- ----------- ------------- ----------- ------------- Gabe Mihaly................................ 17,352 13,014(2) $ 139,973 $0(2) James B. Farland........................... -- -- -- -- Thomas A. Hyrb............................. -- -- -- -- Stephen M. Kasprisin....................... -- -- -- -- Joseph J. Duffy............................ 15,906 0 $ 192,463 --
- --------------- (1) Calculated on the basis of $12.10 per share, the fair market value of the Common Stock at August 2, 1996, as determined by the Board of Directors, less the exercise price payable for such shares. (2) Upon consummation of the Offering, options exercisable for 5,784 of such shares vest at an exercise price of $0 per share and options exercisable for 7,230 of such shares expire. 39 41 PENSION PLANS UnionTools maintains five noncontributory defined benefit pension plans covering substantially all of the hourly employees of the Company. UnionTools also maintains a noncontributory defined benefit pension plan covering salaried, administrative and supervisory employees of the Company (the "Salaried Employee Pension Plan") and a supplemental noncontributory defined benefit pension plan covering certain senior executive officers of the Company (the "Supplemental Pension Plan"). 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 1996 covered compensation.
YEARS OF SERVICE ----------------------------------------------------------- REMUNERATION(1) 15 20 25 30 35 - ------------------------------------- ------- ------- ------- ------- ------- $125,000............................. $42,187 $56,250 $70,313 $70,313 $70,313 150,000 and above................... 50,625 67,000 84,375 84,375 84,375
- --------------- (1) Based on final earnings. For each Named Officer, the Salaried Employee Pension Plan covers total compensation as listed in the summary compensation table, but limited to $150,000 as required by the Employee Retirement Income Security Act of 1974. Messrs. Mihaly, Farland, Hyrb and Kasprisin have credited service of approximately 6, 5, 5 and 8 years, respectively, under the Salaried Employee Pension Plan. Mr. Duffy had credited service of approximately 6 years under the Salaried Employee Pension Plan at the time of termination of his employment with Acorn. 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 Officers are slightly lower than the amounts indicated in the foregoing table. The Company's policy is to fund the maximum amount deductible for federal income tax purposes. 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 1996 covered compensation.
YEARS OF SERVICE ----------------------------------------------------------- REMUNERATION(1) 15 20 25 30 35 - ------------------------------------- ------- -------- -------- -------- -------- $175,000............................. $ 8,437 $ 11,250 $ 14,063 $ 14,063 $ 14,063 200,000............................. 16,875 22,500 28,125 28,125 28,125 225,000............................. 25,313 33,750 42,188 42,188 42,188 250,000............................. 33,750 45,000 56,250 56,250 56,250 300,000............................. 50,625 67,500 84,375 84,375 84,375 400,000............................. 84,375 112,500 140,625 140,625 140,625
- --------------- (1) Based on final earnings. For Messrs. Mihaly and Duffy, the Supplemental Pension Plan covers compensation as listed in the summary compensation table above $150,000. Mr. Mihaly has credited service of approximately 6 years under the Supplemental Pension Plan. Mr. Duffy had credited service of approximately 6 years under the Supplemental Pension Plan at the time of termination of his employment with Acorn. 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 Salaried Employee Pension Plan in an amount equal to 2.25% of the employees' final earnings (as described above) multiplied by the 40 42 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 the Company entered into an employment agreement with Mr. Mihaly which provides for his employment as the President of Acorn and the President and Chief Executive Officer of UnionTools. The agreement has a five year term and automatically is extended for successive one-year periods thereafter unless notice is given at least 90 days, if by Mr. Mihaly, or one year, if by the Company, prior to expiration of the then-current term. Mr. Mihaly's employment agreement provides for a base salary of $296,181 per year, a bonus of $260,000 if Mr. Mihaly is employed by the Company on January 5, 1998, an annual cash bonus in an amount to be determined by the Board of Directors of Acorn and certain additional benefits, including participation in pension, health and other employee benefits plans of the Company. Mr. Mihaly's employment agreement provides that if the term of the agreement is not extended by the Company, the Company is required to make a lump sum payment to Mr. Mihaly in an amount equal to his then-current base salary. Mr. Mihaly's employment agreement also provides that if Mr. Mihaly's employment is terminated by the Company without cause (as defined in the agreement) or if Mr. Mihaly resigns due to a material diminution in his responsibilities or a material breach by the Company of its obligations under the agreement (collectively, "Termination"), the Company is required to make a lump sum payment to Mr. Mihaly in an amount equal to the full cash compensation due through the remaining term of the agreement (the "Remaining Salary"). In addition, Mr. Mihaly will be treated for purposes of pension and related plans as having been employed by the Company through the end of the then-current term of the agreement. If such Termination occurs within two years following a change in control of the Company (as defined in the agreement), the Company also is required to pay to Mr. Mihaly an amount equal to the difference between (i) three times the highest aggregate annual compensation (including salary, bonuses and incentive payments) includable in gross income paid to Mr. Mihaly during any one of the three taxable years preceding the date of the Termination and (ii) the Remaining Salary. In May 1997 the Company also entered into agreements with each of Messrs. Farland, Hyrb and Kasprisin which provide that following the Termination of such officers' employment with the Company, the Company 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 of the Company (as defined in such agreement), the Company also is required to pay to such employee an amount equal to two times the amount described in the preceding sentence. 1997 STOCK INCENTIVE PLAN In April 1997, Acorn adopted 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. The Incentive Plan is administered by the Compensation Committee, which has broad authority in administering the Incentive Plan. Awards to employees may take the form of options, stock appreciation rights or sales or grants of restricted stock. Options granted under the Incentive Plan may be options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or options not intended to so qualify. An award granted to an employee under the Incentive Plan may include a provision terminating the award upon termination of employment under certain circumstances or accelerating the receipt of benefits upon the occurrence of certain specified events. All awards granted under the Incentive Plan immediately vest upon the occurrence of a change in control of the Company, as defined in the Incentive Plan. Acorn has reserved an aggregate of 730,000 shares of Common Stock for issuance under the Incentive Plan. 41 43 There are no awards currently outstanding under the Incentive Plan. Acorn has approved the grant of options to the following executive officers and directors under the Incentive Plan contingent upon the consummation of the Offering:
NUMBER OF SHARES NAME SUBJECT TO OPTIONS ----------------------------------------------------- ------------------ Gabe Mihaly.......................................... 81,300 James B. Farland..................................... 40,600 Thomas A. Hyrb....................................... 40,600 Stephen M. Kasprisin................................. 40,600 Conor D. Reilly...................................... 32,500
Acorn also has approved the grant of options to purchase an aggregate of 73,200 shares of Common Stock to other key employees of the Company. The exercise price for each such option will equal the initial public offering price per share in the Offering. Upon consummation of the Offering, 25% of each officer's options vest, with an additional 25% vesting annually over the next three years. DIRECTOR STOCK PLAN In April 1997, Acorn adopted the Director Stock Plan. The purpose of the Director Stock Plan is to increase the proprietary interest in Acorn of non-employee members of the Board of Directors by providing for payment of all or one half of their fees in the form of common stock units, thereby increasing their incentive to contribute to the success of the Company. The Director Stock Plan is administered by an Administrative Committee comprised of the Chief Financial Officer and Secretary of Acorn. The Director Stock Plan is intended to comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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. Each non-employee director may elect to receive the Common Stock distributed pursuant to common stock units either (a) immediately following his or her resignation from the Board of Directors or (b) in annual installments over a period of time following such resignation. 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. 42 44 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Common Stock as of May 22, 1997, by (i) each person who is known by Acorn to own beneficially more than 5% of the outstanding shares of the Common Stock; (ii) each director and Named Officer and (iii) all executive officers and directors as a group. Unless otherwise indicated, each person has sole voting power and investment power with respect to the shares attributed to them.
BENEFICIAL OWNERSHIP(1) ----------------------------------------------- AFTER THE OFFERING PRIOR TO THE OFFERING AND THE EXCHANGE(2) --------------------- --------------------- NUMBER OF NUMBER OF NAME OF BENEFICIAL OWNER(3) SHARES PERCENT SHARES PERCENT - --------------------------------------------------- --------- ------- --------- ------- The TCW Group, Inc.(4)............................. 1,446,000 96.5% 3,120,116 48.6% Oaktree Capital Management, LLC(5)................. -- -- 812,500 12.7 OCM Principal Opportunities Fund, L.P.............. -- -- 812,500 12.7 Joseph J. Duffy(6)................................. 33,258 2.2 33,258 * Gabe Mihaly(7)..................................... 37,596 2.5 63,705 * James B. Farland................................... -- -- 10,150(8) * Thomas A. Hyrb..................................... -- -- 10,150(9) * Stephen M. Kasprisin............................... -- -- 10,150(10) * Conor D. Reilly.................................... -- -- 8,125(11) * William W. Abbott.................................. -- -- -- -- Matthew S. Barrett(12)............................. -- -- 812,500 12.7 Stephen A. Kaplan(13).............................. -- -- 812,500 12.7 John I. Leahy...................................... 14,460 * 14,460 * All directors and executive officers as group (9 people)(14)...................................... 52,056 3.4 929,240 14.3
- --------------- * Less than 1% (1) As used in this table, a beneficial owner of a security includes any person who, directly or indirectly, through contract, arrangement, understanding, relationship or otherwise has or shares (i) the power to vote, or direct the voting of, such security or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security. In addition, a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days. (2) Assumes the issuance of an aggregate of 1,674,116 shares of Common Stock pursuant to the Exchange (giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom and giving effect to Exchange, each as of May 2, 1997). Other than with respect to Oaktree and the Oaktree Fund, does not include any shares purchased in the Offering. (3) The address of the TCW Group is 865 South Figueroa Street, Los Angeles, California 90017. The address of Oaktree, the Oaktree Fund, Mr. Barrett and Mr. Kaplan is 550 South Hope Street, 22nd Floor, Los Angeles, California 90071. The address of Mr. Duffy is 1077 Old County Road, Severna Park, Maryland 21146. The address for Messrs. Mihaly, Farland, Herb, Kasprisin and Reilly is c/o Acorn Products, Inc., 500 Dublin Avenue, Columbus, Ohio 43216. 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. (4) All such shares of Common Stock are owned by the TCW Funds prior to the Offering as follows: (i) TCW Special Credit Fund III (299,322 shares); (ii) TCW Special Credits Fund IIIb (287,754 shares); (iii) TCW Special Credits Plus Fund (104,112 shares); (iv) TCW Special Credits Trust IIIb (205,332 shares); (v) TCW Special Credits Fund IV (93,990 shares); (vi) TCW Special Credits Trust (144,600 shares); (vii) TCW Special Credits, as investment manager of Weyerhaeuser Company Pension Trust (104,112 shares); (viii) TCW Special Credits Trust IV (144,600 shares); (ix) TCW Special Credits Trust IVA (31,812 shares); (x) TCW Special Credits, as investment manager of Delaware State Employees' Retirement Fund (72,300 shares) and (xi) TCW Special Credits, as investment manager of The Common 43 45 Fund for Bond Investments (20,244 shares). The approximately 1,674,116 shares of Common Stock to be issued pursuant to the Exchange as described in note 2 above will be owned by the TCW Funds as follows: (i) TCW Special Credit Fund III (351,868 shares); (ii) TCW Special Credits Fund IIIb (330,019 shares); (iii) TCW Special Credits Plus Fund (120,673 shares); (iv) TCW Special Credits Trust IIIb (235,911 shares); (v) TCW Special Credits Fund IV (109,395 shares); (vi) TCW Special Credits Trust (166,888 shares); (vii) TCW Special Credits, as investment manager of Weyerhauser Company Pension Trust (120,647 shares); (viii) TCW Special Credits Trust IV (96,989 shares); (ix) TCW Special Credits Trust IVA (36,089 shares); (x) TCW Special Credits, as investment manager of Delaware State Employees' Retirement Fund (81,954 shares); (xi) TCW Special Credits, as investment manager of The Common Fund for Bond Investments (23,683 shares). TCW Asset Management Company, a wholly-owned subsidiary of the TCW Group, is the managing general partner of TCW Special Credits. TCW Special Credits is the general partner of, or the investment advisor to, each of the TCW Funds. Certain principals of Oaktree are individual general partners of TCW Special Credits (the "Individual Partners"). The Individual Partners, in their capacity as general partners of TCW Special Credits, have been designated to manage the TCW Funds. Although Oaktree provides consulting, research and other management support services to the Individual Partners, Oaktree does not have any voting or dispositive power with respect to the TCW Funds. (5) All of such shares of Common Stock are owned by the Oaktree Fund. (6) Includes 15,906 shares of Common Stock issuable pursuant to options. (7) Includes 17,352 shares of Common Stock issuable pursuant to options currently held by Mr. Mihaly. After the Offering and the Exchange also includes 5,784 shares of Common Stock issuable pursuant to options vesting upon consummation of the Offering and 20,325 shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering. (8) Reflects shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering. (9) Reflects shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering. (10) Reflects shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering. (11) Reflects shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering. (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. (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. (14) See notes (6) through (13) above. 44 46 CERTAIN TRANSACTIONS In December 1993 and May 1994 Acorn issued the Subordinated Notes in the aggregate principal amount of approximately $31.4 million to the TCW Funds. The Subordinated Notes mature in July 2003 and bear interest at a rate of 13% per year. In August 1996 Acorn issued 100 shares of Series A Preferred Stock with an aggregate stated value of approximately $8.6 million to the TCW Funds as payment in full of accrued interest on the Subordinated Notes for fiscal 1995 and fiscal 1996. As of May 2, 1997, the aggregate principal amount of the Subordinated Notes and accrued interest thereon was approximately $34.4 million and the aggregate liquidation value of the Series A Preferred Stock was approximately $9.4 million. The Company intends to use approximately $20.4 million of the estimated net proceeds of $40.8 million from the Offering to redeem the Series A Preferred Stock and pay accumulated dividends thereon and to repay a portion of the indebtedness outstanding under the Subordinated Notes and accrued interest thereon. Pursuant to the Exchange, concurrent with the consummation of the Offering the TCW Funds will exchange remainder of the Subordinated Notes for a number of shares of Common Stock equal to the remaining aggregate principal amount of the Subordinated Notes (approximately $23.4 million giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom as of May 2, 1997) divided by the per share Price to Public set forth on the cover page of this Prospectus. As of May 2, 1997 and giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom, the TCW Funds would receive an aggregate of 1,674,116 shares of Common Stock pursuant to the Exchange. See "Risk Factors -- Control by Principal Stockholders" and "Use of Proceeds". In December 1996 Acorn issued a subordinated promissory note to the TCW Funds in the aggregate principal amount of $6 million and bearing interest at a rate of 13% per year as bridge financing. In December 1996 Acorn 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, Chairman of the Board of Acorn and a director of Acorn and UnionTools, is a partner in the law firm of Gibson, Dunn & Crutcher LLP. The Company paid fees of approximately $774,280 and $1,136,660 to Gibson, Dunn & Crutcher LLP in fiscal 1996 and the nine months ended May 2, 1997, respectively. In fiscal 1996 John I. Leahy, a director of Acorn, received fees in the aggregate amount of $15,500 for consulting services rendered to the Company. In connection with Joseph J. Duffy's resignation as the Chairman of the Board, President and Chief Executive Officer of Acorn on August 1, 1996, upon consummation of the Offering Mr. Duffy will receive accelerated payments (aggregating $263,312 as of May 2, 1997) for certain consulting services rendered to the Company. Mr. Duffy also is entitled to certain pension benefits. See "Management -- Executive Compensation -- Pension Plans". From time to time, the Company extends loans to certain officers and directors in connection with the purchase of Common Stock. In January 1994, Mr. Mihaly, the President, Chief Executive Officer and a director of Acorn and UnionTools, received a loan from UnionTools in the aggregate principal amount of $245,000. The loan matures in January 1998, bears interest at an annual rate of 5.34% and is secured by a pledge of Common Stock. The principal of, and accrued interest on, the loan becomes due upon the occurrence of certain events, including voluntary termination of Mr. Mihaly's employment with the Company. 45 47 DESCRIPTION OF CAPITAL STOCK GENERAL Acorn's authorized capital stock consists of 20 million shares of Common Stock, $.001 par value per share, of which 1,498,056 shares are issued and outstanding and 1,000 shares of Preferred Stock, par value $.001 per share, of which 100 shares of Series A Preferred Stock are issued and outstanding. A portion of the net proceeds from the Offering will be used to redeem the Series A Preferred Stock and pay accumulated dividends thereon. See "Certain Transactions". The material terms of Acorn's Amended and Restated Certificate of Incorporation (the "Charter") and bylaws are discussed below. COMMON STOCK Holders of Common Stock are entitled to one vote per share in the election of directors and on all other matters on which stockholders are entitled or permitted to vote. Holders of Common Stock are not entitled to vote cumulatively for the election of directors. Holders of Common Stock have no redemption, conversion, preemptive or other subscription rights. There are no sinking fund provisions relating to the Common Stock. Holders of Common Stock are entitled to receive dividends when and as declared by the Board of Directors of Acorn out of funds legally available therefor. Acorn does not anticipate paying cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy". In the event of the liquidation, dissolution or winding up of Acorn, the holders of Common Stock will be entitled to share ratably in all of the assets of Acorn, if any, remaining after satisfaction of the debts and liabilities of Acorn. The outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, upon payment therefor as contemplated herein, validly issued, fully paid and nonassessable. PREFERRED STOCK Under the Charter, the Board of Directors is authorized, subject to certain limitations prescribed by law, to issue the preferred stock in one or more classes or series and to fix the designations, powers, preferences and relative participation, option or other special rights and qualifications, limitations or restrictions thereof, including, without limitation, the dividend rate, conversion or exchange rights, redemption price and liquidation preference, of any such class or series. In addition, the Board of Directors may fix the number of shares constituting any such class or series, and increase or decrease the number of shares of any such class or series, but not below the number of outstanding shares of any such class or series. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of Acorn. Acorn has no current plans to issue additional shares of preferred stock. See "Risk Factors -- Effect of Certain Charter, Change of Control and Statutory Provisions". CERTAIN PROVISIONS OF DELAWARE LAW Acorn is incorporated under the DGCL. Acorn is subject to Section 203 of the DGCL, which restricts certain transactions and "business combinations" between a Delaware corporation and an "interested stockholder" (in general, a stockholder owning 15% or more of the corporation's outstanding voting stock) or an affiliate or associate of an interested stockholder, for a period of three years from the date the stockholder becomes an interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, unless the transaction is approved by the Board of Directors and the holders of at least 66 2/3% of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder), Section 203 prohibits significant business transactions such as a merger with, disposition of assets to or receipt of disproportionate financial benefits by the interested stockholder, or any other transaction that would increase the interested stockholder's proportionate ownership of any class or series of the corporation's stock. The statutory ban does not apply if, upon consummation of the transaction in which any person becomes an interested stockholder, 46 48 the interested stockholder owns at least 85% of the outstanding voting stock of the corporation (excluding shares held by persons who are both directors and officers or by certain employee stock plans). See "Risk Factors -- Effect of Certain Charter, Change of Control and Statutory Provisions". Acorn's Charter contains certain provisions permitted under the DGCL relating to the liability of directors. The Charter provides that, to the fullest extent permitted by the DGCL, no director of Acorn will be personally liable to Acorn or its stockholders for monetary damages for breach of fiduciary duty as a director. The Charter and Bylaws of Acorn also contain provisions indemnifying the directors, officers and employees of Acorn or individuals serving at the request of Acorn as directors, officers, employees or agents of another corporation, partnership, joint venture, trust or other enterprise, to the fullest extent permitted by the DGCL. Section 203 and certain provisions of Acorn's Charter and Bylaws described above may make it more difficult for a third party to acquire, or discourage acquisition bids for, Acorn. Section 203 and these provisions could have the effect of inhibiting attempts to change the membership of the Board of Directors of Acorn. In addition, the limited liability provisions in the Charter and the indemnification provisions in the Charter and Bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty (including breaches resulting from grossly negligent conduct) and may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise have benefited Acorn and its stockholders. Furthermore, a stockholder's investment in Acorn may be adversely affected to the extent Acorn pays the costs of settlement and damage awards against directors and officers of Acorn pursuant to the indemnification provisions in Acorn's Bylaws. The limited liability provisions in the Charter will not limit the liability of directors under federal securities laws. SHARES RESERVED FOR ISSUANCE Acorn has 39,042 shares of Common Stock reserved for issuance upon the exercise of outstanding options. In addition, Acorn has 730,000 shares of Common Stock reserved for issuance pursuant to awards available for grant under the Incentive Plan a 73,000 shares of Common Stock reserved for issuance pursuant to common stock units generated pursuant to the Director Stock Plan. Acorn has approved the grant of options to purchase 308,800 shares of Common Stock contingent upon consummation of the Offering. Upon consummation of the Offering, options for the purchase of 116,242 shares of Common Stock will be fully vested. TRANSFER AGENT The transfer agent and registrar for the Common Stock is American Stock Transfer and Trust Company. LISTING Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "ACRN". 47 49 DESCRIPTION OF CERTAIN INDEBTEDNESS In December 1996, UnionTools entered into the Credit Facility with Heller Financial, Inc., as agent for the lenders party thereto (the "Lenders"). Acorn guarantees the obligations of UnionTools under the Credit Facility. Upon consummation of the Offering, the Credit Facility will provide for a $30 million revolving credit facility (the "Revolving Facility") and a $35 million acquisition facility (the "Acquisition Line"). Prior to the consummation of the Offering, the Credit Facility also contains a $20 million term loan (the "Term Loan"). The Company intends to use approximately $20.4 million of the net proceeds from the Offering to repay the Term Loan and accrued interest thereon. The Revolving Facility is available until June 2003. The Revolving Facility is subject to a maximum revolving loan balance equal to 85% of eligible accounts receivable (as defined in the Credit Facility) plus 60% of eligible inventory (as defined in the Credit Facility). There is a $3 million limit on the issuance of letters of credit or other risk participation agreements under the terms of the Credit Facility. The Acquisition Line is available until June 2000 and is limited to $15 million per year and $7.5 million per acquisition without the prior approval of the Lenders. Potential targets must be in a line of business similar to that of UnionTools and have a positive pro forma EBIDAT (as defined in the Credit Facility) for the previous twelve months. The Acquisition Facility will convert into a three year term loan in June 2000, with 25% of the balance due in each of June 2001 and June 2002 and the remainder due in June 2003. Interest on all amounts outstanding under the Credit Facility are payable quarterly in arrears at either the Base Rate (as defined in the Credit Facility) plus a margin ranging from 0.25% to 0.75% or, at UnionTools' option, the LIBOR Rate (as defined in the Credit Facility) plus a margin ranging from 2.25% to 2.75%. The applicable margin is determined based on the Adjusted Total Indebtedness to Operating Cash Flow Ratio (as defined in the Credit Facility). The Credit Facility is secured by a first priority, senior security interest in and lien upon substantially all of UnionTools' real and personal property and is guaranteed by Acorn. The Acorn guarantee is secured by a pledge of all of the capital stock of UnionTools. Under the terms of the Credit Facility, UnionTools is required to make certain mandatory prepayments in an amount equal to (i) 50% of UnionTools' Excess Cash Flow (as defined in the Credit Facility) commencing in fiscal 1998, (ii) the net proceeds from the disposition of assets, including the proceeds from the sale of stock of any of UnionTools' subsidiaries and (iii) the net proceeds from the sale of equity securities of Acorn, UnionTools or any subsidiary of UnionTools (other than in connection with the Offering). UnionTools may elect to prepay all or a portion of the Credit Facility at any time. 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 affecting UnionTools 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. The Credit Facility also places certain restrictions on Acorn, including limitations on indebtedness and guarantees. 48 50 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, approximately 6,422,172 shares of Common Stock will be outstanding. The 3,250,000 shares of Common Stock sold in the Offering will be available for resale in the public market without restriction or further registration under the Securities Act, except for shares purchased by "affiliates" of the Company (in general, any person who has a control relationship with the Company), which shares will be subject to the resale limitations of Rule 144 promulgated under the Securities Act. The remaining 3,172,172 outstanding shares of Common Stock are deemed to be "restricted securities" as that term is defined in Rule 144, all of which are eligible for sale in the public market in compliance with Rule 144. The TCW Funds, the executive officers and directors of the Company (who in the aggregate hold approximately 98.8% of the Common Stock outstanding prior to the Offering), and the Oaktree Fund have agreed, subject to certain exceptions, that they will not offer, sell or otherwise dispose of any of the shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. Additionally, the Company has agreed that, during the period of 180 days from the date of this Prospectus, subject to certain exceptions, that it will not issue, sell, offer or agree to sell, grant any options for the sale of (other than employee stock options) or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable for Common Stock, other than pursuant to the Offering. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year, such as the TCW Funds, is entitled to sell, within any three-month period, a number of shares of Common Stock which does not exceed the greater of 1% of the number of then-outstanding shares of the Common Stock or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 also may be subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Any person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned shares within the definition of "restricted securities" under Rule 144 for at least two years, is entitled to sell such shares under Rule 144(k) without regard to the volume limitation, manner of sale provisions, public information requirements or notice requirements. Acorn intends to file a registration statement on Form S-8 under the Securities Act to register the sale of the 730,000 shares of Common Stock reserved for issuance under the Incentive Plan. Acorn also intends to file a registration statement on Form S-8 under the Securities Act to register the sale of the 73,000 shares of Common Stock reserved for issuance under the Director Stock Plan. As a result, any shares of Common Stock issued pursuant to awards granted under such plans will be available, subject to special rules for affiliates, for resale in the public market after the effective date of such registration statement, subject to applicable lock-up arrangements. See "Management -- 1997 Stock Incentive Plan" and "Management -- Director Stock Plan". The TCW Funds and the Oaktree Fund have, subject to certain conditions and restrictions, the right to include the shares of Common Stock owned by them in registered public offerings of Common Stock (or securities exchangeable for or convertible into Common Stock) undertaken by Acorn for its own account, as well as to require Acorn to register the sale of such shares, subject to certain conditions, upon demand. The TCW Group has informed the Company that the TCW Funds currently are in their respective liquidation periods, requiring such funds to liquidate their investments in an orderly manner. Pursuant to their organizational documents, the TCW Funds terminate over the period from November 2001 to June 2003. As a result, it is likely that some or all of the shares of Common Stock held by the TCW Funds either will be sold prior to such time (whether as a block, pursuant to a registered public offering or otherwise) or distributed to investors in the TCW Funds. Upon any such distribution to investors in the TCW Funds, all such shares, except those acquired by affiliates of the Company, will be immediately eligible for resale under Rule 144(k). No prediction can be made as to the effect, if any, that market sales of shares of Common Stock that are restricted securities, or the availability of such shares, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock and could impair the Company's future ability to raise capital through an offering of equity or equity linked securities. See "Underwriting". 49 51 UNDERWRITING The Underwriters named below have severally agreed with the Company, subject to the terms and conditions of the Underwriting Agreement, to purchase the respective number of shares of Common Stock set forth opposite their names below:
UNDERWRITER NUMBER OF SHARES --------------------------------------------------------------------- ---------------- A.G. Edwards & Sons, Inc. ........................................... --------- Total...................................................... 3,250,000 =========
The Underwriting Agreement provides that the Underwriters are obligated to purchase all of the shares of Common Stock if any shares of Common Stock are purchased. Acorn has been advised by A.G. Edwards & Sons, Inc. and , the Representatives of the severally Underwriters (the "Representatives"), that the Underwriters propose to offer the shares of Common Stock to the public at the offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share, and that the Underwriters and such dealers may reallow a discount of not in excess of $ per share to other dealers. The public offering price and the concession and discount to dealers may be changed by the Representatives after the Offering. In the Underwriting Agreement, Acorn has granted the Underwriters an option, expiring at the close of business on the 30th day subsequent to the date of the Underwriting Agreement, to purchase up to 487,500 additional shares of Common Stock at the offering price, less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely to cover over-allotments, if any, in connection with the sale of the Common Stock. To the extent the Underwriters exercise such option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of the option shares as the number of shares to be purchased by it given in the table above bears to 3,250,000 and Acorn will be obligated, pursuant to the option, to sell such shares to the Underwriters. At the request of Acorn, up to 812,500 shares of Common Stock in the Offering have been reserved for sale to the Oaktree Fund at the Price to Public set forth on the cover page of this Prospectus, and up to 66,500 shares of Common Stock in the Offering have been reserved for sale to certain officers and directors of the Company at the Price to Public less the Underwriting Discount set forth on the cover page of this Prospectus. The number of shares of Common Stock available for sale in the Offering will be reduced to the extent such persons purchase such shares. Purchases will be prohibited to the extent that they are requested in lots of less than 100 shares. Any reserved shares not so purchased will be offered by the Underwriters on the same basis as the other shares available through the Offering. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price set forth on the cover page of this Prospectus has been determined by negotiations between the Company and the Representatives. Among the factors considered in determining the initial public offering price were the information set forth in this Prospectus and otherwise available to the Representatives, the history and prospects for the industry in which the Company competes, the ability of the Company's management, the past and present operations of the Company, the historical results of operations, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the offering and the recent market prices and the demand for publicly traded common stock of comparable companies. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act or to contribute to payments that the Underwriters may be required to make. 50 52 The TCW Funds, the executive officers and directors of the Company (who in the aggregate hold approximately 98.8% of the Common Stock outstanding prior to the Offering), and the Oaktree Fund have agreed, subject to certain exceptions, that they will not offer, sell or otherwise dispose of any of the shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus without the prior written consent of the Representatives. Additionally, the Company has agreed that, during the period of 180 days from the date of this Prospectus, subject to certain exceptions, that it will not issue, sell, offer or agree to sell, grant any options for the sale of (other than employee stock options) or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable for Common Stock, other than pursuant to the Offering without the prior written consent of the Representatives. See "Shares Eligible for Future Sale". The Representatives have informed the Company that they have no current intention of consenting to the disposition by the TCW Funds, the executive officers and directors of the Company, the Oaktree Fund or the Company of shares of Common Stock, or any securities convertible into or exercisable for Common Stock, prior to the expiration of the 180-day period described above. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The rules of the Commission generally prohibit the Underwriters and other members of the selling group from making a market in the Common Stock during the "cooling off" period immediately preceding the commencement of sales in the Offering. The Commission has, however, adopted an exemption from these rules that permits passive market making under certain conditions. These rules permit an Underwriter or other member of the selling group to continue to make a market in the Common Stock subject to the conditions, among others, that its bid not exceed the highest bid by a market maker not connected with the Offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters and other members of the selling group intend to engage in passive market making in the Common Stock during the cooling off period. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for Acorn by Gibson, Dunn & Crutcher LLP, New York, New York. Certain legal matters will be passed upon for the Underwriters by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Conor D. Reilly, a partner of Gibson, Dunn & Crutcher LLP, is Chairman and a director of Acorn and UnionTools. See "Certain Transactions" and "Principal Stockholders". EXPERTS The consolidated balance sheets of the Company as of July 28, 1995 and August 2, 1996 and the consolidated statements of operations, stockholders' equity and cash flows for the four months ended December 2, 1993, the eight months ended July 29, 1994, fiscal 1995 and fiscal 1996, included in this Prospectus have been included herein in reliance on the report of Ernst & Young LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. 51 53 ADDITIONAL INFORMATION Acorn has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions having been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is hereby made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, although the material terms thereof are described in this Prospectus, and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement. Each such statement is qualified by such reference to such exhibits. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office in Washington D.C., at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and through the SEC's internet site at http://www.sec.gov. Copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. Acorn intends to furnish its stockholders with annual reports containing audited consolidated financial statements certified by its independent auditors and quarterly reports for each of the first three fiscal quarters of each fiscal year containing unaudited financial information. 52 54 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors........................................................ F-2 Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Operations................................................. F-4 Consolidated Statements of Stockholders' Equity....................................... F-5 Consolidated Statements of Cash Flows................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7
55 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Acorn Products, Inc. We have audited the accompanying consolidated balance sheets of Acorn Products, Inc. (formerly Vision Hardware Group, Inc.) and Subsidiaries (Successor Company) as of July 28, 1995 and August 2, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years then ended and for the period from December 3, 1993 through July 29, 1994 (Successor Company period), and consolidated statements of operations, stockholders' equity and cash flows of Better Vision Hardware Group, Inc. (Predecessor Company) for the period from August 1, 1993 through December 2, 1993 (Predecessor Company period). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 aforementioned Successor Company consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Acorn Products, Inc. and Subsidiaries at July 28, 1995 and August 2, 1996, and the consolidated results of their operations and their cash flows for the Successor Company period in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor Company consolidated financial statements present fairly, in all material respects, the results of their operations and their cash flows for the Predecessor Company period, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective December 3, 1993, all of the outstanding stock of the Predecessor Company was acquired in a business combination accounted for as a purchase. As a result of this acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. As discussed in Note 8 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in 1996. /s/ Ernst & Young LLP Columbus, Ohio October 4, 1996, except for Notes 3, 4, 11 and 13 as to which the date is May 23, 1997 F-2 56 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
PRO FORMA MAY 2, MAY 2, 1997 JULY 28, AUGUST 2, 1997 ----------- 1995 1996 ----------- (UNAUDITED) -------- --------- (UNAUDITED) (NOTE 14) ASSETS Current assets: Cash........................................ $ 2,109 $ 502 $ -- Accounts receivable, less allowance for doubtful accounts (1995-$645; 1996-$557)............................... 10,670 12,067 32,942 Inventories................................. 31,802 23,433 31,777 Prepaids and other current assets........... 1,511 1,701 1,754 -------- ------- -------- Total current assets..................... 46,092 37,703 66,473 Property, plant and equipment, net of accumulated depreciation.................... 11,511 10,558 15,468 Goodwill...................................... 30,988 30,184 29,590 Deferred income taxes......................... 756 -- -- Other intangible assets....................... 1,170 1,166 1,693 Net assets of discontinued operations......... 21,763 19,284 -- -------- ------- -------- Total assets........................ $112,280 $98,895 $ 113,224 ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility................... $ 19,250 $12,537 $ 21,019 Accounts payable............................ 5,920 5,198 10,670 Accrued expenses............................ 4,845 6,154 6,057 Accrued interest............................ 4,133 -- 3,057 Current portion of long-term debt........... 3,500 3,500 3,000 Income taxes payable........................ 1,756 1,100 189 Other current liabilities................... 699 671 710 -------- ------- -------- Total current liabilities................ 40,103 29,160 44,702 Long-term debt................................ 49,354 45,854 54,622 Other long-term liabilities................... 5,500 5,351 4,601 Net liabilities of discontinued operations.... -- -- 315 -------- ------- -------- Total liabilities................... 94,957 80,365 104,240 Stockholders' equity: Common stock, par value of $.001, authorized 20,000,000 shares, issued and outstanding 1,483,596 in 1995 and 1,490,826 shares in 1996... 14,319 14,406 14,494 13,656 Preferred stock, par value of .001, authorized 1,000 shares, issued and outstanding 100 shares in 1996........... -- 8,596 8,596 -- Contributed capital-stock options........... 340 340 460 460 Minimum pension liability................... -- (197) (197) (197) Retained earnings (deficit)................. 2,664 (4,615) (14,369) (14,369) -------- ------- -------- Total stockholders' equity............... 17,323 18,530 8,984 (450) -------- ------- -------- Total liabilities and stockholders' equity............................ $112,280 $98,895 $ 113,224 ======== ======= ========
See accompanying notes. F-3 57 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE DATA)
PREDECESSOR COMPANY SUCCESSOR COMPANY ----------- ----------------------------------------------------------------- AUGUST 1, DECEMBER 3, YEAR ENDED NINE MONTHS NINE MONTHS 1993 THROUGH 1993 THROUGH -------------------- ENDED ENDED DECEMBER 2, JULY 29, JULY 28, AUGUST 2, APRIL 26, MAY 2, 1993 1994 1995 1996 1996 1997 ------------ ------------ -------- --------- ------------ ------------ (UNAUDITED) (UNAUDITED) Net sales.................. $ 20,331 $ 72,370 $ 86,543 $ 92,652 $ 69,407 $ 77,967 Cost of products sold...... (14,185) (52,271) (63,411) (67,496) (51,036) (57,077) Selling and administrative expenses................. (5,482) (9,955) (15,531) (16,815) (11,820) (13,448) -------- -------- -------- -------- -------- -------- Interest expense........... 2,773 3,525 6,485 6,732 5,569 5,743 Amortization of intangible assets................... 124 601 1,061 1,173 603 703 Other expenses, net........ -- 11 694 1,522 546 1,123 -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and cumulative effect adjustment............... (2,233) 6,007 (639) (1,086) (167) (127) Provision for income taxes.................... -- 290 -- 582 -- 52 -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before cumulative effect adjustment............... (2,233) 5,717 (639) (1,668) (167) (179) Discontinued operations: Loss from operations..... (8,373) (614) (1,800) (5,815) (766) (461) Loss on disposal......... -- -- -- (665) -- (9,114) -------- -------- -------- -------- -------- -------- Loss from discontinued operations............... (8,373) (614) (1,800) (6,480) (766) (9,575) -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect adjustment............... (10,606) 5,103 (2,439) (8,148) (933) (9,754) -------- -------- -------- -------- -------- -------- Cumulative effect of change in accounting for postretirement benefits................. -- -- -- 869 869 -- -------- -------- -------- -------- -------- -------- Net income (loss).......... (10,606) 5,103 (2,439) (7,279) (64) (9,754) ======== ======== ======== ======== ======== ======== Pro forma net income from continuing operations.... $ 2,887 $ 4,012 Pro forma loss from discontinued operations............... $ (4,962) $ (9,211) Pro forma per share information (unaudited): Continuing operations.... $ .45 $ .62 Discontinued operations............ (.77) (1.43) Adjustment for cumulative effect of change in accounting for post- retirement benefits... .13 -- -------- -------- Net income (loss)........ $ (.19) $ (.81) ======== ======== Weighted average number of shares outstanding........... 6,444,182 6,450,431
See accompanying notes. F-4 58 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
COMMON SHARES PREFERRED SHARES ------------------- ------------------- CONTRIBUTED MINIMUM RETAINED NUMBER NUMBER CAPITAL-STOCK PENSION EARNINGS OF SHARES AMOUNT OF SHARES AMOUNT OPTIONS LIABILITY (DEFICIT) TOTAL --------- ------- --------- ------- ------------- ------- --------- --------- PREDECESSOR COMPANY: Balances at July 31, 1993..... 1,446,000 $ 2,000 4,427 $43,364 $ -- $ -- $(113,668) $ (68,304) Net loss for the period August 1, 1993 through December 2, 1993........................ -- -- -- -- -- -- (10,606) (10,606) ----- ------- ----- ------- ---- ----- --------- --------- Balances at December 2, 1993........................ 1,446,000 $ 2,000 4,427 $43,364 $ -- $ -- $(126,528) $ (78,910) ===== ======= ===== ======= ==== ===== ========= ========= SUCCESSOR COMPANY: Acquisition of Predecessor Company..................... 1,446,000 $13,864 -- $ -- $ $ $ -- $ 13,864 Net income for the period December 3, 1993 through July 29, 1994............... -- -- -- -- -- -- 5,103 5,103 Stock issued.................. 37,596 455 -- -- -- 455 ----- ------- ----- ------- ---- ----- --------- --------- Balances at July 29, 1994..... 1,483,596 14,319 -- -- -- -- 5,103 19,422 Net loss for the period August 1, 1994 through July 28, 1995........................ -- -- -- -- -- -- (2,439) (2,439) Stock options issued.......... -- -- -- -- 340 -- -- 340 ----- ------- ----- ------- ---- ----- --------- --------- Balances at July 28, 1995..... 1,483,596 14,319 -- -- 340 -- 2,664 17,323 Net loss for the period July 29, 1995 through August 2, 1996........................ -- -- -- -- -- -- (7,279) (7,279) Conversion of debt............ -- -- 100 8,596 -- -- -- 8,596 Stock issued.................. 7,230 87 -- -- -- -- -- 87 Adjustment to recognize minimum pension liability... -- -- -- -- -- (197) -- (197) ----- ------- ----- ------- ---- ----- --------- --------- Balances at August 2, 1996.... 1,490,826 14,406 100 8,596 340 (197) (4,615) 18,530 Net loss for the period August 3, 1996 through May 2, 1997........................ -- -- -- -- -- -- (9,754) (9,754) Stock issued.................. 7,230 88 -- -- -- -- -- 88 Stock options issued.......... -- -- -- -- 120 -- -- 120 ---------------------------------------------------------------------------------- Balances at May 2, 1997 (unaudited)................. 1,498,056 $14,494 100 $ 8,596 $ 460 $(197) $ (14,369) $ 8,984 ===== ======= ===== ======= ==== ===== ========= =========
See accompanying notes. F-5 59 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR COMPANY SUCCESSOR COMPANY ----------- ---------------------------------------------------------------- AUGUST 1, DECEMBER 3, 1993 1993 YEAR ENDED THROUGH THROUGH -------------------- DECEMBER 2, JULY 29, JULY 28, AUGUST 2, 1993 1994 1995 1996 ----------- ----------- -------- --------- NINE MONTHS NINE MONTHS ENDED APRIL ENDED MAY 2, 26, 1996 1997 ------------ ------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)................... $ (10,606) $ 5,103 $ (2,439) $ (7,279) $ (64) $ (9,754) Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Loss from discontinued operations...................... 8,373 614 1,800 6,480 766 9,575 Depreciation and amortization..... 628 1,605 3,030 3,592 2,436 2,402 Deferred income taxes............. -- 87 -- 756 157 -- Conversion of debt to preferred stock........................... -- -- -- 4,463 -- -- Financing fees and other, net..... (364) (1,437) (556) (365) 45 30 Issuance of stock options......... -- -- 340 -- -- 120 Cumulative effect of the change in accounting principal............ -- -- -- 869 869 -- Changes in operating assets and liabilities: Accounts receivable............... 1,233 (5,359) 6,815 (1,397) (15,537) (20,875) Inventories....................... (9,468) (2,652) (8,051) 8,369 5,576 (7,276) Other assets...................... (4,163) 3,963 (739) (190) 517 (53) Accounts payable, accrued expenses and accrued interest............ 4,663 (170) 1,788 587 5,115 8,432 Income taxes payable.............. 20 1,542 19 (656) (553) (911) Other liabilities................. 125 (1,477) (2,511) (1,243) (1,306) (711) -------- -------- ------- -------- ------- -------- Net cash provided by (used in) continuing operations............. (9,559) 1,819 (504) 13,986 (1,979) (19,021) Net cash provided by (used in) discontinued operations........... 1,363 (6,876) (9,894) (4,001) (3,240) 3,598 -------- -------- ------- -------- ------- -------- Net cash provided by (used in) operating activities.............. (8,196) (5,057) (10,398) 9,985 (5,219) (15,423) CASH FLOWS FROM INVESTING ACTIVITIES Net assets from acquisitions........ -- -- -- -- -- (6,455) Purchases of property, plant and equipment, net.................... (527) (1,738) (2,870) (1,466) (1,094) (1,639) Proceeds from disposal of discontinued operation............ -- -- -- -- -- 6,177 -------- -------- ------- -------- ------- -------- Net cash used in investing activities........................ (527) (1,738) (2,870) (1,466) (1,094) (1,147) CASH FLOWS FROM FINANCING ACTIVITIES Subordinated debt................... -- 6,354 -- -- -- -- Net activity on term loan........... 50 12,500 (3,500) (3,500) -- 8,268 Net activity on revolving loan...... 9,931 (12,354) 16,750 (6,713) 4,117 8,482 Issuance of stock................... -- 455 -- 87 87 88 -------- -------- ------- -------- ------- -------- Net cash provided by (used in) financing activities.............. 9,981 6,955 13,250 (10,126) 4,204 16,838 -------- -------- ------- -------- ------- -------- Net increase (decrease) in cash..... 1,258 160 (18) (1,607) (2,109) (502) Cash at beginning of period......... 730 1,967 2,127 2,109 2,109 502 -------- -------- ------- -------- ------- -------- Cash at end of period............... $ 1,988 $ 2,127 $ 2,109 $ 502 $ -- $ -- ======== ======== ======= ======== ======= ========
See accompanying notes. F-6 60 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACQUISITION AND DESCRIPTION OF THE BUSINESS Effective December 3, 1993, Better Vision Hardware Group, Inc. (the "Predecessor Company") merged with Acorn Products, Inc. (formerly Vision Hardware Group, Inc.) ("Acorn" or the "Successor Company"), a corporation controlled by several investment funds and accounts (the "TCW Funds") managed by affiliates of The TCW Group, Inc. (the "TCW Group"). The merger was a part of a series of transactions whereby the TCW Group acquired the revolving credit facility and bank term loan of the Predecessor Company, as well as $5,000,000 aggregate principal amount of senior subordinated notes of the Predecessor Company. The TCW Group also acquired all of the outstanding senior preferred stock and class A, B and C preferred stock of the Predecessor Company. The Predecessor Company and Successor Company collectively are referred to herein as Acorn. Acorn and its subsidiaries collectively are referred to herein as the "Company". Pursuant to the foregoing transaction, the TCW Funds became the beneficial owners of substantially all of the capital stock of Acorn. The total purchase price of the above transaction was approximately $66.2 million. The purchase accounting method was used to record the transaction. The estimated fair value of the acquired assets, excluding goodwill, aggregated approximately $31.7 million and liabilities assumed aggregated approximately $5.5 million. The excess of the purchase price over the fair value of net assets of approximately $40 million was established as goodwill and is being amortized over 40 years. Since purchase accounting was reflected in the opening balance sheet of the Successor Company on December 3, 1993, the financial statements of the Successor Company are not comparable to the financial statements of the Predecessor Company. Accordingly, a vertical black line is shown to separate Successor Company financial statements from those of the Predecessor Company for the period ended December 2, 1993. Business Founded in 1890, 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 and cutting tools. 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. The Company is a holding company with no business operations of its own. (See Note 3 for a discussion of the Company's disposition of 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 below. 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 8.9%, 12.5% and 11.5% of gross sales in fiscal 1995 and fiscal 1996 and the nine months ended May 2, 1997, respectively. No other customer accounted for 10% or more of the Company's gross sales in fiscal 1995, fiscal 1996 or the nine months ended May 2, 1997. 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. F-7 61 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Acorn and its subsidiaries, UnionTools, Inc. ("UnionTools"), McGuire-Nicholas Company, Inc. ("McGuire-Nicholas") and VSI Fasteners, Inc. ("VSI"). All intercompany accounts and transactions have been eliminated. See Note 3 -- Discontinued Operations. 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 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Finished goods................................................... $ 17,372 $12,473 Work in process.................................................. 6,021 5,703 Raw materials and supplies....................................... 8,759 5932 ------- ------- 32,152 24,108 Valuation reserves............................................... (350) (675) ------- ------- Total inventories................................................ $ 31,802 $23,433 ======= =======
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 15 years Buildings and improvements..................................... 3 to 40 years Furniture and fixtures......................................... 3 to 15 years
Property, plant and equipment consists of the following:
JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Land............................................................. $ 1,181 $ 1,207 Buildings and improvements....................................... 2,431 2,553 Machinery and equipment.......................................... 9,610 10,840 Furniture and fixtures........................................... 1,266 1,355 -------- --------- 14,488 15,955 Accumulated depreciation and amortization........................ (2,977) (5,397) -------- --------- $ 11,511 $10,558 ======= =======
Goodwill Goodwill, resulting from the cost of assets acquired exceeding the underlying net asset value, is being amortized on the straight-line method over a forty-year period. Accumulated amortization was $1,411,000 at July 28, 1995 and $2,215,000 at August 2, 1996. The Company assesses the recoverability of its goodwill whenever adverse events or changes in circumstances or business climate indicate that expected future cash flows (undiscounted) for individual business units may not be sufficient to support recorded goodwill. If F-8 62 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) undiscounted cash flows are not sufficient to support the recorded asset, an impairment is recognized to reduce the carrying value of the goodwill based on the expected discounted cash flows of the business unit. Income Taxes The Company files a consolidated federal income tax return. Federal income taxes are apportioned to each includable member based on that member'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. 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. 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 1995 and 1996 relate to the fiscal years ended July 28, 1995 and August 2, 1996 and were comprised of 52 weeks and 53 weeks, respectively. The Company's interim reporting periods for quarterly periods end on the Friday closest to the last day of each month. Interim Financial Reporting In the opinion of management, the unaudited information as of May 2, 1997 and for the nine months ended April 26, 1996 and May 2, 1997 includes all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of such financial statements in accordance with generally accepted accounting principles. Operating results for the nine months ended May 2, 1997 are not necessarily indicative of the results that may be expected for the year ending August 1, 1997. 3. DISCONTINUED OPERATIONS 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 the fiscal year ended August 2, 1996. Prior year financial statements were reclassified to conform to the 1996 presentation. During the fiscal year ended August 2, 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 and recognized an additional loss on disposal of approximately $101,000 during the nine months ended May 2, 1997. On January 23, 1997, the Company adopted a formal plan to sell McGuire-Nicholas. The Company currently is in the process of reviewing offers for the sale of McGuire-Nicholas and anticipates that the sale will be completed in the near future. Accordingly, McGuire-Nicholas has been accounted for as a discontinued operation and classified as such in the accompanying consolidated financial statements. The prior year financial statements have been reclassified to conform to the current year presentation. The estimated loss on the disposal of McGuire-Nicholas is $9.2 million, consisting of an estimated loss on disposal of $8.8 million and a provision of $483,000 for anticipated operating losses until disposal. The loss on disposal represents the F-9 63 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The following represents the combined results of operations of the Company's discontinued operations:
FOUR MONTHS EIGHT MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 2, JULY 29, JULY 28, AUGUST 2, 1993 1994 1995 1996 ----------- ------------ ---------- ---------- (IN THOUSANDS) Revenues........................... $18,738 $ 34,955 $ 53,050 $ 49,810 Costs and expenses................. 28,856 34,682 53,145 50,143 Interest expense................... (254) (670) (1,422) (1,577) Loss from operations............... (8,373) (614) (1,800) (5,815)
Interest expense has been allocated to discontinued operations for all periods based on the ratio of net assets of discontinued operations to consolidated net assets plus debt. The following table summarizes the net assets (liabilities) of the Company's discontinued operations:
JULY 28, AUGUST 2, MAY 2, 1995 1996 1997 -------- --------- ------- (IN THOUSANDS) Accounts receivable................................... $ 6,935 $ 6,109 $ 4,168 Inventories........................................... 14,781 10,321 2,765 Property and equipment................................ 2,299 2,470 1,550 Other assets (including goodwill of $7,600, $7,400 and $0, respectively)................................... 7,725 8,518 -- Liabilities........................................... (9,977) (8,134) (8,798) ------- ------- ------- Net assets of (liabilities) discontinued operations................................ $ 21,763 $19,284 $ (315) ======= ======= =======
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY Long-term debt consists of the following:
JULY 28, AUGUST 2, MAY 2, 1995 1996 1997 -------- --------- ----------- (IN THOUSANDS) Term loan............................................ $ 21,500 $18,000 $20,000 Subordinated debt to shareholder..................... 31,354 31,354 31,354 Acquisition line of credit facility.................. -- -- 6,268 ------- ------- ------- 52,854 49,354 57,622 Less current portion of long-term debt............... 3,500 3,500 3,000 ------- ------- ------- $ 49,354 $45,854 $54,622 ======= ======= =======
F-10 64 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1996, UnionTools entered into a credit facility (the "Credit Facility") which provided for a $20,000,000 term loan (the "Term Loan"), a revolving credit facility with a maximum borrowing of $30,000,000 (the "Revolving Facility") and a $15,000,000 acquisition facility (the "Acquisition Line"). Upon consummation of the Offering (as defined below), the Credit Facility will provide for a $30 million Revolving Facility and a $35 million Acquisition Line. The Company intends to use a portion of the net proceeds from the Offering to repay the Term Loan and accrued interest thereon and reduce indebtedness outstanding under the Acquisition Line and accrued interest thereon. The Credit Facility, which is secured by substantially all of the assets of UnionTools, is guaranteed by Acorn. The Acorn guarantee is secured by a pledge of all the capital stock of UnionTools. The Revolving Facility will expire in June 2003. The Acquisition Line is available until June 2000. Available borrowings under the Revolving Facility are based on specified percentages of accounts receivable and inventory. As of May 2, 1997, there was $9.0 million available for future borrowing under the Revolving Facility. Available borrowings under the Acquisition Line are subject to various financial and non-financial requirements and are limited to $7,500,000 per acquisition and $15,000,000 per year without the prior approval of the lenders. The Acquisition Line will convert to a three year term loan in June 2000 and will be payable according to a predetermined amortization schedule. The Revolving Facility has a letter of credit subcommitment of $3,000,000. The Credit Facility bears interest at either the bank prime rate plus a margin ranging from 0.25% to 0.75% (prime rate at August 2, 1996 was 8.25%) or at UnionTools' option, the LIBOR rate plus a margin ranging from 2.25% to 2.75% (LIBOR rate at August 2, 1996 was 5.5%). At May 2, 1997, UnionTools had all debt outstanding under the LIBOR interest rate option. The interest rate margin fluctuates based on the ratio of total senior debt to operating cash flow as set forth in a predetermined pricing table. In addition, UnionTools is required to pay a fee of 0.5% per year on the unused portion of the Revolving Facility and the Acquisition Line. 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. UnionTools was in compliance of all debt covenants at May 2, 1997. UnionTools is required to make certain mandatory prepayments under the Credit Facility based upon cash flow and other events as defined. UnionTools may elect to prepay all or a portion of the Credit Facility at any time. The fair value of the Company's long-term debt approximates the carrying amount. In December 1993, Acorn issued a Subordinated Unsecured Promissory Note in the amount of $25,000,000 to the TCW Funds. In May 1994 Acorn issued a Temporary Subordinated Promissory Note in the amount of $6,354,000 to the TCW Funds. The Subordinated Unsecured Promissory Note and the Temporary Subordinated Promissory Note collectively are referred to herein as the "Subordinated Notes". The Subordinated Notes are due on July 31, 2003 and carry interest at 13% per year. Annual interest payments for the Subordinated Notes are contingent upon meeting certain financial measures. These financial measures were not met during fiscal 1995 and 1996, thus, no cash interest payments were permitted. The Subordinated Notes require that any non-payment of interest be added to the principal balance of the outstanding Subordinated Notes. On August 2, 1996, Acorn issued 100 shares of Series A Preferred Stock (the "Series A Preferred Stock") with a par value of $.001 per share and a stated value of F-11 65 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $8,596,000 as payment in full of accrued interest on the Subordinated Notes due for fiscal years 1995 and 1996. Interest paid on the Subordinated Notes was $2,113,000 for the eight month period ended July 29, 1994. Interest on the Subordinated Notes of $4,133,000 and $4,463,000 was paid in the form of Series A Preferred Stock during fiscal 1995 and fiscal 1996, respectively. In December 1996 Acorn issued a subordinated promissory note to the TCW Funds in the aggregate principal amount of $6 million and bearing interest at a rate of 13% per year as bridge financing. In December 1996 Acorn paid $6.3 million to the TCW Funds in prepayment of the subordinated promissory note, accrued interest thereon and a $180,000 facility fee. Debt of Discontinued Operations In December 1996, McGuire-Nicholas entered into a loan agreement which provides for a revolving loan with a maximum borrowing of $9,250,000 and a term loan in the amount of $250,000. In addition, the loan agreement provides for a $500,000 capital expenditure facility. Available borrowings are based on specified percentages of accounts receivable and inventory. The revolving loan has a letter of credit subcommitment of $1,000,000. The loan agreement is collateralized by substantially all of the assets of McGuire-Nicholas and expires on December 30, 1999. The Company does not guarantee McGuire-Nicholas' debt nor do any of Acorn's or UnionTools' assets collateralize the debt. The loan agreement will bear interest at the bank prime rate plus 1%. The term loan calls for monthly maturities of $4,167. Aggregate maturities of the McGuire-Nicholas term loan for the five years following August 2, 1996 are as follows: $25,000 in 1997; $50,000 in 1998; $50,000 in 1999; $50,000 in 2000; $50,000 in 2001; and $25,000 in 2002. 5. 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 are 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 is 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 the event of an involuntary liquidation, the holders of the outstanding Series A Preferred Stock would be entitled to full face value plus any unpaid accrued dividends prior to any payment to common stockholders. As of May 2, 1997, the aggregate liquidation value of the Series A Preferred Stock was approximately $9.4 million. F-12 66 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Deferred tax assets: Inventory.................................................... $ 1,971 $ 1,752 Restructuring expenses....................................... 2,909 230 Accrued expenses and other................................... 2,542 8,043 Net operating loss carryforwards............................. 4,531 5,910 -------- -------- Total deferred tax assets................................. 11,953 15,935 Valuation allowance for deferred tax assets.................... (10,693) (14,897) -------- -------- Deferred tax assets............................................ 1,260 1,038 Deferred tax liabilities: Income taxes................................................. 363 209 Depreciation and other....................................... 141 829 -------- -------- Total deferred tax liabilities............................ 504 1,038 -------- -------- Net deferred tax assets.............................. $ 756 $ -- ======== ========
Based upon the Company's operating losses in the past two fiscal years and the uncertainty of operating earnings in the future, management has determined that it is not likely that the deferred tax assets will be fully recognized. Accordingly, a valuation allowance has been recorded. The provision for income taxes is comprised of the following:
EIGHT MONTHS FOUR MONTHS ENDED YEAR ENDED YEAR ENDED ENDED JULY 29, JULY 28, AUGUST 2, DECEMBER 2, 1993 1994 1995 1996 ---------------- ------------ ---------- ---------- (IN THOUSANDS) Current -- state.............................. $ -- $215 $ -- $ -- Deferred -- state............................. -- 75 -- 582 ---- ---- ---- ---- $ -- $290 $ -- $582 ==== ==== ==== ====
At August 2, 1996, the Company has net operating loss carryforwards of $16,917,700 for income tax purposes that expire in the years 2009 and 2010. 7. RETIREMENT PLANS UnionTools maintains defined benefit pension plans which cover substantially all employees. Benefits paid under the defined benefit plans are based generally on either 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 is to fund the maximum amount deductible for federal income tax purposes. F-13 67 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following sets forth the funded status of the defined benefit plans (in thousands):
PLANS WHOSE ASSETS PLAN WHOSE BENEFITS EXCEED BENEFITS EXCEED ASSETS ---------------------- ---------------------- JULY 28, AUGUST 2, JULY 28, AUGUST 2, 1995 1996 1995 1996 -------- --------- -------- --------- Actuarial present value of benefit obligations: Accumulated benefit obligation, (primarily vested)......................................... $ 8,101 $ 8,291 $ 4,714 $ 5,064 ====== ====== ======= ======= Projected benefit obligation for service rendered to date......................................... $ 8,194 $ 8,451 $ 4,714 $ 5,064 Plan assets at fair value.......................... 8,816 9,101 3,381 3,508 ------ ------ ------- ------- Projected benefit obligation less than (in excess) of plan assets.................................. 622 650 (1,333) (1,556) Unrecognized prior service cost.................... (82) (61) 109 156 Unrecognized net losses (gains).................... 438 621 (109) 327 Adjustment to recognize minimum liability.......... -- -- -- (552) ------ ------ ------- ------- Prepaid (accrued) pension cost included in the accompanying balance sheet...................... $ 978 $ 1,210 $ (1,333) $(1,625) ====== ====== ======= =======
The components of net periodic pension cost are as follows (in thousands):
EIGHT MONTHS YEAR ENDED ENDED ---------------------- JULY 29, JULY 28, AUGUST 2, 1994 1995 1996 ------------ -------- --------- Service cost........................................ $ 345 $ 371 $ 438 Interest on projected benefit obligation............ 535 965 981 Return on plan assets............................... (338) (462) (411) Net amortization and deferral....................... (194) (465) (582) ----- ----- ----- Net periodic pension cost......................... $ 348 $ 409 $ 426 ===== ===== =====
Significant assumptions used in 1994, 1995 and 1996 in calculating periodic pension cost are as follows: Discount rate.................................................. 8% Expected long-term rate of return.............................. 8% Rate of increase in future compensation........................ 4%
Plan assets consist primarily of guaranteed interest contracts and pooled investment debt securities. 8. POSTRETIREMENT BENEFITS In addition to providing pension benefits, UnionTools sponsors a defined benefit health care plan that provides postretirement medical and life insurance benefits to employees who had attained age 50 and 10 years of service by July 1, 1995 and to current participants receiving benefits. In connection with the merger between Better Vision Hardware Group, Inc. and Acorn, the purchase price allocation included an estimated obligation for the retiree health care benefits of the Company, and accordingly, an accrual of approximately $5,500,000 was recorded. Effective August 1, 1995, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," whereby the cost of such postretirement benefits is accrued during the employees' active service period. The Company elected to immediately recognize the accumulated benefit obligation rather than amortize it over future periods. The cumulative effect of this accounting change as of August 1, 1995 was to increase net income by $869,000. F-14 68 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Postretirement benefit expense was $105,459 in the four months ended December 2, 1993, $216,596 in the eight months ended July 29, 1994, $431,000 in the fiscal year ended 1995 and $425,242 in the fiscal year ended 1996. The components of expense in 1996 follow: Service cost benefits earned.............................. $ 80,131 Interest cost on projected benefit obligations............ 345,111 -------- $425,242 ========
The following table presents supplemental information related to the Company's postretirement health care benefits:
AUGUST 2, 1996 -------------- Accumulated postretirement benefit obligation: Retirees............................................. $2,773,644 Active employees..................................... 1,938,511 ---------- 4,712,155 Unrecognized net loss.................................. (111,046) ---------- Accrued postretirement benefit cost.................... $4,601,109 ==========
As the benefits provided by the plan are fixed by the plan document, no annual assumed rate of increase in per capita cost of covered benefits is included in the obligation calculation. The discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. 9. COMMITMENTS AND CONTINGENCIES 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(R) brand name. Under the agreement, UnionTools must pay certain minimum royalty amounts annually. Rent expense under operating leases was $662,000 in the four months ended December 2, 1993, $1,080,000 in the eight months ended July 29, 1994, $2,170,000 in the year ended July 28, 1995 and $2,000,000 in the year ended August 2, 1996. The minimum annual payments for leases under noncancelable operating leases and the royalty agreement at August 2, 1996 are as follows (in thousands): 1997........................................................ $2,036 1998........................................................ 1,735 1999........................................................ 1,571 2000........................................................ 917 2001........................................................ 812 Thereafter.................................................. 467 ------ $7,538 ======
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. Management believes that the ultimate disposition of this litigation will not have a material effect on the consolidated financial position or the results of future operations of the Company. F-15 69 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. CONTRIBUTED CAPITAL-STOCK OPTIONS During the nine months ended May 2, 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 stock options and, accordingly, does not recognize compensation costs when the exercise price of its 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 are contingent upon the attainment of certain profitability targets, and portions of the options that fail to vest expire. The following table summarizes the stock option activity:
EIGHT MONTHS YEAR ENDED NINE MONTHS ENDED ---------------------- ENDED JULY 29, JULY 28, AUGUST 2, MAY 2, 1994 1995 1996 1997 ------------ -------- --------- ----------- Outstanding at beginning of period.... -- 111,342 111,342 70,854 Granted............................... 111,342 15,906 14,460 -- Exercised............................. -- -- 7,230 7,230 Expired/terminated.................... -- 15,906 47,718 17,352 ------- ------- ------- ------ Outstanding at end of period.......... 111,342 111,342 70,854 46,272 ======= ======= ======= ====== Exercisable at end of period.......... -- 27,474 34,704 33,258
During fiscal 1995 and the nine months ended May 2, 1997, options to purchase 27,474 and 5,784 shares of common stock, respectively, vested at an exercise price of $0 per share and $12.10 per share, respectively. The Company recognized compensation expense of $340,000 and $120,000 in fiscal 1995 and the nine months ended May 2, 1997, respectively, related to the vesting of these options. Of the remaining options, options to purchase 5,784 shares of common stock will vest at an exercise price of $0 upon consummation of the Offering (as defined below) and options to purchase 7,230 shares of common stock will expire. Vested options expire in December 2003. 11. ACQUISITION OF BUSINESS On February 19, 1997, the Company acquired for approximately $6,268,000 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 division's operations are included in the accompanying financial statements beginning with the date of acquisition. The Company's preliminary allocation of the purchase price, based upon an assessment of the fair value of such assets at the date of acquisition, is as follows: Inventories.............................................................. $1,068,000 Land and buildings....................................................... 2,600,000 Equipment................................................................ 2,370,000 Non-compete agreement.................................................... 417,000 ---------- $6,455,000 ==========
The non-compete agreement is to be amortized over a two year period. F-16 70 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain financial data of the Company for each quarter of fiscal 1995 and 1996. The financial data for each of these quarters is unaudited but includes all adjustments, consisting of only normal recurring adjustments, which the Company believes to be necessary for a fair presentation. These operating results, however, are not necessarily indicative of results for any future period.
INCOME (LOSS) BEFORE CUMULATIVE LOSS FROM EFFECT DISCONTINUED NET INCOME NET SALES GROSS PROFIT ADJUSTMENT OPERATIONS (LOSS) --------- ------------ ------------- ------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 First quarter.......................... $19,150 $ 5,527 $ 206 $ (589) $ (383) Second quarter......................... 18,011 4,595 430 (547) (1,380) Third quarter.......................... 32,609 8,614 1,972 (104) 1,868 Fourth quarter......................... 16,773 4,396 (3,247) (560) (2,544) ------- ------- ------- ------- ------- $86,543 $ 23,132 $ (639) $ (1,800) $ (2,439) ======= ======= ======= ======= ======= 1996 First quarter.......................... $16,486 $ 3,942 $(1,614) $ (291) $ (1,036) Second quarter......................... 19,357 4,626 (1,061) (477) (1,538) Third quarter.......................... 33,564 9,826 2,888 (355) 2,533 Fourth quarter......................... 23,245 6,762 (1,881) (5,357) (7,238) ------- ------- ------- ------- ------- $92,652 $ 25,156 $(1,668) $ (6,480) $ (7,279) ======= ======= ======= ======= =======
The fourth quarter of fiscal 1996 reflects expense of $563,000 incurred in connection with the resignation of Acorn's previous Chairman of the Board and expense of $750,000 incurred in connection with self-insured life insurance accruals related to the death of a former director of the Company. 13. SUBSEQUENT EVENTS Public Offering In April 1997, Acorn filed a registration statement (the "Registration Statement") with the Securities and Exchange Commission in connection with the offer and sale of 3,250,000 shares (3,737,500 shares if the underwriters' over-allotment option is exercised in full) of Common Stock (the "Offering"). 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. 1997 Stock Incentive Plan 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. There are no options currently outstanding under the Incentive Plan. Acorn F-17 71 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company has approved the grant of an aggregate of 308,000 options under the Incentive Plan upon consummation of the Offering. The exercise price for each such option will equal the initial public offering price per share in the Offering. 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. Agreements with Key Employees In May 1997, the Company terminated existing employment agreements with certain executive officers of the Company and entered into a new employment agreement with the President and Chief Executive Officer of Acorn and UnionTools. In addition, 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). 14. PRO FORMA INFORMATION (UNAUDITED) Pro Forma Balance Sheet Data The pro forma balance sheet data at May 2, 1997 gives effect to the proposed redemption of the Series A Preferred Stock and the payment of the accumulated dividends thereon in connection with the Offering, without giving effect to the proceeds from the Offering. Pro Forma Statement of Operations Data The pro forma statements of operations data presents the pro forma effects on the Company's historical results of operations giving effect to the following transactions as if they occurred at the beginning of each of the periods presented: (i) the Offering (at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus) and the application of the net proceeds therefrom to repay indebtedness outstanding under the Credit Facility and repay indebtedness outstanding under the Subordinated Notes and accrued interest thereon and (ii) the Exchange. The redemption of the Series A Preferred Stock and accumulated dividends thereon has no affect on the Company's historical results of operations. F-18 72 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED NINE MONTHS AUGUST 2, ENDED 1996 MAY 2, 1997 ----------- ----------- Historical loss from continuing operations before cumulative effect adjustment............................ $(1,668) $ (179) The elimination of interest expense related to the repayment of indebtedness under the Credit Facility..... 1,200 1,104 The elimination of interest expense related to the repayment of indebtedness under the Subordinated Notes................................................... 1,073 988 The elimination of interest expense related to the conversion of Subordinated Notes to common stock........ 2,282 2,099 ----------- ----------- Pro forma net income from continuing operations........... $ 2,887 $ 4,012 =========== =========== Historical loss from discontinued operations.............. $(6,480) $(9,575) The elimination of interest expense related to the repayment of indebtedness under the Credit Facility..... 400 96 The elimination of interest expense related to the repayment of indebtedness under the Subordinated Notes................................................... 357 86 The elimination of interest expense related to the conversion of Subordinated Notes to common stock........ 761 182 ----------- ----------- Pro forma loss from discontinued operations............... $(4,962) $(9,211) =========== ===========
Pro forma per share information is based on the number of shares of Common Stock outstanding on August 2, 1996 and May 2, 1997, as adjusted to give effect to (i) the issuance of 3,250,000 shares of Common Stock pursuant to the Offering, (ii) the issuance of 1,674,116 shares of Common Stock pursuant to the Exchange (giving effect to the Offering at an assumed initial public offering price of $14.00, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, and the application of the net proceeds therefrom and giving effect to the Exchange as of May 2, 1997) and (iii) the issuance of 29,240 and 28,259 shares of Common Stock at August 2, 1996 and May 2, 1997, respectively, upon the exercise of outstanding stock options pursuant to the treasury stock method. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128"), which is required to be adopted for periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The Company has not yet determined the impact that the adoption of SFAS 128 will have on the calculation of the Company's earnings per share. F-19 73 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 10 Use of Proceeds....................... 15 Dividend Policy....................... 16 Capitalization........................ 17 Dilution.............................. 18 Selected Consolidated Financial Data................................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 21 Business.............................. 27 Description of McGuire-Nicholas....... 36 Management............................ 37 Principal Stockholders................ 43 Certain Transactions.................. 45 Description of Capital Stock.......... 46 Description of Certain Indebtedness... 48 Shares Eligible for Future Sale....... 49 Underwriting.......................... 51 Legal Matters......................... 52 Experts............................... 52 Additional Information................ 52 Index to Consolidated Financial Statements.......................... F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 3,250,000 SHARES ACORN PRODUCTS, INC. COMMON STOCK ($.001 PAR VALUE) --------------------------- PROSPECTUS --------------------------- A.G. EDWARDS & SONS, INC. DATED , 1997 ====================================================== 74 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The Registrant's expenses in connection with the Offering described in this registration statement are set forth below. All amounts except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. (the "NASD") filing fee and the Nasdaq National Market listing fee are estimated. Securities and Exchange Commission registration fee...................... $ 17,000 NASD filing fee.......................................................... 6,100 Printing and engraving expenses.......................................... * Accounting fees and expenses............................................. * Legal fees and expenses.................................................. * Nasdaq National Market listing fee....................................... * Fees and expenses (including legal fees) for qualifications under state securities laws........................................................ * Transfer agent's fees and expenses....................................... * Miscellaneous............................................................ * ------- Total............................................................... $ 1,500,000 =======
- --------------- * To be filed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "DGCL") makes provision for the indemnification of officers and directors of corporations in terms sufficiently broad to indemnify the officers and directors of the Registrant under certain circumstances from liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by the DGCL, the Registrant's Certificate of Incorporation (the "Charter") provides that, to the fullest extent permitted by the DGCL, no director shall be liable to the Registrant or to its stockholders for monetary damages for breach of his fiduciary duty as a director. Delaware law does not permit the elimination of liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases or (iv) for any transaction from which the director derives an improper personal benefit. The effect of this provision in the Charter is to eliminate the rights of the Registrant and its stockholders (through stockholders' derivative suits on behalf of the Registrant) to recover monetary damages against a director for breach of fiduciary duty as a director thereof (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i)-(iv), inclusive, above. These provisions will not alter the liability of directors under federal securities laws. The Registrant's Bylaws (the "Bylaws") provide that the Registrant may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Registrant) by reason of the fact that he is or was a director, officer, employee or agent of the Registrant or is or was serving at the request of the Registrant as a director, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. II-1 75 The Bylaws also provide that the Registrant may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Registrant to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Registrant unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The Bylaws also provide that to the extent a director or officer of the Registrant has been successful in the defense of any action, suit or proceeding referred to in the previous paragraphs or in the defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that indemnification provided for in the Bylaws shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the Registrant may purchase and maintain insurance on behalf of a director or officer of the Registrant against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the Registrant would have the power to indemnify him against such liabilities under such Bylaws. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Registrant has not issued or sold securities within the past three years pursuant to offerings that were not registered under the Securities Act, except as follows: (a) In December 1993, Acorn issued a subordinated promissory note in the aggregate principal amount of $25 million to several investment funds and accounts (the "TCW Funds") managed by affiliates of the TCW Group, Inc. This note was restated in May 1994. (b) In May 1994, Acorn issued a subordinated promissory note in the aggregate principal amount of approximately $6.4 million to the TCW Funds. (c) Pursuant to the terms of an employment agreement dated as of January 1994 between Acorn and Joseph I. Duffy, Acorn granted to Mr. Duffy an option to purchase 63,624 shares of Common Stock. The vesting schedule and exercise price per share were determined based on certain profitability targets. Options to purchase 15,906 shares of Common Stock vested in fiscal 1995 and options to purchase 15,906 and 31,812 shares of Common Stock expired in fiscal 1995 and fiscal 1996, respectively. (d) Pursuant to the terms of an employment agreement dated as of January 1994 between Acorn and Gabe Mihaly, Acorn granted to Mr. Mihaly an option to purchase 47,718 shares of Common Stock. The vesting schedule and exercise price per share were determined based on certain profitability targets. Options to purchase 11,568 shares of Common Stock vested in fiscal 1995, options to purchase 5,784 shares and 17,352 shares of Common Stock vested and expired, respectively, the nine months ended May 2, 1996 and options to purchase 5,784 shares and 7,230 shares of Common Stock will vest and expire, respectively, upon consummation of the Offering. (e) In May 1994, Acorn sold 17,352 shares of Common Stock to Joseph I. Duffy for an aggregate purchase price of $210,000. (f) In May 1994, Acorn sold 20,244 shares of Common Stock to Gabe Mihaly for an aggregate purchase price of $245,000. (g) Pursuant to the terms of an employment agreement dated as of August 1994 between Acorn and L. Edwin Donegan, Jr., Acorn granted to Mr. Donegan an option to purchase 15,906 shares of Common Stock. All such options expired. II-2 76 (h) Pursuant to the terms of an option agreement dated as of August 1, 1995, the Company granted John I. Leahy an option to purchase 14,460 shares of Common Stock at an exercise price of $12.10 per share. Mr. Leahy exercised the option with respect to 7,230 shares of Common Stock in each of November 1995 and November 1996. (i) In August 1996, Acorn issued 100 shares of Series A Preferred Stock to the TCW Funds as payment in full of approximately $8.6 million in accrued interest on the Subordinated Notes for fiscal 1995 and fiscal 1996. (j) In December 1996, Acorn issued a subordinated promissory note in the aggregate principal amount of $6 million to the TCW Funds. The transactions set forth above were undertaken in reliance upon the exemptions from the registration requirements of the Securities Act afforded by (i) Section 4(2) thereof and/or Regulation D promulgated thereunder, as sales not involving a public offering, and/or (ii) Rule 701 promulgated thereunder, as sales by an issuer to employees, directors, officers, consultants or advisors pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. The purchasers of the securities described above acquired such securities for their own account not with a view to any distribution thereof to the public. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ---------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement* 2.1 Asset Purchase Agreement, dated as of February 19, 1997, between Greif Bros. Corporation and UnionTools, Inc.** 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 of Certificate for Common Stock 5.1 Opinion of Gibson, Dunn & Crutcher LLP 10.1 Form of Employment Agreement dated May , 1997, between the Company, UnionTools and Gabe Mihaly 10.2.1 Form of Employee Severance Agreement, dated as of May , 1997, between the Company and James B. Farland 10.2.2 Form of Employee Severance Agreement, dated as of May , 1997, between the Company and Thomas A. Hyrb 10.2.3 Form of Employee Severance Agreement, dated as of May , 1997, between the Company and Stephen M. Kasprisin 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** 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 between UnionTools and Heller Financial, Inc. dated as of May 20, 1997 10.10 License Agreement, dated as of August 1, 1992, between The Scott Company and UnionTools**
II-3 77
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ---------------------------------------------------------------------------------- 10.11 Form of Registration Rights Agreement, dated as of May , 1997, between Acorn Products, Inc. and various funds and accounts managed by TCW Special Credits 10.12 Form of Registration Rights Agreement, dated as of May , 1997, between Acorn Products, Inc. and OMC Principal Opportunities Fund, L.P. 11.1 Statement re computation of earnings per share (See Note 14 of the Notes to the Consolidated Financial Statements) 21.1 Subsidiaries of the Registrant** 23.1 Consent of Ernst & Young LLP 23.2 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1) 24.1 Power of Attorney (included in signature page to registration statement)** 27.1 Financial Data Schedule
- --------------- * To be filed by amendment. ** Previously filed. (B) Financial Statement Schedules
SCHEDULE NUMBER DESCRIPTION OF SCHEDULE - -------- ---------------------------------------------------------------------------------- I Condensed Financial Information of Registrant II Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 78 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Columbus, State of Ohio, on May 23, 1997. ACORN PRODUCTS, INC. By: /s/ GAVRIL MIHALY ------------------------------------ Gavril Mihaly Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacity indicated on May 23, 1997.
SIGNATURE TITLE - --------------------------------------------- -------------------------------------------- /s/ GAVRIL MIHALY Chief Executive Officer and President - --------------------------------------------- (Principal Executive Officer) Gavril Mihaly /s/ STEPHEN M. KASPRISIN Chief Financial Officer and Treasurer - --------------------------------------------- (Principal Financial and Accounting Officer) Stephen M. Kasprisin /s/ CONOR D. REILLY Chairman of the Board - --------------------------------------------- Conor D. Reilly Director - --------------------------------------------- William W. Abbott * Director - --------------------------------------------- Matthew S. Barrett * Director - --------------------------------------------- Stephen A. Kaplan * Director - --------------------------------------------- John I. Leahy *By: /s/ GAVRIL MIHALY - --------------------------------------------- Gavril Mihaly Attorney-in-Fact
II-5 79 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Acorn Products, Inc. We have audited the consolidated balance sheets of Acorn Products, Inc. (formerly Vision Hardware Group, Inc.) and Subsidiaries (Successor Company) as of July 28, 1995 and August 2, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years then ended and for the period from December 3, 1993 through July 29, 1994 (Successor Company period), and consolidated statements of operations, stockholders' equity and cash flows of Better Vision Hardware Group, Inc. (Predecessor Company) for the period from August 1, 1993 through December 2, 1993 (Predecessor Company period) and have issued our report thereon dated October 4, 1996 (except for notes 3, 4, 11 and 13 as to which the date is May 23, 1997) (included elsewhere in this Registration Statement). Our audits also included the financial statement schedules listed in Item 16(b) of this Registration Statement. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, effective December 3, 1993, all of the outstanding stock of the Predecessor Company was acquired in a business combination accounted for as a purchase. As a result of this acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. As discussed in Note 8 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in 1996. /s/ ERNST & YOUNG LLP Columbus, Ohio October 4, 1996, except for Notes 3, 4, 11 and 13 as to which the date is May 23, 1997 S-1 80 ACORN PRODUCTS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) CONDENSED BALANCE SHEETS
JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) ASSETS Cash..................................................................... $ 1,211 $ 253 Accounts receivable...................................................... 480 253 Prepaids and other....................................................... 2,501 945 -------- --------- Total current assets..................................................... 4,192 1,451 Property, plant and equipment, net....................................... 11 4 Goodwill................................................................. 6,995 6,812 Other assets (principally investment in and amounts due from wholly-owned subsidiaries).......................................................... 64,730 57,420 -------- --------- Total assets................................................... $ 75,928 $65,687 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Revolving credit facility................................................ $ 19,250 $12,537 Accounts payable and accrued expenses.................................... 742 1,421 Accrued interest......................................................... 4,133 -- Income taxes payable..................................................... 1,488 875 Other current liabilities................................................ 231 220 -------- --------- Total current liabilities................................................ 25,844 15,053 Long-term debt........................................................... 31,354 31,354 Other long-term liabilities.............................................. 1,407 750 -------- --------- Total liabilities........................................................ 58,605 47,157 Stockholders' equity Common stock........................................................... 14,319 14,406 Preferred stock........................................................ -- 8,596 Contributed capital -- stock options................................... 340 340 Minimum pension liability.............................................. -- (197) Retained earnings (deficit)............................................ 2,664 (4,615) -------- --------- Total stockholders' equity.......................................... 17,323 18,530 -------- --------- Total liabilities and stockholders' equity..................... $ 75,928 $65,687 ======= =======
S-2 81 ACORN PRODUCTS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED) (PARENT COMPANY) CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED ---------------------- JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Selling and administrative expenses...................................... $ 1,524 $ 1,828 Interest expense......................................................... -- 1,659 Amortization of intangible assets........................................ 370 471 Other expenses........................................................... -- 1,014 -------- --------- Loss before equity in earnings of subsidiaries........................... (1,894) (4,972) Equity in earnings of wholly-owned subsidiaries.......................... (545) (2,307) -------- --------- Net loss................................................................. $ (2,439) $(7,279) ======= =======
S-3 82 ACORN PRODUCTS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED) (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED ---------------------- JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Net cash from operating activities....................................... (17,621) $ 5,661 INVESTING ACTIVITIES Property and equipment................................................. 5 7 FINANCING ACTIVITIES Net activity on revolving loan......................................... 16,750 (6,713) Issuance of stock...................................................... -- 87 -------- --------- 16,750 (6,626) -------- --------- Decrease in cash......................................................... $ (866) $ (958) ======= =======
S-4 83 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 At July 28, 1995 and August 2, 1996, the Company had a revolving credit facility with a maximum borrowing of $30 million (the Revolving Facility). The Revolving Facility is collateralized by substantially all of the assets and common stock of the Company's subsidiaries. Available borrowings under the Revolving Facility are based on specified percentages of accounts receivable, inventory and fixed assets of the Company's subsidiaries. The Revolving Facility has a letter of credit subcommitment of $5,000,000. The Revolving Facility bears interest at either the bank prime rate plus a margin ranging from 0.25% to 0.75% (prime rate at August 2, 1996 was 8.25%) or at the Company's option, the LIBOR rate plus a margin ranging from 2.25% to 2.75% (LIBOR rate at August 2, 1996 was 5.5%). At August 2, 1996, the Company had all debt outstanding under the LIBOR interest rate option. The interest rate margin fluctuates based on the ratio of total senior debt to operating cash flow as set forth in a predetermined pricing table. In addition, the Company is required to pay a fee of 0.5% per year on the unused portion of the Revolving Facility. The Credit Facility contains certain covenants, which, among other things, require the Company to maintain specified financial ratios and satisfy certain tests including minimum interest coverage ratios and places limits on future capital expenditures. The Company was in compliance of all debt covenants at August 2, 1996. In December 1993, the Company issued a Subordinated Unsecured Promissory Note in the amount of $25,000,000 to the TCW Funds. In May 1994 the Company issued a Temporary Subordinated Promissory Note in the amount of $6,354,000 to the TCW Funds. The Subordinated Unsecured Promissory Note and the Temporary Subordinated Promissory Note collectively are referred to herein as the "Subordinated Notes". The Subordinated Notes are due on July 31, 2003 and carry interest at 13% per year. Annual interest payments for the Subordinated Notes are contingent upon meeting certain financial measures. These financial measures were not met during fiscal 1995 and 1996, thus, no cash interest payments were permitted. The Subordinated Notes require that any non-payment of interest be added to the principal balance of the outstanding Subordinated Notes. On August 2, 1996, the Company issued 100 shares of Series A Preferred Stock (the "Series A Preferred Stock") with a par value of $.001 per share and a stated value of $8,596,000 as payment in full of accrued interest on the Subordinated Notes due for fiscal years 1995 and 1996. Interest on the Subordinated Notes of $4,133,000 and $4,463,000 was paid in the form of Series A Preferred Stock during fiscal 1995 and fiscal 1996, respectively. S-5 84 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ACORN PRODUCTS, INC. AND SUBSIDIARIES AUGUST 2, 1996
COL. C ----------------------------------- COL. B COL. E ------------ ADDITIONS COL. D ---------- COL. A BALANCE AT ----------------------------------- ---------- BALANCE AT - -------------------------------- BEGINNING OF CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS END OF DESCRIPTION PERIOD AND EXPENSES ACCOUNTS DESCRIBE PERIOD - -------------------------------- ------------ ---------------- ---------------- ---------- ---------- Year Ended August 2, 1996: Deducted from asset accounts: Allowance for doubtful accounts................. $175,000 $ 0 $ 35,000(1) $ 140,000 Reserve for sales discounts and allowances............. 470,205 105,46 159,000(1) 416,673 -- -------- -------- -------- -------- Total................. $645,205 $105,468 $194,000 $ 556,673 ======== ======== == ======== ======== Year Ended July 28, 1995: Deducted from asset accounts: Allowance for doubtful accounts................. $175,689 $ 0 $ 689(1) $ 175,000 Reserve for sales discounts and allowances............. 305,962 329,000 164,757(2) 470,205 -- -------- -------- -------- -------- Total................. $481,651 $329,000 $165,446 $ 645,205 ======== ======== == ======== ======== Eight months ended July 29, 1994: Deducted from asset accounts: Allowance for doubtful accounts................. $175,433 $ 256 $ 175,689 Reserve for sales discounts and allowances............. 219,582 86,380 305,962 -- -------- -------- -------- -------- $395,015 $ 86,636 $ 481,651 ======== ======== == ======== ========
- --------------- (1) Uncollectible accounts written off net of recoveries. (2) Discounts taken by customers during year. S-6 85 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE - ------ -------------------------------------------------------------------------- ---- 1.1 Form of Underwriting Agreement*........................................... 2.1 Asset Purchase Agreement, dated as of February 19, 1997, between Greif Bros. Corporation and UnionTools, Inc.**.................................. 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 of Certificate for Common Stock.................................. 5.1 Opinion of Gibson, Dunn & Crutcher LLP.................................... 10.1 Form of Employment Agreement dated May , 1997, between the Company, UnionTools and Gabe Mihaly................................................ 10.2.1 Form of Employee Severance Agreement, dated as of May , 1997, between the Company and James B. Farland.......................................... 10.2.2 Form of Employee Severance Agreement, dated as of May , 1997, between the Company and Thomas A. Hyrb............................................ 10.2.3 Form of Employee Severance Agreement, dated as of May , 1997, between the Company and Stephen M. Kasprisin 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**................. 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 between UnionTools and Heller Financial, Inc. dated as of May 20, 1997.................................. 10.10 License Agreement, dated as of August 1, 1992, between The Scott Company and UnionTools**.......................................................... 10.11 Form of Registration Rights Agreement, dated as of May , 1997, between Acorn Products, Inc. and various funds and accounts managed by TCW Special Credits................................................................... 10.12 Form of Registration Rights Agreement, dated as of May , 1997, between Acorn Products, Inc. and The OMC Principal Opportunities Fund, L.P........ 11.1 Statement re computation of earnings per share (See Note 14 of the Notes to the Consolidated Financial Statements)................................. 21.1 Subsidiaries of the Registrant**.......................................... 23.1 Consent of Ernst & Young LLP.............................................. 23.2 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1).......... 24.1 Power of Attorney (included in signature page to registration statement)**.............................................................. 27.1 Financial Data Schedule...................................................
- --------------- * To be filed by amendment. ** Previously filed. EX-4.1 2 SPECIMEN CERTIFICATE FOR COMMON STOCK 1 Exhibit 4.1 COMMON STOCK ACORN PRODUCTS, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 004857 10 8 This Certifies that is the Owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE OF $.001 EACH, OF ACORN PRODUCTS, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney on surrender of this certificate, properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. DATED: /s/ Stephen M. Kasprisin /s/ Gavril M. Mihaly VICE PRESIDENT AND PRESIDENT AND CHIEF CHIEF FINANCIAL OFFICER EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: American Stock Transfer & Trust Company TRANSFER AGENT AND REGISTRAR EX-5.1 3 OPINION OF GIBSON, DUNN, & CRUTCHER LLP 1 EXHIBIT 5.1 May 19, 1997 (212) 351-4000 C 07329-00031 Acorn Products, Inc. 500 Dublin Avenue Columbus, Ohio 43216-1930 Re: Registration Statement on Form S-1 (Reg. No. 333-25325) Gentlemen: We have examined the Registration Statement on Form S-1 (the "Registration Statement"), File No. 333-25325, of Acorn Products, Inc., a Delaware corporation (the "Company"), filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended (the "Securities Act"), in connection with the public offering by the Company of up to 3,737,500 newly issued shares (the "Shares") of Common Stock, par value $.001, of the Company. For the purposes of the opinion set forth below, we have examined and are familiar with the proceedings taken and proposed to be taken by the Company in connection with the issuance and sale of the Shares, including, among other things, upon our examination of such corporate records of the Company and certificates of officers of the Company and of public officials and such other documents as we have deemed relevant and necessary as the basis for the opinions set forth below. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies. 2 EXHIBIT 5.1 Acorn Products, Inc. May 19, 1997 Page 2 Based upon the foregoing examination and in reliance thereon, and subject to the assumptions stated and relying on statements of fact contained in the documents that we have examined and subject to the completion of the proceedings to be taken by the Company prior to the sale of the Shares, it is our opinion that, when the Registration Statement has become effective under the Securities Act and the shares have been issued and sold as contemplated in the Registration Statement and duly delivered, the Shares will be validly issued, fully paid and non-assessable. We render no opinion herein as to matters involving the laws of any jurisdiction other than the laws of the United States of America, the laws of the State of New York and the General Corporation Law of the State of Delaware. In rendering this opinion, we assume no obligation to revise or supplement this opinion should current laws, or the interpretations thereof, be changed. We consent to the filing of this opinion as an exhibit to the Registration Statement, and we further consent to the use of our name under the caption "Legal Matters" in the Registration Statement and the Prospectus which forms a part thereof. In giving these consents, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the Rules and Regulations of the Commission. Very truly yours, /s/ GIBSON, DUNN & CRUTCHER EX-10.1 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement"), dated as of May , 1997, by and among ACORN PRODUCTS, INC., a Delaware corporation ("Acorn"), and UNIONTOOLS, INC., a Delaware corporation ("UnionTools" and, together, with Acorn, the "Company"), and GABE MIHALY, an individual residing in the State of Ohio (the "Executive"). W I T N E S S E T H WHEREAS, the Executive wishes to continue to serve as President and Chief Executive Officer of the Company and the Company wishes to secure the services of the Executive under the terms described below. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained in this Agreement, the parties hereto agree as follows: 1. Term of Employment. The Company hereby employs the Executive for a term (the "Term") of five years commencing upon the date hereof, which Term shall automatically be extended for, and include, successive one-year periods thereafter unless written notice of non-renewal is provided at least 90 days, if by the Executive, or one year, if by the Company, prior to the expiration of the then current Term. In the event of non-renewal of the Term, the obligations and covenants of the parties hereunder shall be of no further force and effect as of the end of the Term, except those obligations which shall survive this Agreement as set forth in Section 12, and except for vested fringe benefits and compensation earned by the Executive pursuant to Section 3 up to the termination date. 2. Duties of Executive. During the Term, the Executive shall perform the duties of President of Acorn and President and Chief Executive Officer of Union Tools. Subject to supervision by the Board of Directors of each such corporation and by the Chief Executive Officer of Acorn, if other than the Executive, the Executive shall have overall charge of the business affairs of the Company, with the duties, responsibilities and authorities normally associated with such position. The Executive also shall serve as a director of Acorn and UnionTools and as an officer and/or director of one or more affiliates and subsidiaries of Acorn and UnionTools (the "Subsidiaries") as Acorn's Board of Directors shall request and shall be entitled to no additional remuneration for such service. During the Term, the Executive shall devote substantially all of his business time and efforts to the business and affairs of the Company and will not engage in any activity which interferes with the performance of his duties hereunder. 2 3. Compensation. 3.1 Base Salary. In consideration of the Executive's service hereunder, the Company shall pay to the Executive an annual base salary of $296,181 (the "Base Salary"). The Base Salary shall be payable in accordance with the standard policies of the Company in existence from time to time, subject to any deductions required by law. Beginning on January 1, 1998, the Base Salary shall be increased annually on January 1 of each year during the Term of this Agreement by the Percentage Increase (as defined below) of the Consumer Price Index for All Urban Consumers for All Cities for all items as published by the Bureau of Labor Statistics of the United States Department of Labor (the "Index") for the 12 months ending immediately prior to such January 1. For purposes hereof, "Percentage Increase" shall mean such percentage equal to the fraction, the numerator of which shall be the Index for the immediately preceding December less the Index for the second preceding December, and the denominator of which shall be the Index for the second preceding December. 3.2 Bonus. In addition to the Base Salary, the Executive shall be entitled to a cash bonus (the "Annual Cash Bonus") within three months after the end of each fiscal year of the Company, with the amount thereof to be determined at the discretion of the Board of Directors and payable in accordance with the standard policies of the Company in existence from time to time, subject to any deductions required by law. In addition to the Annual Cash Bonus, if (i) the Executive is employed by the Company on January 5, 1998, (ii) the Executive has died prior to January 5, 1998 or (iii) the Executive's employment has been terminated, other than by the Executive (except pursuant to Section 4.1(b) hereof) or pursuant to Section 4.4 hereof, the Company shall pay to the Executive (or his estate or personal representative, if applicable) on January 12, 1998 a cash bonus of $260,000 (the "One-Time Cash Bonus"). The Annual Cash Bonus and the One-Time Cash Bonus collectively are referred to herein as the "Bonuses". 3.3 Additional Benefits. In addition to the compensation explicitly provided for herein, the Executive shall be entitled to such fringe benefits as are made available generally to the senior executives of the Company, including participation in such pension, group life, disability, health and other similar benefit or insurance programs as are now or hereafter made available generally to such executives, including any "top hat" pension program which the Company may adopt for some or all of its senior executives during the Term. Without limiting the foregoing, the Executive shall be entitled to a car allowance in the amount of $750 per month and the Executive shall be entitled to membership in one country or other social club selected by him and approved by the Company. All benefits payable pursuant to this Section 3.3 are herein referred to as the "Additional Benefits". 3.4 Expenses. The Executive shall be reimbursed by the Company for all reasonable, out-of-pocket ordinary and necessary business expenses incurred by the Executive for the purpose of and in connection with the performance of the Executive's services hereunder. Such reimbursement shall be made upon presentation of vouchers or other 2 3 statements itemizing such expenses in reasonable detail consistent with the Company's policies. 3.5. Vacation. The Executive shall be entitled to such amount of paid vacation during each year as shall be afforded to the other senior executives of the Company. 3.6. Life Insurance, Disability. The Company shall maintain for the Executive during the Term a term life insurance policy of not less than $750,000 and disability insurance providing benefits upon disability at least equal to 70% of the Base Salary. The Executive shall be entitled to designate the beneficiaries of such policies. 4. Termination of Employment. 4.1 Termination Without Cause; Resignation for Good Reason. (a) Termination Without Cause. During the Term, the Company may terminate this Agreement without Cause, effective upon the occurrence of any of the following events: (i) 30 days after written notice is delivered to the Executive by the Company of the determination of the permanent disability of the Executive, defined for purposes of this subparagraph (a) as incapacity of the Executive to fulfill his normal duties and responsibilities hereunder for a period of 120 work days out of 150 consecutive work days by reason of physical or mental disability as determined by a medical doctor reasonably acceptable to both the Board of Directors of Acorn and the Executive or his personal representative and confirmed in writing by such doctor, which confirmation shall be submitted to the Board of Directors of Acorn and to the Executive or his personal representative; (ii) the death of the Executive; or (iii) 60 days after written notice of termination is delivered to the Executive by the Company for any reason other than pursuant to subsections (a)(i) or (a)(ii) of this Section or Section 4.4 hereof. (b) Resignation for Good Reason. During the Term, the Executive may terminate this Agreement for Good Reason 30 days after written notice is delivered to the Company by the Executive. "Good Reason" shall mean (i) a material adverse change or diminution in the Executive's duties or responsibilities, offices, facilities, staff assistance, fringe benefits or other indicia of the Executive's position or (ii) any other material breach by the Company of its obligations under this Agreement. "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. 3 4 (c) Upon termination of this Agreement pursuant to this Section 4.1, the obligations and covenants of the parties hereunder shall be of no further force and effect, except those obligations which shall survive this Agreement as set forth in Section 12 and except for the payment obligations of the Company set forth in Section 4.2 below. 4.2 Payment Obligations of the Company upon Termination Without Cause or Resignation for Good Reason. In the event of any termination of this Agreement pursuant to Section 4.1 hereof, the Company shall be obligated to the Executive as follows: (a) In the event of termination pursuant to Section 4.1(a)(i) or (ii), the Executive or his estate, as the case may be, shall be entitled to receive (i) all compensation and other benefits, including, without limitation, the Base Salary, any Bonuses and Additional Benefits to which the Executive is entitled through the date of such termination and (ii) the Additional Benefits for a period of one year after such termination. If, for any reason, the Company cannot provide any such Additional Benefits, it shall pay to the Executive the present value thereof in cash at an assumed per annum interest rate of seven percent (7%). (b) In the event of termination pursuant to Section 4.1(a)(iii) or (b), the Executive or his estate shall be entitled to receive (i) all compensation and other benefits, including, without limitation, the Base Salary, any Bonuses and Additional Benefits to which the Executive is entitled through the date of such termination, (ii) a lump sum payment, to be paid on the fifth day following the date of termination of the Executive's employment, in an amount equal to all Base Salary due the Executive through the Term and (iii) the Additional Benefits for a period of one year after such termination. If, for any reason, the Company cannot provide any such Additional Benefits, it shall pay to the Executive the present value thereof in cash at an assumed per annum interest rate of seven percent (7%). (c) In the event of termination pursuant to Section 4.1(a)(iii) or (b) within two years following a Change of Control, the Executive or his estate also shall be entitled to receive a lump sum payment, to be paid on the fifth day following the date of termination of the Executive's employment, in an amount equal to the difference between (i) three times 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 minus (ii) the compensation received by the Executive pursuant to clause (ii) of Section 4.2(b). For purposes of this Section 4.2, the following terms shall have the following meanings: "Affiliate" of any specified Person (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall mean (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control 4 5 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. A "Change of Control" occurs upon any of the following events: (i) the acquisition by any Person (as defined in Section 13(d) of 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 the Company (a) having 25% or more of the total voting power of the then outstanding voting securities of the Company and (b) having more voting power than the securities of the Company beneficially owned by Oaktree; (ii) during any 12 month period, a change in the Board of Directors of Acorn occurs such that Incumbent Members (as defined below) 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 the Company 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. "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. "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. 4.3 Payment Obligations of the Company Upon Non-Renewal of the Agreement. If the Company provides the Executive with notice of non-renewal pursuant to Section 1 hereof, the Executive shall be entitled to receive a lump sum payment, to be paid on the fifth day following the expiration of the Term, in an amount equal to the Executive's then- 5 6 current Base Salary; provided, however, that if this Agreement subsequently is terminated pursuant to Section 4.1(a)(iii) or 4.1(b), the Company shall also be obligated to make payments to the Executive pursuant to Section 4.2(b). 4.4 Termination for Cause. During the Term, this Agreement may be terminated for Cause effective upon receipt by the Executive of the Company's written notice specifying a valid basis for termination of the Executive for Cause. "Cause" shall mean: (a) the Executive's criminal conviction for fraud, embezzlement, misappropriation of assets or any other felony (excluding traffic violations); or (b) the continuance of willful and repeated failures by the Executive to perform his obligations under this Agreement which have not been cured by the Executive within thirty (30) days following receipt of written notice from the Board of Directors of Acorn specifying such failure and the action required by the Executive to cure such breach of his obligations hereunder. Upon termination of this Agreement by the Company for Cause, the obligations and covenants of the parties hereunder shall be of no further force and effect, except those obligations which shall survive this Agreement as set forth in Section 12, and except for vested fringe benefits and compensation earned by the Executive pursuant to Section 3 up to the termination date. 5. Pension Plans. The Executive shall participate in the pension plans of the Company for purposes of receiving the pension benefits contemplated by Section 3.5. For purposes of calculating years of service, vesting, benefit accrual and other terms under such plans and any other plans in which the Executive is eligible to participate pursuant to Section 3.5, the Executive shall be deemed to have been employed by Union Tools since June 1, 1991 and, if terminated pursuant to Sections 4.1(a) or 4.1(b), the Executive shall receive credit for the period of time corresponding to the remainder of the Term, for such purposes to be not less than three years from the date of such termination. To the extent the Company is not able by the terms of such plans to extend or continue participation by the Executive under such plans in accordance with this Section 5, whether because of the sale of Union Tools, termination of the employment of the Executive or otherwise, the Company shall provide on a supplemental basis benefits equal to the additional amounts which the Executive would have received under such plans if participation had been extended as required. 6. Non-Competition; Confidentiality. 6.1 Non-Competition. At all times during the Term, and for a period of (a) one year thereafter in the event of termination of this Agreement by the Company pursuant to Section 4.4 hereof or termination of this Agreement by the Executive before the end of the Term or (b) six months thereafter in the event of non-renewal of the term of this Agreement at 6 7 the election of the Executive, the Executive shall not commit any Prohibited Acts (as defined in Section 6.2 below). For purposes of this Section 6.1, the following terms shall have the following meanings: "Direct Competitor" shall mean any company which is or becomes a significant and direct competitor of Acorn, UnionTools or the Subsidiaries on or after the date of this Agreement. A company will be considered a significant and direct competitor of Acorn, UnionTools or the Subsidiaries if such company acquires a 10% or greater market share in the United States of any product category which accounts for 10% or more of the revenue of Acorn, UnionTools and the Subsidiaries on a consolidated basis in any of the last three fiscal years. "Prohibited Acts" shall mean owning, managing, operating, controlling or participating in the ownership, management, operation or control of, or being connected as an officer, employee, partner, director, agent or consultant of, or having any financial interest in, any Direct Competitor. 6.2 De Minimis Stock Ownership. Notwithstanding any other provisions of this Section 6, ownership of five percent (5%) or less of any class of voting securities of a company listed on a nationally recognized stock exchange or for which prices are quoted on the NASDAQ National Market shall not constitute a violation hereof. 6.3 Confidentiality. The Executive agrees, at all times during and after the Executive's employment hereunder, to hold in strictest confidence, and not to disclose to any person, firm or corporation, without the express written authorization of the Board of Directors of Acorn, any trade secrets, such as inventions, processes, formulae, programs, data, any financial information or any secret or confidential information relating to the research and development program, products, vendor and marketing programs, customers, customers' information, sales or business of the Company, except as such disclosure or use may be required in connection with his work for the Company or is published or otherwise readily available to the public or becomes known to the public other than by breach by him of this Agreement. The Executive further agrees, upon termination of this Agreement, to promptly deliver to the Company all notes, books, engineering records, correspondence, drawings, magnetic tape, punch cards, computer storage information or media, and any and all other written and graphical records in his possession or under his control relating to the past, present or future business, products, or projects of the Company. 6.4 Remedies. It is recognized that damages in the event of breach by the Executive of this Section 6 would be difficult, if not impossible, to ascertain, and it is therefore agreed that the Company, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief, in any court of competent jurisdiction, enjoining any such breach, and the Executive hereby waives any and 7 8 all defenses he may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right shall not preclude or impair any other rights and remedies at law or in equity that the Company may have. 7. Indemnification. The Company will indemnify the Executive against all costs, charges and expenses (including reasonable attorneys' fees) incurred or sustained by him in connection with any claim, action, suit or proceeding to which he may be made a party by reason of his being an officer, director or employee of the Company or the Subsidiaries, provided the Executive acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was illegal. In addition, 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 insure compliance by the Company with the terms of this Agreement. 8. Certain Additional Payments by the Employers. 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 8. 9. Assignability; Binding Nature. (a) 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. (b) 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. 8 9 (c) Except as expressly stated in Section 9(a) above, this Agreement shall be non-assignable by either the Company or the Executive without the prior written consent of all parties hereto. 10. Notices. Any notice hereunder shall be properly given if by personal delivery or registered or certified mail, return receipt requested, as follows: If to Executive, at his address as it appears on the payroll records of Union Tools. If to the Company to: Acorn Products, Inc. 500 Dublin Avenue Columbus, Ohio 43216 Attention: President with a copy to: Conor D. Reilly, Esq. Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, N.Y. 10166-0193 or to such other addresses as the parties may designate in writing. 11. Integration; Modification. Except for the letter agreement, dated as of the date hereof, among Acorn, UnionTools and the Executive, 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 any 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 any party thereafter to enforce each and every such provisions. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach. 12. Survival of Certain Obligations. Except as otherwise specifically provided for herein, the obligations of the parties pursuant to Sections 3.3, 3.4, 4.2, 6, 7, 8 and this Section 12 shall survive the termination of this Agreement. 13. Severability. If any term or provisions of this Agreement is declared invalid by a court of competent jurisdiction the remaining terms and provisions of this Agreement shall remain unimpaired. If any term or provisions of Section 6 of this Agreement, or portion thereof, is so broad in scope or duration as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 9 10 14. 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 the provisions hereof. 15. 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 provisions or rule that would cause the application of the domestic substantive laws of any other jurisdiction. 16. 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. 10 11 IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of the date first above written. ACORN PRODUCTS, INC. By: ____________________________________ Name: Title: UNION TOOLS, INC. By: ____________________________________ Name: Title: ________________________________________ Gabe Mihaly 11 EX-10.2.1 5 EMPLOYEE SEVERANCE AGREEMENT 1 EXHIBIT 10.2.1 EMPLOYEE SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into as of May , 1997 among Acorn Products, Inc., a Delaware corporation ("Acorn"), UnionTools, Inc., a Delaware corporation ("UnionTools" and together with Acorn, the "Company") and James B. Farland (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: (i) resignation by the Executive for Good Reason; or (ii) 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 2 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 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). 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 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: (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 2 3 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. "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 (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 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. 3 4 (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. (i) 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). (ii) If, within two years after the Executive resigns for Good Reason or his employment is terminated by the Company other than for Cause, the Executive obtains employment from any person or entity other than the Company and as a result thereof is required to relocate to a city outside of the greater metropolitan area in which the Executive's principal residence was located at the time of such termination (and remains so located at the time such employment is obtained), then the Company shall be obligated to pay all reasonable relocation expenses (upon presentation of proper receipts therefor) directly incurred by the Executive in connection with such relocation in accordance with the Company's policies currently then in effect (the "Relocation Payment"). The Executive shall be entitled to the Relocation Payment, if applicable, only in connection with the first full-time employment obtained by the Executive following the termination of his employment with the Company. 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. 4 5 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, Ohio 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 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. 5 6 (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. 6 7 IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of the date first above written. EXECUTIVE ________________________________________ Name: James B. Farland ACORN PRODUCTS, INC. By: ___________________________________ Name: Title: UNIONTOOLS, INC. By: ___________________________________ Name: Title: 7 EX-10.2.2 6 EMPLOYEE SEVERANCE AGREEMENT 1 EXHIBIT 10.2.2 EMPLOYEE SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into as of May , 1997 among Acorn Products, Inc., a Delaware corporation ("Acorn"), UnionTools, Inc., a Delaware corporation ("UnionTools" and together with Acorn, the "Company") and Thomas A. Hyrb (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: (i) resignation by the Executive for Good Reason; or (ii) 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 2 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 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). 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 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: (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 2 3 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. "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 (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 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. 3 4 (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. 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. 4 5 500 Dublin Ave. Columbus, Ohio 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 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. 5 6 IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of the date first above written. EXECUTIVE ________________________________________ Name: Thomas A. Hyrb ACORN PRODUCTS, INC. By: ___________________________________ Name: Title: UNIONTOOLS, INC. By: ____________________________________ Name: Title: 6 EX-10.2.3 7 EMPLOYEE SEVERANCE AGREEMENT 1 EXHIBIT 10.2.3 EMPLOYEE SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into as of May , 1997 among Acorn Products, Inc., a Delaware corporation ("Acorn"), UnionTools, Inc., a Delaware corporation ("UnionTools" and together with Acorn, the "Company") and Stephen M. Kasprisin (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: (i) resignation by the Executive for Good Reason; or (ii) 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 2 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 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). 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 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: (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 2 3 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. "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 (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 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. 3 4 (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. 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. 4 5 If to the Company, to: Acorn Products, Inc. 500 Dublin Ave. Columbus, Ohio 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 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. 5 6 IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of the date first above written. EXECUTIVE ________________________________________ Name: Stephen M. Kasprisin ACORN PRODUCTS, INC. By: ___________________________________ Name: Title: UNIONTOOLS, INC. By: ___________________________________ Name: Title: 6 EX-10.3 8 DEFERRED EQUITY COMPENSATION PLAN 1 EXHIBIT 10.3 ACORN PRODUCTS, INC. DEFERRED EQUITY COMPENSATION PLAN FOR DIRECTORS SECTION 1. INTRODUCTION 1.1 ESTABLISHMENT OF PLAN. Acorn Products, Inc., a Delaware corporation (the "Company"), hereby establishes the Acorn Products, Inc. Deferred Equity Compensation Plan for Directors (the "Plan") for those directors of the Company who are not employees of the Company. The Plan provides the opportunity for Directors to defer receipt of all or one-half of their cash compensation on a pretax basis and to invest those deferrals in the Company's Stock. 1.2 PURPOSES. The purposes of the Plan are to align the interests of Directors more closely with the interests of other shareholders of the Company, to encourage the highest level of Director performance by providing the Directors with a direct interest in the Company's attainment of its financial goals and to help attract and retain qualified Directors. 1.3 EFFECTIVE DATE. The Plan shall be effective (the "Effective Date") on May , 1997. To the extent an investment or distribution of Stock may be made under the Plan, the Plan is intended to qualify for the exemption provided by Rule 16b-3 under the Exchange Act, as now in effect or hereafter amended, from short swing profit liability under Section 16(b) of the Exchange Act. SECTION 2. DEFINITIONS 2.1 DEFINITIONS. The following terms shall have the meanings set forth below: (a) "Administrative Committee" means the committee designated in Section 3 to administer the Plan. (b) "Affiliate" of any specified Person means (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. (c) "Board", as used in connection with the defined terms "Change of Control" and "Incumbent Members" means the Board of Directors of the Company. As used elsewhere in the Plan, the Board shall mean not only the Board of Directors of the Company but, with respect to actions taken or to be taken in connection with the Plan, any committee thereof authorized by the Board to take action with respect to the Plan. 2 EXHIBIT 10.3 (d) "Change of Control" occurs upon any of the following events: (i) the acquisition by any Person (as defined in Section 13(d) of 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 the Company (a) having 25% or more of the total voting power of the then outstanding voting securities of the Company and (b) having more voting power than the securities of the Company beneficially owned by Oaktree; (ii) during any twelve month period, a change in the Board occurs such that Incumbent Members do not constitute a majority of the Board; (iii) a sale of all or substantially all of the assets of the Company or UnionTools, Inc.; or (iv) the consummation of a merger or consolidation of the Company 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 the Company 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 the Company's voting securities. (e) "Common Stock Equivalent" means a hypothetical share of Stock which shall have a value on any date equal to the Fair Market Value of one share of Stock on that date. (f) "Deferred Stock Equivalent Account" means the bookkeeping account established by the Company in respect to each Director pursuant to Section 5.3 hereof and to which shall be credited the fees deferred by the Director as provided in the Plan and the Common Stock Equivalents into which such deferred fees are deemed invested pursuant to the Plan. (g) "Director" means a member of the Board who is not an employee of the Company or a subsidiary of the Company. For purposes of the Plan, an employee is an individual whose wages are subject to the withholding of federal income tax under Section 3401 of the Internal Revenue Code. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (i) "Fair Market Value" of a share of Stock means as of any applicable date the average of the high and low sale prices of such Stock on the date such determination is required herein, or if there were no sales on such date, the average of the closing bid and asked prices, as reported on the principal United States securities exchange on which the Stock is listed or, in the absence of any such listing, on the Nasdaq National Market or, if the Stock is not at the time listed on a national securities exchange or traded on the Nasdaq National Market, the value of such Stock on such date as determined in good faith by the Board. 2 3 EXHIBIT 10.3 (j) "Incumbent Members" means the members of the Board 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. (k) "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time. (l) "Oaktree" means Oaktree Capital Management, LLC and its Affiliates, including any partnerships, separate accounts or other entities managed by Oaktree. (m) "Payment Date" means each of the dates each year on which the Company pays fees to Directors. (n) "Stock" means the $0.001 par value common stock of the Company. (o) "TCW" means: 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. 2.2 GENDER AND NUMBER. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definitions of any term herein in the singular shall also include the plural. SECTION 3. PLAN ADMINISTRATION The Plan shall be administered by the Administrative Committee, comprised of the Chief Financial Officer and the Secretary of the Company or such other officers of the Company as the Board may designate. Subject to the limitations of the Plan, the Administrative Committee shall have the sole and complete authority: (i) to impose such limitations, restrictions and conditions as it shall deem appropriate; (ii) to interpret the Plan and to adopt, amend and rescind administrative guidelines and other rules and regulations relating to the Plan; and (iii) to make all other determinations and to take all other actions necessary or advisable for the implementation and administration of the Plan. Notwithstanding the foregoing, the Administrative Committee shall have no authority, discretion or power to alter any terms or conditions specified in the Plan. The Administrative Committee's determinations on matters within its authority shall be conclusive and binding upon the Company, the Directors and all other persons. 3 4 EXHIBIT 10.3 SECTION 4. STOCK SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. There shall be authorized for issuance under the Plan, in accordance with the provisions of the Plan, 73,000 shares of Stock. This authorization may be increased from time to time by approval of the Board and by the shareholders of the Company if the Board determines that such shareholder approval is required. The Company shall at all times during the term of the Plan retain as authorized and unissued Stock at least the number of shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder. The shares of Stock issuable hereunder shall be authorized and unissued shares or previously issued and outstanding shares of Stock reacquired by the Company. 4.2 ADJUSTMENTS UPON CHANGES IN STOCK. If there shall be any change in the Stock, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, spin-off, split up, dividend in kind or other change in the corporate structure or distribution to the shareholders, appropriate adjustments shall be made by the Administrative Committee (or if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) in the aggregate number and kind of shares subject to the Plan and the number and kind of shares which may be issued under the Plan. Appropriate adjustments may also be made by the Administrative Committee in the terms of Common Stock Equivalents under the Plan to reflect such changes and to modify any other terms on an equitable basis as the Administrative Committee in its discretion determines. SECTION 5. DEFERRALS AND DISTRIBUTIONS 5.1 DEFERRAL ELECTIONS. A Director may elect to defer receipt of all or one-half of the annual fees payable to the Director for serving on the Board. A Director may make the elections permitted hereunder by giving written notice to the Company in a form approved by the Administrative Committee. The notice shall state: (i) whether all or one-half of such fees shall be deferred; (ii) the date as of which deferral is to commence; and (iii) subject to the limitations of this Section 5, the year in which distribution is to commence and the form (i.e., lump sum or installments over a stated number of years) of distribution. 5.2 TIME FOR ELECTING DEFERRAL AND CHANGE IN ELECTION. The election to defer fees shall be made in the first instance prior to the first meeting of the Board following the Effective Date of the Plan and, thereafter, prior to the latest to occur of the following: (i) the beginning of the calendar year for which the fees are to be earned; (ii) such Director's first day of Board service in that year; or (iii) the thirty-first day following the date the Director first becomes eligible to participate in the Plan; provided that, an election made on or after the first day of a calendar year shall only apply to fees earned after the date of the election. An election to defer, once made, is irrevocable for the first calendar year with respect to which the election is made, except as provided in Section 4 5 EXHIBIT 10.3 5.11 hereof. An election to defer, once made, shall continue to be effective for succeeding calendar years until revoked or modified by the Director by written request to the Administrative Committee prior to the beginning of a calendar year for which fees would otherwise be deferred. 5.3 DEFERRED STOCK EQUIVALENT ACCOUNTS. A Deferred Stock Equivalent Account shall be established for each Director. Deferred fees shall be credited to such Account as of the date such amounts would have otherwise been paid in cash to the Director, and shall be converted into Common Stock Equivalents based on the Fair Market Value as of the date such amounts would have otherwise been paid in cash to the Director. Deferred fees shall be converted into Common Stock Equivalents by dividing (i) an amount equal to the dollar amount of the fees deferred by (ii) the Fair Market Value. A Director's Deferred Stock Equivalent Account also shall be credited with dividend equivalents and other distributions pursuant to Section 5.4. 5.4 DIVIDEND EQUIVALENTS. Dividends and other distributions with respect to Common Stock Equivalents shall be deemed to have been paid as if such Common Stock Equivalents were actual shares of Stock issued and outstanding on the respective record or distribution dates. Common Stock Equivalents shall be credited to a Director's Deferred Stock Equivalent Account in respect of cash dividends and any other securities or property distributed with respect to the Stock in connection with reclassifications, spin-offs and the like on the basis of the value of the dividend or other asset distributed and the Fair Market Value of the Common Stock Equivalents on the date of the announcement of the dividend or asset distribution, all at the same time and in the same amount as dividends or other distributions are paid or distributed with respect to the Stock. Fractional shares shall be credited to a Director's Deferred Stock Equivalent Account cumulatively, but the balance of shares of Common Stock Equivalents in a Director's Deferred Stock Equivalent Account shall be rounded to the next highest whole share for any distribution to such Director pursuant to this Section 5. 5.5 STATEMENT OF ACCOUNTS. A statement as to the balance of his or her Deferred Stock Equivalent Account will be sent to each Director at least once each calendar year. 5.6 PAYMENT OF ACCOUNTS. As soon as practicable following termination of service as a Director, a Director shall receive a distribution of his or her Deferred Stock Equivalent Account as directed by the Director in his or her most recent notice of distribution instructions, provided, however, that any such notice, other than the initial such notice, shall not be effective to direct the time and manner of distribution of the Director's Deferred Stock Equivalent Account unless such notice is received by the Administrative Committee at least two years prior to the effective date of the Director's termination of service. Either a lump sum or the first of a stated number of equal annual installments shall be paid in the year of such termination. Succeeding installments (if any) shall be paid on January 31 of each calendar year following the calendar year in which the first payment was made. Such distribution(s) shall be made in shares of Stock on the basis of one share of Stock for each Common Stock Equivalent credited to such Director's 5 6 EXHIBIT 10.3 Deferred Stock Equivalent Account as of the Payment Date immediately preceding the date of distribution. 5.7 PAYMENTS FOLLOWING THE DEATH OF A DIRECTOR. In the event of a Director's death before the balance of his or her Deferred Stock Equivalent Account is fully paid, payment of the balance of the Director's Deferred Stock Equivalent Account shall then be made to the beneficiary or beneficiaries, at such time or times and in such manner as shall be designated by the Director pursuant to Section 5.8 or, in the absence of a designation as to the time and manner of payment, in the time and manner selected by the Administrative Committee. The Administrative Committee may, in its discretion, take into account the application of any designated beneficiary and direct that the balance of the Director's Deferred Stock Equivalent Account be paid to such beneficiary in the manner requested by such application. 5.8 DESIGNATION OF BENEFICIARY. A Director shall file with the Administrative Committee a written designation of one or more persons as the beneficiary who shall be entitled to receive the amount, if any, payable hereunder after the Director's death. Such designation also shall specify the manner and the time or times at which such amount shall be paid. A Director may, from time to time, revoke or change his beneficiary designation without the consent of any prior beneficiary by filing a new designation with the Administrative Committee. The last such designation received by the Administrative Committee shall be controlling; provided, however, that no designation or change or revocation thereof shall be effective unless received by the Administrative Committee prior to the Director's death and in no event shall it be effective as of a date prior to its receipt. If no such beneficiary designation is in effect at the time of the Director's death, or if no designated beneficiary survives the Director, the Director's estate shall be deemed to have been designated his or her beneficiary and the executor or administrator thereof shall receive the amount, if any, payable hereunder after the Director's death. If the Administrative Committee is in doubt as to the right of any person to receive all or part of such amount, the Company may retain such amount until the rights thereto are determined, or the Company may pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Company therefor. 5.9 CHANGE OF CONTROL. Notwithstanding any provision of this Plan to the contrary, in the event of a Change of Control, each Director shall receive, within ten (10) days of the date of such Change of Control a lump sum distribution of the number of shares of Stock equal to the number of Common Stock Equivalents credited to such Director's Deferred Stock Equivalent Account as of the date of the Change of Control. 5.10 EMERGENCY PAYMENTS. In the event of an "unforeseeable emergency" as defined herein, the Administrative Committee may determine the amounts payable under Section 5 hereof and pay all or a part of such amounts in shares of Stock without regard to the payment dates otherwise determined pursuant to Sections 5.6, 5.7 and 5.8, to the extent the Administrative Committee determines that such action is necessary in light of immediate and substantial needs of the Director (or his beneficiary) occasioned by severe 6 7 EXHIBIT 10.3 financial hardship. For the purposes of this Section, an "unforeseeable emergency" is a severe financial hardship to the Director resulting from a sudden and unexpected illness or accident of the Director or beneficiary, or of a dependent (as defined in Section 152(a) of the Internal Revenue Code) of the Director or beneficiary, loss of the Director's or beneficiary's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Director or beneficiary. Payments shall not be made pursuant to this Section to the extent that such hardship is or may be relieved: (a) through reimbursement or compensation by insurance or otherwise; (b) by liquidation of the Director's or beneficiary's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or (c) by cessation of the Director's deferrals under the Plan. Such action shall be taken only if a Director (or a Director's legal representatives or successors) signs an application describing fully the circumstances which are deemed to justify the payment, together with an estimate of the amounts necessary to prevent such hardship, which application shall be approved by the Administrative Committee after making such inquiries as the Administrative Committee deems necessary or appropriate. 5.11 PAYMENT OF TAXABLE AMOUNT. Notwithstanding any other provision of this Section 5 or any payment schedule directed by a Director pursuant to Sections 5.6, 5.7 or 5.8 and regardless of whether payments have commenced under this Section 5, in the event that the Internal Revenue Service should finally determine that part or all of the value of a Director's Deferred Stock Equivalent Account which has not actually been distributed to the Director is nevertheless required to be included in the Director's or beneficiary's gross income for federal income tax purposes, then the balance of the Deferred Stock Equivalent Account or the part thereof that was determined to be includable in gross income shall be distributed in shares of Stock to the Director or beneficiary, as the case may be, in a lump sum as soon as practicable after such determination, without any action or approval by the Administrative Committee. A "final determination" of the Internal Revenue Service for purposes of this Section is a determination in writing by said Service ordering the payment of additional tax, reporting of additional gross income or otherwise requiring Plan amounts to be included in gross income, which is not appealable or which the Director or beneficiary does not appeal within the time prescribed for appeals. SECTION 6. GENERAL CREDITOR STATUS Each participating Director and beneficiary designated by a Director shall be and remain an unsecured general creditor of the Company with respect to any payments due and owing to such Director or beneficiary hereunder. All payments to persons entitled to benefits hereunder shall be made out of the general assets and shall be solely the obligation of the Company. The Plan is a promise by the Company to pay benefits in the future and it is the intention of the Company and participating Directors that the Plan be "unfunded" for tax purposes (and for the purposes of Title I of the Employee Retirement Income Security Act of 1974). 7 8 EXHIBIT 10.3 SECTION 7. CLAIMS PROCEDURES If a claim for benefits made by any person (the "Applicant") is denied, the Administrative Committee shall furnish to the Applicant, within 90 days after its receipt of such claim (or within 180 days after such receipt if special circumstances require an extension of time), a written notice which: (i) specifies the reasons for the denial; (ii) refers to the pertinent provisions of the Plan on which the denial is based; (iii) describes any additional material or information necessary for the perfection of the claim and explains why such material or information is necessary; and (iv) explains the claim review procedures. Upon the written request of the Applicant submitted within 60 days after receipt of such written notice, the Administrative Committee shall afford the Applicant a full and fair review of the decision denying the claim and, if so requested: (i) permit the Applicant to review any documents which are pertinent to the claim; (ii) permit the Applicant to submit to the Administrative Committee issues and comments in writing; and (iii) afford the Applicant an opportunity to meet with the Administrative Committee as a part of the review procedure. Within 60 days after its receipt of a request for review (or within 120 days after such receipt if special circumstances, such as the need to hold a hearing, require an extension of time) the Administrative Committee shall notify the Applicant in writing of its decision and the reasons for its decision and shall refer the Applicant to the provisions of the Plan which form the basis for its decision. SECTION 8. ASSIGNABILITY The right of a Director and his beneficiary to receive payments or distributions hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer (other than by will or the laws of descent and distribution), assignment, pledge, encumbrance, attachment, or garnishment by creditors of a participating Director or his beneficiary. SECTION 9. PLAN TERMINATION, AMENDMENT AND MODIFICATION The Plan shall automatically terminate at the close of business on the fifteenth anniversary of the effective date unless sooner terminated by the Board. The Board may at any time terminate, and from time to time may amend or modify the Plan, provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the shareholders if shareholder approval is required to enable the Plan to satisfy any applicable federal or state statutory or regulatory requirements, and, provided further that no termination, amendment or modification shall reduce the then existing balance of any Director's Deferred Stock Equivalent Account or otherwise adversely change the terms and conditions thereof without the Director's consent. SECTION 10. GOVERNING LAW/PLAN CONSTRUCTION The Plan and all agreements hereunder shall be construed in accordance with and 8 9 EXHIBIT 10.3 governed by the laws of the State of New York. Nothing in this document shall be construed as an employment agreement or in any way impairing the right of the Company, the Board or its committees or the Company's shareholders, to remove a Director from service as a director, to refuse to renominate or reelect such person as a director, or to enforce the duly adopted retirement policies of the Board. 9 EX-10.4 9 1997 STOCK INCENTIVE PLAN 1 EXHIBIT 10.4 ACORN PRODUCTS, INC. 1997 STOCK INCENTIVE PLAN 1. Establishment and Purpose of the Plan. This 1997 Stock Incentive Plan (the "Plan") is established by Acorn Products, Inc., a Delaware corporation (the "Company"), as of May , 1997. The Plan is designed to enable the Company to attract, retain and motivate members of the senior management and certain other officers and key employees of the Company, UnionTools, Inc., a Delaware corporation ("UnionTools"), and the Company's other direct and indirect subsidiaries by providing for or increasing their proprietary interest in the Company. The Plan provides for the grant of options ("Options") that qualify as incentive stock options ("Incentive Stock Options") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as Options that do not so qualify ("Non-Qualified Options"), for the grant of stock appreciation rights ("Stock Appreciation Rights") and for the sale or grant of restricted stock ("Restricted Stock"). 2. Stock Subject to the Plan. The maximum number of shares of stock that may be subject to Options or Stock Appreciation Rights granted hereunder and the number of shares of stock that may be sold as Restricted Stock hereunder, shall not in the aggregate exceed 730,000 shares of common stock, $0.001 par value (the "Shares", and individually, a "Share"), of the Company, subject to adjustment under Section 12 hereof. Anything contained herein to the contrary notwithstanding, the aggregate number of Shares with respect to which options or stock appreciation rights may be granted during any calendar year to any individual shall be limited to 90,000. The Shares that may be subject to Options granted under the Plan, and Restricted Stock sold or granted under the Plan, may be authorized and unissued Shares or Shares reacquired by the Company and held as treasury stock. Shares that are subject to the unexercised portions of any Options that expire, terminate or are canceled, and Shares that are not required to satisfy the exercise of any Stock Appreciation Rights that expire, terminate or are canceled, and Shares of Restricted Stock that are reacquired by the Company pursuant to the restrictions thereon, may again become available for the grant of Options or Stock Appreciation Rights and the sale or grant of Restricted Stock under the Plan. If a Stock Appreciation Right is exercised, any Option or portion thereof that is surrendered in connection with such exercise shall terminate and the Shares theretofore subject to the Option or portion thereof shall not be available for further use under the Plan. 3. Administration of the Plan. The Plan shall be administered by the Management Development and Compensation Committee (the "Committee") consisting of not less than two members appointed by the Board of Directors (the "Board") of the Company. If no persons are designated by the Board to serve on the Committee, the Plan shall be administered by the Board and all references herein to the Committee shall refer to the Board. From time to time, the Board shall have the discretion to add, remove or replace members of the Committee and shall have the sole authority to fill vacancies on the Committee. All actions of the Committee shall comply with the provisions of Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 162(m) of the Code. 2 EXHIBIT 10.4 All actions of the Committee shall be authorized by a majority vote thereof at a duly called meeting. The Committee shall have the sole authority, in its absolute discretion, to adopt, amend, and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan, to construe and interpret the Plan, the rules and regulations, and the agreements and other instruments evidencing Options and Stock Appreciation Rights granted and Restricted Stock sold or granted under the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations, and interpretations of the Committee shall be final and conclusive upon the Eligible Employees, as hereinafter defined. Notwithstanding the foregoing, any dispute arising under any Agreement (as defined below) shall be resolved pursuant to the dispute resolution mechanism (if any) set forth in such Agreement. Subject to the express provisions of the Plan, the Committee shall determine the number of Shares subject to grants or sales and the terms thereof, including the provisions relating to the exercisability of Options and Stock Appreciation Rights, lapse and non-lapse restrictions upon the Shares obtained or obtainable under the Plan and the termination and/or forfeiture of Options and Stock Appreciation Rights and Restricted Stock under the Plan. The terms upon which Options and Stock Appreciation Rights are granted and Restricted Stock is sold or granted shall be evidenced by a written agreement executed by the Company and the Participant (as defined below) to whom such Options, Stock Acquisition Rights and Restricted Stock are sold or granted (the "Agreement"). 4. Eligibility. Persons who shall be eligible for grants of Options or Stock Appreciation Rights or sales or grants of Restricted Stock hereunder ("Eligible Employees") shall be employee directors of the Company or UnionTools or the Company's other direct and indirect subsidiaries and those employees of the Company, UnionTools or the Company's other direct and indirect subsidiaries who are members of a select group of management or other key employees that the Committee may from time to time designate to participate under the Plan ("Participants") through grants of Non-Qualified Options, Incentive Stock Options and, if applicable, Stock Appreciation Rights, and/or through sales or grants of Restricted Stock. 5. Terms and Conditions of Options. No Incentive Stock Option shall be granted for a term of more than ten years and no Non-Qualified Option shall be granted for a term of more than ten years and thirty days. Options may, in the discretion of the Committee, be granted with associated Stock Appreciation Rights or be amended so as to provide for associated Stock Appreciation Rights. The Agreement may contain such other terms, provisions and conditions as may be determined by the Committee as long as such terms, conditions and provisions are not inconsistent with the Plan. The Committee shall designate as such those Options intended to be eligible to qualify and be treated as Incentive Stock Options and, correspondingly, those Options not intended to be eligible to qualify and be treated as Incentive Stock Options. 6. Exercise Price of Options. The exercise price per share for each Non-Qualified Option granted hereunder shall be set forth in the Agreement. The exercise price per share of any Option intended to be eligible to qualify and be treated as an Incentive Stock Option shall not be less than the Fair Market Value of a Share on the date such Incentive Stock Option is granted, except that if such Incentive Stock Option is granted to a Participant who on the date of grant is treated under Section 424(d) of the Code as owning stock (not including stock purchasable under outstanding options) possessing more than ten percent of the total combined voting power of all classes of the Company's stock, the exercise price per share shall not be less than one hundred ten 2 3 EXHIBIT 10.4 percent (110%) of the Fair Market Value of a Share on the date such Incentive Stock Option is granted, and the option shall not be exercisable more than four years from the date of grant. Payment for Shares purchased upon exercise of any Option granted hereunder shall be in cash at the time of exercise, except that, if either the Agreement so provides or the Committee so permits, and if the Company is not then prohibited from purchasing or acquiring Shares, such payment may be made in whole or in part with Shares. The Committee also may on an individual basis permit payment or agree to permit payment by such other alternative means as may be lawful, including by delivery of an executed exercise notice together with irrevocable instructions to a broker promptly to deliver to the Company the amount of sale or loan proceeds required to pay the exercise price. 7. Determination of Fair Market Value. The Fair Market Value of a Share for the purposes of the Plan shall mean the average of the high and low sale prices of a Share on the date such determination is required herein, or if there were no sales on such date, the average of the closing bid and asked prices, as reported on the principal United States securities exchange on which the Shares are listed or, in the absence of such listing, on the Nasdaq National Market or, if Shares are not at the time listed on a national securities exchange or traded on the Nasdaq National Market, the value of a Share on such date as determined in good faith by the Committee. 8. Non-Transferability. Except to the extent provided otherwise in the Agreement, any Option granted under the Plan shall by its terms be nontransferable by the Participant other than by will or the laws of descent and distribution (in which case such descendant or beneficiary shall be subject to all terms of the Plan applicable to Participants) and is exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. 9. Incentive Stock Options. The provisions of the Plan are intended to satisfy the requirements set forth in Section 422 of the Code and the regulations promulgated thereunder (including the aggregate fair market value limits set forth in Section 422(d) of the Code) with respect to Incentive Stock Options granted under the Plan. For the purpose of this Section 9, the Fair Market Value of a Share shall be determined at the time the Incentive Stock Option is granted. 10. Stock Appreciation Rights. The Committee may, under such terms and conditions as it deems appropriate, grant to any Eligible Employee selected by the Committee, Stock Appreciation Rights, which may or may not be associated with Options. Upon exercise of a Stock Appreciation Right, the Participant shall be entitled to receive payment of an amount equal to the excess of the Fair Market Value of the underlying Shares on the date of exercise over the exercise price of the Stock Appreciation Rights. Such payment may be made in additional Shares valued at their Fair Market Value on the date of exercise or in cash, or partly in Shares and partly in cash, as the Committee may designate. The Committee may require that any Stock Appreciation Right shall be subject to the condition that the Committee may at any time, in its absolute discretion, not allow the exercise of such Stock Appreciation Right. The Committee may further impose such conditions on the exercise of Stock Appreciation Rights as may be necessary or desirable to comply with Rule 16b-3 under the Exchange Act. 11. Restricted Stock. The Committee may sell or grant Restricted Stock under the Plan (either independently or in connection with the exercise of options or Stock Appreciation Rights under the Plan) to Eligible Employees selected by the Committee. The Committee shall in each case 3 4 EXHIBIT 10.4 determine the number of Shares of Restricted Stock to be sold or granted, the price at which such Shares are to be sold, if applicable, and the terms or duration of the restrictions to be imposed upon those Shares. 12. Adjustments. If at any time the class of Shares subject to the Plan is changed into or exchanged for a different number or kind of shares or securities, as the result of any one or more reorganizations, recapitalizations, stock splits, reverse stock splits, stock dividends or similar events, or in the event of a rights offering to purchase Shares at a price substantially below Fair Market Value, an appropriate adjustment consistent with such change, exchange or offering shall be made in the number, exercise or sale price and/or type of shares or securities for which Options or Stock Appreciation Rights may thereafter be granted and Restricted Stock may thereafter be sold or granted under the Plan in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. Any such adjustment in outstanding Options or in outstanding rights to purchase Restricted Stock shall be made without changing the aggregate exercise price applicable to the unexercised portions of such Options or the aggregate purchase price of such Restricted Stock, as the case may be. 13. Change of Control. Notwithstanding any provision of this Plan to the contrary, in the event of a Change of Control (as defined below), all Options and Stock Appreciation Rights that have been granted by the Board as of the date thereof shall vest and become exercisable, as the case may be, immediately prior to the effective time of any Change of Control and all conditions to exercise thereof shall be deemed to have been met. For purposes of this Section 13, 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. "Change of Control" shall mean: (i) the acquisition by any Person (as defined in Section 13(d) of 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 the Company (a) having 25% or more of the total voting power of the then outstanding voting securities of the Company and (b) having more voting power than the securities of the Company beneficially owned by Oaktree; (ii) during any twelve month period, a change in the Board occurs such that Incumbent Members do not constitute a majority of the Board; (iii) a sale of all or substantially all of the assets of the Company or UnionTools; or (iv) the consummation of a merger or consolidation of the Company 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 the Company prior to such merger or consolidation continue to represent more than 50% of the combined voting power of 4 5 EXHIBIT 10.4 such Person or (B) if such merger or consolidation does not result in a material change in the beneficial ownership of the Company's voting securities. "Incumbent Members" shall mean the members of the Board 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. "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. 14. Investment Representation. Each Agreement may provide that, upon demand by the Committee for such a representation, the Optionee shall deliver to the Committee at the time of any exercise of an Option a written representation that the Shares to be acquired upon such exercise are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such representation prior to the delivery of any Shares issued upon exercise of an Option shall be a condition precedent to the right of the Optionee or such other person to purchase any Shares. 15. Duration of the Plan. Options and Stock Appreciation Rights may not be granted and Restricted Stock may not be sold or granted under the Plan after May , 2007. 16. Amendment and Termination of the Plan. The Board may at any time alter, amend, suspend or terminate the Plan. The Committee may amend the Plan or any Agreement issued hereunder to the extent necessary for any Option or Stock Appreciation Right granted or Restricted Stock sold or granted under the Plan to comply with applicable tax or securities laws. No Option or Stock Appreciation Right may be granted or Restricted Stock sold or granted during any suspension or after the termination of the Plan. No amendment, suspension or termination of the Plan or of any Agreement issued hereunder shall, without the consent of the affected holder of such Option or Stock Appreciation Right or Restricted Stock, alter or impair any rights or obligations in any Option or Stock Appreciation Right or Restricted Stock theretofore granted or sold to such holder under the Plan. 17. Nature of the Plan. The Plan is intended to qualify as a compensatory benefit plan within the meaning of Rule 701 under the Securities Act of 1933. The grant, exercise or sale of securities under the Plan is intended to qualify for the exemption from short swing profits liability under Section 16(b) of the Exchange Act, provided by Rule 16b-3 promulgated thereunder, as such Rule is now in effect or hereafter amended. 5 6 EXHIBIT 10.4 18. Cancellation of Options. Any Option granted under the Plan may be canceled at any time with the consent of the holder and a new Option may be granted to such holder in lieu thereof. 19. Withholding Taxes. Whenever Shares are to be issued with respect to the exercise of Options or amounts are to be paid or income earned with respect to Stock Appreciation Rights or Restricted Stock under the Plan, the Committee in its discretion may require the Participant to remit to the Company, prior to the delivery of any certificate or certificates for such Shares or the payment of any such amounts, all or any part of the amount determined in the Committee's discretion to be sufficient to satisfy federal, state and local withholding tax obligations (the "Withholding Obligation") that the Company or its counsel determines may arise with respect to such exercise, issuance or payment. Pursuant to a procedure established by the Committee, the Participant may (i) request the Company to withhold delivery of a sufficient number of Shares or a sufficient amount of the Participant's compensation or (ii) deliver a sufficient number of previously-issued Shares, to satisfy the Withholding Obligation. 20. No Rights as Stockholder or to Continuance of Employment. No Participant shall have any rights as a Stockholder with respect to any Shares subject to his or her Option or Stock Appreciation Right prior to the date of issuance to him or her of a certificate or certificate for such Shares. The Plan and any Option or Stock Appreciation Rights granted and any Restricted Stock sold or granted under the Plan shall not confer upon any Participant any right with respect to any continuance of employment by the Company, nor shall they interfere in any way with the right of the Company to terminate his or her employment at any time. 21. Compliance with Government Law and Regulations. The Plan, the grant and exercise of Options and Stock Appreciation Rights, and the grant and sale of Restricted Stock thereunder, and the obligation of the Company to sell and deliver Shares under such Options and Stock Appreciation Rights, shall be subject to all applicable laws, rules and regulations and to such approvals by any government or regulatory agency that may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange on which Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any state or federal law, or any ruling or regulation of any governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable. 6 EX-10.5 10 STANDARD FORM OF STOCK OPTION AGREEMENT 1 EXHIBIT 10.5 STOCK OPTION AGREEMENT PURSUANT TO THE ACORN PRODUCTS, INC. 1997 STOCK INCENTIVE PLAN THIS STOCK OPTION AGREEMENT (this "Agreement") is made as of (the "Effective Date"), between Acorn Products, Inc., a Delaware corporation ("API"), and Name (the "Optionee"). R E C I T A L S A. API has adopted the 1997 Stock Incentive Plan (the "Plan"), a copy of which is attached hereto as Exhibit A. B. API desires to grant the Optionee the opportunity to acquire a proprietary interest in API to encourage the Optionee's contribution to the success and progress of the Company (as defined below). C. In accordance with the Plan, the Committee (as defined in the Plan) has, as of the Effective Date, granted to the Optionee an option to purchase shares of Common Stock, $0.001 par value, of API (the "Common Stock") subject to the terms and conditions of the Plan and this Agreement. Such option [is/is not] intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended. AGREEMENTS 1. Definitions. Capitalized terms used herein shall have the following meanings: "Act" is defined in Section 8(a). "Agreement" means this Stock Option Agreement. "Board" is defined in Section 4(a). "Cause" is defined in Section 4(a). "Committee" is defined in Section 3 of the 1997 Stock Incentive Plan. "Common Stock" is defined in recital C. "Company" means API and its Subsidiaries. With respect to the Optionee's employment, including but not limited to policies associated therewith and retirement or termination therefrom, the Company shall mean [INSERT NAME OF ACTUAL EMPLOYER]. "Disability" means the failure by the Optionee to render services to the Company for an aggregate of sixty (60) business days in any continuous period of six (6) months on account of physical or mental disability. 2 EXHIBIT 10.5 "Effective Date" is defined in the preamble. "Exercise Price" is defined in Section 2. "Fiscal Year" means the fiscal year of API. "Option" is defined in Section 2. "Optionee" is defined in the preamble. "Option Shares" is defined in Section 2. "Plan" is defined in recital A. "Retirement" means the Optionee's retirement from employment with the Company in accordance with the Company's retirement policy then in effect. The Optionee's Retirement shall not constitute resignation from employment with the Company. "Subsidiary" means any joint venture, corporation, partnership or other entity as to which API, whether directly or indirectly, has more than 50% of the (i) voting rights or (ii) rights to capital or profits. "Termination Date" means the date on which the Optionee ceases to be employed by the Company for any reason. 2. Grant of Option. API grants to the Optionee the right and option (the "Option") to purchase up to shares of Common Stock (the "Option Shares"), at the purchase price of $ per Share (as such amount may be adjusted, the "Exercise Price"), on the terms and conditions set forth herein. 3. Exercisability. The Optionee's right to exercise the Option shall vest to the extent of one-quarter (1/4) of the number of Option Shares on the date (the "Vesting Date") that is the Effective Date, and one quarter (1/4) of the number of Option Shares on each of the next three (3) succeeding dates that are the anniversary of the Effective Date provided that, on each such Vesting Date, Optionee is employed by the Company. Pursuant to Section 13 of the Plan, upon a Change of Control (as defined in the Plan), the Option shall fully vest and become immediately exercisable immediately prior to the effective time of any Change of Control. 4. Expiration. (a) The vested portion of the Option shall expire upon the earlier of (1) the seventh (7th) anniversary of the Effective Date, or (2) (i) if the Optionee resigns from employment or is terminated from employment by the Company for cause, the Termination Date, (ii) if the Optionee ceases to be employed by the Company due to death or Disability, the one-year anniversary of the Termination Date, or (iii) if the Optionee ceases to be employed by the Company due to Retirement or termination by the Company without cause, the ninetieth (90th) day following the Termination Date. For the purposes of the preceding sentence, "cause" shall mean the Optionee's 3 EXHIBIT 10.5 (i) conviction of, or plea of guilty or nolo contendere to, a felony or a crime involving moral turpitude, (ii) embezzlement or misappropriation of funds or property of the Company, (iii) continued use of alcohol or drugs to an extent that interferes with the performance by the Optionee of his or her employment responsibilities or (iv) willful failure or refusal to perform those duties reasonably assigned or delegated to him or her by the Board of Directors of the Company (the "Board") or his or her supervisor, which failure or refusal continues following (a) the Company giving the Optionee written notice setting forth the facts or events constituting such failure or refusal and (b) a reasonable opportunity to correct the deficiencies or other problems specified in such notice to the reasonable satisfaction of the Board or such supervisor. (b) The Optionee shall not be considered to have ceased to be employed by the Company for purposes of this Agreement if he or she continues to be employed by API or a Subsidiary. (c) The unvested portion of the Option shall expire on the Termination Date. 5. Nontransferability. The Option shall not be transferable by the Optionee otherwise than upon the Optionee's death to Optionee's spouse, child, estate, personal representative, heir or successor or to a trust for the benefit of Optionee's spouse, child or heir, as designated by Optionee in a form of Beneficiary Designation filed by Optionee with the Committee, and the Option is exercisable, during the Optionee's lifetime, only by him or her or, in the event of the Optionee's Disability, Optionee's guardian or legal representative. More particularly (but without limiting the generality of the foregoing), the Option may not be assigned, transferred (except as aforesaid), pledged or hypothecated in any way (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process. Any assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof, and the levy of any attachment or similar process upon the Option that would otherwise effect a change in the ownership of the Option, shall terminate the Option; provided, however, that in the case of the involuntary levy of any attachment or similar involuntary process upon the Option, the Optionee shall have thirty (30) days after notice thereof to cure such levy or process before the Option terminates. This Agreement shall be binding on and enforceable against any person who is a permitted transferee of the Option pursuant to the first sentence of this Section. 6. Adjustments. If the shares of the Common Stock are changed into or exchanged for a different number or kind of shares or securities, as the result of any one or more reorganizations, recapitalizations, mergers, acquisitions, stock splits, reverse stock splits, stock dividends or similar events, or in the event of a rights offering to purchase Common Stock at a price substantially below its fair market value, an appropriate adjustment shall be made in the number and kind of shares or other securities subject to the Option, and the price for each share or other unit of any securities subject to this Agreement, in accordance with Section 12 of the Plan. No fractional interests shall be issued on account of any such adjustment unless the Committee specifically determines to the contrary; provided, however, that in lieu of fractional interests, the Optionee, upon the exercise of the Option in whole or part, shall receive cash in an amount equal to the amount by which the fair market value of such fractional interests exceeds the Exercise Price attributable to such fractional interests. 4 EXHIBIT 10.5 7. Exercise of the Option. Prior to the expiration thereof, the Optionee may exercise the vested portion of the Option from time to time in whole or in part, provided that unless the Committee in its sole discretion shall determine otherwise, each such exercise, other than an exercise for all remaining shares pursuant to this Agreement, shall be for no fewer than one hundred (100) shares. Upon electing to exercise the Option, the Optionee shall deliver to the Secretary of the Company a written and signed notice of such election setting forth the number of Option Shares the Optionee has elected to purchase and shall at the time of delivery of such notice tender cash or a cashier's or certified bank check to the order of the Company for the full Exercise Price of such Option Shares and any amount required pursuant to Section 13 hereof. Alternatively, if the Company is not at the time prohibited from purchasing or acquiring shares of its capital stock, and if the Committee, acting in its sole discretion, grants its approval, the Exercise Price may be paid in whole or in part by delivery of shares of the Common Stock owned by the Optionee. The value of any such shares delivered as payment of the Exercise Price shall be the average of the high and low sale prices of such Common Stock on the date such determination is required herein, or if there were no sales on such date, the average of the closing bid and asked prices, as reported on the principal national securities exchange on which the Company's common stock is listed or, in the absence of such listing, on the Nasdaq National Market or, if the common stock is not at the time listed on a national securities exchange or traded on the Nasdaq National Market, the value of such common stock on such date as determined in good faith by the Committee. The Committee further may, in its discretion, permit payment of the Exercise Price in such form or in such manner as may be permissible under the Plan and under any applicable law. 8. Compliance with Legal Requirements. (a) No Option Shares shall be issued or transferred pursuant to this Agreement unless and until all legal requirements applicable to such issuance or transfer have, in the opinion of counsel to the Company, been satisfied. Such requirements may include, but are not limited to, registering or qualifying such Shares under any state or federal law, satisfying any applicable law relating to the transfer of unregistered securities or demonstrating the availability of an exemption from applicable laws, placing a legend on the Shares to the effect that they were issued in reliance upon an exemption from registration under the Securities Act of 1933, as amended (the "Act"), and may not be transferred other than in reliance upon Rule 144 or Rule 701 promulgated under the Act, if available, or upon another exemption from the Act, or obtaining the consent or approval of any governmental regulatory body. (b) The Optionee understands that the Company intends for the offering and sale of Option Shares to be effected in reliance upon Rule 701 or another available exemption from registration under the Act and intends to file a Form 701 as appropriate, and that the Company is under no obligation to register for resale the Option Shares issued upon exercise of the Option. In connection with any such issuance or transfer, the person acquiring the Option Shares shall, if requested by the Company, provide information and assurances satisfactory to counsel to the Company with respect to such matters as the Company reasonably may deem desirable to assure compliance with all applicable legal requirements, including without limitation, a representation that the Option Shares are being acquired for investment and not with a view to the sale or distribution thereof. 5 EXHIBIT 10.5 9. No Interest in Shares Subject to Option. Neither the Optionee (individually or as a member of a group) nor any beneficiary or other person claiming under or through the Optionee shall have any right, title, interest, or privilege in or to any shares of stock allocated or reserved for the purpose of the Plan or subject to this Agreement except as to such Option Shares, if any, as shall have been issued to such person upon exercise of this Option or any part of it. 10. Plan Controls. The Option hereby granted is subject to, and the Company and the Optionee agree to be bound by, all of the terms and conditions of the Plan as the same may be amended from time to time in accordance with the terms thereof, but no such amendment shall be effective as to the Option without the Optionee's consent insofar as it may adversely affect the Optionee's rights under this Agreement. 11. Not an Employment Contract. Nothing in the Plan, in this Agreement or any other instrument executed pursuant thereto shall confer upon the Optionee any right to employment by API, the Company or any Subsidiary or shall affect the right of the Company to terminate the employment of the Optionee with or without cause (as defined in Section 4). 12. 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. 13. Taxes. The Committee may, in its discretion, make such provisions and take such steps as it may deem necessary or appropriate for the withholding of all federal, state, local and other taxes required by law to be withheld with respect to the issuance or exercise of the Option including, but not limited to, deducting the amount of any such withholding taxes from any other amount then or thereafter payable to the Optionee, requiring the Optionee to pay to the Company the amount required to be withheld or to execute such documents as the Committee deems necessary or desirable to enable it to satisfy its withholding obligations, or any other means provided in the Plan. 14. Notices. All notices, requests, demands and 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. 500 Dublin Avenue Columbus, Ohio 43216-1930 Attention: Secretary If to the Optionee, to the address set forth below the Optionee's signature below. 15. Amendments and Waivers. This Agreement may be amended, and any provision hereof may be waived, only by a writing signed by both parties hereto. 16. Entire Agreement. This Agreement, together with the Plan, sets forth the entire agreement and understanding between the parties as to the subject matter hereof and 6 EXHIBIT 10.5 supersedes all prior oral and written and all contemporaneous oral discussions, agreements and understandings of any kind or nature. 17. Separability. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. 18. Headings. The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. 19. 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. 20. Further Assurances. Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement. 21. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns. 22. Restrictions on Transfers During Lock-Up Period. Prior to [ , 1997], the expiration of the lock-up period in connection with API's initial public offering, Option Shares acquired upon exercise of an Option shall not be transferable or transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) except that the Optionee may transfer such Option Shares to his or her spouse, child, estate, personal representative, heir or successor or to a trust for the benefit of the Optionee or his or her spouse, child or heir. This restriction shall be binding on and enforceable against any person who is a permitted transferee of such Option Shares. The stock certificates issued to evidence such Option Shares upon exercise of the Option hereunder may bear a legend referring to this restriction. 7 EXHIBIT 10.5 IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. ACORN PRODUCTS, INC. By: ____________________________________ Name: __________________________________ Title: _________________________________ OPTIONEE ________________________________________ [Name] Address: [Address] EX-10.9 11 AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.9 ------------------------------------------------------------------------------ AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF MAY 20, 1997 Among UNIONTOOLS, INC. as Borrower HELLER FINANCIAL, INC. as Agent and as a Lender SANWA BUSINESS CREDIT CORPORATION as a Lender FLEET CAPITAL CORPORATION as a Lender PNC BANK, OHIO NATIONAL ASSOCIATION as a Lender BANKBOSTON, N.A., formerly known as The First National Bank Of Boston as a Lender and STAR BANK, N.A. as a Lender ------------------------------------------------------------------------------ 2 TABLE OF CONTENTS SECTION 1 AMOUNTS AND TERMS OF LOANS................................................. 2 1.1 Loans.................................................... 2 1.2 Interest and Related Fees................................ 7 1.3 Other Fees and Expenses.................................. 11 1.4 Payments................................................. 11 1.5 Prepayments.............................................. 12 1.6 Term of the Agreement.................................... 13 1.7 Loan Accounts............................................ 13 1.8 Capital Adequacy and Other Adjustments................... 14 1.9 Taxes.................................................... 14 1.10 Optional Prepayment/Replacement of Lender in Respect of Increased Costs.......................................... 16 SECTION 2 AFFIRMATIVE COVENANTS...................................................... 16 2.1 Compliance With Laws..................................... 16 2.2 Maintenance of Properties; Insurance..................... 17 2.3 Inspection; Lender Meeting............................... 17 2.4 Corporate Existence, Etc................................. 18 2.5 Further Assurances....................................... 18 SECTION 3 NEGATIVE COVENANTS......................................................... 18 3.1 Indebtedness............................................. 18 3.2 Liens and Related Matters................................ 19 3.3 Investments; Joint Ventures.............................. 20 3.4 Contingent Obligations................................... 21 3.5 Restricted Junior Payments............................... 22 3.6 Restriction on Fundamental Changes....................... 23 3.7 Disposal of Assets or Subsidiary Stock................... 24 3.8 Transactions with Affiliates............................. 24 3.9 Management Fees and Compensation......................... 24 3.10 Conduct of Business...................................... 24 3.11 Changes Relating to Subordinated Indebtedness............ 25 3.12 Fiscal Year.............................................. 25 3.13 Press Release; Public Offering Materials................. 25 3.14 Subsidiaries............................................. 25 3.15 Bank Accounts............................................ 25 3.16 Non-Operating Expenditures............................... 25 SECTION 4 FINANCIAL COVENANTS/REPORTING.............................................. 25 4.1 Capital Expenditure Limits............................... 25 (i) 3 4.2 Lease Limits............................................. 26 4.3 EBIDAT................................................... 26 4.4 Fixed Charge Coverage.................................... 26 4.5 Total Interest Coverage.................................. 27 4.6 Total Indebtedness to Operating Cash Flow Ratio.......... 28 4.7 [Intentionally Deleted.]................................. 28 4.8 [Intentionally Deleted.]................................. 28 4.9 [Intentionally Deleted.]................................. 28 4.10 Financial Statements and Other Reports................... 28 4.11 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement............................. 32 SECTION 5 REPRESENTATIONS AND WARRANTIES............................................. 32 5.1 Disclosure............................................... 32 5.2 No Material Adverse Effect............................... 32 5.3 No Default............................................... 33 5.4 Organization, Powers, Capitalization and Good Standing... 33 5.5 Financial Statements..................................... 33 5.6 Intellectual Property.................................... 34 5.7 Investigations, Audits, Etc.............................. 34 5.8 Employee Matters......................................... 34 5.9 Solvency................................................. 34 SECTION 6 DEFAULT, RIGHTS AND REMEDIES............................................... 34 6.1 Event of Default......................................... 34 6.2 Suspension of Commitments................................ 38 6.3 Acceleration............................................. 38 6.4 Performance by Agent..................................... 38 SECTION 7 EFFECTIVENESS OF THIS AGREEMENT AND CONDITIONS TO LOANS.................... 39 7.1 Effectiveness of this Agreement.......................... 39 7.2 Conditions to All Loans.................................. 40 SECTION 8 ASSIGNMENT AND PARTICIPATION............................................... 40 8.1 Assignments and Participations in Loans and Notes........ 40 8.2 Agent.................................................... 42 8.3 Amendments, Consents and Waivers for Certain Actions..... 46 8.4 Set Off and Sharing of Payments.......................... 47 8.5 Disbursement of Funds.................................... 47 8.6 Disbursements of Advances; Payment....................... 47 (ii) 4 SECTION 9 MISCELLANEOUS.............................................................. 50 9.1 Indemnities.............................................. 50 9.2 Amendments and Waivers................................... 50 9.3 Notices.................................................. 51 9.4 Failure or Indulgence Not Waiver; Remedies Cumulative.... 52 9.5 Marshalling; Payments Set Aside.......................... 52 9.6 Severability............................................. 52 9.7 Lenders' Obligations Several; Independent Nature of Lenders' Rights ......................................... 52 9.8 Headings................................................. 52 9.9 Applicable Law........................................... 52 9.10 Successors and Assigns................................... 52 9.11 No Fiduciary Relationship................................ 53 9.12 Construction............................................. 53 9.13 Confidentiality.......................................... 53 9.14 Consent to Jurisdiction and Service of Process........... 53 9.15 Waiver of Jury Trial..................................... 54 9.16 Survival of Warranties and Certain Agreements............ 54 9.17 Entire Agreement......................................... 54 9.18 Counterparts; Effectiveness.............................. 55 SECTION 10 DEFINITIONS................................................................ 55 10.1 Certain Defined Terms.................................... 55 10.2 Other Definitional Provisions............................ 60 (iii) 5 INDEX OF DEFINED TERMS Defined Term Defined in Section ------------ ------------------ Accounting Changes Section 4.11 Acquisition Loans Section 1.1(C) Acquisition Loan Commitment Section 1.1(C) Adjusted Total Indebtedness to Operating Cash Flow Ratio Section 1.2(A) Affected Lender Section 1.10 Affiliate Section 10.1 Agent Section 10.1 Agreement Section 10.1 Asset Disposition Section 10.1 Assigning Lender Section 8.3(C) Bankruptcy Code Section 10.1 Base Rate Section 1.2(A) Base Rate Loans Section 1.2(A) Base Rate Margin Section 1.2(A) Borrower Preamble & Section 10.1 Borrowing Base Section 1.1(A)(1) Borrowing Base Certificate Section 1.1(A)(1) Business Day Section 10.1 Calculation Period Section 1.2(A) Capex Limit Section 4.1 Capital Expenditures Section 4.1 Cash Equivalents Section 3.3 Certificate of Exemption Section 1.9(C) Closing Date Section 10.1 Collateral Section 10.1 Contingent Obligation Section 3.4 Contractual Obligation Section 2.1 Daily Interest Amount Section 8.6(A)(3) Daily Interest Rate Section 8.6(A)(3) Daily Loan Balance Section 8.6(A)(3) Default Section 10.1 EBIDAT Section 4.3 Event of Default Section 6.1 Excess Cash Flow Exhibit 1.5(B) Excess Revolving Loans Section 1.1(A)(2) Expiry Date Section 10.1 Fixed Charge Coverage Section 4.4 Foreign Lenders Section 1.9(C) Funding Date Section 7.2 GAAP Section 10.1 (iv) 6 Heller Preamble Holdings 3rd Recital Indebtedness Section 10.1 Indemnities Section 9.1 Intellectual Property Section 5.6 Interest Period Section 1.2(A)(2) Interest Ratio Section 8.6(A)(3) Interest Settlement Date Section 8.6(A)(3) Investments Section 3.3 IPO 4th Recital IRC Section 10.1 Lender(s) Section 10.1 Lender Addition Agreement Section 10.1 Lender Letter of Credit Section 1.1(B) Letter of Non-Exemption Section 1.9(C) LIBOR Section 1.2(A)(2) LIBOR Breakage Fee Section 1.3(B) LIBOR Loans Section 1.2(A)(2) LIBOR Margin Section 1.2(A) Lien Section 10.1 Loan(s) Section 10.1 Loan Documents Section 10.1 Loan Party Section 10.1 Loan Year Section 10.1 Material Adverse Effect Section 10.1 Maximum Revolving Loan Balance Section 1.1(A)(1) Net Proceeds Section 10.1 Note(s) Section 10.1 Oaktree Section 6.1(T) Obligations Section 10.1 Operating Cash Flow Section 4.6 Original Credit Agreement 1st Recital Permitted Acquisitions Section 3.3 Permitted Encumbrances Section 3.2(A) Person Section 10.1 Pro Forma Total Indebtedness to Operating Cash Flow Ratio Section 1.1(C) Pro Rata Share Section 10.1 Projections Section 10.1 Related Transactions Section 10.1 Related Transactions Documents Section 10.1 Replacement Lender Section 1.10(A) Requisite Lenders Section 10.1 Restricted Junior Payment Section 3.5 Revolving Loan Commitment Section 1.1(A) Revolving Loans Section 1.1(A) (v) 7 Risk Participation Agreement Section 1.1(B) Risk Participation Liability Section 10.1 Scheduled Acquisition Loan Installments Section 1.1(C) Security Documents Section 10.1 Settlement Date Section 8.6(A)(2) Statement Section 4.10(B) Subordinated Indebtedness Section 10.1 Subsidiary Section 10.1 Target Section 1.1(C) Tax Liabilities Section 1.9(A) TCW Notes 5th Recital Total Indebtedness Section 4.6 Total Interest Coverage Section 4.5 (vi) 8 LIST OF EXHIBITS AND SCHEDULES Exhibits - -------- Exhibit 1.2(G) - LIBOR Loan Request Exhibit 1.5(B) - Excess Cash Flow Computation Exhibit 4.10(C) - Compliance Certificate Exhibit 4.10(F) - Borrowing Base Certificate Exhibit 10.1(A) - Notes Schedules - --------- Schedule 3.2(A)(10) - Liens Schedule 3.4 - Contingent Obligations Schedule 3.8 - Affiliate Transactions Schedule 3.10 - Business Description Schedule 3.16 - Non-Operating Expenditures Schedule 5.3 - Violations, Conflicts, Breaches and Defaults Schedule 5.4(A) - Jurisdictions of Organization Schedule 5.4(B) - Capitalization Schedule 5.4(D) - Foreign Qualifications Schedule 5.6 - Intellectual Property Schedule 5.7 - Investigations and Audits Schedule 5.8 - Employee Matters (vii) 9 AMENDED AND RESTATED CREDIT AGREEMENT This AMENDED AND RESTATED CREDIT AGREEMENT is dated as of May 20, 1997 and entered into by and among UNIONTOOLS, INC., a Delaware corporation ("Borrower"), with its principal place of business at 500 Dublin Avenue, Columbus, Ohio 43216, HELLER FINANCIAL, INC., a Delaware corporation ("Heller"), with offices at 500 West Monroe Street, Chicago, Illinois 60661, in its capacity as a Lender (as hereinafter defined in Section 10), and in its capacity as Agent (as hereinafter defined in Section 10) for all Lenders, and such other Persons executing this Agreement as Lenders. R E C I T A L S: WHEREAS, Borrower, Agent and Lenders are parties to that certain Credit Agreement dated as of December 27, 1996, as amended and modified by Amendment No. 1 to Credit Agreement dated as of February 28, 1997 (as so amended and modified, the "Original Credit Agreement"), pursuant to which Lenders extended a certain term credit facility, revolving credit facility and acquisition credit facility to Borrower, to fund the repayment of certain indebtedness of Borrower, to provide working capital financing for Borrower, to fund certain permitted acquisitions, and to provide funds for other general corporate purposes of Borrower; and WHEREAS, Borrower secured all of its Obligations (as hereinafter defined in Section 10) under the Loan Documents (as hereinafter defined in Section 10) by granting to Agent, for the benefit of Agent and Lenders, a security interest in and lien upon substantially all of its personal and real property; and WHEREAS, Acorn Products, Inc., a Delaware corporation formerly known as Vision Hardware Group, Inc. ("Holdings"), which owns all of the issued and outstanding capital stock of Borrower, guaranteed all of the Obligations of Borrower to Lenders under the Loan Documents and pledged to Agent, for the benefit of Agent and Lenders, all of the capital stock of Borrower to secure such guaranty; and WHEREAS, Holdings intends to make an initial public offering of its Common Stock pursuant to Registration Statement Number 333-25325 filed on Form S-1 pursuant to the Securities Act of 1933 ("IPO"); and WHEREAS, one-half of the net proceeds of the IPO shall be used first to pay accrued but unpaid dividends on the Series A Preferred Stock of Holdings, second to redeem such Series A Preferred Stock, third to pay accrued but unpaid interest on the $25,000,000 Subordinated Unsecured Promissory Note and the $6,304,167 Temporary Subordinated Unsecured Promissory Note, both dated May 26, 1994 and executed by Holdings to the order of TCW Special Credits, a California general partnership (collectively, the "TCW Notes"), and fourth to repay the principal balance of the TCW Notes; and any balance of the TCW Notes and 10 such Series A Preferred Stock remaining outstanding shall be converted into Common Stock of Holdings at the IPO price; and WHEREAS, the remainder of the net proceeds of the IPO shall be used first to satisfy, in whole or in part, the principal balance of the Term Loan (as defined in the Original Credit Agreement), and then to satisfy, in whole or in part, the principal balance of the Acquisition Loans; and any remaining principal balance of such Term Loan shall be added to the principal balance of the Acquisition Loans; and WHEREAS, the parties now desire to amend and restate the Original Credit Agreement upon the terms and provisions set forth below; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrower, Agent and Lenders agree as follows: SECTION 1 AMOUNTS AND TERMS OF LOANS 1.1 Loans. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Borrower contained herein: (A) Revolving Loans. (1) Subject to the satisfaction of the terms and conditions set forth herein and in reliance upon the representations and warranties set forth herein, each Lender agrees, severally and not jointly, to lend to Borrower from the Closing Date to the Expiry Date its Pro Rata Share of the loans requested by Borrower to be made by Lenders under this subsection 1.1(A), up to an aggregate maximum for all Lenders of $30,000,000 (as the same may be reduced from time to time hereunder, the "Revolving Loan Commitment"). Advances or amounts outstanding under the Revolving Loan Commitment will be called "Revolving Loans". Revolving Loans may be repaid and reborrowed. The "Maximum Revolving Loan Balance" will be the lesser of (a) the "Borrowing Base" (as calculated on Exhibit 4.10(F), the "Borrowing Base Certificate") or (b) the Revolving Loan Commitment less outstanding Risk Participation Liability. If at any time the outstanding Revolving Loans exceed the Maximum Revolving Loan Balance (as it may be deemed increased from time to time pursuant to subsection 1.1(A)(2)), Lenders shall not be obligated to make Revolving Loans and issue Lender Letters of Credit and Risk Participation Agreements, and Revolving Loans must be repaid immediately, in an amount sufficient to eliminate any excess. Revolving Loans may be requested in any amount with one (1) Business Day prior notice required for amounts greater than $5,000,000. For amounts less than $5,000,000, written or telephonic notice must be provided by noon CT on the day on which the Loan is to be made. All LIBOR Loans require three (3) Business Days notice. All Loans requested telephonically must be confirmed in writing within twenty-four (24) hours. Neither Agent nor any Lender shall incur any liability to Borrower for acting upon any telephonic notice that Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Borrower. 2 11 (2) If Borrower requests that Lenders make, or permit to remain outstanding, Revolving Loans in an aggregate amount in excess of the Borrowing Base, Requisite Lenders may in their discretion elect to cause all Lenders to make, or permit to remain outstanding, such excess Revolving Loans (such Revolving Loans in excess of the Borrowing Base being referred to as "Excess Revolving Loans"), provided that, Requisite Lenders may not cause all Lenders to make, or permit to remain outstanding, aggregate Revolving Loans in excess of the Revolving Loan Commitment or Excess Revolving Loans in excess of 15% of the Revolving Loan Commitment. If Excess Revolving Loans are made, or permitted to remain outstanding, pursuant to the preceding sentence, then (a) the Maximum Revolving Loan Balance shall be deemed increased by the amount of such Excess Revolving Loans, but only for so long as Requisite Lenders allow such Excess Revolving Loans to be outstanding and (b) all Lenders that have committed to make Revolving Loans shall be bound to make, or permit to remain outstanding, such Excess Revolving Loans based upon their Pro Rata Shares in accordance with the terms of this Agreement. If Excess Revolving Loans remain outstanding for more than ninety (90) days during any 360-day period, Revolving Loans must be repaid immediately, in an amount sufficient to eliminate all of such Excess Revolving Loans. (B) Letters of Credit and Risk Participation Agreements. The Revolving Loan Commitment may, in addition to advances under the Revolving Loan, be utilized, upon the request of Borrower, for (i) the issuance of letters of credit for the benefit of Borrower by Agent, including without limitation a letter of credit issued for the account of Holdings in the amount of $1,000,000 with respect to certain insurance maintained for the benefit of Borrower (each such letter of credit, a "Lender Letter of Credit") or (ii) the issuance by Agent of risk participation agreements (each such agreement, a "Risk Participation Agreement") to confirm payment to banks which issue letters of credit for the account of Borrower. (1) Maximum Amount. The aggregate amount of Risk Participation Liability with respect to all Lender Letters of Credit and Risk Participation Agreements outstanding for the account of Borrower at any time shall not exceed $3,000,000. (2) Reimbursement. Borrower shall be irrevocably and unconditionally obligated forthwith without presentment, demand, protest or other formalities of any kind, to reimburse Agent for any amounts paid by Agent with respect to a Lender Letter of Credit or a Risk Participation Agreement issued for the account of Borrower, including all fees, costs and expenses paid by Agent to any bank that issues letters of credit. Borrower hereby authorizes and directs Agent, at Agent's option, to make a Revolving Loan in the amount of any payment made by Agent with respect to any Lender Letter of Credit or any Risk Participation Agreement. All amounts paid by Agent with respect to any Lender Letter of Credit or Risk Participation Agreement that are not immediately repaid by Borrower with the proceeds of a Revolving Loan or otherwise shall bear interest at the interest rate applicable to Revolving Loans calculated using the Base Rate. Each Lender agrees to fund its Pro Rata Share of any Revolving Loan made pursuant to this subsection 1.1(B)(2). If no such Revolving Loan is made, each Lender agrees to purchase, and shall be deemed to have purchased, a participation in such Lender Letter of Credit or Risk Participation Agreement, as the case may be, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Lender Letter of Credit or Risk Participation Agreement, as the case may be, and each Lender agrees to pay to Agent such Lender's Pro Rata 3 12 Share of any payments made by Agent under such Lender Letter of Credit and Risk Participation Agreement. The obligation of each Lender to deliver to Agent an amount equal to its respective Pro Rata Share pursuant to the preceding two (2) sentences shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in subsection 7.2. If any Lender fails to make available to Agent the amount of such Lender's Pro Rata Share of any payments made by Agent in respect of such Lender Letter of Credit or Risk Participation Agreement as provided in this subsection 1.1(B)(2), Agent shall be entitled to recover such amount on demand from such Lender together with interest at the Base Rate. (3) Conditions of Issuance of Letters of Credit or Risk Participation Agreements. In addition to all other terms and conditions set forth in this Agreement, the issuance by Agent of any Lender Letter of Credit or Risk Participation Agreement shall be subject to the conditions precedent that the Lender Letter of Credit, the Risk Participation Agreement or the letter of credit for which Borrower requests a Risk Participation Agreement shall support a transaction entered into in the ordinary course of Borrower's business and shall be in such form, be for such amount, and contain such terms and conditions as are reasonably satisfactory to Agent. The expiration date of each Lender Letter of Credit and each letter of credit to be issued under a Risk Participation Agreement shall be on a date which is the earlier of (a) one year from its date of issuance, or (b) the thirtieth (30th) day before the date set forth in clause (c) of the definition of the term Expiry Date. Each Risk Participation Agreement shall provide that the agreement terminates and all demand or claims for payment must be presented by a date certain, which date will be at least thirty (30) days before the date set forth in clause (c) of the definition of the term Expiry Date. (4) Request for Lender Letters of Credit or Risk Participation Agreements. Borrower shall give Agent at least three (3) Business Days prior notice specifying the date a Lender Letter of Credit or Risk Participation Agreement (or a letter of credit to be issued under a Risk Participation Agreement) is requested to be issued, identifying the beneficiary and describing the nature of the transactions proposed to be supported thereby. After the issuance of a Risk Participation Agreement in favor of a bank that will issue letters of credit on behalf of Borrower, Borrower shall give Agent at least two (2) Business Days prior written notice specifying the date a letter of credit is to be issued under a Risk Participation Agreement (five (5) Business Days in the case of the first letter of credit to be issued under a particular Risk Participation Agreement), identifying the beneficiary and describing the nature of the transactions proposed to be supported thereby. Any notice described in this paragraph shall be accompanied by the form of the Lender Letter of Credit or the letter of credit to which such Risk Participation Agreement relates. (C) Acquisition Loans. Subject to the satisfaction of the terms and conditions set forth herein and in reliance upon the representations and warranties set forth herein, each Lender agrees, severally and not jointly, to lend to Borrower from the Closing Date to the third anniversary thereof its Pro Rata Share of the loans requested by Borrower (upon not less than thirty (30) days prior written notice to Agent) to be made by Lenders under this subsection 1.1(C) (the "Acquisition Loans"), up to an aggregate maximum for all Lenders of $35,000,000 (the "Acquisition Loan Commitment"). An Acquisition Loan shall be made only upon the 4 13 acquisition by Borrower of all of the issued and outstanding capital stock of another Person, or of all or substantially all of the assets of another Person or of a division of another Person (a "Target") and shall be limited in amount to the purchase price of such acquisition, and the proceeds of the Acquisition Loan may be used only to fund such purchase price. Amounts borrowed under this subsection 1.1(C) and repaid may not be reborrowed, except for such amounts repaid from the net proceeds of the IPO as set forth in the Recitals hereof. The obligations of Lenders to make any Acquisition Loan are further subject to the following conditions precedent: (1) At least ten (10) Business Days prior to the acquisition of the subject Target, Agent shall have received a certificate demonstrating compliance with subsections 1.1(C)(3), (4), (5), (6) and (7); (2) Agent shall have received such financial and other information concerning the subject Target as Agent may reasonably request; (3) Requisite Lenders shall have approved the acquisition of the subject Target, provided, however, that such approval shall not be required if the purchase price for the subject Target is not greater than $7,500,000 and the sum of the purchase price for the subject Target plus the purchase price(s) for any other Target(s) previously acquired by Borrower during the then current Loan Year, is not greater than $15,000,000; (4) The subject Target's EBIDAT (as defined in Exhibit 4.10(C)) during the twelve (12) months immediately preceding the acquisition of the subject Target, plus those expenses deducted in calculating such earnings that would be eliminated upon such acquisition (as agreed to by Requisite Lenders), shall have been positive; (5) Based upon the financial performance of both Borrower and the subject Target during the twelve (12) months immediately preceding the acquisition of the subject Target, the combined financial performance of Borrower and the subject Target would comply with the financial covenants set forth in Article 4 hereof after giving effect to the Acquisition Loan; (6) The Maximum Revolving Loan Balance as of the acquisition of the subject Target must exceed the Revolving Loans then outstanding by not less than the applicable amount set forth below (based upon the period in which such acquisition occurs), after giving effect to such acquisition:
Period Amount ------ ------ January 1 through March 31 of any calendar year $6,000,000 April 1 through June 30 of any calendar year $7,000,000 July 1 through September 30 of any calendar year $9,000,000 October 1 through December 31 of any calendar year $8,000,000
5 14 (7) Based upon the financial performance of both Borrower and the subject Target during the twelve (12) months immediately preceding the acquisition of the subject Target, the Pro Forma Total Indebtedness to Operating Cash Flow Ratio of Borrower and the subject Target on a pro forma combined basis would not be more than 4.25:1 as of the last day of any month in the first Loan Year, 4.00:1 as of the last day of any month in the second Loan Year and 3.75:1 as of the last day of any month in the third Loan Year. For the purposes of this subsection 1.1(C)(7), "Pro Forma Total Indebtedness to Operating Cash Flow Ratio" means the ratio of (i) the sum of (a) the average daily principal balance of the Revolving Loans during the twelve (12) month period ending on the last day of the subject month (for any month preceding the Closing Date, such average daily principal balance shall be deemed to be $13,000,000), plus (b) the aggregate outstanding principal balance of the Acquisition Loans, the Lender Letters of Credit and Risk Participation Agreements as of the last day of such month plus (c) all other Indebtedness for borrowed money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of such month, to (ii) Operating Cash Flow (calculated as illustrated on Exhibit 4.10(C)) for the twelve (12) month period ending on the last day of such month; (8) The subject Target shall be in the same or similar type of business as Borrower; (9) No event shall have occurred and be continuing or would result from the acquisition of the subject Target or the Acquisition Loan which would reasonably be expected to cause a Material Adverse Effect; and (10) No event shall have occurred and be continuing or would result from the acquisition of the subject Target or the Acquisition Loan that would constitute an Event of Default or a Default. On the dates indicated below, Borrower shall repay the Acquisition Loans through periodic installments in the amounts equal to the applicable percentage of the Acquisition Loans outstanding as of the third anniversary of the Closing Date ("Scheduled Acquisition Loan Installments").
Date Percentage ---- ---------- Each September 30th of calendar years 2000, 2001 and 2002 8.333% Each December 31st of calendar years 2000, 2001 and 2002 2.083% Each March 31st of calendar years 2001, 2002 and 2003 2.083% Each June 30th of calendar years 2001 and 2002 12.50%
6 15 On June 30, 2003, the entire remaining principal balance of the Acquisition Loans, together with all accrued but unpaid interest thereon, shall be due and payable in full. (D) Notes. Borrower shall execute and deliver to each Lender (i) a Note to evidence the Revolving Loans, such Note to be in the principal amount of such Lender's Pro Rata Share of the Revolving Loan Commitment and (ii) a Note to evidence the Acquisition Loans, such Note to be in the principal amount of such Lender's Pro Rata Share of the Acquisition Loan Commitment. In the event of an assignment under subsection 8.1, Borrower shall, upon surrender of the assigning Lender's Notes, issue new Notes to reflect the interests of the assigning Lender and the Person to which interests are to be assigned. 1.2 Interest and Related Fees. (A) Interest. From the date the Loans are made and the date the other Obligations become due, depending upon Borrower's election from time to time, as permitted herein, to have portions of the Loans accrue interest based upon the LIBOR, the Loans and the other Obligations shall bear interest at the rates set forth in paragraphs (1) and (2)below: (1) If a Base Rate Loan, then at the sum of the Base Rate plus the Base Rate Margin then applicable. (2) If a LIBOR Loan, then at the sum of the LIBOR plus the LIBOR Margin then applicable. "Base Rate" means a variable rate of interest per annum equal to the rate of interest from time to time published by the Board of Governors of the Federal Reserve System in Federal Reserve statistical release H.15 (519) entitled "Selected Interest Rates" as the Bank prime loan rate. Base Rate also includes rates published in any successor publications of the Federal Reserve System reporting the Bank prime loan rate or its equivalent. The statistical release generally sets forth a Bank prime loan rate for each business day. The applicable Bank prime loan rate for any date not set forth shall be the rate set forth for the last preceding date. In the event the Board of Governors of the Federal Reserve System ceases to publish a Bank prime loan rate or equivalent, the term "Base Rate" shall mean a variable rate of interest per annum equal to the highest of the "prime rate," "reference rate," "base rate" or other similar rate as determined by Agent announced from time to time by any of Bankers Trust Company, The Chase Manhattan Bank, National Association and Citibank, N.A. (with the understanding that any such rate may merely be a reference rate and may not necessarily represent the lowest or best rate actually charged to any customer by such bank). "Base Rate Loans" means Loans bearing interest at rates determined by reference to the Base Rate. "Base Rate Margin" shall mean, (i) for the period commencing on the Closing Date and ending on January 1, 1998, three quarters of one percent (0.75%) per annum, and (ii) for each period commencing on January 2, 1998, or any subsequent first Business Day of a calendar quarter after Agent has received a new Compliance Certificate delivered by Borrower 7 16 pursuant to subsection 4.10(C) (each such First Business Day being hereinafter referred to as an "Adjustment Date"), and ending on the day immediately preceding each subsequent Adjustment Date (each such period being hereinafter referred to as a "Calculation Period"), the applicable percent per annum set forth in the pricing table below opposite the Adjusted Total Indebtedness to Operating Cash Flow Ratio calculated for such Calculation Period. "LIBOR" means, for each Interest Period, a rate equal to: (a) the rate of interest determined by Agent at which deposits in U.S. dollars for the relevant Interest Period are offered based on information presented on the Reuters Screen LIBO Page as of 11:00 a.m. (London time) on the day which is two (2) Business Days prior to the first day of such Interest Period, provided that if at least two such offered rates appear on the Reuters Screen LIBO Page in respect of such Interest Period, the arithmetic mean of all such rates will be the rate used, provided, further, that if fewer than two offered rates appear or if Reuters ceases to provide LIBOR quotations, such rate shall be the rate of interest at which deposits in U.S. dollars are offered for the relevant Interest Period by any of Bankers Trust Company, The Chase Manhattan Bank, National Association or Citibank, N.A. to prime banks in the London interbank market, divided by (b) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on the day which is two (2) Business Days prior to the beginning of such Interest Period (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other governmental authority having jurisdiction with respect thereto, as now and from time to time in effect) for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) which are required to be maintained by a member bank of the Federal Reserve System; such rate to be rounded upward to the next whole multiple of one-sixteenth of one percent (.0625%). "LIBOR Loans" means Loans bearing interest at rates determined by reference to the LIBOR. "LIBOR Margin" shall mean, (i) for all LIBOR Loans having an Interest Period commencing during the period commencing on the Closing Date and ending on the day immediately preceding the first Adjustment Date, two and three quarters percent (2.75%) per annum, and (ii) for all LIBOR Loans having an Interest Period commencing during a subsequent period commencing on an Adjustment Date and ending on the day immediately preceding the subsequent Adjustment Date (each such period being hereinafter referred to as a "Calculation Period"), the applicable percent per annum set forth in the pricing table below opposite the Adjusted Total Indebtedness to Operating Cash Flow Ratio calculated for such Calculation Period. For the purposes of this subsection 1.2(A), "Adjusted Total Indebtedness to Operating Cash Flow Ratio" means, for any Calculation Period, the ratio of (i) the sum of (a) the average daily principal balance of the Revolving Loans during the twelve (12) month period ending on the last day of the month for which the Compliance Certificate most recently delivered pursuant to subsection 4.10(C) was prepared, plus (b) the aggregate outstanding principal balance of the Acquisition Loans, the Lender Letters of Credit and Risk Participation Agreements as of the last day of such month plus (c) all other Indebtedness for borrowed money of the Borrower 8 17 and its Subsidiaries on a consolidated basis as of the last day of such month, to (ii) Operating Cash Flow (calculated as illustrated on Exhibit 4.10(C)) for the twelve (12) month period ending on the last day of such month. PRICING TABLE
- ---------------------------------------------------------------------------------------- Adjusted Total Indebtedness to Operating Cash Flow Ratio Base Rate Margin LIBOR Margin - ---------------------------------------------------------------------------------------- Greater than 3.75:1 0.75% 2.75% - ---------------------------------------------------------------------------------------- Equal to or greater than 3.00:1 but equal to or less 0.50% 2.50% than 3.75:1 - ---------------------------------------------------------------------------------------- Less than 3:00:1 0.25% 2.25% - ----------------------------------------------------------------------------------------
If Borrower shall fail to deliver a Compliance Certificate by the date required pursuant to subsection 4.10(C), effective as of the first Business Day of the immediately succeeding calendar month and continuing through the day preceding the next succeeding Adjustment Date, each applicable Base Rate Margin and each applicable LIBOR Margin shall be conclusively presumed to equal the highest Base Rate Margin and the highest LIBOR Margin specified in the pricing table set forth above. Each LIBOR Loan may be obtained for a one (1), two (2), three (3), or six (6) month period (each being an "Interest Period"). With respect to all LIBOR Loans: (a) the Interest Period will commence on the date that the LIBOR Loan is made or the date on which a Base Rate Loan is converted into a LIBOR Loan, as applicable, or in the case of immediately successive Interest Periods, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires, (b) if the Interest Period expires on a day that is not a Business Day, then it will expire on the next Business Day, and (c) no Interest Period shall extend beyond the date set forth in clause (c) of the definition of the term "Expiry Date." If the introduction of or the interpretation of any law, rule, or regulation would increase the reserve requirement or otherwise increase the cost to any Lender of making or maintaining a LIBOR Loan, then Agent, on behalf of all affected Lenders, shall submit a certificate to Borrower demonstrating the calculation of the increased cost and requiring payment thereof to Agent for the benefit of the affected Lenders within ten (10) days after the date of the certificate. There are no limitations on the number of times such certificate may be submitted. (B) Unused Line Fees. On the first day of each month, Borrower shall pay Agent, for the benefit of all Lenders committed to make Revolving Loans and Acquisition Loans (based upon their respective Pro Rata Shares), an unused line fee in an amount equal to one-half of one percent (0.5%) per annum of the sum of (1) the amount by which the Revolving Loan Commitment exceeded the average daily outstanding Revolving Loans, Lender Letters of Credit and Risk Participation Agreements during the immediately preceding month, plus (2) the amount 9 18 by which the Acquisition Loan Commitment exceeded the average daily outstanding Acquisition Loans during the immediately preceding month. (C) Risk Participation Fee. From the Closing Date, Borrower shall pay Agent, for the benefit of all Lenders committed to make Revolving Loans (based upon their respective Pro Rata Shares), a fee for each Lender Letter of Credit and each Risk Participation Agreement, from the date of issuance to the date of termination, equal to (1) the average daily outstanding amount of the Risk Participation Liability, multiplied by (2) two and three quarters percent (2.75%) per annum. Such fee is to be paid monthly in arrears on the first day of each month. Borrower shall also reimburse Agent for any and all fees and expenses paid to the issuer of any letter of credit that is in any way related to a Risk Participation Agreement. (D) Computation of Interest and Related Fees. Interest on all Loans and all other Obligations and any fees set forth in this subsection 1.2 shall be calculated daily on the basis of a three hundred sixty (360) day year for the actual number of days elapsed in the period during which it accrues. The date of funding a Base Rate Loan and the first day of an Interest Period with respect to a LIBOR Loan shall be included in the calculation of interest. The date of payment of a Base Rate Loan and the last day of an Interest Period with respect to a LIBOR Loan shall be excluded from the calculation of interest. If a Loan is repaid on the same day that it is made, one (1) days' interest shall be charged. Interest on all Base Rate Loans is payable in arrears on the first day of each calendar quarter and on the Expiry Date, whether by acceleration or otherwise. Interest on LIBOR Loans shall be payable on the last day of the applicable Interest Period, unless the Interest Period is greater than three (3) months, in which case interest will be payable on the last day of each three (3) month interval. In addition, interest on LIBOR Loans is due on the Expiry Date, whether by acceleration or otherwise. (E) Default Rate of Interest. At the election of Agent or Requisite Lenders, after the occurrence of an Event of Default and for so long as it continues, the Loans and other Obligations shall bear interest at a rate that is two percent (2%) in excess of the rates otherwise payable under this Agreement. Furthermore, during any period in which any Event of Default is continuing, as the Interest Periods for LIBOR Loans then in effect expire, such Loans shall be converted at Agent's discretion into Base Rate Loans and the LIBOR election will not be available to Borrower until all Events of Default are cured or waived. (F) Excess Interest. Under no circumstances will the rate of interest chargeable be in excess of the maximum amount permitted by law. If excess interest is charged and paid in error, then the excess amount will be promptly refunded. (G) LIBOR Rate Election. Borrower may request, upon not less than three (3) Business Days' notice to Agent, that Revolving Loans to be made be LIBOR Loans and that outstanding portions of the Acquisition Loans be converted to LIBOR Loans. Agent shall provide a copy of any such request to each Lender at least two (2) Business Days prior to the commencement of the subject Interest Period. Any such request, which will be made by submitting a LIBOR Loan request, in the form of Exhibit 1.2(G), shall pertain to Loans in an aggregate minimum amount of $500,000 and integral multiples of $10,000 in excess thereof. Once given, a LIBOR Loan request shall be irrevocable and Borrower shall be bound thereby. 10 19 Upon the expiration of an Interest Period, in the absence of a new LIBOR Loan request submitted to Agent not less than three (3) Business Days prior to the end of such Interest Period, the LIBOR Loan then maturing shall be automatically converted to a Base Rate Loan. There may be no more than six (6) LIBOR Loans outstanding at any one time. Loans which are not the subject of a LIBOR Loan request shall be Base Rate Loans. 1.3 Other Fees and Expenses. (A) Certain Fees. Borrower shall pay to Heller, individually, on each December 30th, the fees specified in that certain letter agreement dated November 20, 1996 between Borrower and Heller. On the Closing Date, Borrower shall pay Agent, for the benefit of all Lenders (based upon their respective Pro Rata Shares), an amendment fee in the amount of $75,000. (B) LIBOR Breakage Fee. Upon any payment of a LIBOR Loan on any day that is not the last day of the Interest Period applicable thereto (regardless of the source of such prepayment and whether voluntary, by acceleration or otherwise) or if for any reason (other than a default by Agent or Lenders) a borrowing or advance of, or conversion to or continuation of, a LIBOR Loan does not take place on the date specified therefor, Borrower shall pay Agent, for the benefit of all affected Lenders, an amount (the "LIBOR Breakage Fee") equal to the amount of any losses, expenses and liabilities (including, without limitation, any loss (including interest paid) sustained by each such affected Lender in connection with the re-employment of such funds) that any such affected Lender may sustain as a result of the payment of such LIBOR Loan on a day that is not the last day of the Interest Period applicable thereto or as a result of a borrowing or advance of, or conversion to or continuation of, a LIBOR Loan not taking place on the date specified therefor. (C) Expenses and Attorneys Fees. Borrower agrees to promptly pay the reasonable fees, out-of-pocket costs and expenses (including those of attorneys) incurred by Agent in connection with any matters contemplated by or arising out of the Loan Documents, in connection with the examination, review, due diligence investigation, documentation, negotiation and closing of the transactions contemplated herein and in connection with the continued administration of the Loan Documents including any amendments, modifications and waivers. Borrower agrees to promptly pay all fees, costs and expenses incurred by Agent and Lenders in connection with any action to enforce any Loan Document or to collect any payments due from Borrower or any other Loan Party. All fees, costs and expenses for which Borrower is responsible under this subsection 1.3(C) shall be deemed part of the Obligations when incurred, payable in accordance with the final two sentences of subsection 1.4 and secured by the Collateral. 1.4 Payments. All payments by Borrower of the Obligations shall be made in same day funds and delivered to Agent, for the benefit of Agent and Lenders, as applicable, by wire transfer to the following account or such other place as Agent may from time to time designate. 11 20 ABA No. 0710-0001-3 Account Number 55-00540 The First National Bank of Chicago One First National Plaza Chicago, IL 60670 Reference: Heller Corporate Finance Group for the benefit of UnionTools, Inc. Borrower shall receive credit on the day of receipt for funds received by Agent by 1:00 p.m. CST. In the absence of timely receipt, such funds shall be deemed to have been paid on the next Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, the payment may be made on the next succeeding Business Day and such extension of time shall be included in the computation of the amount of interest and fees due hereunder. Borrower hereby authorizes Lenders to make Revolving Loans, on the basis of their Pro Rata Shares, for the payment of Scheduled Acquisition Loan Installments, interest, unused line fees, amendment fees, Risk Participation Liability fees, LIBOR Breakage Fees, and Risk Participation Liability payments. Prior to an Event of Default, other fees, costs and expenses (including those of attorneys) reimbursable to Agent pursuant to subsections 1.3(A) and (C) or elsewhere in any Loan Document may be debited to the Revolving Loan after fifteen (15) days notice. After the occurrence of an Event of Default, no prior notice will be required, but Agent will promptly notify Borrower of the amount of any such debit. 1.5 Prepayments. (A) Voluntary Prepayment of Term Loan and Acquisition Loans. At any time, Borrower may prepay the Acquisition Loans in whole or in part, in minimum amounts of $500,000, without penalty, but with LIBOR Breakage Fees, if applicable, after not less than five (5) Business Days' prior written notice to Agent specifying how such prepayment shall be applied. (B) Prepayments from Excess Cash Flow. On or before the first (1st) day of the December following the end of each of its fiscal years, commencing with the fiscal year ending July 31, 1998, Borrower shall prepay the Loans in an amount equal to fifty percent (50%) of the Excess Cash Flow for such fiscal year pursuant to the calculation on Exhibit 1.5(B). The calculation shall be based on the audited financial statements for Borrower. The payments shall be applied in accordance with subsection 1.5(E). (C) Prepayments from Asset Dispositions. Immediately upon receipt of the Net Proceeds in excess of $250,000 for any single transaction or series of transactions, or in excess of $500,000 in the aggregate during any fiscal year of Borrower, Borrower shall repay the outstanding principal balance of the Revolving Loan by the amount of any reduction in the Borrowing Base attributable to the Asset Disposition giving rise to such Net Proceeds. Borrower or any Subsidiary may, upon prior written notice to Agent, reinvest all remaining Net Proceeds of such Asset Disposition, within ninety (90) days, in productive replacement assets of a kind 12 21 then used or usable in the business of Borrower. If Borrower does not intend to so reinvest such Net Proceeds or if the period set forth in the immediately preceding sentence expires without Borrower having reinvested such Net Proceeds, Borrower shall prepay the Loans in an amount equal to the remaining Net Proceeds of such Asset Disposition. The payments shall be applied in accordance with subsection 1.5(E). (D) Prepayment from Issuance of Securities. Unless otherwise agreed by Requisite Lenders, immediately upon the receipt by Holdings, Borrower or any of its Subsidiaries of the proceeds of the issuance of equity securities (other than (1) proceeds of the IPO and any other issuance of equity securities received on or before the Closing Date, (2) proceeds from the issuance of equity securities to members of the management of Borrower and (3) proceeds of the issuance of equity securities to Borrower or any Subsidiary), Borrower shall prepay the Loans in an amount equal to such proceeds, net of underwriting discounts and commissions and other reasonable costs associated therewith. The prepayments under this subsection 1.5(D) shall be applied in accordance with subsection 1.5(E). (E) Application of Proceeds. With respect to the mandatory prepayments described in subsections 1.5(B), 1.5(C) and 1.5(D), such prepayments shall first be applied in payment of the Acquisition Loans pro rata against all remaining Scheduled Acquisition Loan Installments and, at any time after the Acquisition Loans shall have been prepaid in full, such prepayments shall be applied to reduce the outstanding principal balance of the Revolving Loans and as a permanent reduction of the Revolving Loan Commitment. 1.6 Term of the Agreement. All of the Obligations shall become due and payable as otherwise set forth herein, but in any event, all of the remaining Obligations shall become due and payable on the date set forth in clause (c) of the definition of the term "Expiry Date." Upon such date and following repayment in full of the Obligations, this Agreement will terminate. Notwithstanding any such termination, until all Obligations have been fully paid and satisfied, Agent, for the benefit of Agent and Lenders, shall be entitled to retain the security interests in the Collateral granted under the Security Documents and the ability to exercise all rights and remedies available to them under the Loan Documents and applicable laws. 1.7 Loan Accounts. Agent will maintain loan account records for (a) all Loans, interest charges and payments thereof, (b) all Risk Participation Liability, (c) the charging and payment of all fees, costs and expenses and (d) all other debits and credits pursuant to this Agreement. The balance in the loan accounts shall be presumptive evidence of the amounts due and owing to Lenders, provided that any failure by Agent to so record shall not limit or affect the Borrower's obligation to pay. Within five (5) days of the first of each month, Agent shall provide a statement for each loan account setting forth the principal of each account and interest due thereon. Borrower must deliver a written objection within sixty (60) days after receipt of the statement or the statement will be presumptive evidence of the Obligations absent manifest error. During the continuance of an Event of Default, Borrower irrevocably waives the right to direct the application of any and all payments and Borrower hereby irrevocably agrees that Agent shall have the continuing exclusive right to apply and reapply payments in any manner it deems appropriate. 13 22 1.8 Capital Adequacy and Other Adjustments. In the event that any Lender shall have determined that the adoption after the date hereof of any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy, reserve requirements or similar requirements or compliance by any Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy, reserve requirements or similar requirements (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) from any central bank or governmental agency or body having jurisdiction does or shall have the effect of increasing the amount of capital, reserves or other funds required to be maintained by such Lender or any corporation controlling such Lender and thereby reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder, then Borrower shall from time to time within fifteen (15) days after notice and demand from such Lender (together with the certificate referred to in the next sentence and with a copy to Agent) pay to Agent, for the account of such Lender, additional amounts sufficient to compensate such Lender for such reduction. A certificate as to the amount of such cost and showing the basis of the computation of such cost submitted by such Lender to Borrower and Agent shall, absent manifest error, be final, conclusive and binding for all purposes. 1.9 Taxes. (A) No Deductions. Any and all payments or reimbursements made hereunder or under the Notes shall be made free and clear of and without deduction for any and all taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto (all such taxes, levies, imposts, deductions, charges or withholdings and all liabilities with respect thereto excluding such taxes imposed on net income, herein "Tax Liabilities"), excluding, however, taxes imposed on the net income of a Lender or Agent. If Borrower shall be required by law to deduct any such amounts from or in respect of any sum payable hereunder to any Lender or Agent, then the sum payable hereunder shall be increased as may be necessary so that, after making all required deductions, such Lender or Agent receives an amount equal to the sum it would have received had no such deductions been made. (B) Changes in Tax Laws. In the event that, subsequent to the Closing Date, (1) any changes in any existing law, regulation, treaty or directive or in the interpretation or application thereof, (2) any new law, regulation, treaty or directive enacted or any interpretation or application thereof, or (3) compliance by Agent or any Lender with any request or directive (whether or not having the force of law) from any governmental authority, agency or instrumentality: (a) does or shall subject Agent or any Lender to any tax of any kind whatsoever with respect to this Agreement, the other Loan Documents or any Loans made or Lender Letters of Credit or Risk Participation Agreements issued hereunder, or change the basis of taxation of payments to Agent or such Lender of principal, fees, interest or any other amount payable hereunder (except for net income taxes, or franchise taxes imposed in lieu of net income taxes, imposed generally by federal, state or local taxing authorities with respect to 14 23 interest or commitment or other fees payable hereunder or changes in the rate of tax on the overall net income of Agent or such Lender); or (b) does or shall impose on Agent or any Lender any other condition or increased cost in connection with the transactions contemplated hereby or participations herein; and the result of any of the foregoing is to increase the cost to Agent or any such Lender of issuing any Lender Letter of Credit or Risk Participation Agreement or making or continuing any Loan hereunder, as the case may be, or to reduce any amount receivable hereunder, then, in any such case, Borrower shall promptly pay to Agent or such Lender, upon its demand, any additional amounts necessary to compensate Agent or such Lender, on an after-tax basis, for such additional cost or reduced amount receivable, as determined by Agent or such Lender with respect to this Agreement or the other Loan Documents. If Agent or such Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify Borrower of the event by reason of which Agent or such Lender has become so entitled. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Agent or such Lender to Borrower and Agent shall, absent manifest error, be final, conclusive and binding for all purposes. (C) Foreign Lenders. Each Lender organized under the laws of a jurisdiction outside the United States (a "Foreign Lender") as to which payments to be made under this Agreement or under the Notes are exempt from United States withholding tax or are subject to United States withholding tax at a reduced rate under an applicable statute or tax treaty shall provide to Borrower and Agent (1) a properly completed and executed Internal Revenue Service Form 4224 or Form 1001 or other applicable form, certificate or document prescribed by the Internal Revenue Service of the United States certifying as to such Foreign Lender's entitlement to such exemption or reduced rate of withholding with respect to payments to be made to such Foreign Lender under this Agreement and under the Notes (a "Certificate of Exemption") or (2) a letter from any such Foreign Lender stating that it is not entitled to any such exemption or reduced rate of withholding (a "Letter of Non-Exemption"). Prior to becoming a Lender under this Agreement and within fifteen (15) days after a reasonable written request of Borrower or Agent from time to time thereafter, each Foreign Lender that becomes a Lender under this Agreement shall provide a Certificate of Exemption or a Letter of Non-Exemption to Borrower and Agent. If a Foreign Lender is not entitled to an exemption or reduced rate of withholding with respect to payments to be made to such Foreign Lender under this Agreement or if a Foreign Lender is entitled to an exemption with respect to payments to be made to such Foreign Lender under this Agreement (or to a reduced rate of withholding) and does not provide a Certificate of Exemption to Borrower and Agent within the time periods set forth in the preceding paragraph, Borrower shall withhold taxes from payments to such Foreign Lender at the applicable statutory rates and Borrower shall not be required to pay any additional amounts as a result of such withholding, provided that all such withholding shall cease upon delivery by such Foreign Lender of a Certificate of Exemption to Borrower and Agent. 15 24 1.10 Optional Prepayment/Replacement of Lender in Respect of Increased Costs. Within fifteen (15) days after receipt by Borrower of written notice and demand from any Lender (an "Affected Lender") for payment of additional costs as provided in subsection 1.8, Borrower may, at its option, notify Agent and such Affected Lender of its intention to do one of the following: (A) Borrower may obtain, at Borrower's expense, a replacement Lender ("Replacement Lender") for such Affected Lender, which Replacement Lender shall be reasonably satisfactory to Agent. In the event Borrower obtains a Replacement Lender within ninety (90) days following notice of its intention to do so, the Affected Lender shall sell and assign its Loans and its obligations under the Revolving Loan Commitment and Acquisition Loan Commitment to such Replacement Lender, provided that Borrower has reimbursed such Affected Lender for its increased costs for which it is entitled to reimbursement under this Agreement through the date of such sale and assignment; or (B) Borrower may prepay in full all outstanding Obligations owed to such Affected Lender and terminate such Affected Lender's Pro Rata Share of the Revolving Loan Commitment and Acquisition Loan Commitment, in which case the Revolving Loan Commitment and Acquisition Loan Commitment will be reduced by the amount of such Pro Rata Share. Borrower shall, within ninety (90) days following notice of its intention to do so, prepay in full all outstanding Obligations owed to such Affected Lender (including such Affected Lender's increased costs for which it is entitled to reimbursement under this Agreement through the date of such prepayment), and terminate such Affected Lender's obligations under the Revolving Loan Commitment and Acquisition Loan Commitment. SECTION 2 AFFIRMATIVE COVENANTS Borrower covenants and agrees that so long as the Revolving Loan Commitment or Acquisition Loan Commitment is in effect and until payment in full of all Obligations and termination of all Lender Letters of Credit and Risk Participation Agreements, unless Requisite Lenders shall otherwise give their prior written consent, Borrower shall perform and comply with, and shall cause each of the other Loan Parties to perform and comply with, all covenants in this Section 2 applicable to such Person. 2.1 Compliance With Laws. Borrower will (a) comply with and will cause each of its Subsidiaries to comply with (i) the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including, without limitation, laws, rules, regulations and orders relating to taxes, employer and employee contributions, securities, employee retirement and welfare benefits, environmental protection matters and employee health and safety) as now in effect and which may be imposed in the future in all jurisdictions in which Borrower or its Subsidiaries are now doing business or may hereafter be doing business, and (ii) the obligations, covenants, and conditions contained in any Contractual Obligation of Borrower and/or such Subsidiary, other than those laws, rules, regulations, orders and Contractual Obligations the noncompliance with which could not be reasonably expected to have, either individually or in 16 25 the aggregate, a Material Adverse Effect, and (b) maintain or obtain and will cause each of its Subsidiaries to maintain or obtain, all licenses, qualifications and permits now held or hereafter required to be held by Borrower and its Subsidiaries, for which the loss, suspension, revocation or failure to obtain or renew, could have a Material Adverse Effect. This subsection 2.1 shall not preclude the Borrower or any Subsidiary from contesting any taxes, fees, assessments, charges, levies or other payments, if they are being diligently contested in good faith and if appropriate expense provisions have been recorded in conformity with GAAP. Borrower represents and warrants that as of the date hereof, it (i) is in compliance and each of its Subsidiaries is in compliance with the requirements of all applicable laws, rules, regulations and orders of any governmental authority as now in effect, and all Contractual Obligations, and (ii) maintains and each of its Subsidiaries maintains all licenses, qualifications and permits referred to above, except in each case as could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. "Contractual Obligations", as applied to any Person, means any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject including, without limitation, the Related Transactions Documents. 2.2 Maintenance of Properties; Insurance. Borrower will maintain or cause to be maintained in good repair, working order and condition all material properties used in the business of Borrower and its Subsidiaries and will make or cause to be made all appropriate repairs, renewals and replacements thereof. Borrower will maintain or cause to be maintained, with financially sound and reputable insurers, public liability and property damage insurance with respect to its business and properties and the business and properties of its Subsidiaries against loss or damage of the kinds customarily carried or maintained by corporations of established reputation engaged in similar businesses and in amounts acceptable to Agent and will deliver evidence thereof to Agent. Borrower will maintain business interruption insurance in an amount not less than $30,000,000. Borrower shall cause, pursuant to endorsements and assignments and assignments in form and substance reasonably satisfactory to Agent, Agent, for the benefit of Agent and Lenders, to be named as lender's loss payee in the case of casualty insurance, Agent for the benefit of Agent and Lenders, to be named as additional insured in the case of all liability insurance and Agent, for the benefit of Agent and Lenders, to be named as assignee in the case of all business interruption insurance. Borrower represents and warrants that it and each of its Subsidiaries currently maintains all material properties as set forth above and maintains all insurance described above. 2.3 Inspection; Lender Meeting. Borrower shall permit any authorized representatives of Agent to visit and inspect any of the properties of Borrower or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and business with its and their officers and certified public accountants, at such reasonable times during normal business hours and as often as may be reasonably requested. Representatives of each Lender will be permitted to accompany representatives of Agent during each visit, inspection and discussion referred to in the immediately preceding sentence. Without in any way limiting the foregoing, Borrower will participate and will cause its key management personnel to participate in a meeting with Agent 17 26 and Lenders at least once during each year, which meeting shall be held at such time and such place as may be reasonably requested by Agent. 2.4 Corporate Existence, Etc. Except as otherwise permitted by subsection 3.6, Borrower will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence and all rights and franchises material to its business. 2.5 Further Assurances. (A) Borrower shall and shall cause each Loan Party to, from time to time, execute such guaranties, financing statements, documents, security agreements and reports as Agent or Requisite Lenders at any time may reasonably request to evidence, perfect or otherwise implement the guaranties and security for repayment of the Obligations contemplated by the Loan Documents. (B) At Agent's or Requisite Lenders' request, Borrower shall cause any Subsidiaries of Borrower promptly to guaranty the Obligations and to grant to Agent, for the benefit of Agent and Lenders, a security interest in the real, personal and mixed property of such Subsidiary to secure the Obligations. The documentation for such guaranty or security shall be substantially similar to the Loan Documents executed concurrently herewith with such modifications as are reasonably requested by Agent. SECTION 3 NEGATIVE COVENANTS Borrower covenants and agrees that so long as the Revolving Loan Commitment or Acquisition Loan Commitment is in effect and until payment in full of all Obligations and termination of all Lender Letters of Credit and Risk Participation Agreements, unless Requisite Lenders shall otherwise give their prior written consent, Borrower shall perform and comply with, and shall cause each of the other Loan Parties to perform and comply with, all covenants in this Section 3 applicable to such Person. 3.1 Indebtedness. Borrower will not and will not permit any of its Subsidiaries or Holdings directly or indirectly to create, incur, assume, guaranty, or otherwise become or remain directly or indirectly liable with respect to any Indebtedness except: (A) the Obligations; (B) intercompany Indebtedness among Borrower, its Subsidiaries or Holdings; provided that the obligations of each obligor of such Indebtedness shall: (1) be subordinated in right of payment to the Obligations from and after such time as any portion of the Obligations shall become due and payable (whether at stated maturity, by acceleration or otherwise); (2) be evidenced by promissory notes, which shall have been pledged to Agent, for the benefit of Agent and Lenders, as security for the Obligations; and (3) have such other terms and provisions as Agent or Requisite Lenders may reasonably require; and 18 27 (C) Indebtedness not to exceed $2,000,000 in the aggregate at any time outstanding secured by purchase money Liens or incurred with respect to capital leases. 3.2 Liens and Related Matters. (A) No Liens. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create, incur, assume or permit to exist any Lien on or with respect to any property or asset (including any document or instrument with respect to goods or accounts receivable) of Borrower or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, except Permitted Encumbrances. "Permitted Encumbrances" means the following: (1) Liens for taxes, assessments or other governmental charges not yet due and payable; (2) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar liens imposed by law, which are incurred in the ordinary course of business for sums not more than thirty (30) days delinquent or which are being contested in good faith; provided that a reserve or other appropriate provision shall have been made therefor and the aggregate amount of liabilities secured by such Liens is less than $100,000; (3) Liens (other than any Lien imposed by the Employee Retirement Income Security Act of 1974 or any rule or regulation promulgated thereunder) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety, stay, customs and appeal bonds, bids, leases, government contracts, trade contracts, performance and return of money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (4) deposits, in an aggregate amount not to exceed $50,000, made in the ordinary course of business to secure liability to insurance carriers, excluding the Lender Letters of Credit and the letters of credit issued under the Risk Participation Agreements; (5) Liens for purchase money obligations; provided that: (a) the purchase of the asset subject to any such Lien is permitted under subsection 4.1; (b) the Indebtedness secured by any such Lien is permitted under subsection 3.1; and (c) any such Lien encumbers only the asset so purchased; (6) any attachment or judgment Lien not constituting an Event of Default under subsection 6.1(I); (7) easements, rights of way, restrictions, and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of Borrower or any of its Subsidiaries; 19 28 (8) any interest or title of a lessor or sublessor under any lease permitted by subsection 4.2; (9) Liens in favor of Agent, for the benefit of Agent and Lenders; (10) Liens existing on the date hereof and renewals and extensions thereof, which Liens are set forth on Schedule 3.2(A)(10) hereto; (11) Liens existing on any fixed assets acquired by Borrower or its Subsidiaries at the time of its acquisition; provided that the acquisition is a Permitted Acquisition hereunder and the Lien is confined solely to the fixed assets so acquired; and (12) Liens on fixed assets of corporations which become subsidiaries of Borrower after the date hereof; provided that such corporations become subsidiaries of Borrower under a Permitted Acquisition hereunder and such Liens existed at the time the respective corporations became Subsidiaries of Borrower and were not created in anticipation thereof. (B) No Negative Pledges. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to enter into or assume any agreement (other than the Loan Documents) prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired. (C) No Restrictions on Subsidiary Distributions to Borrower. Except as provided herein, Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to: (1) pay dividends or make any other distribution on any of such Subsidiary's capital stock owned by Borrower or any Subsidiary of Borrower; (2) subject to subordination provisions for the benefit of Agent and Lenders, pay any Indebtedness owed to Borrower or any other Subsidiary; (3) make loans or advances to Borrower or any other Subsidiary; or (4) transfer any of its property or assets to Borrower or any other Subsidiary. 3.3 Investments; Joint Ventures. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to make or own any Investment in any Person except: (A) Borrower and its Subsidiaries may make and own Investments in Cash Equivalents; provided that such Cash Equivalents are not subject to setoff rights; (B) Borrower and its Subsidiaries may make intercompany loans to the extent permitted under subsection 3.1; (C) Borrower and its Subsidiaries may make loans and advances to employees for moving, entertainment, travel and other similar expenses in the ordinary course of business not to exceed $100,000 in the aggregate at any time outstanding; 20 29 (D) Borrower or a Subsidiary may make Investments of up to $750,000 in the aggregate in a United States corporation, limited liability company or limited liability partnership, for the purposes of a joint venture with Mexican investors for the purchase and sale of wheelbarrows. (E) Permitted Acquisitions. "Investment" means (i) any direct or indirect purchase or other acquisition by Borrower or any of its Subsidiaries of any beneficial interest in, including stock, partnership interest or other equity securities of, any other Person; and (ii) any direct or indirect loan (including the purchase of Indebtedness), advance or capital contribution by Borrower or any of its Subsidiaries to any other Person, including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "Cash Equivalents" means: (i) marketable direct obligations issued or unconditionally guarantied by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year from the date of acquisition thereof; (ii) commercial paper maturing no more than one (1) year from the date issued and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors Service, Inc.; (iii) certificates of deposit or bankers' acceptances maturing within one (1) year from the date of issuance thereof issued by, or overnight reverse repurchase agreements from, any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having combined capital and surplus of not less than $500,000,000; (iv) time deposits maturing no more than thirty (30) days from the date of creation thereof with commercial banks having membership in the Federal Deposit Insurance Corporation in amounts not exceeding the lesser of $100,000 or the maximum amount of insurance applicable to the aggregate amount of Borrower's deposits at such institution; and (v) deposits or investments in mutual or similar funds offered or sponsored by brokerage or other companies having membership in the Securities Investor Protection Corporation in amounts not exceeding the lesser of $100,000 or the maximum amount of insurance applicable to the aggregate amount of Borrower's deposits at such institution. "Permitted Acquisitions" shall mean acquisitions by Borrower or any of its Subsidiaries of the stock or assets of any Person in a negotiated transaction; provided that such acquisition either is funded by an Acquisition Loan made pursuant to subsection 1.1(C) or is consented to in writing by the Requisite Lenders. 3.4 Contingent Obligations. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create or become or be liable with respect to any Contingent Obligation except those: 21 30 (A) resulting from endorsement of negotiable instruments for collection in the ordinary course of business; (B) existing on the Closing Date and described in Schedule 3.4 annexed hereto; (C) arising under indemnity agreements to title insurers to cause such title insurers to issue to Agent mortgagee title insurance policies; (D) arising with respect to customary indemnification obligations incurred in connection with Asset Dispositions; (E) incurred in the ordinary course of business with respect to surety and appeal bonds, performance and return-of-money bonds and other similar obligations not exceeding at any time outstanding $25,000 in aggregate liability; (F) incurred with respect to Indebtedness permitted by subsection 3.1; and (G) not permitted by clauses (A) through (F) above, so long as any such Contingent Obligations, in the aggregate at any time outstanding, do not exceed $25,000. "Contingent Obligation", as applied to any Person, means any direct or indirect liability of that Person: (i) with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings; or (iii) under any foreign exchange contract, currency swap agreement, interest rate swap agreement or other similar agreement or arrangement designed to alter the risks of that Person arising from fluctuations in currency values or interest rates. Contingent Obligations shall also include (a) the direct or indirect guaranty, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of nonperformance by any other party or parties to an agreement, and (c) any liability of such Person for the obligations of another through any agreement to purchase, repurchase or otherwise acquire such obligation or any property constituting security therefor, to provide funds for the payment or discharge of such obligation or to maintain the solvency, financial condition or any balance sheet item or level of income of another. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if not a fixed and determined amount, the maximum amount so guaranteed. 3.5 Restricted Junior Payments. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to declare, order, pay, make or set apart any sum for any Restricted Junior Payment, except that if after giving effect thereto no Default or Event of 22 31 Default would exist, Borrower may make the following Restricted Junior Payments (without duplication): (A) Borrower may make payments and distributions to Holdings to permit Holdings to pay federal and state income taxes then due and owing, franchise taxes and other similar licensing expenses incurred in the ordinary course of business; provided that Borrower's aggregate contribution to taxes as a result of the filing of a consolidated return by Holdings shall not be greater, nor the aggregate receipt of tax benefits less, than they would have been had Borrower not filed a consolidated return with Holdings; (B) Wholly-owned Subsidiaries of Borrower may make Restricted Junior Payments with respect to their common stock; (C) Borrower may make payments and distributions to Holdings for corporate expenditures in cash of up to a maximum aggregate amount of $125,000 per month; provided, however, that such dollar limitation shall not apply if (i) after giving effect to such payments and distributions, the Fixed Charge Coverage (calculated as illustrated on Exhibit 4.10(C)) during the immediately preceding twelve (12) month period (or such lesser number of months that have elapsed since January 1, 1997) would not be less than 1.2:1 for such periods ending prior to July 31, 1998 and 1.3:1 for such periods ending on or after July 31 1998, and the Maximum Revolving Loan Balance would exceed the outstanding Revolving Loans by an amount not less than $5,000,000, (ii) all such payments and distributions held by Holdings shall be pledged to Agent in a manner reasonably satisfactory to Agent, and shall be used only for the current ordinary business expenses of Holdings and specifically not for any expenditures related to any Subsidiary of Holdings other than Borrower and its Subsidiaries, and (iii) Agent shall have received a certificate demonstrating compliance with the foregoing requirements; and (D) Borrower may make payments and distributions to Holdings to cover those non-operating expenses of Holdings set forth on Schedule 3.16. "Restricted Junior Payment" means: (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class; (ii) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding; (iii) any payment or prepayment of interest on, principal of, premium, if any, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Subordinated Indebtedness; and (iv) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding. 3.6 Restriction on Fundamental Changes. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to: (a) amend, modify or waive any term or provision of its articles of incorporation, certificates of designations pertaining to preferred stock or by-laws unless required by law; (b) enter into any transaction of merger or consolidation except 23 32 any Subsidiary of Borrower may be merged with or into Borrower (provided that Borrower is the surviving entity) or any other Subsidiary of Borrower; (c) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); or (d) acquire by purchase or otherwise all or any substantial part of the business or assets of any other Person, except for any Permitted Acquisition. 3.7 Disposal of Assets or Subsidiary Stock. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to: convey, sell, lease, sublease, transfer or otherwise dispose of, or grant any Person an option to acquire, in one transaction or a series of transactions, any of its property, business or assets, or the capital stock of or other equity interests in any of its Subsidiaries, whether now owned or hereafter acquired, except for (a) bona fide sales of inventory to customers for fair value in the ordinary course of business and dispositions of obsolete equipment not used or useful in the business and (b) Asset Dispositions if all of the following conditions are met: (i) the market value of assets sold or otherwise disposed of in any single transaction or series of related transactions does not exceed $250,000 and the aggregate market value of assets sold or otherwise disposed of in any fiscal year of Borrower does not exceed $500,000; (ii) the consideration received is at least equal to the fair market value of such assets; (iii) the sole consideration received is cash; (iv) the Net Proceeds of such Asset Disposition are applied as required by subsection 1.5(C); (v) after giving effect to the sale or other disposition of the assets included within the Asset Disposition and the repayment of Indebtedness with the proceeds thereof, Borrower is in compliance on a pro forma basis with the covenants set forth in Section 4 recomputed for the most recently ended month for which information is available and is in compliance with all other terms and conditions contained in this Agreement; and (vi) no Default or Event of Default then exists or shall result from such sale or other disposition. 3.8 Transactions with Affiliates. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate or with any director, officer or employee of any Loan Party, except (a) as set forth on Schedule 3.8 or (b) transactions in the ordinary course of and pursuant to the reasonable requirements of the business of Borrower or any of its Subsidiaries and upon fair and reasonable terms which are fully disclosed to Agent and are no less favorable to Borrower or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person that is not an Affiliate. Notwithstanding the foregoing, upon the election of Agent no payments may be made with respect to any items set forth on Schedule 3.8 upon the occurrence and during the continuation of a Default or Event of Default. 3.9 Management Fees and Compensation. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to pay any management, consulting or similar fees to any Affiliate or to any director, officer or employee of any Loan Party. 3.10 Conduct of Business. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to engage in any business other than businesses of the type described on Schedule 3.10. 24 33 3.11 Changes Relating to Subordinated Indebtedness. Borrower will not and will not permit any of its Subsidiaries or Holdings directly or indirectly to change or amend the terms of any Subordinated Indebtedness if the effect of such amendment is to: (a) increase the interest rate on such Indebtedness; (b) change the dates upon which payments of principal or interest are due on such Indebtedness; (c) change any event of default or add or change any covenant with respect to such Indebtedness; (d) change the prepayment provisions of such Indebtedness; (e) change the subordination provisions thereof (or the subordination terms of any guaranty thereof); or (f) change or amend any other term if such change or amendment would materially increase the obligations of the obligor or confer additional material rights on the holder of such Indebtedness in a manner adverse to Borrower, any of its Subsidiaries, Holdings or Lenders. 3.12 Fiscal Year. Neither Borrower nor any Subsidiary of Borrower shall change its fiscal year. 3.13 Press Release; Public Offering Materials. Borrower will not and will not permit any of its Subsidiaries to disclose the name of Agent or any Lender in any press release or in any prospectus, proxy statement or other materials filed with any governmental entity relating to a public offering of the capital stock of any Loan Party, except as required by applicable law. 3.14 Subsidiaries. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to establish, create or acquire any new Subsidiary, except for Permitted Acquisitions. 3.15 Bank Accounts. Borrower will not and will not permit any of its Subsidiaries to establish any new bank accounts without prior written notice to Agent and unless Agent and the bank at which the account is to be opened enter into a bank agency agreement in form and substance satisfactory to Agent. 3.16 Non-Operating Expenditures. Borrower will not make any expenditures that are not related to its current or future business operations, except as described on Schedule 3.16. SECTION 4 FINANCIAL COVENANTS/REPORTING Borrower covenants and agrees that so long as the Revolving Loan Commitment or the Acquisition Loan Commitment is in effect, and until payment in full of all Obligations and termination of all Lender Letters of Credit and Risk Participation Agreements, unless Requisite Lenders shall otherwise give their prior written consent, Borrower shall perform and comply with, and shall cause each of the other Loan Parties to perform and comply with, all covenants in this Section 4 applicable to such Person. 4.1 Capital Expenditure Limits. The aggregate amount of all Capital Expenditures of Borrower and its Subsidiaries will not exceed $3,500,000 (the "Capex Limit") in any fiscal year of Borrower. Notwithstanding the foregoing, in the event Borrower and its Subsidiaries do not expend the entire Capex Limit permitted in any fiscal year, Borrower and its Subsidiaries 25 34 may carry forward to the immediately succeeding fiscal year 50% of the unutilized portion of the Capex Limit. All Capital Expenditures made by Borrower and its Subsidiaries shall first be applied to reduce the applicable Capex Limit and then to reduce the carry forward from the previous fiscal year, if any. "Capital Expenditures" will be calculated as illustrated on Exhibit 4.10(C). 4.2 Lease Limits. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to become or remain liable in any way, whether directly or by assignment or as a guarantor or other surety, for the obligations of the lessee under any operating lease (other than intercompany leases between Borrower and its Subsidiaries), if the aggregate amount of all rents paid by Borrower and its Subsidiaries under all such leases would exceed $3,000,000 in any fiscal year of Borrower. 4.3 EBIDAT. (a) Borrower shall not permit EBIDAT for any of the periods set forth below to be less than the amount set forth for such period.
Period Amount ------ ------ January 1, 1997 through April 30, 1997 $ 7,000,000 January 1, 1997 through July 31, 1997 $ 9,100,000 January 1, 1997 through October 31, 1997 $10,200,000
(b) Borrower shall not permit EBIDAT for the twelve (12) month period ending on the last day of any fiscal quarter ending on the dates or during the periods set forth below to be less than the amount set forth below for such date or period.
Date/ Period Amount ------ ------ January 31, 1998 $11,100,000 April 30, 1998 $12,500,000 July 31, 1998 $13,200,000 October 31, 1998 $13,500,000 January 31, 1999 $14,000,000 April 30, 1999 $15,100,000 On or after July 31, 1999 $15,600,000
"EBIDAT" will be calculated as illustrated on Exhibit 4.10(C). 4.4 Fixed Charge Coverage. (a) Borrower shall not permit Fixed Charge Coverage for any of the periods set forth below to be less than the amount set forth below for such period. 26 35 Period Amount ------ ------ January 1, 1997 through April 30, 1997 1.1:1 January 1, 1997 through July 31, 1997 1.1:1 January 1, 1997 through October 31, 1997 1.1:1 (b) Borrower shall not permit Fixed Charge Coverage for the twelve (12) month period ending on the last day of any fiscal quarter ending on the dates or during the periods set forth below to be less than the amount set forth below for such date or period. Date/ Period Amount ------ ------ January 31, 1998 1.1:1 On or after April 30, 1998 1.2:1 "Fixed Charge Coverage" will be calculated as illustrated on Exhibit 4.10(C). 4.5 Total Interest Coverage. (a) Borrower shall not permit Total Interest Coverage for any of the periods set forth to be less than the amount set forth below for such period. Period Amount ------ ------ January 1, 1997 through April 30, 1997 6.2:1 January 1, 1997 through July 31, 1997 4.7:1 January 1, 1997 through October 31, 1997 4.2:1 (b) Borrower shall not permit Total Interest Coverage for the twelve (12) month period ending on the last day of any fiscal quarter ending on the dates or during the periods set forth below to be less than the amount set forth below for such date or period. Date/ Period Amount ------ ------ January 31, 1998 3.4:1 April 30, 1998 3.8:1 July 31, 1998 4.0:1 October 31, 1998 4.2:1 January 31, 1999 4.4:1 April 30, 1999 4.9:1 On or after July 31, 1999 5.2:1 "Total Interest Coverage" will be calculated as illustrated on Exhibit 4.10(C). 27 36 4.6 Total Indebtedness to Operating Cash Flow Ratio. (a) Borrower shall not permit the ratio of Total Indebtedness calculated as of the last day of any of the periods set forth below to Operating Cash Flow for such period to be greater than the amount set forth below for such period. Period Amount ------ ------ January 1, 1997 through April 30, 1997 5.7:1 January 1, 1997 through July 31, 1997 3.4:1 January 1, 1997 through October 31, 1997 3.0:1 (b) Borrower shall not permit the ratio of Total Indebtedness calculated as of the last day of any fiscal quarter ending on the dates or during the periods set forth below to Operating Cash Flow for the twelve (12) month period ending on such day to be greater than the amount set forth below for such date or period. Date/ Period Amount ------ ------ January 31, 1998 4.0:1 April 30, 1998 3.8:1 July 31, 1998 2.7:1 October 31, 1998 2.3:1 January 31, 1999 3.0:1 April 30, 1999 3.0:1 On or after July 31, 1999 2.0:1 "Total Indebtedness" and "Operating Cash Flow" will be calculated as illustrated on Exhibit 4.10(C). 4.7 [Intentionally Deleted.] 4.8 [Intentionally Deleted.] 4.9 [Intentionally Deleted.] 4.10 Financial Statements and Other Reports. Borrower will maintain, and cause each of its Subsidiaries and Holdings to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP (it being understood that monthly financial statements are not required to have footnote disclosures and are subject to changes resulting from normal year-end adjustments). Borrower will deliver each of the financial statements and other reports described below to Agent (and each Lender in the case of the financial statements and other reports described in subsections (A), (B), (C), (G), (I) and (K)). 28 37 (A) Monthly Financials. As soon as available and in any event within thirty (30) days after the end of each month, Borrower will deliver (1) the consolidated and consolidating balance sheets of Holdings, Borrower and their Subsidiaries, as at the end of such month, and the related consolidated and consolidating statements of income, stockholders' equity and cash flow for such month and for the period from the beginning of the then current fiscal year of Borrower to the end of such month and (2) a schedule of the outstanding Indebtedness for borrowed money of Holdings, Borrower and their Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan. (B) Year-End Financials. As soon as available and in any event on or before the fifteenth (15th) day of the November following the end of each fiscal year of Borrower, Borrower will deliver (1) the consolidated and consolidating balance sheets of Holdings, Borrower and their Subsidiaries, as at the end of such year, and the related consolidated and consolidating statements of income, stockholders' equity and cash flow for such fiscal year, (2) a schedule of the outstanding Indebtedness for borrowed money of Holdings, Borrower and their Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan and (3) a report with respect to the financial statements from a firm of Certified Public Accountants selected by Borrower and reasonably acceptable to Agent, which report shall be prepared in accordance with Statement of Auditing Standards No. 58 (the "Statement") entitled "Reports on Audited Financial Statements" and such report shall be "Unqualified" (as such term is defined in such Statement). (C) Borrower Compliance Certificate. Together with each delivery of financial statements of Holdings, Borrower and their Subsidiaries pursuant to subsections 4.10(A) and 4.10(B) above for periods ending on the last day of any fiscal quarter or fiscal year, Borrower will deliver a fully and properly completed Compliance Certificate (in substantially the same form as Exhibit 4.10(C)) signed by Borrower's chief executive officer or chief financial officer. (D) Accountants' Reliance Letter. Together with each delivery of consolidated financial statements of Borrower pursuant to subsection 4.10(B), Borrower will deliver a copy of a letter addressed to Borrower's certified public accountants informing such accountants that a primary intent of Borrower was for the professional services such accountants provided to Borrower in preparing their audit report was to benefit or influence Lenders and their successors or assigns, and identifying Lenders as parties that Borrower has indicated intend to rely on such professional services provided to Borrower by such accountants. (E) Accountants' Reports. Promptly upon receipt thereof, Borrower will deliver copies of all significant reports submitted by Borrower's firm of certified public accountants in connection with each annual, interim or special audit or review of any type of the financial statements or related internal control systems of Borrower made by such accountants, including any comment letter submitted by such accountants to management in connection with their services. 29 38 (F) Borrowing Base Certificate. As soon as available and in any event within thirty (30) days after the end of each month, and from time to time upon the request of Agent, Borrower will deliver a Borrowing Base Certificate (in substantially the same form as Exhibit 4.10(F)) as at the last day of such period. (G) Management Report. Together with each delivery of financial statements of Borrower pursuant to subsections 4.10(A) and 4.10(B), Borrower will deliver a management report (1) describing the operations and financial condition of Holdings, Borrower and their Subsidiaries for the month then ended and the portion of the current fiscal year then elapsed (or for the fiscal year then ended in the case of year-end financials), (2) setting forth in comparative form the corresponding figures for the corresponding periods of the previous fiscal year and the corresponding figures from the most recent Projections for the current fiscal year delivered pursuant to subsection 4.10(J) and (3) discussing the reasons for any significant variations. The information above shall be presented in reasonable detail and shall be certified by the chief financial officer of Borrower to the effect that such information fairly presents the results of operations and financial condition of Holdings, Borrower and their Subsidiaries as at the dates and for the periods indicated, subject to normal year-end adjustments. (H) Collateral Value Report. Upon the request of Agent, which may be made not more than once each year prior to an Event of Default and at any time (but not more often than quarterly) while and so long as an Event of Default shall be continuing, Borrower will obtain and deliver to Agent a report of an independent collateral auditor satisfactory to Agent (which may be, or be affiliated with, a Lender) with respect to the accounts and inventory components included in the Borrowing Base, which report shall indicate whether or not the information set forth in the Borrowing Base Certificate most recently delivered is accurate and complete in all material respects based upon a review by such auditors of the accounts (including verification with respect to the amount, aging, identity and credit of the respective account debtors and the billing practices of Borrower) and inventory (including verification as to the value, location and respective types). (I) Appraisals. From time to time, if Agent or any Lender determines that obtaining appraisals is necessary in order for Agent or such Lender to comply with applicable laws or regulations, Agent will, at Borrower's expense, obtain appraisal reports in form and substance and from appraisers satisfactory to Agent stating the then current fair market values of all or any portion of the real estate owned by Borrower or any of its Subsidiaries. In addition to the foregoing, from time to time, but in the absence of a Default or Event of Default not more than once during each calendar year, Agent may require Borrower to obtain and deliver to Agent appraisal reports in form and substance and from appraisers satisfactory to Agent stating the then current market values of all or any portion of the real estate and personal property owned by Borrower or any of its Subsidiaries. (J) Projections. As soon as available and in any event no later than September 30th of each of Borrower's fiscal years, Borrower will deliver Projections of Borrower and its Subsidiaries for the then current fiscal year and the forthcoming two (2) fiscal years, year by year, and for the then current fiscal year, month by month. 30 39 (K) SEC Filings and Press Releases. Promptly upon their becoming available, Borrower will deliver copies of (1) all financial statements, reports, notices and proxy statements sent or made available by Holdings, Borrower or any of their respective Subsidiaries to their security holders, (2) all regular and periodic reports and all registration statements and prospectuses, if any, filed by Holdings, Borrower or any of their respective Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (3) all press releases and other statements made available by Holdings, Borrower or any of their respective Subsidiaries to the public concerning developments in the business of any such Person. (L) Events of Default, Etc. Promptly upon any officer of Borrower obtaining knowledge of any of the following events or conditions, Borrower shall deliver copies of all notices given or received by Borrower or Holdings with respect to any such event or condition and a certificate of Borrower's chief executive officer specifying the nature and period of existence of such event or condition and what action Borrower has taken, is taking and proposes to take with respect thereto: (1) any condition or event that constitutes an Event of Default or Default; (2) any notice that any Person has given to Borrower or any of its Subsidiaries or any other action taken with respect to a claimed default or event or condition of the type referred to in subsection 6.1(B); or (3) any event or condition that could reasonably be expected to result in any Material Adverse Effect. (M) Litigation. Promptly upon any officer of Borrower obtaining knowledge of (1) the institution of any action, suit, proceeding, governmental investigation or arbitration against or affecting any Loan Party or any property of any Loan Party not previously disclosed by Borrower to Agent or (2) any material development in any action, suit, proceeding, governmental investigation or arbitration at any time pending against or affecting any Loan Party or any property of any Loan Party which, in each case, could reasonably be expected to have a Material Adverse Effect, Borrower will promptly give notice thereof to Agent and provide such other information as may be reasonably available to them to enable Agent and its counsel to evaluate such matter. (N) Supplemented Schedules; Notice of Corporate Changes. Annually, concurrently with Borrower's delivery of the Projections required by subsection 4.10(J), Borrower shall supplement in writing and deliver revisions of the Schedules annexed to this Agreement to the extent necessary to disclose new or changed facts or circumstances after the Closing Date; provided that subsequent disclosures shall not constitute a cure or waiver of any Default or Event of Default resulting from the matters disclosed. Borrower shall provide prompt written notice of (1) all jurisdictions in which a Loan Party becomes qualified after the Closing Date to transact business, (2) any material change after the Closing Date in the authorized and issued capital stock or other equity interests of any Loan Party or any of their respective Subsidiaries or any other material amendment to their charter, by-laws or other organization documents and (3) any Subsidiary created or acquired by any Loan Party after the Closing Date, such notice, in each case, to identify the applicable jurisdictions, capital structures or Subsidiaries, as applicable. 31 40 (O) Other Information. With reasonable promptness, Borrower will deliver such other information and data with respect to any Loan Party or any Subsidiary of any Loan Party as from time to time may be reasonably requested by Agent. 4.11 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to such terms in conformity with GAAP. Financial statements and other information furnished to Agent pursuant to subsection 4.10 shall be prepared in accordance with GAAP as in effect at the time of such preparation. No "Accounting Changes" (as defined below) shall affect financial covenants, standards or terms in this Agreement; provided that Borrower shall prepare footnotes to each Compliance Certificate and the financial statements required to be delivered hereunder that show the differences between the financial statements delivered (which reflect such Accounting Changes) and the basis for calculating financial covenant compliance (without reflecting such Accounting Changes). "Accounting Changes" means: (a) changes in accounting principles required by GAAP and implemented by Borrower; (b) changes in accounting principles recommended by Borrower's certified public accountants and implemented by Borrower; and (c) changes in carrying value of Borrower's or any of its Subsidiaries' assets, liabilities or equity accounts resulting from (i) the application of purchase accounting principles (A.P.B. 16 and/or 17 and EITF 88-16 and FASB 109) or (ii) as the result of any other adjustments that, in each case, were applicable to, but not included in, the Pro Forma. All such adjustments resulting from expenditures made subsequent to the Closing Date (including, but not limited to, capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made. SECTION 5 REPRESENTATIONS AND WARRANTIES In order to induce Agent and Lenders to enter into this Agreement, to make Loans and to issue Lender Letters of Credit and Risk Participation Agreements, Borrower represents and warrants to Agent and each Lender that the following statements are and, after giving effect to the Related Transactions, will be true, correct and complete: 5.1 Disclosure. No representation or warranty of any Loan Party contained in this Agreement, the financial statements referred to in subsection 5.5, the other Related Transactions Documents or any other document, certificate or written statement furnished to Agent or any Lender by or on behalf of any such Person for use in connection with the Loan Documents or the Related Transactions Documents contains any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. 5.2 No Material Adverse Effect. Since the date of the most recent financial statements delivered to Agent, there have been no events or changes in facts or circumstances affecting any Loan Party which individually or in the aggregate have had or could reasonably be expected to have a Material Adverse Effect and that have not been disclosed herein or in the attached Schedules. 32 41 5.3 No Default. The consummation of the Related Transactions does not and will not violate, conflict with, result in a breach of, or constitute a default (with due notice or lapse of time or both) under any contract of any Loan Party except if such violations, conflicts, breaches or defaults have either been waived on or before the Closing Date and are disclosed on Schedule 5.3 or could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. 5.4 Organization, Powers, Capitalization and Good Standing. (A) Organization and Powers. Each of the Loan Parties is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation (which jurisdiction is set forth on Schedule 5.4(A)). Each of the Loan Parties has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into each Related Transactions Document to which it is a party and to carry out the Related Transactions. (B) Capitalization. The authorized capital stock of each of the Loan Parties is as set forth on Schedule 5.4(B). All issued and outstanding shares of capital stock of each of the Loan Parties are duly authorized and validly issued, fully paid, nonassessable, free and clear of all Liens other than those in favor of Agent, for the benefit of Agent and Lenders, and such shares were issued in compliance with all applicable state and federal laws concerning the issuance of securities. The capital stock of the Borrower is owned by the stockholders and in the amounts set forth on Schedule 5.4(B). No shares of the capital stock of any Loan Party, other than those described above, are issued and outstanding. There are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from any Loan Party, of any shares of capital stock or other securities of any such entity, except as disclosed in Schedule 5.4(B). (C) Binding Obligation. This Agreement is, and the other Related Transactions Documents when executed and delivered will be, the legally valid and binding obligations of the applicable parties thereto, each enforceable against each of such parties, as applicable, in accordance with their respective terms. (D) Qualification. Each of the Loan Parties is duly qualified and in good standing wherever necessary to carry on its business and operations, except in jurisdictions in which the failure to be qualified and in good standing could not reasonably be expected to have a Material Adverse Effect. All jurisdictions in which each Loan Party is qualified to do business are set forth on Schedule 5.4(D). 5.5 Financial Statements. All financial statements concerning Holdings, Borrower and their respective Subsidiaries which have been or will hereafter be furnished to Agent pursuant to this Agreement, have been or will be prepared in accordance with GAAP consistently applied (except as disclosed therein) and do or will present fairly the financial condition of the corporations covered thereby as at the dates thereof and the results of their operations for the periods then ended, subject to normal year-end adjustments. 33 42 5.6 Intellectual Property. Borrower and each of its Subsidiaries owns, is licensed to use or otherwise has the right to use, all patents, trademarks, trade names, copyrights, technology, know-how and processes used in or necessary for the conduct of its business as currently conducted that are material to the condition (financial or other), business or operations of Borrower or its Subsidiaries (collectively called "Intellectual Property") and all such Intellectual Property is identified on Schedule 5.6 and fully protected and/or duly and properly registered, filed or issued in the appropriate office and jurisdictions for such registrations, filings or issuances. Except as disclosed in Schedule 5.6, the use of such Intellectual Property by Borrower and its Subsidiaries does not and has not been alleged by any Person to infringe on the rights of any Person. 5.7 Investigations, Audits, Etc. Except as set forth on Schedule 5.7, none of Holdings, Borrower or any of their respective Subsidiaries, is the subject of any review or audit by the Internal Revenue Service or any governmental investigation concerning the violation or possible violation of any law. 5.8 Employee Matters. Except as set forth on Schedule 5.8, (a) no Loan Party nor any of their respective employees is subject to any collective bargaining agreement, (b) no petition for certification or union election is pending with respect to the employees of any Loan Party and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of any Loan Party and (c) there are no strikes, slowdowns, work stoppages or controversies pending or, to the best knowledge of Borrower after due inquiry, threatened between any Loan Party and its respective employees, other than employee grievances arising in the ordinary course of business which could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. Except as set forth on Schedule 5.8, neither Borrower nor any of its Subsidiaries is party to an employment contract. 5.9 Solvency. Borrower: (a) owns and will own assets the fair saleable value of which are (i) greater than the total amount of liabilities (including contingent liabilities) of Borrower and (ii) greater than the amount that will be required to pay the probable liabilities of Borrower's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to Borrower; (b) has capital that is not unreasonably small in relation to its business as presently conducted or after giving effect to any contemplated transaction; and (c) does not intend to incur and does not believe that it will incur debts beyond its ability to pay such debts as they become due. SECTION 6 DEFAULT, RIGHTS AND REMEDIES 6.1 Event of Default. "Event of Default" shall mean the occurrence or existence of any one or more of the following: (A) Payment. Failure to pay any installment of principal of any Loan when due, or to repay Revolving Loans to reduce their balance to the Maximum Revolving Loan Balance or to reimburse Agent for any payment made by Agent under or in respect of any 34 43 Lender Letters of Credit or Risk Participation Agreements when due or failure to pay, within five (5) days after the due date, any interest on any Loan or any other amount due under this Agreement or any of the other Loan Documents; or (B) Default in Other Agreements. (1) Failure of Holdings, Borrower or any of its Subsidiaries to pay when due or within any applicable grace period any principal or interest on Indebtedness (other than the Loans) or any Contingent Obligations or (2) breach or default of Holdings, Borrower or any of its Subsidiaries with respect to any Indebtedness (other than the Loans) or any Contingent Obligations, if the effect of such breach or default is to cause or to permit the holder or holders then to cause, Indebtedness and/or Contingent Obligations having an individual principal amount in excess of $250,000 or having an aggregate principal amount in excess of $500,000 to become or be declared due prior to their stated maturity; or (C) Breach of Certain Provisions. Failure of Borrower to perform or comply with any term or condition contained in that portion of subsection 2.2 relating to Borrower's obligation to maintain insurance, subsection 2.3, Section 3 or Section 4; or (D) Breach of Warranty. Any representation, warranty, certification or other statement made by any Loan Party in any Loan Document or in any statement or certificate at any time given by such Person in writing pursuant or in connection with any Loan Document is false in any material respect on the date made; or (E) Other Defaults Under Loan Documents. Borrower or any other Loan Party defaults in the performance of or compliance with any term contained in this Agreement or the other Loan Documents and such default is not remedied or waived within fifteen (15) days after receipt by Borrower of notice from Agent or Requisite Lenders of such default (other than occurrences described in other provisions of this subsection 6.1 for which a different grace or cure period is specified or which constitute immediate Events of Default); or (F) Involuntary Bankruptcy; Appointment of Receiver, Etc. (1) A court enters a decree or order for relief with respect to Holdings, Borrower or any of its Subsidiaries in an involuntary case under the Bankruptcy Code, which decree or order is not stayed or other similar relief is not granted under any applicable federal or state law; or (2) the continuance of any of the following events for sixty (60) days unless dismissed, bonded or discharged: (a) an involuntary case is commenced against Holdings, Borrower or any of its Subsidiaries, under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or (b) a decree or order of a court for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Holdings, Borrower or any of its Subsidiaries, or over all or a substantial part of its property, is entered; or (c) an interim receiver, trustee or other custodian is appointed without the consent of Holdings, Borrower or any of its Subsidiaries, for all or a substantial part of the property of Holdings, Borrower or any such Subsidiary; or (G) Voluntary Bankruptcy; Appointment of Receiver, Etc. (1) An order for relief is entered with respect to Holdings, Borrower or any of its Subsidiaries or Holdings, Borrower or any of its Subsidiaries commences a voluntary case under the Bankruptcy Code, 35 44 or consents to the entry of an order for relief in an involuntary case or to the conversion of an involuntary case to a voluntary case under any such law or consents to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or (2) Holdings, Borrower or any of its Subsidiaries makes any assignment for the benefit of creditors; or (3) the Board of Directors of Holdings, Borrower or any of its Subsidiaries adopts any resolution or otherwise authorizes action to approve any of the actions referred to in this subsection 6.1(G); or (H) Governmental Liens. Any lien, levy or assessment is filed or recorded with respect to or otherwise imposed upon all or any part of the Collateral or the assets of Holdings, Borrower or any of its Subsidiaries by the United States or any department or instrumentality thereof or by any state, county, municipality or other governmental agency (other than Permitted Encumbrances); or (I) Judgment and Attachments. Any money judgment, writ or warrant of attachment, or similar process (other than those described in subsection 6.1(H)) involving (1) an amount in any individual case in excess of $50,000 or (2) an amount in the aggregate at any time in excess of $100,000 (in either case not adequately covered by insurance as to which the insurance company has acknowledged coverage) is entered or filed against Holdings, Borrower or any of its Subsidiaries or any of their respective assets and remains undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days or in any event later than five (5) Business Days prior to the date of any proposed sale thereunder; or (J) Dissolution. Any order, judgment or decree is entered against Holdings, Borrower or any of its Subsidiaries decreeing the dissolution or split up of Holdings, Borrower or that Subsidiary and such order remains undischarged or unstayed for a period in excess of fifteen (15) days; or (K) Solvency. Borrower ceases to be solvent (as represented by Borrower in subsection 5.9) or admits in writing its present or prospective inability to pay its debts as they become due; or (L) Injunction. Holdings, Borrower or any of its Subsidiaries is enjoined, restrained or in any way prevented by the order of any court or any administrative or regulatory agency from conducting all or any material part of its business and such order continues for more than fifteen (15) days; or (M) ERISA; Pension Plans. (1) Borrower or any of its Affiliates fails to make full payment when due of all amounts which, under the provisions of any employee benefit plans or any applicable provisions of the IRC, any such Person is required to pay as contributions thereto and such failure results in or is likely to result in a Material Adverse Effect; or (2) an accumulated funding deficiency in excess of $25,000 occurs or exists in relation to the minimum funding requirements of the IRC, whether or not waived, with respect to any such employee benefit plans; or (3) any employee benefit plan loses its status as a qualified plan under the IRC which results in or could reasonably be expected to result in a Material Adverse Effect; or 36 45 (N) Environmental Matters. Holdings, Borrower or any of their respective Subsidiaries fails to: obtain or maintain any operating licenses or permits required by environmental authorities; begin, continue or complete any remediation activities as required by any environmental authorities; store or dispose of any hazardous materials in accordance with applicable environmental laws and regulations; or comply with any other environmental laws; if such failure could reasonably be expected to have a Material Adverse Effect; or (O) Invalidity of Loan Documents. Any of the Loan Documents for any reason, other than a partial or full release in accordance with the terms thereof, ceases to be in full force and effect or is declared to be null and void, or any Loan Party denies that it has any further liability under any Loan Documents to which it is party, or gives notice to such effect; or (P) Damage; Strike; Casualty. Any material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of Borrower or any of its Subsidiaries if any such event or circumstance could reasonably be expected to have a Material Adverse Effect; or (Q) Licenses and Permits. The loss, suspension or revocation of, or failure to renew, any license or permit now held or hereafter acquired by Borrower or any of its Subsidiaries, if such loss, suspension, revocation or failure to renew could reasonably be expected to have a Material Adverse Effect; or (R) Failure of Security. Agent, for the benefit of Agent and Lenders, does not have or ceases to have a valid and perfected first priority security interest in the Collateral (subject to Permitted Encumbrances) or any substantial portion thereof, in each case, for any reason other than the failure of Agent to take any action within its control; or (S) Business Activities. Holdings engages in any type of business activity other than the ownership of stock of Borrower, McGuire-Nicholas Company, a California corporation, or other Person engaged in the same or similar business or acquired in a Permitted Acquisition, and performance of its obligations under the Related Transaction Documents to which it is a party; or (T) Change in Control or Ownership. (1) Oaktree Capital Management, LLC ("Oaktree") ceases to beneficially own (as determined under Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934) at least ten percent (10%) of the issued and outstanding shares of each class of capital stock of Holdings entitled (without regard to the occurrence of any contingency) to vote for the election of a majority of the members of the boards of directors of Holdings, (2) in connection with any shareholders' election of the board of directors of Holdings, Holdings' board of directors shall have failed to nominate at least two (2) candidates for election to such board designated by Oaktree, or (3) Holdings ceases to beneficially own, directly, one hundred percent (100%) of the issued and outstanding shares of capital stock of Borrower. 37 46 6.2 Suspension of Commitments. Upon the occurrence of any Default or Event of Default, Agent and each Lender without notice or demand, may immediately cease making additional Loans and issuing Lender Letters of Credit and Risk Participation Agreements and cause its obligation to lend its Pro Rata Share of the Revolving Loan Commitment and the Acquisition Loan Commitment to be suspended; provided that, in the case of a Default, if the subject condition or event is waived, cured or removed by Requisite Lenders within any applicable grace or cure period, any suspended portion of the Revolving Loan Commitment and the Acquisition Loan Commitment shall be reinstated. Each Lender may alternatively suspend only a portion of its obligation to lend its Pro Rata Share of the Revolving Loan Commitment and the Acquisition Loan Commitment. 6.3 Acceleration. Upon the occurrence of any Event of Default described in the foregoing subsections 6.1(F) or 6.1(G), the unpaid principal amount of and accrued interest and fees on the Revolving Loans and the Acquisition Loans, payments under the Lender Letters of Credit and Risk Participation Agreements and all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other requirements of any kind, all of which are hereby expressly waived by Borrower, and the obligations of Agent and Lenders to make Revolving Loans and Acquisition Loans and issue Lender Letters of Credit and Risk Participation Agreements shall thereupon terminate. Upon the occurrence and during the continuance of any other Event of Default, Agent may, and upon written demand by Requisite Lenders shall, by written notice to Borrower (a) declare all or any portion of the Loans and all or some of the other Obligations to be, and the same shall forthwith become, immediately due and payable together with accrued interest thereon, and the obligations of Agent and Lenders to make Revolving Loans and Acquisition Loans and issue Lender Letters of Credit and Risk Participation Agreements shall thereupon terminate and (b) demand that Borrower immediately deposit with Agent an amount equal to the aggregate outstanding Risk Participation Liability to enable Agent to make payments under the Lender Letters of Credit and Risk Participation Agreements when required and such amount shall become immediately due and payable. 6.4 Performance by Agent. If Borrower shall fail to perform any covenant, duty or agreement contained in any of the Loan Documents, Agent may perform or attempt to perform such covenant, duty or agreement on behalf of Borrower after the expiration of any cure or grace periods set forth herein. In such event, Borrower shall, at the request of Agent, promptly pay any amount reasonably expended by Agent in such performance or attempted performance to Agent, together with interest thereon at the highest rate of interest in effect upon the occurrence of an Event of Default as specified in subsection 1.2(E) from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly agreed that Agent shall not have any liability or responsibility for the performance of any obligation of Borrower under this Agreement or any other Loan Document. 38 47 SECTION 7 EFFECTIVENESS OF THIS AGREEMENT AND CONDITIONS TO LOANS 7.1 Effectiveness of this Agreement. The effectiveness of this Agreement is subject to the satisfaction of all of the following conditions precedent on or before July 31, 1997: (A) The proceeds of the IPO, net of underwriting discounts and commissions and other reasonable costs associated therewith, shall have been not less than $35,000,000, and such net proceeds shall have been used in accordance with the Recitals hereof; (B) Oaktree shall beneficially own (as determined under Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934) at least ten percent (10%) of the Common Stock of Holdings; (C) Agent shall have received such amendments, modifications, reaffirmations, replacements, restatements, endorsements and other agreements and documents as it may require in accordance with the terms and provisions hereof; (D) Agent shall have received all of the following documents in form and substance satisfactory to Agent: (1) Certified copies of the certificates or articles of incorporation of Borrower and each Loan Party together with good standing certificates from the respective states of incorporation and the respective states in which the principal places of business of each is located and from all states in which the activities of such Persons require them to be qualified and/or licensed to do business, each to be dated a recent date prior to the Closing Date; (2) Copies of the bylaws of Borrower and each Loan Party certified as of the Closing Date by its corporate secretary or an assistant secretary; (3) Resolutions of the boards of directors of Borrower and each Loan Party authorizing and approving the execution, delivery and performance of the Loan Documents to which such Person is a party, certified as of the Closing Date by its corporate secretary or an assistant secretary as being in full force and effect without modification or amendment; (4) Signature and incumbency certificates of (i) the officers of Borrower executing the Loan Documents, and (ii) the officers of each Loan Party executing the Loan Documents to which any of them is a party; and (5) Written opinions of Gibson, Dunn & Crutcher LLP, counsel for Borrower and the Loan Parties, dated as of the Closing Date; and (E) No Default or Event of Default shall have occurred and be continuing. 39 48 Subject to the satisfaction of all of the above conditions precedent, (i) this Agreement shall amend and restate the Original Credit Agreement in its entirety, (ii) each reference in any other Loan Document to the Original Credit Agreement shall mean and be a reference to this Agreement, and (iii) Agent and Lenders consent to the IPO and the use of the net proceeds thereof as set forth in the Recitals hereof. 7.2 Conditions to All Loans. The obligations of Lenders to make Loans and of Agent to issue Lender Letters of Credit and Risk Participation Agreements on any date ("Funding Date") are subject to the further conditions precedent set forth below. (A) Agent shall have received, in accordance with the provisions of subsection 1.1, a notice requesting an advance of a Revolving Loan or issuance of a Lender Letter of Credit or Risk Participation Agreement. (B) The representations and warranties contained in Section 5 of this Agreement and elsewhere herein and in the Loan Documents shall be (and each request by Borrower for a Loan or a Lender Letter of Credit and Risk Participation Agreement shall constitute a representation and warranty by Borrower that such representations and warranties are) true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except for any representation or warranty limited by its terms to a specific date and taking into account any amendments to the Schedules or Exhibits as a result of any disclosures made in writing by Borrower to Agent after the Closing Date and approved by Agent in writing. (C) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated (or notice requesting issuance of a Lender Letters of Credit and Risk Participation Agreement) that would constitute an Event of Default or a Default. (D) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain any Lender from making any Loan or Agent from issuing any Lender Letter of Credit or Risk Participation Agreement. SECTION 8 ASSIGNMENT AND PARTICIPATION 8.1 Assignments and Participations in Loans and Notes. Each Lender (including Heller) may assign, subject to the terms of a Lender Addition Agreement, its rights and delegate its obligations under this Agreement to another Person, provided that (a) such Lender (excluding Heller) shall first obtain the written consent of Agent and Borrower, which consent shall not be unreasonably withheld; (b) the Pro Rata Share of the Revolving Loan Commitment and the Acquisition Loan Commitment being assigned shall in no event be less than the lesser of (i) $5,000,000 and (ii) the entire amount of the Pro Rata Share of the Revolving Loan Commitment and the Acquisition Loan Commitment of the assigning Lender; and (c) upon the consummation of each such assignment the Lender accepting the assignment shall pay Agent an administrative 40 49 fee of $3,000. The administrative fee referred to in clause (c) of the preceding sentence shall not apply to an assignment from a Lender to an affiliate of such Lender. In the case of an assignment authorized under this subsection 8.1, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were an initial Lender hereunder. The assigning Lender shall be relieved of its obligations hereunder with respect to its Pro Rata Share of the Revolving Loan Commitment and the Acquisition Loan Commitment or assigned portion thereof. Borrower hereby acknowledges and agrees that any assignment will give rise to a direct obligation of Borrower to the assignee and that the assignee shall be considered to be a "Lender". Each Lender (including Heller) may sell participations in all or any part of its Pro Rata Share of the Revolving Loan Commitment and the Acquisition Loan Commitment to another Person, provided that (a) such Lender (excluding Heller) shall first obtain the prior written consent of Agent, which consent shall not be unreasonably withheld; and (b) any such participation shall be in a minimum amount of $5,000,000, and provided, further, that all amounts payable by Borrower hereunder shall be determined as if that Lender had not sold such participation and the holder of any such participation shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly effecting (i) any reduction in the principal amount, interest rate or fees payable with respect to any Loan in which such holder participates; (ii) any extension of the Expiry Date, any extension of the date on which any Scheduled Acquisition Loan Installment is to be paid or any change of any date fixed for any payment of interest or fees payable with respect to any Loan in which such holder participates; (iii) any change of the aggregate unpaid principal amount of the Loans; (iv) any change of the percentage of Lenders which shall be required for Lenders or any of them to take any action hereunder; (v) any release of Collateral (except if the sale or disposition of such Collateral is permitted under subsection 8.2 or any other Loan Document); (vi) any amendment or waiver of this subsection 8.1 or the definitions of the terms used in this subsection 8.1 insofar as the definitions affect the substance of this subsection 8.1; (vii) any consent to the assignment, delegation or other transfer by any Loan Party of any of its rights and obligations under any Loan Document; (viii) any change in the form in which interest is required to be paid; and (ix) any change of any advance rate set forth in the Borrowing Base Certificate. Borrower hereby acknowledges and agrees that any participation will give rise to a direct obligation of Borrower to the participant, and the participant shall for purposes of subsections 1.8, 1.9, 8.4 and 9.1 be considered to be a "Lender". Except as otherwise provided in this subsection 8.1 no Lender shall, as between Borrower and that Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment, transfer or negotiation of, or granting of a participation in, all or any part of the Loans, the Notes or other Obligations owed to such Lender. Each Lender may furnish any information concerning Borrower and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to the provisions of subsection 9.13. Borrower agrees that it will assist and cooperate with Agent and any Lender in any manner reasonably requested by Agent or such Lender to effect the sale of a participation 41 50 or an assignment described above, including without limitation assistance in the preparation of appropriate disclosure documents or placement memoranda. Agent shall provide Borrower with written notice of the name and address of any new Lender after the date hereof. In the event that Heller assigns all or a portion of its Pro Rata Share of the Revolving Loan Commitment or the Acquisition Loan Commitment, or sells participation(s) therein, where the effect of such assignment(s) or participation(s) is to reduce Heller's Pro Rata Share (less the aggregate amount of any percentage participation interests held therein by another Person) to less than twenty-three percent (23%), Heller shall give reasonably prompt subsequent notice thereof to each Lender. Notwithstanding anything contained in this Agreement to the contrary, so long as the Requisite Lenders shall remain capable of making LIBOR Loans, no Person shall become a "Lender" hereunder unless such Person shall also be capable of making LIBOR Loans. 8.2 Agent. (A) Appointment. Each Lender hereby designates and appoints Heller as its Agent under this Agreement and the other Loan Documents, and each Lender hereby irrevocably authorizes Agent to take such action or to refrain from taking such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers as are set forth herein or therein, together with such other powers as are reasonably incidental thereto. Agent is authorized and empowered to amend, modify, or waive any provisions of this Agreement or the other Loan Documents on behalf of Lenders subject to the requirement that certain of Lenders' consent be obtained in certain instances as provided in subsections 8.3 and 9.2. Agent agrees to act as such on the express conditions contained in this subsection 8.2. The provisions of this subsection 8.2 are solely for the benefit of Agent and Lenders and neither Borrower nor any Loan Party shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, Agent shall act solely as agent of Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for Borrower or any other Loan Party. Agent may perform any of its duties hereunder, or under the Loan Documents, by or through its agents or employees. (B) Nature of Duties. The duties of Agent shall be mechanical and administrative in nature. Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Lender. Nothing in this Agreement or any of the Loan Documents, express or implied, is intended to or shall be construed to impose upon Agent any obligations in respect of this Agreement or any of the Loan Documents except as expressly set forth herein or therein. Each Lender shall make its own independent investigation of the financial condition and affairs of Borrower in connection with the extension of credit hereunder and shall make its own appraisal of the creditworthiness of Borrower, and Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto (other than as expressly required herein). If Agent seeks the consent or approval of any Lenders to the taking or refraining from taking any action hereunder, then Agent shall send notice thereof to each Lender. Agent shall promptly 42 51 notify each Lender any time that the Requisite Lenders have instructed Agent to act or refrain from acting pursuant hereto. In the event that Agent receives a written notice or certificate from Borrower pursuant to subsection 4.10(L), Agent shall provide a copy thereof to each Lender in a reasonably prompt manner. (C) Rights, Exculpation, Etc. Neither Agent nor any of its officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted by them hereunder or under any of the Loan Documents, or in connection herewith or therewith, except that Agent shall be liable with respect to its own gross negligence or willful misconduct. Agent shall not be liable for any apportionment or distribution of payments made by it in good faith and if any such apportionment or distribution is subsequently determined to have been made in error the sole recourse of any Lender to whom payment was due but not made, shall be to recover from other Lenders any payment in excess of the amount to which they are determined to be entitled (and such other Lenders hereby agree to return to such Lender any such erroneous payments received by them). In performing its functions and duties hereunder, Agent shall exercise the same care which it would in dealing with loans for its own account, but Agent shall not be responsible to any Lender for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, or sufficiency of this Agreement or any of the Loan Documents or the transactions contemplated thereby, or for the financial condition of any Loan Party. Agent shall not be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the Loan Documents or the financial condition of any Loan Party, or the existence or possible existence of any Default or Event of Default. Agent may at any time request instructions from Lenders with respect to any actions or approvals which by the terms of this Agreement or of any of the Loan Documents Agent is permitted or required to take or to grant, and if such instructions are promptly requested, Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under any of the Loan Documents until it shall have received such instructions from Requisite Lenders or all of the Lenders, as applicable. Without limiting the foregoing, no Lender shall have any right of action whatsoever against Agent as a result of Agent acting or refraining from acting under this Agreement, the Notes, or any of the other Loan Documents in accordance with the instructions of Requisite Lenders. (D) Reliance. Agent shall be entitled to rely, and shall be fully protected in relying, upon any written or oral notices, statements, certificates, orders or other documents or any telephone message or other communication (including any writing, telex, telecopy or telegram) believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the Loan Documents and its duties hereunder or thereunder, upon advice of counsel selected by it. Agent shall be entitled to rely upon the advice of legal counsel, independent accountants, and other experts selected by Agent in its sole discretion. (E) Indemnification. Lenders will reimburse and indemnify Agent for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, attorneys' fees and expenses), advances or 43 52 disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against Agent in any way relating to or arising out of this Agreement or any of the Loan Documents or any action taken or omitted by Agent under this Agreement or any of the Loan Documents, in proportion to each Lender's Pro Rata Share; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements resulting from Agent's gross negligence or willful misconduct. If any indemnity furnished to Agent for any purpose shall, in the opinion of Agent, be insufficient or become impaired, Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The obligations of Lenders under this subsection 8.2(E) shall survive the payment in full of the Obligations and the termination of this Agreement. (F) Heller Individually. With respect to its obligations under the Revolving Loan Commitment and the Acquisition Loan Commitment, the Loans made by it, and the Notes issued to it, Heller shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender. The terms "Lenders" or "Requisite Lenders" or any similar terms shall, unless the context clearly otherwise indicates, include Heller in its individual capacity as a Lender or one of the Requisite Lenders. Heller may lend money to, and generally engage in any kind of banking, trust or other business with any Loan Party as if it were not acting as Agent pursuant hereto. (G) Successor Agent. (1) Resignation. Agent may resign from the performance of all its agency functions and duties hereunder at any time by giving at least thirty (30) Business Days' prior written notice to Borrower and the Lenders. Such resignation shall take effect upon the acceptance by a successor Agent of appointment pursuant to clause (2) below or as otherwise provided below. (2) Appointment of Successor. Upon any such notice of resignation pursuant to clause (1) above, Requisite Lenders shall, upon receipt of Borrower's prior consent which shall not be unreasonably withheld, appoint a successor Agent. If a successor Agent shall not have been so appointed within the thirty (30) Business Day period, referred to in clause (1) above, the retiring Agent, upon notice to Borrower, shall then appoint a successor Agent who shall serve as Agent until such time, if any, as Requisite Lenders, upon receipt of Borrower's prior written consent which shall not be unreasonably withheld, appoint a successor Agent as provided above. (3) Successor Agent. Upon the acceptance of any appointment as Agent under the Loan Documents by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Agent's resignation as Agent under the Loan Documents, the provisions of this subsection 8.2 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. 44 53 (H) Collateral Matters. (1) Release of Collateral. Lenders hereby irrevocably authorize Agent, at its option and in its discretion, to release any Lien granted to or held by Agent upon any property covered by the Security Documents (i) upon termination of the Revolving Loan Commitment and payment and satisfaction of all Obligations (other than contingent indemnification Obligations not then due and payable); (ii) constituting property being sold or disposed of if Borrower certifies to Agent that the sale or disposition is made in compliance with the provisions of this Agreement (and Agent may rely in good faith conclusively on any such certificate, without further inquiry); (iii) constituting property leased to Borrower under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by Borrower to be, renewed or extended; or (iv) in accordance with the provisions of the succeeding sentence. Agent may release or compromise any Collateral and the proceeds thereof having a value not greater than ten percent (10%) of the total book value of all Collateral, either in a single transaction or in a series of related transactions, with the consent of Lenders owning an aggregate of at least eighty percent (80%) of the Revolving Loan Commitment and the Acquisition Loan Commitment, provided that in no event will Agent, acting under the authority granted to it pursuant to this sentence, release or compromise Collateral or the proceeds thereof having a total book value in excess of twenty percent (20%) of the book value of all Collateral, as determined by Agent, during any calendar year. (2) Confirmation of Authority; Execution of Releases. Without in any manner limiting Agent's authority to act without any specific or further authorization or consent by Lenders (as set forth in subsection 8.2(H)(1)), each Lender agrees to confirm in writing, upon request by Agent or Borrower, the authority to release any property covered by the Security Documents conferred upon Agent under clauses (i) through (iii) of subsection 8.2(H)(1). Upon receipt by Agent of confirmation from the requisite percentage of Lenders required by subsection 8.2(H)(1), if any, of its authority to release or compromise any particular item or types of property covered by the Security Documents, and upon at least ten (10) Business Days prior written request by Borrower, Agent shall (and is hereby irrevocably authorized by Lenders to) execute such documents as may be necessary to evidence the release or compromise of the Liens granted to Agent, for the benefit of Agent and Lenders, upon such Collateral, provided that (i) Agent shall not be required to execute any such document on terms which, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release or compromise of such Liens without recourse or warranty, and (ii) such release or compromise shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or obligations of any Loan Party, in respect of), all interests retained by any Loan Party, including (without limitation) the proceeds of any sale, all of which shall continue to constitute part of the property covered by the Security Documents. (3) Absence of Duty. Agent shall have no obligation whatsoever to any Lender or any other Person to assure that the property covered by the Security Documents exists or is owned by Borrower or is cared for, protected or insured or has been encumbered or that the Liens granted to Agent have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any 45 54 particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent in this subsection 8.2(H) or in any of the Loan Documents, it being understood and agreed that in respect of the property covered by the Security Documents or any act, omission or event related thereto, Agent may act in any manner it may deem appropriate, in its discretion, given Agent's own interest in property covered by the Security Documents as one of the Lenders and that Agent shall have no duty or liability whatsoever to any of the other Lenders, provided that Agent shall exercise the same care which it would in dealing with loans for its own account. (I) Agency for Perfection. Agent and each Lender hereby appoint each other Lender as agent for the purpose of perfecting Agent's security interest in assets which, in accordance with Article 9 of the Uniform Commercial Code in any applicable jurisdiction, can be perfected only by possession. Should any Lender (other than Agent) obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefor, shall deliver such Collateral to Agent or in accordance with Agent's instructions. Each Lender agrees that it will not have any right individually to enforce or seek to enforce any Security Document or to realize upon any collateral security for the Loans, it being understood and agreed that such rights and remedies may be exercised only by Agent. (J) Dissemination of Information. Agent will use its best efforts to provide Lenders with any information received by Agent from Borrower or any other Loan Party which is required to be provided to a Lender hereunder, provided that Agent shall not be liable to Lenders for any failure to do so, except to the extent that such failure is attributable to Agent's gross negligence or willful misconduct. 8.3 Amendments, Consents and Waivers for Certain Actions. (A) Except as otherwise provided in this subsection 8.3, in subsection 9.2 or in any Lender Addition Agreement and except as to matters set forth in other subsections hereof or in any other Loan Document as requiring only Agent's consent, the consent of Requisite Lenders and Borrower will be required to amend, modify, terminate, or waive any provision of this Agreement or any of the other Loan Documents. (B) In the event Agent requests the consent of a Lender and does not receive a written consent or denial thereof within ten (10) Business Days after such Lender's receipt of such request, then such Lender will be deemed to have denied the giving of such consent. (C) In the event Agent requests the consent of a Lender and such consent is denied, then Heller or the Lender which assigned its interest in the Loans to such Lender (the "Assigning Lender") may, at its option, require such Lender to reassign its interest in the Loans to Heller or the Assigning Lender, as applicable, for a price equal to the then outstanding principal amount thereof plus accrued and unpaid interest and fees due such Lender, which interest and fees will be paid when collected from Borrower. In the event that Heller or the Assigning Lender elects to require any Lender to reassign its interest to Heller or the Assigning Lender, Heller or the Assigning Lender, as applicable, will so notify such Lender in writing within forty-five (45) days following such Lender's denial, and such Lender will reassign its 46 55 interest to Heller or the Assigning Lender, as applicable, no later than five (5) days following receipt of such notice. 8.4 Set Off and Sharing of Payments. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, during the continuance of any Event of Default, each Lender is hereby authorized by Borrower at any time or from time to time, with reasonably prompt subsequent notice to Borrower and Agent (any prior or contemporaneous notice being hereby expressly waived) to set off and to appropriate and to apply any and all (A) balances held by such Lender at any of its offices for the account of Borrower or any of its Subsidiaries (regardless of whether such balances are then due to Borrower or its Subsidiaries), and (B) other property at any time held or owing by such Lender to or for the credit or for the account of Borrower or any of its Subsidiaries, against and on account of any of the Obligations. Any Lender exercising a right to set off shall, to the extent the amount of any such set off exceeds its Pro Rata Share of the amount set off, purchase for cash (and the other Lenders shall sell) interests in each such other Lender's Pro Rata Share of the Obligations as would be necessary to cause such Lender to share such excess with each other Lender in accordance with their respective Pro Rata Shares. Borrower agrees, to the fullest extent permitted by law, that any Lender may exercise its right to set off with respect to amounts in excess of its Pro Rata Share of the Obligations and upon doing so shall deliver such excess to the Agent for the benefit of all Lenders in accordance with their Pro Rata Shares. 8.5 Disbursement of Funds. Agent may, on behalf of Lenders, disburse funds to Borrower for Loans requested. Each Lender shall reimburse Agent on demand for all funds disbursed on its behalf by Agent, or if Agent so requests, each Lender will remit to Agent its Pro Rata Share of any Loan before Agent disburses same to Borrower. If Agent elects to require that each Lender make funds available to Agent, prior to a disbursement by Agent to Borrower, Agent shall advise each Lender by telephone or telecopy of the amount of such Lender's Pro Rata Share of the Loan requested by Borrower no later than 1:00 p.m. CST on the Funding Date applicable thereto, and each such Lender shall pay Agent such Lender's Pro Rata Share of such requested Loan, in same day funds, by wire transfer to Agent's account on such Funding Date. If any Lender fails to pay the amount of its Pro Rata Share forthwith upon Agent's demand, Agent shall promptly notify Borrower, and Borrower shall immediately repay such amount to Agent. Any repayment required pursuant to this subsection 8.5 shall be without premium or penalty. Nothing in this subsection 8.5 or elsewhere in this Agreement or the other Loan Documents, including without limitation the provisions of subsection 8.6, shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights that Agent or Borrower may have against any Lender as a result of any default by such Lender hereunder. 8.6 Disbursements of Advances; Payment. (A) Revolving Loan Advances, Payments and Settlements; Related Fee Payments. (1) The Revolving Loan balance may fluctuate from day to day through Agent's disbursement of funds to, and receipt of funds from, Borrower. In order to minimize 47 56 the frequency of transfers of funds between Agent and each Lender notwithstanding terms to the contrary set forth in Section 1 or subsection 8.5, Revolving Loan advances and payments will be settled among Agent and Lenders according to the procedures described in this subsection 8.6. Notwithstanding these procedures, each Lender's obligation to fund its portion of any advances made by Agent to Borrower will commence on the date such advances are made by Agent. Such payments will be made by such Lender without set-off, counterclaim or reduction of any kind. (2) On the second (2nd) Business Day of each week, or more frequently (including daily), if Agent so elects (each such day being a "Settlement Date"), Agent will advise each Lender by telephone or telecopy of the amount of each such Lender's Pro Rata Share of the Revolving Loan balance as of the close of business of the (2nd) second Business Day immediately preceding the Settlement Date. In the event that payments are necessary to adjust the amount of such Lender's required Pro Rata Share of the Revolving Loan balance to such Lender's actual Pro Rata Share of the Revolving Loan balance as of any Settlement Date, the party from which such payment is due will pay the other, in same day funds, by wire transfer to the other's account not later than 3:00 p.m. CST on the Business Day following the Settlement Date. (3) For purposes of this subsection 8.6(A)(3), the following terms and conditions will have the meanings indicated: (a) "Daily Loan Balance" means an amount calculated as of the end of each calendar day by subtracting (i) the cumulative principal amount paid by Agent to a Lender on a Loan from the Closing Date through and including such calendar day, from (ii) the cumulative principal amount on a Loan advanced by such Lender to Agent on that Loan from the Closing Date through and including such calendar day. (b) "Daily Interest Rate" means an amount calculated by dividing the interest rate payable to a Lender on a Loan (as set forth in subsection 1.2) as of each calendar day by three hundred sixty (360). (c) "Daily Interest Amount" means an amount calculated by multiplying the Daily Loan Balance of a Loan by the associated Daily Interest Rate on that Loan. (d) "Interest Ratio" means a number calculated by dividing the total amount of the interest on a Loan received by Agent with respect to the immediately preceding month by the total amount of interest on that Loan due from Borrower during the immediately preceding month. On the first (1st) Business Day of each month ("Interest Settlement Date"), Agent will advise each Lender by telephone, telex, or telecopy of the amount of such Lender's Pro Rata Share of interest and fees on each of the Loans as of the end of the last day of the immediately preceding month. Provided that such Lender has made all payments required to be made by it under this 48 57 Agreement, Agent will pay to such Lender, by wire transfer to such Lender's account (as specified by such Lender on the signature page of this Agreement or the applicable Lender Addition Agreement, as amended by such Lender from time to time after the date hereof pursuant to the notice provisions contained herein or in the applicable Lender Addition Agreement) not later than 3:00 p.m. (Chicago time) on the next Business Day following the Interest Settlement Date, such Lender's Pro Rata Share of interest and fees on each of the Loans. Such Lender's Pro Rata Share of interest on each Loan will be calculated for that Loan by adding together the Daily Interest Amounts for each calendar day of the prior month for that Loan and multiplying the total thereof by the Interest Ratio for that Loan. Such Lender's Pro Rata Share of each of the commitment fee described in subsection 1.2(B) and the Risk Participation Liability fee described in subsection 1.2(C) shall be paid and calculated in a manner consistent with the payment and calculation of interest as described in this subsection 8.6(A). (B) Acquisition Loan Payments; Related Fee Payments. Payments of principal, interest and fees in respect of the Acquisition Loans, and payment of all other fees and expenses not otherwise described in subsection 8.6(A) will be settled on the Business Day received by Agent in accordance with the provisions of Section 1. (C) Availability of Lender's Pro Rata Share. (1) Unless Agent has been notified by a Lender prior to a Funding Date of such Lender's intention not to fund its Pro Rata Share of the Loan amount requested by Borrower, Agent may assume that such Lender will make such amount available to Agent on the Business Day following the next Settlement Date. If such amount is not, in fact, made available to Agent by such Lender when due, Agent will be entitled to recover such amount on demand from such Lender without set-off, counterclaim or deduction of any kind. (2) Nothing contained in this subsection 8.6(C) will be deemed to relieve a Lender of its obligation to fulfill its commitments or to prejudice any rights Agent or Borrower may have against such Lender as a result of any default by such Lender under this Agreement. (3) Without limiting the generality of the foregoing, each Lender shall be obligated to fund its Pro Rata Share of any Revolving Loan or Acquisition Loan made after any Event of Default or acceleration of the Obligations with respect to any draw on a Lender Letter of Credit or a Risk Participation Agreement. (D) Return of Payments (1) If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent from Borrower and such related payment is not received by Agent, then Agent will be entitled to recover such amount from such Lender without set-off, counterclaim or deduction of any kind. (2) If Agent determines at any time that any amount received by Agent under this Agreement must be returned to Borrower or paid to any other person pursuant to any 49 58 solvency law or otherwise, then, notwithstanding any other term or condition of this Agreement, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to Borrower or such other Person, without set-off, counterclaim or deduction of any kind. SECTION 9 MISCELLANEOUS 9.1 Indemnities. Borrower agrees to indemnify, pay, and hold Agent, each Lender and their respective officers, directors, employees, agents, and attorneys (the "Indemnitees") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits and claims of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Indemnitee as a result of its being a party to this Agreement; provided that Borrower shall have no obligation to an Indemnitee hereunder with respect to liabilities arising from the gross negligence or willful misconduct of that Indemnitee as determined by a court of competent jurisdiction. This subsection and other indemnification provisions contained within the Loan Documents shall survive the termination of this Agreement. 9.2 Amendments and Waivers. Except as otherwise provided herein, no amendment, modification, termination or waiver of any provision of this Agreement, the Notes or any of the other Loan Documents, or consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by Requisite Lenders (or Agent, if expressly set forth herein, in any Note or in any other Loan Document) and the applicable Loan Party; provided, that except to the extent permitted by the applicable Lender Addition Agreement, no amendment, modification, termination or waiver shall, unless in writing and signed by all Lenders, do any of the following: (a) increase any Lender's Pro Rata Share of the Revolving Loan Commitment or the Acquisition Loan Commitment; (b) reduce the principal of, rate of interest on or fees payable with respect to any Loan; (c) extend the Expiry Date, extend the date on which any Scheduled Acquisition Loan Installment is to be paid or change any date fixed for any payment of interest or fees; (d) change the aggregate unpaid principal amount of the Loans; (e) change the percentage of Lenders which shall be required for Lenders or any of them to take any action hereunder; (f) release Collateral (except if the sale or disposition of such Collateral is permitted under subsection 8.2 or any other Loan Document); (g) amend or waive this subsection 9.2 or the definitions of the terms used in this subsection 9.2 insofar as the definitions affect the substance of this subsection 9.2; (h) consent to the assignment, delegation or other transfer by any Loan Party of any of its rights and obligations under any Loan Document; (i) change the form in which interest is required to be paid and (j) change the advance rates set forth in the Borrowing Base Certificate; and provided, further, that no amendment, modification, termination or waiver affecting the rights or duties of Agent under any Loan Document shall in any event be effective, unless in writing and signed by Agent, in addition to Lenders required hereinabove to take such action. Each amendment, modification, termination or waiver shall be effective only in the specific instance and for the specific purpose for which it was given. No amendment, modification, termination or waiver shall be required for Agent to take additional Collateral pursuant to any Loan Document. No amendment, 50 59 modification, termination or waiver of any provision of any Note shall be effective without the written concurrence of the holder of that Note. No notice to or demand on Borrower or any other Loan Party in any case shall entitle Borrower or any other Loan Party to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 9.2 shall be binding upon each holder of the Notes at the time outstanding, each future holder of the Notes, and, if signed by a Loan Party, on such Loan Party. Agent shall provide a copy of any written amendments, modifications, terminations and waivers as provided in this subsection 9.2 to each Lender in a reasonably prompt manner. 9.3 Notices. Any notice or other communication required shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied, sent by overnight courier service or U.S. mail and shall be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a Business Day before 4:00 p.m. CST; (c) if delivered by overnight courier, two (2) days after delivery to the courier properly addressed; or (d) if delivered by U.S. mail, four (4) Business Days after deposit with postage prepaid and properly addressed. Notices shall be addressed as follows: If to Borrower: UNIONTOOLS, INC. 500 Dublin Avenue Columbus, Ohio 43216 ATTN: Chief Financial Officer Telecopy: (614) 222-4437 With a copy to: Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, New York 10166 ATTN: Conor D. Reilly, Esq. Telecopy: (212) 351-4035 If to Agent or Heller: HELLER FINANCIAL, INC. 500 West Monroe Street Chicago, Illinois 60661 ATTN: Portfolio Manager Corporate Finance Group Telecopy: (312) 441-7367 With a copy to: HELLER FINANCIAL, INC. 500 West Monroe Street Chicago, Illinois 60661 ATTN: Legal Department Corporate Finance Group Telecopy: (312) 441-7367 51 60 If to a Lender: To the address set forth in the applicable Lender Addition Agreement 9.4 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Agent or any Lender to exercise, nor any partial exercise of, any power, right or privilege hereunder or under any other Loan Documents shall impair such power, right, or privilege or be construed to be a waiver of any Default or Event of Default. All rights and remedies existing hereunder or under any other Loan Document are cumulative to and not exclusive of any rights or remedies otherwise available. 9.5 Marshalling; Payments Set Aside. Neither Agent nor any Lender shall be under any obligation to marshall any assets in payment of any or all of the Obligations. To the extent that Borrower makes payment(s) or Agent enforces its Liens or Agent or any Lender exercises its right of set-off, and such payment(s) or the proceeds of such enforcement or set-off is subsequently invalidated, declared to be fraudulent or preferential, set aside, or required to be repaid by anyone, then to the extent of such recovery, the Obligations or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or set-off had not occurred. 9.6 Severability. The invalidity, illegality, or unenforceability in any jurisdiction of any provision under the Loan Documents shall not affect or impair the remaining provisions in the Loan Documents. 9.7 Lenders' Obligations Several; Independent Nature of Lenders' Rights. The obligation of each Lender hereunder is several and not joint and no Lender shall be responsible for the obligation or commitment of any other Lender hereunder. In the event that any Lender at any time should fail to make a Loan as herein provided, the Lenders, or any of them, at their sole option, may make the Loan that was to have been made by the Lender so failing to make such Loan. Nothing contained in any Loan Document and no action taken by Agent or any Lender pursuant hereto or thereto shall be deemed to constitute Lenders to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt. 9.8 Headings. Section and subsection headings are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purposes or be given substantive effect. 9.9 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. 9.10 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns except that Borrower may not assign its rights or obligations hereunder without the written consent of all Lenders. 52 61 9.11 No Fiduciary Relationship. No provision in the Loan Documents and no course of dealing between the parties shall be deemed to create any fiduciary duty owing to Borrower by Agent or any Lender. 9.12 Construction. Agent, each Lender and Borrower acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review the Loan Documents with its legal counsel and that the Loan Documents shall be constructed as if jointly drafted by Agent, each Lender and Borrower. 9.13 Confidentiality. Agent and each Lender agree to exercise their best efforts to keep any non-public information delivered pursuant to the Loan Documents confidential from Persons other than those employed by or engaged by Agent or such Lender and those employed by or engaged by Agent's or such Lender's assignees or participants, or potential assignees or participants. This subsection shall not apply to disclosures required to be made by Agent or any Lender to any regulatory or governmental agency or pursuant to legal process. 9.14 Consent to Jurisdiction and Service of Process. (A) BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY BORROWER AGAINST AGENT OR ANY LENDER OR ANY AFFILIATE THEREOF INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS. (B) BORROWER DESIGNATES AND APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER PERSONS AS MAY HEREAFTER BE SELECTED BY BORROWER WHICH IRREVOCABLY AGREE IN WRITING TO SO SERVE AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY BORROWER TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO BORROWER AT ITS ADDRESS PROVIDED IN SUBSECTION 9.3 EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY BORROWER REFUSES TO ACCEPT 53 62 SERVICE, BORROWER HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 9.15 Waiver of Jury Trial. BORROWER, AGENT AND EACH LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION AND THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. BORROWER, AGENT AND EACH LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. BORROWER, AGENT AND EACH LENDER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS OR THE LENDER LETTERS OF CREDIT OR RISK PARTICIPATION AGREEMENTS. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. BORROWER, AGENT AND EACH LENDER ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF AGENT AND EACH LENDER. 9.16 Survival of Warranties and Certain Agreements. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Loans, issuances of Lender Letters of Credit and Risk Participation Agreements and the execution and delivery of the Notes. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Borrower set forth in subsections 1.3(C), 1.8 and 9.1 shall survive the payment of the Loans and the termination of this Agreement. 9.17 Entire Agreement. This Agreement, the Notes and the other Loan Documents referred to herein embody the final, entire agreement among the parties hereto and supersede any and all prior commitments, agreements, representations, understandings, whether oral or written, relating to the subject matter hereof and may not be contradicted or varied by evidence of prior, contemporaneous or subsequent oral agreements or discussions of the parties hereto. 54 63 9.18 Counterparts; Effectiveness. This Agreement and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all of which counterparts together shall constitute but one in the same instrument. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto, subject to subsection 7.1. SECTION 10 DEFINITIONS 10.1 Certain Defined Terms. The terms defined below are used in this Agreement as so defined. Terms defined in the preamble and recitals to this Agreement are used in this Agreement as so defined. "Affiliate" means any Person: (a) directly or indirectly controlling, controlled by, or under common control with, Borrower; (b) directly or indirectly owning or holding five percent (5%) or more of any equity interest in Borrower; or (c) five percent (5%) or more of whose voting stock or other equity interest is directly or indirectly owned or held by Borrower. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with") means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or by contract or otherwise. "Agent" means Heller in its capacity as agent for the Lenders under this Agreement and each of the other Loan Documents and any successor in such capacity appointed pursuant to subsection 8.2. "Agreement" means this Amended and Restated Credit Agreement (including all schedules and exhibits hereto). "Asset Disposition" means the disposition whether by sale, lease, transfer, loss, damage, destruction, condemnation or otherwise of any of the following: (a) any of the stock of any of Borrower's Subsidiaries or (b) any or all of the assets of Borrower or any of its Subsidiaries other than sales of inventory in the ordinary course of business. "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy", as amended from time to time or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect and all rules and regulations promulgated thereunder. "Borrower" shall have the meaning ascribed to that term in the preamble of this Agreement. 55 64 "Business Day" means (a) for all purposes other than as covered by clause (b) below, any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the Commonwealth of Pennsylvania or the State of Illinois, or is a day on which banking institutions located in any such states are closed, and (b) with respect to all notices, determinations, fundings and payments in connection with Loans bearing interest at the LIBOR, any day that is a Business Day described in clause (a) above and that is also a day for trading by and between banks in Dollar deposits in the applicable interbank LIBOR market. "Closing Date" means July 31, 1997, or such earlier date on which all of the conditions precedent set forth in Section 7.1 have been satisfied in full. "Collateral" means, collectively: (a) all capital stock and other property pledged pursuant to the Security Documents; (b) all "Collateral" as defined in the Security Documents; (c) all real property mortgaged pursuant to the Security Documents; and (d) any property or interest provided in addition to or in substitution for any of the foregoing. "Default" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period. "Expiry Date" means the earlier of (a) the suspension (subject to reinstatement) of the Lenders' obligations to make Revolving Loans and Acquisition Loans pursuant to subsection 6.2, (b) the acceleration of the Obligations pursuant to subsection 6.3 or (c) June 30, 2003. "GAAP" means generally accepted accounting principles as set forth in statements from Auditing Standards No. 69 entitled "The Meaning of 'Present Fairly in Conformance with Generally Accepted Accounting Principles in the Independent Auditors Reports'" issued by the Auditing Standards Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination. "Indebtedness", as applied to any Person, means: (a) all indebtedness for borrowed money; (b) that portion of obligations with respect to capital leases that is properly classified as a liability on a balance sheet in conformity with GAAP; (c) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (d) any obligation owed for all or any part of the deferred purchase price of property or services if the purchase price is due more than six (6) months from the date the obligation is incurred or is evidenced by a note or similar written instrument; and (e) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. 56 65 "IRC" means the Internal Revenue Code of 1986, as amended from time to time and all rules and regulations promulgated thereunder. "Lender" or "Lenders" means Heller together with its successors and permitted assigns pursuant to subsection 8.1. "Lender Addition Agreement" means an agreement among Agent, a Lender and such Lender's assignee regarding their respective rights and obligations with respect to assignments of the Loans, the Revolving Loan Commitment, the Acquisition Loan Commitment and other interests under this Agreement and the other Loan Documents. "Lien" means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind, whether voluntary or involuntary (including any conditional sale or other title retention agreement and any lease in the nature thereof), and any agreement to give any lien, mortgage, pledge, security interest, charge or encumbrance. "Loan" or "Loans" means an advance or advances under the Revolving Loan Commitment or the Acquisition Loans. "Loan Documents" means this Agreement, the Notes, the Security Documents and all other instruments, documents and agreements executed by or on behalf of any Loan Party and delivered heretofore, concurrently herewith or at any time hereafter to or for the benefit of Agent or any Lender in connection with the Loans and other transactions contemplated by this Agreement, all as amended, supplemented or modified from time to time. "Loan Party" means, collectively, Holdings, Borrower and any other Person (other than Agent and each Lender) which is or becomes a party to any Loan Document. "Loan Year" means any period of twelve (12) consecutive months commencing on December 30, 1996, or any anniversary thereof. "Material Adverse Effect" means (a) a material adverse effect upon the business, operations, properties, assets or condition (financial or otherwise) either of Borrower or any of its Subsidiaries, taken as a whole, or of Holdings or (b) the impairment of the ability of any Loan Party to perform its material obligations under any Loan Document to which it is a party or of Agent or any Lender to enforce any Loan Document or collect any of the Obligations. In determining whether any individual event would result in a Material Adverse Effect, notwithstanding that such event does not of itself have such effect, a Material Adverse Effect shall be deemed to have occurred if the cumulative effect of such event and all other then existing events would result in a Material Adverse Effect. 57 66 "Net Proceeds" means cash proceeds received by Borrower or any of its Subsidiaries from any Asset Disposition (including insurance proceeds, awards of condemnation, and payments under notes or other debt securities received in connection with any Asset Disposition), net of (a) the costs of such sale, lease, transfer or other disposition (including taxes attributable to such sale, lease or transfer) and (b) amounts applied to repayment of Indebtedness (other than the Obligations) secured by a Lien on the asset or property disposed. "Note" or "Notes" means one or more of the notes of Borrower substantially in the form of Exhibit 10.1(A), or any combination thereof. "Obligations" means all obligations, liabilities and indebtedness of every nature of each Loan Party from time to time owed to Agent or any Lender under the Loan Documents including the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable whether before or after the filing of a proceeding under the Bankruptcy Code by or against Borrower or any of its Subsidiaries. "Person" means and includes natural persons, corporations, limited liability companies, limited partnerships, limited liability partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof and their respective permitted successors and assigns (or in the case of a governmental person, the successor functional equivalent of such Person). "Pro Rata Share" means the percentage obtained by dividing (i) such Lender's commitment to make Revolving Loans and Acquisition Loans, as set forth on the signature page of this agreement opposite such Lender's signature or in the most recent Lender Addition Agreement, if any, executed by such Lender, by (ii) all such commitments of all Lenders to make Revolving Loans and Acquisition Loans. "Projections" means Borrower's forecasted consolidated: (a) balance sheets; (b) profit and loss statements; (c) cash flow statements; and (d) capitalization statements, all prepared on a consistent basis with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. The Projections represent and will represent as of the date thereof the good faith estimate of Borrower and its senior management concerning the most probable course of its business. 58 67 "Related Transactions" means the funding of all Loans on the Closing Date, and the payment of all fees, costs and expenses associated with all of the foregoing. "Related Transactions Documents" means the Loan Documents, and all other agreements, instruments and documents executed or delivered in connection with the Related Transactions. "Requisite Lenders" means Lenders having sixty-six and two-thirds percent (66-2/3%) or more of the sum of the Revolving Loan Commitment and the Acquisition Loan Commitment. "Risk Participation Liability" means, as to each Lender Letter of Credit and each Risk Participation Agreement, all reimbursement obligations of Borrower to the issuer of the Lender Letter of Credit or to the issuer of the letter of credit with respect to the transaction for which the Risk Participation Agreement was executed and delivered, consisting of (a) the amount available to be drawn or which may become available to be drawn; (b) all amounts which have been paid and made available by the issuing bank to the extent not reimbursed by Borrower, whether by the making of a Revolving Loan or otherwise; and (c) all accrued and unpaid interest, fees and expenses with respect thereto. For purposes of determining the outstanding amount of Risk Participation Liability, the maximum amount potentially owing under any Risk Participation Agreement will be considered outstanding unless the bank which is the beneficiary of such Risk Participation Agreement reports daily activity to Agent showing actual outstanding letters of credit subject to such Risk Participation Agreement. "Security Documents" means all instruments, documents and agreements executed by or on behalf of any Loan Party to guaranty or provide collateral security with respect to the Obligations including, without limitation, any security agreement or pledge agreement, any guaranty of the Obligations, any mortgage, any subordination and intercreditor agreements, and all instruments, documents and agreements executed pursuant to the terms of the foregoing. "Subordinated Indebtedness" means the "Junior Note" as defined in that certain Subordination and Intercreditor Agreement dated as of December 27, 1996 among Agent, Borrower and Holdings, and all other Indebtedness of Borrower, Holdings or any of their Subsidiaries which is subordinated, in a manner satisfactory to Agent, in right of payment to the Obligations. "Subsidiary" means, with respect to any Person, any corporation, partnership, association or other business entity of which more than fifty percent (50%) of the total voting power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time 59 68 owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. 10.2 Other Definitional Provisions. References to "Sections", "subsections", "Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in subsection 10.1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. In this Agreement, "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific section, paragraph or clause in which the respective word appears; words importing any gender include the other gender; references to "writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to agreements and other contractual instruments shall be deemed to include subsequent amendments, assignments, and other modifications thereto, but only to the extent such amendments, assignments and other modifications are not prohibited by the terms of this Agreement or any other Loan Document; references to Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. WITNESS the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above. UNIONTOOLS, INC. By: /s/ Stephen M. Kasprisin --------------------------------- Title: Vice Presidient --------------------------------- Commitment to make Revolving Loans HELLER FINANCIAL, INC., as Agent and and Acquisition Loans: a Lender $15,000,000 (23.077%) By: /s/ Joseph F. Romic --------------------------------- Title: Vice President --------------------------------- Commitment to make Revolving Loans SANWA BUSINESS CREDIT and Acquisition Loans: CORPORATION $10,000,000 (15.385%) By: /s/ Lawrence J. Placek --------------------------------- Title: Vice President --------------------------------- 60 69 Commitment to make Revolving Loans FLEET CAPITAL CORPORATION and Acquisition Loans: $10,000,000 (15.385%) By: /s/ Alisa Frederick --------------------------------- Title: Vice President --------------------------------- Commitment to make Revolving Loans PNC BANK, OHIO, NATIONAL and Acquisition Loans: ASSOCIATION $10,000,000 (15.385%) By: /s/ Warren Weber --------------------------------- Title: Assistant Vice President --------------------------------- Commitment to make Revolving Loans BANKBOSTON, N.A., formerly known as and Acquisition Loans: The First National Bank Of Boston $12,500,000 (19.231%) By: /s/ Timothy M. Barns --------------------------------- Title: Division Executive --------------------------------- Commitment to make Revolving Loans STAR BANK, N.A. and Acquisition Loans: $7,500,000 (11.537%) By: /s/ Rick Neltner --------------------------------- Title: Vice President --------------------------------- 61 EX-10.11 12 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.11 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May __,1997 among ACORN PRODUCTS, INC., a Delaware corporation (the "Company"), and the entities listed on Exhibit A to this Agreement as the "SHAREHOLDERS" (the "Shareholders"). W I T N E S S E T H WHEREAS, in connection with the Company's proposed initial public offering of its Common Stock (the "IPO"), the Shareholders have agreed with the representatives of the underwriters, pursuant to certain lock-up agreements (the "IPO Lock-Up Agreements"), for the benefit of the Company, not to offer, sell, transfer or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of the IPO without the prior written consent of the representatives of the underwriters (the "IPO Lock-Up Period"); WHEREAS, the Company believes that unorganized sales of shares of Common Stock by the Shareholders in the public market could have an adverse effect on prevailing market prices for the Common Stock and could adversely impact the Company's ability to participate in the capital markets; WHEREAS, in order to provide for the orderly distribution of the shares of Common Stock held by the Shareholders, the Company has agreed to grant registration rights to the Shareholders with respect to the shares of Common Stock as set forth herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Definitions. (a) As used in this Agreement the following terms shall have the following meanings: "ACT": the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "COMMISSION": the Securities and Exchange Commission or any other federal agency at the time administering the Act. "COMMON STOCK": the common stock, $0.001 par value, of the Company. "COMPANY": as defined in the preamble. 2 "EFFECTIVE DATE": the date that the IPO Registration Statement is declared effective under the Act by the Commission. "EXCHANGE ACT": the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "FUND INVESTOR": the investors in the Shareholders set forth on Exhibit B. "GAAP": generally accepted accounting principles in the United States of America in effect from time to time. "HOLDER": a Shareholder or a Permitted Transferee. "INITIATING HOLDERS": means one or more Holders who, singularly or in the aggregate, hold 25% or more of the Registrable Securities. "IPO": as defined in the preamble. "IPO LOCK-UP AGREEMENTS": as defined in the preamble. "IPO LOCK-UP PERIOD": as defined in the preamble. "IPO REGISTRATION STATEMENT": the Registration Statement on Form S-1 (Reg. No. 333-25325) filed by the Company with the Commission in connection with the IPO. "PERMITTED TRANSFER": any transfer of Registrable Securities that is permitted without the consent of the representatives of the underwriters under the terms of the IPO Lock-Up Agreements and any distribution of Registrable Securities from the Shareholders to the Fund Investors. "PERMITTED TRANSFEREE": any transferee that receives Registrable Securities pursuant to a Permitted Transfer and who agrees in writing to become bound by the terms of this Agreement. "PERSON": an individual, partnership, joint venture, corporation, trust, unincorporated organization or a government or any department or agency thereof. "PIGGYBACK NOTICE": as defined in Section 2. "PROSPECTIVE SELLER": with respect to any registration, a Holder that proposes to include shares of Registrable Securities in such registration. "REGISTER," "REGISTERED" and "REGISTRATION": a registration effected by preparing and filing a registration statement in compliance with the Act, the declaration or ordering of effectiveness of such registration statement by the Commission and the compliance 2 3 with all applicable state securities or blue sky laws which will permit the sale of Registrable Securities to the public. "REGISTRABLE SECURITIES": (i) those shares of Common Stock currently held by the Shareholders, (ii) those shares of Common Stock to be received by the Shareholders pursuant to the Exchange (as defined and described in the IPO Registration Statement) in connection with the IPO, (iii) any Common Stock issued or issuable with respect to or in exchange for the shares of Common Stock described in clauses (i) and (ii) above by reason of a stock dividend or other distribution on such shares or stock split or in connection with a combination of shares, recapitalization, reclassification, exchange, offer, merger, consolidation or other reorganization. Each share of Registrable Securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such stock shall have become effective under the Act and such stock shall have been disposed of in accordance with such registration statement, (b) such stock ceases to be outstanding, (c) such stock is no longer held by a Holder or (d) the fourth anniversary of the Effective Date has occurred. A schedule of the number of shares of Registrable Securities held by each Shareholder is attached hereto as Exhibit C. "REGISTRATION EXPENSES": as defined in Section 7. "UNDERWRITTEN OFFERING": a registration in which securities of the Company are sold to an underwriter for reoffering to the public. (b) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any certificate or document made or delivered pursuant hereto. (c) As used herein and in any certificate or other documents made or delivered pursuant hereto, accounting terms not defined in Section 1(a) and accounting terms partly defined in Section 1(a) to the extent not defined, shall have the respective meanings given to them under GAAP. (d) Any reference to any provision of or rule under the Act or the Exchange Act shall encompass any successor provision or rule. (e) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. (f) The meanings given to terms defined herein shall be equally applicable to the singular and plural forms of such terms. 2. Incidental Registration. If the Company proposes to register any of its securities for sale (other than a registration relating to the sale of securities to employees of the 3 4 Company pursuant to a stock option, stock purchase or similar plan including a registration statement on Form S-8, an exchange offer, a transaction subject to Rule 145 of the Act or in connection with the acquisition of the assets or shares of or merger or consolidation with another company), and the registration form to be used also may be used for the registration of the Registrable Securities, then it shall give written notice (a "Piggyback Notice"), at its expense, to all Holders of Registrable Securities of its intention to do so at least 10 business days prior to the filing of a registration statement with respect to such registration with the Commission. The Company shall specify in the Piggyback Notice the form and manner of, and the other relevant facts involved in, such proposed registration, including the estimated effective date of the registration statement for such registration (the "Estimated Effective Date). If any Holder desires to dispose of all or part of its Registrable Securities in such registration, it shall deliver to the Company, within 10 business days after receipt of the Piggyback Notice, written notice of such request stating the number of shares of Registrable Securities so proposed to be sold by such Holder. Any Holder may withdraw its request for inclusion at any time prior to 15 business days prior to the Estimated Effective Date. The Company shall use its commercially reasonable efforts to cause all shares of Registrable Securities specified in such written notice to be included in such registration, subject, however, to the limitations set forth in Section 3 and provided that, for purposes of this sentence, commercially reasonable efforts shall not require the Company or any other seller of securities of the Company (other than a Holder of Registrable Securities), to reduce the amount or sale price of such securities proposed to be so registered. 3. Limitations on Incidental Registration. (a) If the registration of which the Company gives notice pursuant to Section 2 is for the purpose of permitting a disposition of securities pursuant to an Underwritten Offering, the Piggyback Notice shall so state, and, if requested to do so by the managing underwriter of the offering, the Company shall have the right to limit the aggregate size of the offering or the number of shares of Registrable Securities to be included therein by the Holders in accordance with the provisions of Section 3(b) below. (b) Whenever the number of shares of Registrable Securities that may be registered pursuant to Section 2 is limited by the provisions of Section 3(a) above, the Company or any other seller of securities of the Company for whom such registration was initiated, as the case may be, shall have priority as to sales over the Holders, and each Holder hereby agrees that he or she shall withdraw his or her securities from such registration to the extent necessary to allow the Company or such other seller of securities of the Company to include all the shares it desires to include in such registration, and thereafter the number of shares of Registrable Securities to be included in such registration shall be allocated pro rata among Holders of Registrable Securities (with such allocation to be made on the basis of the number of shares requested to be included in such registration by such Holders) and any person other than a Holder who holds registration rights with respect to securities of the Company (each such person, an "Additional Registration Rights Holder"), to the extent provided in the relevant agreement between the Company and the Additional Registration Rights Holder. 4 5 (c) Nothing in this Section 3 shall be construed as creating an obligation on the part of the Company to register Registrable Securities if the Board of Directors of the Company shall have determined in its sole discretion not to proceed with a registration of its securities whether or not a Piggyback Notice shall have previously been sent by the Company. 4. Registration on Request. (a) At any time following the expiration of the IPO Lock-Up Period, Initiating Holders may by written notice make a request that the Company effect the registration under the Act of all or part of such Initiating Holders' Registrable Securities, specifying the intended method or methods of disposition thereof; provided that the Shareholders, collectively, are entitled to an aggregate of four such registrations pursuant to this Section 4(a). Notwithstanding the provisions of this Section 4(a), the Company shall not be obligated to effect a registration under the Act of the designated Registrable Securities if in the preceding 180 days the Company shall have previously effected a registration under the Act of the Company's securities. (b) Upon receipt of the request of the Initiating Holders pursuant to Section 4(a), the Company shall give written notice of the requested registration ( a "Demand Notice"), at its expense, to all Holders of Registrable Securities within 15 business days of receipt of such Initiating Holders request and thereupon shall use its commercially reasonable efforts to effect the registration under the Act of: (i) the Registrable Securities that the Company has been so requested to register by the Initiating Holders for disposition in accordance with the intended method or methods of disposition stated in such request; and (ii) all other Registrable Securities that the Company has been requested to register by the Holders thereof by written request delivered to the Company within 15 business days after the giving of the Demand Notice (which request shall specify the intended method or methods of disposition of such Registrable Securities); all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered. (c) Whenever the Company shall effect a registration of Registrable Securities pursuant to this Section 4, subject to Section 4(d) below, (i) any Additional Registration Rights Holder shall have the right to include in the registration made pursuant to this Section 4, to the extent provided in the relevant agreement between the Company and the Additional Registration Rights Holder, the securities held by such Additional Registration Rights Holders to which such registration rights relate and (ii) the Company shall have the right to include in the registration made pursuant to this Section 4 any securities to be issued by the Company (the securities referred to in clause (i) and (ii) above are hereinafter referred to as "Additional Securities"). 5 6 (d) Each registration requested pursuant to this Section 4 shall be effected by the filing of a registration statement on the applicable form, as reasonably determined by the Company. (e) If the managing underwriter of any Underwritten Offering undertaken pursuant to this Section 4 shall advise the Company in writing (with a copy to each holder of Registrable Securities requesting registration) that, in its opinion, the number or type of securities requested to be included in such registration (including any Additional Securities) is a number or type which would adversely affect such offering, then the number of shares of Registrable Securities to be included in such registration shall be allocated pro rata among Holders of Registrable Securities (with such allocation to be made on the basis of the number of shares requested to be included in such registration by such Holders) and, thereafter, pro rata among the Company and the Additional Registration Rights Holders (such limited number to be allocated between the Company and the affected Additional Registration Rights Holders as the Company shall determine). (f) If the Company determines, in its reasonable judgment, that a registration requested pursuant to this Section 4 would interfere with or require public disclosure of any financing, acquisition, disposition, corporate reorganization or other transaction involving the Company or its subsidiaries which would have a material adverse effect on such transaction, the Company shall be entitled to postpone for a reasonable period of time (not to exceed 90 days) the filing, supplementing or amending of any such registration statement. Upon such determination, the Company shall give the holders of Registrable Securities requesting registration written notice of such determination and an estimate of the anticipated delay. The Company shall not, within 120 days of the expiration of any such postponement, exercise again its right of postponement pursuant to this Section 4(f). If the Company shall so postpone the filing of a registration statement, such holders of Registrable Securities may withdraw their request for registration by giving written notice to the Company within 15 days of receipt of the notice of postponement and such withdrawn request shall not constitute a request for registration pursuant to Section 4(a). (g) Notwithstanding anything in this Section 4 to the contrary, in no event shall the Company be required to effect a registration pursuant to this Section 4 in which the estimated aggregate gross proceeds from the sale of Registrable Securities included therein is less than $1 million. 5. Underwritten Offerings. (a) Selection of Underwriters. Whenever a registration requested pursuant to Section 4 hereof is for an Underwritten Offering, the Initiating Holders shall select managing underwriter(s) of recognized standing to administer the offering, subject to approval by the Company with such approval not to be unreasonably withheld, and each Holder requesting registration of its Registrable Securities for disposition in an Underwritten Offering agrees to include such Registrable Securities such Underwritten Offering and shall be bound by the provisions of this Section 5. 6 7 (b) Underwriting Agreement. If requested by the underwriters for any Underwritten Offering of Registrable Securities pursuant to a registration requested under Section 4 hereof, the Company shall enter into an underwriting agreement with such underwriters for such offering, such agreement to contain representations and warranties by the Company and other terms and provisions not inconsistent with this Agreement as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities to the effect and to the extent provided in Section 8 hereof; and the Company will cooperate with such Holders of Registrable Securities to the end that the conditions precedent to the obligations of such Holders of Registrable Securities under such underwriting agreement shall not include conditions that are not customary in underwriting agreements with respect to secondary distributions and shall be otherwise reasonably satisfactory to such Holders. The Holders on whose behalf shares of Registrable Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of the Company to and for the benefit of such underwriters, shall also be made to and for the benefit of such Holders selling Registrable Securities. Such Holders shall not be required by the Company to make any representations or warranties to or agreements with the Company or the underwriters (including any restrictions on sales inconsistent with Section 5(c) hereof) other than reasonable representations, warranties or agreements regarding such Holder, such Holder's Registrable Securities and such Holder's intended method or methods of disposition and any other representation required by law. If requested by the underwriters for any Underwritten Offering of Registrable Securities pursuant to a registration under Section 2 hereof, the Holders on whose behalf shares of Registrable Securities are to be distributed by such underwriters shall execute and deliver to such underwriters and the Company an Underwriting Agreement, subject to the limitations set forth in the preceding two sentences. (c) Restrictions on Sales by Holders. If any registration subject to Section 2 or 4 shall be in connection with an Underwritten Offering on a firm commitment basis, each Holder agrees, if and to the extent requested in writing by the managing underwriter, not to effect any public sales or distribution (other than as part of such Underwritten Offering pursuant to Section 2 or 4, respectively) of Common Stock, any securities of the Company similar to Common Stock or any securities of the Company convertible, exchangeable or exercisable for Common Stock, including a sale pursuant to Rule 144 or pursuant to a registered offering not being distributed on a firm commitment basis by or through one or more underwriters, within the period from seven days prior to the effective date of such registration statement up to ninety (90) days after the effective date of such registration statement or such other period not to exceed one hundred and twenty (120) days after the effective date of such registration statement as may be required by such managing underwriter. (d) Restrictions on Sales by the Company. The Company agrees not to effect any public sale or distribution of any Common Stock, any securities of the Company similar to Common Stock or any securities of the Company convertible, exchangeable or exercisable for Common Stock (including pursuant to a registered offering not being distributed on a firm commitment basis by or through one or more underwriters) within the period from seven days 7 8 prior to the effective date of any registration statement that includes Registrable Securities to be distributed by or through one or more underwriters on a firm commitment basis up to ninety (90) days after the effective date of such registration statement or such other period not to exceed one hundred and eighty (180) days after the effective date of such registration statement as may be required by such managing underwriter unless such sale or distribution is pursuant to such registration statement (or a separate registration statement filed concurrently); provided, however, that the foregoing shall not prevent the conversion or exchange of any securities pursuant to their terms into or for other securities or the offer or sale of securities by the Company pursuant to a dividend reinvestment plan or to its employees or directors pursuant to an employee benefit plan. 6. Registration Procedures (a) Each Prospective Seller shall furnish to the Company such information as the Company may reasonably require for inclusion in the registration statement (and the prospectus included therein). (b) The Prospective Sellers shall not (until further notice) effect sales of the shares covered by the registration statement after receipt of telegraphic or written notice from the Company to suspend sales to permit the Company to correct or update a registration statement or prospectus. 7. Expenses of Registration. All expenses of registration pursuant to either Section 2 or Section 4, including, without limitation, all registration and filing fees, printing expenses (including reasonable expenses of printing prospectuses), expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications or registrations (or the obtaining of exemptions therefrom) of Registrable Securities), fees and disbursements of counsel, auditors or experts for the Company, expenses of any audits incidental to or required by any such registration, expenses of all marketing and promotional efforts requested by the managing underwriter (collectively, "Registration Expenses") shall be borne by the Company; provided, however, that each Prospective Seller shall bear all underwriting discounts, commissions or fees and all brokerage fees or commissions relating to the sale of its Registrable Securities and the fees and expenses of counsel for such Prospective Seller. 8. Indemnification. (a) Indemnification by the Company. In connection with any registration statement filed pursuant to Section 2 or 4 hereof, the Company shall indemnify and hold harmless each Holder selling Registrable Securities covered by such registration statement, its directors, officers, employees, agents, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Holder or such underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities or 8 9 expenses (including reasonable costs of investigation and reasonable legal expenses), joint or several, to which such Person may become subject, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment thereof or supplement thereto, or any document incorporated by reference therein, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse such Indemnified Person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense (or action or proceeding in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information about such Indemnified Person furnished to the Company through an instrument duly executed by such Indemnified Person specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Person and shall survive the transfer of such securities by such seller. The Company shall agree to a provision for contribution relating to such indemnity as shall be reasonably requested by any seller of Registrable Shares or the underwriters. (b) Indemnification by the Prospective Sellers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 2 or 4 hereof, that the Company shall have received an undertaking satisfactory to it from each Prospective Seller to indemnify and hold harmless such Person, each director of such Person, each officer of such Person who shall sign such registration statement, each Person who participates as an underwriter (if such underwriter so requests) in the offering or sale of such securities and each other Person, if any, who controls the Company or any such underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, damages, liabilities or expenses (including reasonable costs of investigation and reasonable legal expenses), to which such Person may become subject, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment thereof or supplement thereto, or any document incorporated by reference therein, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such actual or alleged statement or omission described in (i) or (ii) above was made in reliance upon and in conformity with written information about such Prospective Seller 9 10 furnished to such Person through an instrument duly executed by such Prospective Seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. The indemnification obligations of any Prospective Seller shall not be greater than the dollar amount of the net proceeds received by such Prospective Seller upon the sale of the Registrable Securities giving rise to such obligation. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Person or any such director, officer, participating Person or controlling Person and shall survive the transfer of such securities by such Prospective Seller. (c) Notice of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action, proceeding, investigation or threat involving a claim referred to in Section 8(a) or 8(b), such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, proceeding, investigation or threat; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 8 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless a conflict of interest between such indemnified and indemnifying parties exists in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, and after notice from the indemnifying party to such indemnified party of its elections so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, which consent shall not be unreasonably withheld or delayed, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) Other Indemnification. Indemnification similar to that specified in the preceding subdivisions of this Section 8 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of such Registrable Securities under any state securities or blue sky law or regulation of a governmental authority other than the Act. (e) Contribution. If the indemnification provided for in Section 8(a) or 8(b) above is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities, in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified parties on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. 10 11 Such relative fault shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or any omission or alleged omission to state a material fact relates to information supplied by the indemnifying party, or by the indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 8(e) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph; provided that the Company and each holder of Registrable Securities shall agree with each other and the underwriters of the Registrable Securities, if requested by such underwriters, that the underwriter's portion of such contribution shall not exceed the underwriting discount. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities or actions in respect thereof referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. The contribution obligations of any Prospective Seller shall not be greater than the excess of (A) the dollar amount of the net proceeds received by such Prospective Seller upon the sale of the Registrable Securities giving rise to such contribution obligation over (B) the dollar amount of any damages that such Holder has otherwise been required to pay by reason of the untrue or alleged untrue statement or omission or alleged omission giving rise to such obligation. No Person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (f) Indemnification Payments. The indemnification required by this Section 8 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 9. Miscellaneous. (a) Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be sent by overnight courier service; or delivered (in person or by telecopy) against receipt, in each case to the party to whom it is given: (i) if to the Company, to it at 500 Dublin Avenue, Columbus, Ohio 43210-1930, with a copy to Gibson, Dunn & Crutcher LLP, 200 Park Avenue, 48th Floor, New York, New York 10016, attention: Conor D. Reilly; and (ii) if to the Holders, to each c/o TCW Special Credits, 550 South Hope Street, 22nd Floor, Los Angeles, California 90071, attention: Kenneth Liang. Any notice or other communication given hereunder shall be deemed given when sent, except for a notice changing a party's address, which shall be deemed given at the time of receipt thereof. 11 12 (b) Assignment. Except with respect to Permitted Transferees, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by the Company or the Holders without the prior written consent of the other party, and any purported assignment shall be void. (c) Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of the Company and the Holders and their respective successors and permitted assigns. (d) Third-Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any Person not a party to this Agreement other than any assignee with respect to whom the respective assignment was made in accordance with the terms hereof. (e) Effectiveness. This Agreement shall be effective as of the Effective Date. (f) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (g) Governing Law. This Agreement and the rights and obligations of the parties under this Agreement shall be governed by, and construed and interpreted in accordance with, the substantive law of the State of New York without regard to principles of choice or conflicts of laws. (h) Attorney's Fees. In the event of litigation arising between the parties respecting the subject matter hereof, the prevailing party shall be entitled to recover its reasonable attorney's fees and costs. (i) Expenses. Except as otherwise specifically set forth herein, each party shall bear its own costs and expenses incurred in connection with this Agreement or the transactions herein contemplated. 12 13 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement or caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first written above. ACORN PRODUCTS, INC. By: ________________________________ Name: Title: TCW SPECIAL CREDITS, on behalf of the Shareholders listed on Exhibit A hereto By: TCW ASSET MANAGEMENT COMPANY, its managing partner By: ___________________________ Name: Title: By: ___________________________ Name: Title: 13 14 EXHIBIT A SCHEDULE OF SHAREHOLDERS NAME Delaware State Employees Retirement Fund TCW Special Credits Plus Fund TCW Special Credits Fund III TCW Special Credits Fund IIIb TCW Special Credits Fund IV The Common Fund for Bond Investments Weyerhaeuser Company Master Pension Trust TCW Special Credits Trust IVA TCW Special Credits Trust TCW Special Credits Trust IV TCW Special Credits Trust IIIb 14 15 EXHIBIT B SCHEDULE OF FUND INVESTORS 15 16 EXHIBIT C SCHEDULE OF REGISTRABLE SECURITIES
NAME OF HOLDER NUMBER OF SHARES - -------------- ---------------- [pre IPO stock split and Exchange] Delaware State Employees Retirement Fund 50 TCW Special Credits Plus Fund 72 TCW Special Credits Fund III 207 TCW Special Credits Fund IIIb 199 TCW Special Credits Fund IV 65 The Common Fund for Bond Investments 14 Weyerheuser Company Master Pension Trust 72 TCW Special Credits Trust IVA 22 TCW Special Credits Trust 100 TCW Special Credits Trust IV 57 TCW Special Credits Trust IIIb 142
16 EX-10.12 13 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.12 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May __,1997 among ACORN PRODUCTS, INC., a Delaware corporation (the "Company"), and the entities listed on Exhibit A to this Agreement as the "SHAREHOLDERS" (the "Shareholders"). W I T N E S S E T H WHEREAS, in connection with the Company's proposed initial public offering of its Common Stock (the "IPO"), the Shareholders have agreed with the representatives of the underwriters, pursuant to certain lock-up agreements (the "IPO Lock-Up Agreements"), for the benefit of the Company, not to offer, sell, transfer or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of the IPO without the prior written consent of the representatives of the underwriters (the "IPO Lock-Up Period"); WHEREAS, the Company believes that unorganized sales of shares of Common Stock by the Shareholders in the public market could have an adverse effect on prevailing market prices for the Common Stock and could adversely impact the Company's ability to participate in the capital markets; WHEREAS, in order to provide for the orderly distribution of the shares of Common Stock held by the Shareholders, the Company has agreed to grant registration rights to the Shareholders with respect to the shares of Common Stock as set forth herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Definitions. (a) As used in this Agreement the following terms shall have the following meanings: "ACT": the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "COMMISSION": the Securities and Exchange Commission or any other federal agency at the time administering the Act. "COMMON STOCK": the common stock, $0.001 par value, of the Company. "COMPANY": as defined in the preamble. 2 "EFFECTIVE DATE": the date that the IPO Registration Statement is declared effective under the Act by the Commission. "EXCHANGE ACT": the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "FUND INVESTOR": the investors in the Shareholders set forth on Exhibit B. "GAAP": generally accepted accounting principles in the United States of America in effect from time to time. "HOLDER": a Shareholder or a Permitted Transferee. "INITIATING HOLDERS": means one or more Holders who, singularly or in the aggregate, hold 25% or more of the Registrable Securities. "IPO": as defined in the preamble. "IPO LOCK-UP AGREEMENTS": as defined in the preamble. "IPO LOCK-UP PERIOD": as defined in the preamble. "IPO REGISTRATION STATEMENT": the Registration Statement on Form S-1 (Reg. No. 333-25325) filed by the Company with the Commission in connection with the IPO. "PERMITTED TRANSFER": any transfer of Registrable Securities that is permitted without the consent of the representatives of the underwriters under the terms of the IPO Lock-Up Agreements and any distribution of Registrable Securities from the Shareholders to the Fund Investors. "PERMITTED TRANSFEREE": any transferee that receives Registrable Securities pursuant to a Permitted Transfer and who agrees in writing to become bound by the terms of this Agreement. "PERSON": an individual, partnership, joint venture, corporation, trust, unincorporated organization or a government or any department or agency thereof. "PIGGYBACK NOTICE": as defined in Section 2. "PROSPECTIVE SELLER": with respect to any registration, a Holder that proposes to include shares of Registrable Securities in such registration. "REGISTER," "REGISTERED" and "REGISTRATION": a registration effected by preparing and filing a registration statement in compliance with the Act, the declaration or ordering of effectiveness of such registration statement by the Commission and the compliance 2 3 with all applicable state securities or blue sky laws which will permit the sale of Registrable Securities to the public. "REGISTRABLE SECURITIES": (i) those shares of Common Stock currently held by the Shareholders, (ii) those shares of Common Stock to be received by the Shareholders pursuant to the Exchange (as defined and described in the IPO Registration Statement) in connection with the IPO, (iii) any Common Stock issued or issuable with respect to or in exchange for the shares of Common Stock described in clauses (i) and (ii) above by reason of a stock dividend or other distribution on such shares or stock split or in connection with a combination of shares, recapitalization, reclassification, exchange, offer, merger, consolidation or other reorganization. Each share of Registrable Securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such stock shall have become effective under the Act and such stock shall have been disposed of in accordance with such registration statement, (b) such stock ceases to be outstanding, (c) such stock is no longer held by a Holder or (d) the fourth anniversary of the Effective Date has occurred. A schedule of the number of shares of Registrable Securities held by each Shareholder is attached hereto as Exhibit C. "REGISTRATION EXPENSES": as defined in Section 7. "UNDERWRITTEN OFFERING": a registration in which securities of the Company are sold to an underwriter for reoffering to the public. (b) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any certificate or document made or delivered pursuant hereto. (c) As used herein and in any certificate or other documents made or delivered pursuant hereto, accounting terms not defined in Section 1(a) and accounting terms partly defined in Section 1(a) to the extent not defined, shall have the respective meanings given to them under GAAP. (d) Any reference to any provision of or rule under the Act or the Exchange Act shall encompass any successor provision or rule. (e) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. (f) The meanings given to terms defined herein shall be equally applicable to the singular and plural forms of such terms. 2. Incidental Registration. If the Company proposes to register any of its securities for sale (other than a registration relating to the sale of securities to employees of the 3 4 Company pursuant to a stock option, stock purchase or similar plan including a registration statement on Form S-8, an exchange offer, a transaction subject to Rule 145 of the Act or in connection with the acquisition of the assets or shares of or merger or consolidation with another company), and the registration form to be used also may be used for the registration of the Registrable Securities, then it shall give written notice (a "Piggyback Notice"), at its expense, to all Holders of Registrable Securities of its intention to do so at least 10 business days prior to the filing of a registration statement with respect to such registration with the Commission. The Company shall specify in the Piggyback Notice the form and manner of, and the other relevant facts involved in, such proposed registration, including the estimated effective date of the registration statement for such registration (the "Estimated Effective Date). If any Holder desires to dispose of all or part of its Registrable Securities in such registration, it shall deliver to the Company, within 10 business days after receipt of the Piggyback Notice, written notice of such request stating the number of shares of Registrable Securities so proposed to be sold by such Holder. Any Holder may withdraw its request for inclusion at any time prior to 15 business days prior to the Estimated Effective Date. The Company shall use its commercially reasonable efforts to cause all shares of Registrable Securities specified in such written notice to be included in such registration, subject, however, to the limitations set forth in Section 3 and provided that, for purposes of this sentence, commercially reasonable efforts shall not require the Company or any other seller of securities of the Company (other than a Holder of Registrable Securities), to reduce the amount or sale price of such securities proposed to be so registered. 3. Limitations on Incidental Registration. (a) If the registration of which the Company gives notice pursuant to Section 2 is for the purpose of permitting a disposition of securities pursuant to an Underwritten Offering, the Piggyback Notice shall so state, and, if requested to do so by the managing underwriter of the offering, the Company shall have the right to limit the aggregate size of the offering or the number of shares of Registrable Securities to be included therein by the Holders in accordance with the provisions of Section 3(b) below. (b) Whenever the number of shares of Registrable Securities that may be registered pursuant to Section 2 is limited by the provisions of Section 3(a) above, the Company or any other seller of securities of the Company for whom such registration was initiated, as the case may be, shall have priority as to sales over the Holders, and each Holder hereby agrees that he or she shall withdraw his or her securities from such registration to the extent necessary to allow the Company or such other seller of securities of the Company to include all the shares it desires to include in such registration, and thereafter the number of shares of Registrable Securities to be included in such registration shall be allocated pro rata among Holders of Registrable Securities (with such allocation to be made on the basis of the number of shares requested to be included in such registration by such Holders) and any person other than a Holder who holds registration rights with respect to securities of the Company (each such person, an "Additional Registration Rights Holder"), to the extent provided in the relevant agreement between the Company and the Additional Registration Rights Holder. 4 5 (c) Nothing in this Section 3 shall be construed as creating an obligation on the part of the Company to register Registrable Securities if the Board of Directors of the Company shall have determined in its sole discretion not to proceed with a registration of its securities whether or not a Piggyback Notice shall have previously been sent by the Company. 4. Registration on Request. (a) At any time following the expiration of the IPO Lock-Up Period, Initiating Holders may by written notice make a request that the Company effect the registration under the Act of all or part of such Initiating Holders' Registrable Securities, specifying the intended method or methods of disposition thereof; provided that the Shareholders, collectively, are entitled to an aggregate of four such registrations pursuant to this Section 4(a). Notwithstanding the provisions of this Section 4(a), the Company shall not be obligated to effect a registration under the Act of the designated Registrable Securities if in the preceding 180 days the Company shall have previously effected a registration under the Act of the Company's securities. (b) Upon receipt of the request of the Initiating Holders pursuant to Section 4(a), the Company shall give written notice of the requested registration ( a "Demand Notice"), at its expense, to all Holders of Registrable Securities within 15 business days of receipt of such Initiating Holders request and thereupon shall use its commercially reasonable efforts to effect the registration under the Act of: (i) the Registrable Securities that the Company has been so requested to register by the Initiating Holders for disposition in accordance with the intended method or methods of disposition stated in such request; and (ii) all other Registrable Securities that the Company has been requested to register by the Holders thereof by written request delivered to the Company within 15 business days after the giving of the Demand Notice (which request shall specify the intended method or methods of disposition of such Registrable Securities); all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered. (c) Whenever the Company shall effect a registration of Registrable Securities pursuant to this Section 4, subject to Section 4(d) below, (i) any Additional Registration Rights Holder shall have the right to include in the registration made pursuant to this Section 4, to the extent provided in the relevant agreement between the Company and the Additional Registration Rights Holder, the securities held by such Additional Registration Rights Holders to which such registration rights relate and (ii) the Company shall have the right to include in the registration made pursuant to this Section 4 any securities to be issued by the Company (the securities referred to in clause (i) and (ii) above are hereinafter referred to as "Additional Securities"). 5 6 (d) Each registration requested pursuant to this Section 4 shall be effected by the filing of a registration statement on the applicable form, as reasonably determined by the Company. (e) If the managing underwriter of any Underwritten Offering undertaken pursuant to this Section 4 shall advise the Company in writing (with a copy to each holder of Registrable Securities requesting registration) that, in its opinion, the number or type of securities requested to be included in such registration (including any Additional Securities) is a number or type which would adversely affect such offering, then the number of shares of Registrable Securities to be included in such registration shall be allocated pro rata among Holders of Registrable Securities (with such allocation to be made on the basis of the number of shares requested to be included in such registration by such Holders) and, thereafter, pro rata among the Company and the Additional Registration Rights Holders (such limited number to be allocated between the Company and the affected Additional Registration Rights Holders as the Company shall determine). (f) If the Company determines, in its reasonable judgment, that a registration requested pursuant to this Section 4 would interfere with or require public disclosure of any financing, acquisition, disposition, corporate reorganization or other transaction involving the Company or its subsidiaries, which would have a material adverse effect on such transaction the Company shall be entitled to postpone for a reasonable period of time (not to exceed 90 days) the filing, supplementing or amending of any such registration statement. Upon such determination, the Company shall give the holders of Registrable Securities requesting registration written notice of such determination and an estimate of the anticipated delay. The Company shall not, within 120 days of the expiration of any such postponement, exercise again its right of postponement pursuant to this Section 4(f). If the Company shall so postpone the filing of a registration statement, such holders of Registrable Securities may withdraw their request for registration by giving written notice to the Company within 15 days of receipt of the notice of postponement and such withdrawn request shall not constitute a request for registration pursuant to Section 4(a). (g) Notwithstanding anything in this Section 4 to the contrary, in no event shall the Company be required to effect a registration pursuant to this Section 4 in which the estimated aggregate gross proceeds from the sale of Registrable Securities included therein is less than $1 million. 5. Underwritten Offerings. (a) Selection of Underwriters. Whenever a registration requested pursuant to Section 4 hereof is for an Underwritten Offering, the Initiating Holders shall select managing underwriter(s) of recognized standing to administer the offering, subject to approval by the Company with such approval not to be unreasonably withheld, and each Holder requesting registration of its Registrable Securities for disposition in an Underwritten Offering agrees to include such Registrable Securities such Underwritten Offering and shall be bound by the provisions of this Section 5. 6 7 (b) Underwriting Agreement. If requested by the underwriters for any Underwritten Offering of Registrable Securities pursuant to a registration requested under Section 4 hereof, the Company shall enter into an underwriting agreement with such underwriters for such offering, such agreement to contain representations and warranties by the Company and other terms and provisions not inconsistent with this Agreement as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities to the effect and to the extent provided in Section 8 hereof; and the Company will cooperate with such Holders of Registrable Securities to the end that the conditions precedent to the obligations of such Holders of Registrable Securities under such underwriting agreement shall not include conditions that are not customary in underwriting agreements with respect to secondary distributions and shall be otherwise reasonably satisfactory to such Holders. The Holders on whose behalf shares of Registrable Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of the Company to and for the benefit of such underwriters, shall also be made to and for the benefit of such Holders selling Registrable Securities. Such Holders shall not be required by the Company to make any representations or warranties to or agreements with the Company or the underwriters (including any restrictions on sales inconsistent with Section 5(c) hereof) other than reasonable representations, warranties or agreements regarding such Holder, such Holder's Registrable Securities and such Holder's intended method or methods of disposition and any other representation required by law. If requested by the underwriters for any Underwritten Offering of Registrable Securities pursuant to a registration under Section 2 hereof, the Holders on whose behalf shares of Registrable Securities are to be distributed by such underwriters shall execute and deliver to such underwriters and the Company an Underwriting Agreement, subject to the limitations set forth in the preceding two sentences. (c) Restrictions on Sales by Holders. If any registration subject to Section 2 or 4 shall be in connection with an Underwritten Offering on a firm commitment basis, each Holder agrees, if and to the extent requested in writing by the managing underwriter, not to effect any public sales or distribution (other than as part of such Underwritten Offering pursuant to Section 2 or 4, respectively) of Common Stock, any securities of the Company similar to Common Stock or any securities of the Company convertible, exchangeable or exercisable for Common Stock, including a sale pursuant to Rule 144 or pursuant to a registered offering not being distributed on a firm commitment basis by or through one or more underwriters, within the period from seven days prior to the effective date of such registration statement up to ninety (90) days after the effective date of such registration statement or such other period not to exceed one hundred and twenty (120) days after the effective date of such registration statement as may be required by such managing underwriter. (d) Restrictions on Sales by the Company. The Company agrees not to effect any public sale or distribution of any Common Stock, any securities of the Company similar to Common Stock or any securities of the Company convertible, exchangeable or exercisable for Common Stock (including pursuant to a registered offering not being distributed on a firm commitment basis by or through one or more underwriters) within the period from seven days 7 8 prior to the effective date of any registration statement that includes Registrable Securities to be distributed by or through one or more underwriters on a firm commitment basis up to ninety (90) days after the effective date of such registration statement or such other period not to exceed one hundred and eighty (180) days after the effective date of such registration statement as may be required by such managing underwriter unless such sale or distribution is pursuant to such registration statement (or a separate registration statement filed concurrently); provided, however, that the foregoing shall not prevent the conversion or exchange of any securities pursuant to their terms into or for other securities or the offer or sale of securities by the Company pursuant to a dividend reinvestment plan or to its employees or directors pursuant to an employee benefit plan. 6. Registration Procedures (a) Each Prospective Seller shall furnish to the Company such information as the Company may reasonably require for inclusion in the registration statement (and the prospectus included therein). (b) The Prospective Sellers shall not (until further notice) effect sales of the shares covered by the registration statement after receipt of telegraphic or written notice from the Company to suspend sales to permit the Company to correct or update a registration statement or prospectus. 7. Expenses of Registration. All expenses of registration pursuant to either Section 2 or Section 4, including, without limitation, all registration and filing fees, printing expenses (including reasonable expenses of printing prospectuses), expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications or registrations (or the obtaining of exemptions therefrom) of Registrable Securities), fees and disbursements of counsel, auditors or experts for the Company, expenses of any audits incidental to or required by any such registration, expenses of all marketing and promotional efforts requested by the managing underwriter (collectively, "Registration Expenses") shall be borne by the Company; provided, however, that each Prospective Seller shall bear all underwriting discounts, commissions or fees and all brokerage fees or commissions relating to the sale of its Registrable Securities and the fees and expenses of counsel for such Prospective Seller. 8. Indemnification. (a) Indemnification by the Company. In connection with any registration statement filed pursuant to Section 2 or 4 hereof, the Company shall indemnify and hold harmless each Holder selling Registrable Securities covered by such registration statement, its directors, officers, employees, agents, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Holder or such underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities or 8 9 expenses (including reasonable costs of investigation and reasonable legal expenses), joint or several, to which such Person may become subject, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment thereof or supplement thereto, or any document incorporated by reference therein, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse such Indemnified Person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense (or action or proceeding in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information about such Indemnified Person furnished to the Company through an instrument duly executed by such Indemnified Person specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Person and shall survive the transfer of such securities by such seller. The Company shall agree to a provision for contribution relating to such indemnity as shall be reasonably requested by any seller of Registrable Shares or the underwriters. (b) Indemnification by the Prospective Sellers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 2 or 4 hereof, that the Company shall have received an undertaking satisfactory to it from each Prospective Seller to indemnify and hold harmless such Person, each director of such Person, each officer of such Person who shall sign such registration statement, each Person who participates as an underwriter (if such underwriter so requests) in the offering or sale of such securities and each other Person, if any, who controls the Company or any such underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, damages, liabilities or expenses (including reasonable costs of investigation and reasonable legal expenses), to which such Person may become subject, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment thereof or supplement thereto, or any document incorporated by reference therein, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such actual or alleged statement or omission described in (i) or (ii) above was made in reliance upon and in conformity with written information about such Prospective Seller 9 10 furnished to such Person through an instrument duly executed by such Prospective Seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. The indemnification obligations of any Prospective Seller shall not be greater than the dollar amount of the net proceeds received by such Prospective Seller upon the sale of the Registrable Securities giving rise to such obligation. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Person or any such director, officer, participating Person or controlling Person and shall survive the transfer of such securities by such Prospective Seller. (c) Notice of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action, proceeding, investigation or threat involving a claim referred to in Section 8(a) or 8(b), such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, proceeding, investigation or threat; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 8 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless a conflict of interest between such indemnified and indemnifying parties exists in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, and after notice from the indemnifying party to such indemnified party of its elections so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, which consent shall not be unreasonably withheld or delayed, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) Other Indemnification. Indemnification similar to that specified in the preceding subdivisions of this Section 8 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of such Registrable Securities under any state securities or blue sky law or regulation of a governmental authority other than the Act. (e) Contribution. If the indemnification provided for in Section 8(a) or 8(b) above is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities, in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified parties on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. 10 11 Such relative fault shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or any omission or alleged omission to state a material fact relates to information supplied by the indemnifying party, or by the indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 8(e) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph; provided that the Company and each holder of Registrable Securities shall agree with each other and the underwriters of the Registrable Securities, if requested by such underwriters, that the underwriter's portion of such contribution shall not exceed the underwriting discount. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities or actions in respect thereof referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. The contribution obligations of any Prospective Seller shall not be greater than the excess of (A) the dollar amount of the net proceeds received by such Prospective Seller upon the sale of the Registrable Securities giving rise to such contribution obligation over (B) the dollar amount of any damages that such Holder has otherwise been required to pay by reason of the untrue or alleged untrue statement or omission or alleged omission giving rise to such obligation. No Person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (f) Indemnification Payments. The indemnification required by this Section 8 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 9. Miscellaneous. (a) Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be sent by overnight courier service; or delivered (in person or by telecopy) against receipt, in each case to the party to whom it is given: (i) if to the Company, to it at 500 Dublin Avenue, Columbus, Ohio 43210-1930, with a copy to Gibson, Dunn & Crutcher LLP, 200 Park Avenue, 48th Floor, New York, New York 10016, attention: Conor D. Reilly; and (ii) if to the Holders, to each c/o Oaktree Capital Management, LLC, 550 South Hope Street, 22nd Floor, Los Angeles, California 90071, attention: Kenneth Liang. Any notice or other communication given hereunder shall be deemed given when sent, except for a notice changing a party's address, which shall be deemed given at the time of receipt thereof. 11 12 (b) Assignment. Except with respect to Permitted Transferees, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by the Company or the Holders without the prior written consent of the other party, and any purported assignment shall be void. (c) Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of the Company and the Holders and their respective successors and permitted assigns. (d) Third-Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any Person not a party to this Agreement other than any assignee with respect to whom the respective assignment was made in accordance with the terms hereof. (e) Effectiveness. This Agreement shall be effective as of the Effective Date. (f) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (g) Governing Law. This Agreement and the rights and obligations of the parties under this Agreement shall be governed by, and construed and interpreted in accordance with, the substantive law of the State of New York without regard to principles of choice or conflicts of laws. (h) Attorney's Fees. In the event of litigation arising between the parties respecting the subject matter hereof, the prevailing party shall be entitled to recover its reasonable attorney's fees and costs. (i) Expenses. Except as otherwise specifically set forth herein, each party shall bear its own costs and expenses incurred in connection with this Agreement or the transactions herein contemplated. 12 13 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement or caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first written above. ACORN PRODUCTS, INC. By: ________________________________ Name: Title: OAKTREE CAPITAL MANAGEMENT, LLC, on behalf of the Shareholders listed on Exhibit A hereto By: ________________________________ Name: Title: 13 14 EXHIBIT A SCHEDULE OF SHAREHOLDERS NAME 14 15 EXHIBIT B SCHEDULE OF FUND INVESTORS 15 16 EXHIBIT C SCHEDULE OF REGISTRABLE SECURITIES NAME OF HOLDER NUMBER OF SHARES - -------------- ---------------- [pre IPO stock split and Exchange] 16 EX-11.1 14 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 Statement Re: Computation of Per Share Earnings
Year ended Nine months ended Pro Forma August 2, 1996 May 2, 1997 - --------- --------------- ----------------- Shares outstanding 1,490,826 1,498,056 Shares issued upon the consummation of the offering 4,924,116 4,924,116 Net effect of stock options based on the treasury stock method 29,240 28,259 ------------- -------------- Total 6,444,182 6,450,431 ------------- -------------- Continuing Operations - --------------------- Pro forma net income from continuing operations $ 2,887 $ 4,012 ------------- -------------- Per share amount $ .45 .62 ------------- --------------
Discontinued Operations - ----------------------- Pro forma loss from discontinued operations $ (4,962) $ (9,211) ------------- ------------- Per share amount $ (.19) $ (1.43) ------------- -------------
EX-23.1 15 CONSENT OF ERNST AND YOUNG LLP 1 EXHIBIT 23.1 CONSENT We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated October 4, 1996 (except Notes 3, 4, 11 and 13 as to which the date is May 23, 1997) in the Registration Statement (Form S-1) and related Prospectus of Acorn Products, Inc. dated May 23, 1997. ERNST & YOUNG LLP /s/ Ernst & Young LLP --------------------- Columbus, Ohio May 23, 1997 EX-27.1 16 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.1 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 (REGISTRATION NO. 333-25325) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
5 1,000 U.S. YEAR 9-MOS JUL-28-1995 AUG-03-1996 AUG-02-1996 MAY-02-1997 1 1 502 0 0 0 11,226 33,322 556 380 23,433 31,777 37,703 66,473 15,955 22,564 5,397 (7,096) 98,895 113,224 29,160 44,702 45,854 54,622 0 0 8,596 8,596 14,406 14,494 (4,472) (14,106) 98,895 113,224 92,652 77,967 92,652 77,967 67,496 57,077 67,496 57,077 16,815 13,448 0 0 6,732 5,743 (1,086) (129) 582 52 (1,668) (179) (6,480) (9,575) 0 0 869 0 (7,279) (9,754) 0 0 0 0
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